Company Quick10K Filing
Quick10K
American Airlines Group
Closing Price ($) Shares Out (MM) Market Cap ($MM)
$35.06 478 $16,750
10-Q 2018-09-30 Quarter: 2018-09-30
10-Q 2018-06-30 Quarter: 2018-06-30
10-Q 2018-03-31 Quarter: 2018-03-31
10-K 2017-12-31 Annual: 2017-12-31
10-Q 2017-09-30 Quarter: 2017-09-30
10-Q 2017-06-30 Quarter: 2017-06-30
10-Q 2017-03-31 Quarter: 2017-03-31
10-K 2016-12-31 Annual: 2016-12-31
10-Q 2016-09-30 Quarter: 2016-09-30
10-Q 2016-06-30 Quarter: 2016-06-30
10-Q 2016-03-31 Quarter: 2016-03-31
10-K 2015-12-31 Annual: 2015-12-31
8-K 2019-02-12 Other Events
8-K 2019-01-24 Earnings, Regulation FD, Exhibits
8-K 2019-01-24 Earnings, Regulation FD, Exhibits
8-K 2019-01-10 Regulation FD, Exhibits
8-K 2018-12-10 Enter Agreement, Off-BS Arrangement
8-K 2018-10-25 Earnings, Regulation FD, Exhibits
8-K 2018-10-09 Regulation FD, Exhibits
8-K 2018-09-17 Enter Agreement, Off-BS Arrangement
8-K 2018-09-05 Regulation FD, Exhibits
8-K 2018-07-26 Earnings, Regulation FD, Exhibits
8-K 2018-07-11 Regulation FD, Exhibits
8-K 2018-06-13 Amend Bylaw, Shareholder Vote, Exhibits
8-K 2018-05-15 Enter Agreement, Off-BS Arrangement
8-K 2018-05-02 Other Events
8-K 2018-04-25 Other Events, Exhibits
8-K 2018-04-10 Regulation FD, Exhibits
8-K 2018-04-09 Enter Agreement, Leave Agreement, Other Events, Exhibits
8-K 2018-01-25 Earnings, Regulation FD, Exhibits
8-K 2018-01-10 Regulation FD, Exhibits
FDX Fedex
LUV Southwest Airlines
GOL GOL Intelligent Airlines
ZNH China Southern Airlines
JBLU Jetblue Airways
SKYW Skywest
ALGT Allegiant Travel
HA Hawaiian Holdings
VLRS Controladora Vuela Compania De Aviacion
AVH Avianca Holdings
AAL 2018-09-30
Part I: Financial Information
Item 1A. Condensed Consolidated Financial Statements of American Airlines Group Inc.
Item 1B. Condensed Consolidated Financial Statements of American Airlines, Inc.
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
Part Ii: Other Information
Item 1. Legal Proceedings
Item 1A. Risk Factors
Item 6. Exhibits
EX-10.1 ex10110qq318.htm
EX-10.2 ex10210qq318.htm
EX-12.1 ex12110qq318.htm
EX-12.2 ex12210qq318.htm
EX-31.1 ex31110qq318.htm
EX-31.2 ex31210qq318.htm
EX-31.3 ex31310qq318.htm
EX-31.4 ex31410qq318.htm
EX-32.1 ex32110qq318.htm
EX-32.2 ex32210qq318.htm

American Airlines Group Earnings 2018-09-30

AAL 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

10-Q 1 aalq310-q093018.htm 10-Q Q3'18 10.25.18 Document


 
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
 
 
 FORM 10-Q
 
 
 
 
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the Quarterly Period Ended September 30, 2018
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
 
 
 
American Airlines Group Inc.
(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
 
(817) 963-1234
(Address of principal executive offices, including zip code)
 
(Registrant’s telephone number, including area code)
Commission file number 1-2691
 
 
 
American Airlines, Inc.
(Exact name of registrant as specified in its charter)
 
 
 
 
Delaware
 
13-1502798
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
4333 Amon Carter Blvd., Fort Worth, Texas 76155
 
(817) 963-1234
(Address of principal executive offices, including zip code)
 
(Registrant’s telephone number, including area code)
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. 
American Airlines Group Inc.
Yes
 
No
American Airlines, Inc.
Yes
 
No
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). 
American Airlines Group Inc.
Yes
 
No
American Airlines, Inc.
Yes
 
No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
American Airlines Group Inc.
☒ Large Accelerated Filer
☐ Accelerated Filer
☐ Non-accelerated Filer
☐ Smaller Reporting Company
☐ Emerging Growth Company
American Airlines, Inc.
☐ Large Accelerated Filer
☐ Accelerated Filer
☒ Non-accelerated Filer
☐ Smaller Reporting Company
☐ Emerging Growth Company
If an emerging growth company, indicate by checkmark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
American Airlines Group Inc.
 
American Airlines, Inc.
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
American Airlines Group Inc.
Yes
 
No
American Airlines, Inc.
Yes
 
No
Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 12, 13, or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. 
American Airlines Group Inc.
Yes
 
No
American Airlines, Inc.
Yes
 
No
As of October 19, 2018, there were 460,581,463 shares of American Airlines Group Inc. common stock outstanding.
As of October 19, 2018, there were 1,000 shares of American Airlines, Inc. common stock outstanding, all of which were held by American Airlines Group Inc.
 




American Airlines Group Inc.
American Airlines, Inc.
Form 10-Q
Quarterly Period Ended September 30, 2018
Table of Contents
 
 
Page
PART I: FINANCIAL INFORMATION
Item 1A.
 
 
 
 
 
Item 1B.
 
 
 
 
 
Item 2.
Item 3.
Item 4.
PART II: OTHER INFORMATION
Item 1.
Item 1A.
Item 6.


1



This report is filed by American Airlines Group Inc. (formerly named AMR Corporation) (AAG) and its wholly-owned subsidiary American Airlines, Inc. (American). References in this report to “we,” “us,” “our,” the “Company” and similar terms refer to AAG and its consolidated subsidiaries. “AMR” or “AMR Corporation” refers to the Company during the period of time prior to its emergence from Chapter 11 and its acquisition of US Airways Group, Inc. (US Airways Group) on December 9, 2013. References to “US Airways Group” and “US Airways,” a subsidiary of US Airways Group, represent the entities during the period of time prior to the dissolution of those entities in connection with AAG’s internal corporate restructuring on December 30, 2015. References in this report to “mainline” refer to the operations of American only and exclude regional operations.
Note Concerning Forward-Looking Statements
Certain of the statements contained in this report should be considered forward-looking statements within the meaning of the Securities Act of 1933, as amended (the Securities Act), the Securities Exchange Act of 1934, as amended (the Exchange Act), and the Private Securities Litigation Reform Act of 1995. These forward-looking statements may be identified by words such as “may,” “will,” “expect,” “intend,” “anticipate,” “believe,” “estimate,” “plan,” “project,” “could,” “should,” “would,” “continue,” “seek,” “target,” “guidance,” “outlook,” “if current trends continue,” “optimistic,” “forecast” and other similar words. Such statements include, but are not limited to, statements about our plans, objectives, expectations, intentions, estimates and strategies for the future, and other statements that are not historical facts. These forward-looking statements are based on our current objectives, beliefs and expectations, and they are subject to significant risks and uncertainties that may cause actual results and financial position and timing of certain events to differ materially from the information in the forward-looking statements. These risks and uncertainties include, but are not limited to, those described below under Part I, Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations, Part II, Item 1A. Risk Factors and other risks and uncertainties listed from time to time in our filings with the Securities and Exchange Commission (the SEC).
All of the forward-looking statements are qualified in their entirety by reference to the factors discussed in Part II, Item 1A. Risk Factors and elsewhere in this report. There may be other factors of which we are not currently aware that may affect matters discussed in the forward-looking statements and may also cause actual results to differ materially from those discussed. We do not assume any obligation to publicly update or supplement any forward-looking statement to reflect actual results, changes in assumptions or changes in other factors affecting such statements other than as required by law. Forward-looking statements speak only as of the date of this report or as of the dates indicated in the statements.

2



PART I: FINANCIAL INFORMATION
This report on Form 10-Q is filed by both AAG and American and includes the Condensed Consolidated Financial Statements of each company in Item 1A and Item 1B, respectively.


3



ITEM 1A. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS OF AMERICAN AIRLINES GROUP INC.
AMERICAN AIRLINES GROUP INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In millions, except shares and per share amounts)(Unaudited)
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2018
 
2017
 
2018
 
2017
Operating revenues:
 
 
 
Passenger
$
10,561

 
$
10,096

 
$
30,714

 
$
29,447

Cargo
260

 
223

 
748

 
633

Other
738

 
646

 
2,141

 
1,931

Total operating revenues
11,559

 
10,965

 
33,603

 
32,011

Operating expenses:
 
 
 
 
 
 
 
Aircraft fuel and related taxes
2,234

 
1,570

 
6,100

 
4,481

Salaries, wages and benefits
3,129

 
3,030

 
9,240

 
8,928

Regional expenses
1,833

 
1,654

 
5,323

 
4,848

Maintenance, materials and repairs
526

 
487

 
1,499

 
1,474

Other rent and landing fees
497

 
471

 
1,448

 
1,363

Aircraft rent
312

 
304

 
921

 
892

Selling expenses
395

 
400

 
1,136

 
1,094

Depreciation and amortization
473

 
433

 
1,382

 
1,255

Special items, net
215

 
112

 
563

 
432

Other
1,296

 
1,248

 
3,883

 
3,652

Total operating expenses
10,910

 
9,709

 
31,495

 
28,419

Operating income
649

 
1,256

 
2,108

 
3,592

Nonoperating income (expense):
 
 
 
 
 
 
 
Interest income
29

 
25

 
84

 
70

Interest expense, net
(265
)
 
(266
)
 
(795
)
 
(787
)
Other income, net
43

 
48

 
101

 
112

Total nonoperating expense, net
(193
)
 
(193
)
 
(610
)
 
(605
)
Income before income taxes
456

 
1,063

 
1,498

 
2,987

Income tax provision
115

 
402

 
404

 
1,122

Net income
$
341

 
$
661

 
$
1,094

 
$
1,865

 
 
 
 
 
 
 
 
Earnings per common share:
 
 
 
 
 
 
 
Basic
$
0.74

 
$
1.36

 
$
2.35

 
$
3.78

Diluted
$
0.74

 
$
1.36

 
$
2.34

 
$
3.76

Weighted average shares outstanding (in thousands):
 
 
 
 
 
 
 
Basic
460,526

 
484,772

 
465,452

 
493,164

Diluted
461,507

 
486,625

 
466,908

 
495,796

Cash dividends declared per common share
$
0.10

 
$
0.10

 
$
0.30

 
$
0.30

See accompanying notes to condensed consolidated financial statements.

4



AMERICAN AIRLINES GROUP INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In millions)(Unaudited) 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2018
 
2017
 
2018
 
2017
Net income
$
341

 
$
661

 
$
1,094

 
$
1,865

Other comprehensive loss, net of tax:
 
 
 
 
 
 
 
Pension, retiree medical and other postretirement benefits
(17
)
 
(15
)
 
(49
)
 
(44
)
Total comprehensive income
$
324

 
$
646

 
$
1,045

 
$
1,821

See accompanying notes to condensed consolidated financial statements.


5



AMERICAN AIRLINES GROUP INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In millions, except shares and par value)
 
September 30, 2018
 
December 31, 2017
 
(Unaudited)
 
 
ASSETS
 
Current assets
 
 
 
Cash
$
303

 
$
295

Short-term investments
4,552

 
4,771

Restricted cash and short-term investments
154

 
318

Accounts receivable, net
2,170

 
1,752

Aircraft fuel, spare parts and supplies, net
1,576

 
1,359

Prepaid expenses and other
743

 
651

Total current assets
9,498

 
9,146

Operating property and equipment
 
 
 
Flight equipment
40,983

 
40,318

Ground property and equipment
9,187

 
8,267

Equipment purchase deposits
1,330

 
1,217

Total property and equipment, at cost
51,500

 
49,802

Less accumulated depreciation and amortization
(17,277
)
 
(15,646
)
Total property and equipment, net
34,223

 
34,156

Other assets
 
 
 
Goodwill
4,091

 
4,091

Intangibles, net of accumulated amortization of $653 and $622, respectively
2,147

 
2,203

Deferred tax asset
1,293

 
1,816

Other assets
1,383

 
1,373

Total other assets
8,914

 
9,483

Total assets
$
52,635

 
$
52,785

 
 
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)
 
 
 
Current liabilities
 
 
 
Current maturities of long-term debt and capital leases
$
2,493

 
$
2,554

Accounts payable
1,886

 
1,688

Accrued salaries and wages
1,386

 
1,672

Air traffic liability
5,040

 
4,042

Loyalty program liability
3,242

 
3,121

Other accrued liabilities
2,301

 
2,281

Total current liabilities
16,348

 
15,358

Noncurrent liabilities
 
 
 
Long-term debt and capital leases, net of current maturities
22,274

 
22,511

Pension and postretirement benefits
6,898

 
7,497

Loyalty program liability
5,317

 
5,701

Other liabilities
2,366

 
2,498

Total noncurrent liabilities
36,855

 
38,207

Commitments and contingencies

 

Stockholders’ equity (deficit)
 
 
 
Common stock, $0.01 par value; 1,750,000,000 shares authorized, 460,559,470 shares issued and outstanding at September 30, 2018; 475,507,887 shares issued and outstanding at December 31, 2017
5

 
5

Additional paid-in capital
4,946

 
5,714

Accumulated other comprehensive loss
(5,203
)
 
(5,154
)
Accumulated deficit
(316
)
 
(1,345
)
Total stockholders’ deficit
(568
)
 
(780
)
Total liabilities and stockholders’ equity (deficit)
$
52,635

 
$
52,785

See accompanying notes to condensed consolidated financial statements.

6






AMERICAN AIRLINES GROUP INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)(Unaudited)
 
Nine Months Ended September 30,
 
2018
 
2017
Net cash provided by operating activities
$
2,804

 
$
4,307

Cash flows from investing activities:
 
 
 
Capital expenditures and aircraft purchase deposits
(2,736
)
 
(4,563
)
Proceeds from sale of property and equipment and sale-leaseback transactions
860

 
831

Purchases of short-term investments
(2,590
)
 
(4,093
)
Sales of short-term investments
2,816

 
4,714

Decrease in restricted short-term investments
72

 
235

Purchase of equity investment

 
(203
)
Other investing activities
(5
)
 

Net cash used in investing activities
(1,583
)
 
(3,079
)
Cash flows from financing activities:
 
 
 
Proceeds from issuance of long-term debt
2,149

 
2,160

Payments on long-term debt and capital leases
(2,442
)
 
(1,813
)
Deferred financing costs
(48
)
 
(66
)
Treasury stock repurchases
(837
)
 
(1,372
)
Dividend payments
(140
)
 
(150
)
Other financing activities
13

 
21

Net cash used in financing activities
(1,305
)
 
(1,220
)
Net increase (decrease) in cash and restricted cash
(84
)
 
8

Cash and restricted cash at beginning of period
398

 
436

Cash and restricted cash at end of period (a)
$
314

 
$
444

 
 
 
 
Supplemental information:
 
 
 
Interest paid, net
801

 
778

Income taxes paid
16

 
15

 
   
(a) The following table provides a reconciliation of cash and restricted cash to amounts reported within the condensed consolidated balance sheets:
Cash
$
303

 
$
340

Restricted cash included in restricted cash and short-term investments
11

 
104

Total cash and restricted cash
$
314

 
$
444


See accompanying notes to condensed consolidated financial statements.


7



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS OF AMERICAN AIRLINES GROUP INC.
(Unaudited)
1. Basis of Presentation and Recent Accounting Pronouncements
(a) Basis of Presentation
The accompanying unaudited condensed consolidated financial statements of American Airlines Group Inc. (we, us, our and similar terms, or AAG) should be read in conjunction with the consolidated financial statements contained in our Annual Report on Form 10-K for the year ended December 31, 2017. The accompanying unaudited condensed consolidated financial statements include the accounts of AAG and its wholly-owned subsidiaries. AAG’s principal subsidiary is American Airlines, Inc. (American). All significant intercompany transactions have been eliminated.
On December 9, 2013, a subsidiary of AMR Corporation (AMR) merged with and into US Airways Group, Inc. (US Airways Group), a Delaware corporation, which survived as a wholly-owned subsidiary of AAG, and AAG emerged from Chapter 11 (the Merger). Upon closing of the Merger and emergence from Chapter 11, AMR changed its name to American Airlines Group Inc. On December 30, 2015, in order to simplify AAG’s internal corporate structure, US Airways Group merged with and into AAG, with AAG as the surviving corporation. Immediately thereafter, US Airways, Inc. (US Airways), a wholly-owned subsidiary of US Airways Group, merged with and into American, with American as the surviving corporation.
Management believes that all adjustments necessary for the fair presentation of results, consisting of normally recurring items, have been included in the unaudited condensed consolidated financial statements for the interim periods presented. The preparation of financial statements in accordance with accounting principles generally accepted in the United States (GAAP) requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities, revenues and expenses, and the disclosure of contingent assets and liabilities at the date of the financial statements. Actual results could differ from those estimates. The most significant areas of judgment relate to passenger revenue recognition, impairment of goodwill, impairment of long-lived and intangible assets, the loyalty program, valuation allowance for deferred tax assets, as well as pension and retiree medical and other postretirement benefits.
(b) Recent Accounting Pronouncements
Standards Effective for 2018 Reporting Periods
Effective January 1, 2018, we adopted the accounting pronouncements described below.
ASU 2014-09: Revenue from Contracts with Customers (Topic 606) (the New Revenue Standard)
The New Revenue Standard applies to all companies that enter into contracts with customers to transfer goods or services. We adopted the New Revenue Standard using the full retrospective method, which resulted in the recast of prior reporting periods.
The adoption of the New Revenue Standard impacted our accounting for outstanding mileage credits earned through travel by AAdvantage loyalty program members. There was no change in accounting for sales of mileage credits to co-branded card or other partners. Prior to the adoption of the New Revenue Standard, we used the incremental cost method to account for the portion of our loyalty program liability related to mileage credits earned through travel, which were valued based on the estimated incremental cost of carrying one additional passenger. The New Revenue Standard required us to change our policy to the deferred revenue method and apply a relative selling price approach whereby a portion of each passenger ticket sale attributable to mileage credits earned is deferred and recognized in passenger revenue upon future mileage redemption. The value of the earned mileage credits is materially greater under the deferred revenue method than the value attributed to these mileage credits under the incremental cost method.
The New Revenue Standard also required certain reclassifications, principally the reclassification of certain ancillary revenues previously classified and reported as other revenue to passenger revenue and as applicable to cargo revenue. Additionally, the New Revenue Standard required a gross presentation on the face of our condensed consolidated statement of operations for certain revenues and expenses that had previously been presented on a net basis.
See recast condensed consolidated statement of operations data for the three and nine months ended September 30, 2017 and recast consolidated balance sheet data as of December 31, 2017 presented below for the effects of adoption.

8


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS OF AMERICAN AIRLINES GROUP INC.
(Unaudited)


ASU 2017-07: Compensation - Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost (the New Retirement Standard)
The New Retirement Standard required all components of our net periodic benefit cost (income), with the exception of service cost, previously reported within operating expenses as salaries, wages and benefits, to be reclassified and reported within nonoperating income (expense). The New Retirement Standard was applied retrospectively, which resulted in the recast of each prior reporting period presented. The adoption of the New Retirement Standard had no impact on pre-tax income or net income reported.
See recast condensed consolidated statement of operations data for the three and nine months ended September 30, 2017 presented below for the effects of adoption.
ASU 2016-01: Financial Instruments - Overall (Subtopic 825-10)
This ASU made several modifications to Subtopic 825-10, including the elimination of the available-for-sale classification of equity investments, and it required equity investments with readily determinable fair values to be measured at fair value with changes in fair value recognized in net income. This standard was adopted prospectively as of January 1, 2018 and resulted in a $77 million cumulative effect adjustment credit to retained earnings related to our investment in China Southern Airlines Company Limited (China Southern Airlines), which was previously accounted for under the cost method.
ASU 2016-18: Statement of Cash Flows (Topic 230): Restricted Cash
This ASU required that the change in total cash, cash at beginning of period and cash at end of period on the statement of cash flows include restricted cash and also requires companies who report cash and restricted cash separately on the balance sheet to reconcile those amounts to the statement of cash flows. This standard was applied retrospectively, which resulted in the recast of the prior reporting period in the statement of cash flows. For the nine months ended September 30, 2018 and 2017, $11 million and $104 million, respectively, of restricted cash is included in the total of cash and restricted cash balance at the end of period. A reconciliation of cash and restricted cash from our condensed consolidated statement of cash flows to the amounts reported within our condensed consolidated balance sheet is also included in a table below our condensed consolidated statement of cash flows.
Impacts to Prior Period Results
The effects of adoption of the New Revenue Standard and New Retirement Standard to our condensed consolidated statement of operations for the three and nine months ended September 30, 2017 were as follows (in millions, except per share amounts):
 



New Revenue Standard

New Retirement Standard


Three Months Ended
September 30, 2017

As Reported

Deferred Revenue Method

Ancillary Revenue Reclassifications

Gross Versus Net Presentation

Reclassifications

As Recast
Operating revenues:












    Passenger

$
9,377


$
59


$
651


$
9


$


$
10,096

    Cargo

200




10


13




223

    Other

1,301




(661
)

6




646

    Total operating revenues

10,878


59




28




10,965

    Total operating expenses

9,646






28


35


9,709

Operating income

1,232


59






(35
)

1,256

Total nonoperating expense, net

(228
)







35


(193
)
Income before income taxes

1,004


59








1,063

Income tax provision

380


22








402

Net income

$
624


$
37


$


$


$


$
661

Diluted earnings per common share

$
1.28














$
1.36


9


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS OF AMERICAN AIRLINES GROUP INC.
(Unaudited)


 



New Revenue Standard

New Retirement Standard


Nine Months Ended
September 30, 2017

As Reported

Deferred Revenue Method

Ancillary Revenue Reclassifications

Gross Versus Net Presentation

Reclassifications

As Recast
Operating revenues:












    Passenger

$
27,114


$
328


$
1,976


$
29


$


$
29,447

    Cargo

568




31


34




633

    Other

3,924




(2,007
)

14




1,931

    Total operating revenues

31,606


328




77




32,011

    Total operating expenses

28,238






77


104


28,419

Operating income

3,368


328






(104
)

3,592

Total nonoperating expense, net

(709
)







104


(605
)
Income before income taxes

2,659


328








2,987

Income tax provision

998


124








1,122

Net income

$
1,661


$
204


$


$


$


$
1,865

Diluted earnings per common share

$
3.35














$
3.76

The effects of adoption of the New Revenue Standard to our December 31, 2017 consolidated balance sheet are as follows (in millions):
 
As Reported
 
New Revenue Standard
 
As Recast
Deferred tax asset
$
427

 
$
1,389

 
$
1,816

Air traffic liability
3,978

 
64

 
4,042

Current loyalty program liability
2,791

 
330

 
3,121

Noncurrent loyalty program liability

 
5,701

 
5,701

Total stockholders' equity (deficit)
3,926

 
(4,706
)
 
(780
)
Standards Effective for 2019 Reporting Periods
ASU 2016-02: Leases (Topic 842) (the New Lease Standard)
The New Lease Standard requires lessees to recognize a lease liability and a right-of-use asset on the balance sheet and aligns many of the underlying principles of the new lessor model with those in the New Revenue Standard. The New Lease Standard is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted. In July 2018, the FASB issued ASU 2018-11, "Leases (Topic 842) - Targeted Improvements," which provides entities an optional transition method to apply the New Lease Standard prospectively at the date of adoption instead of recasting prior reporting periods. If this optional transition method is elected, an entity would recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption.
We will adopt the New Lease Standard effective January 1, 2019. We are currently evaluating how the adoption of the New Lease Standard will impact our consolidated financial statements. Interpretations are on-going and could have a material impact on our implementation of the New Lease Standard. Currently, we expect that the adoption of the New Lease Standard will have a material impact on our consolidated balance sheet due to the recognition of right-of-use assets and lease liabilities principally for certain leases currently accounted for as operating leases.

10


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS OF AMERICAN AIRLINES GROUP INC.
(Unaudited)


ASU 2018-02: Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income
This ASU provides financial statement preparers with an option to reclassify stranded tax effects within accumulated other comprehensive income to retained earnings due to the U.S. federal corporate income tax rate change as a result of H.R. 1, the 2017 Tax Cuts and Jobs Act (the 2017 Tax Act). The amount of the reclassification is the difference between the amount initially charged or credited directly to other comprehensive income at the previously enacted U.S. federal corporate income tax rate that remains in accumulated other comprehensive income and the amount that would have been charged or credited directly to other comprehensive income using the newly enacted U.S. federal corporate income tax rate, excluding the effect of any valuation allowance previously charged to income from continuing operations. This standard is effective for interim and annual reporting periods beginning after December 15, 2018, and early adoption is permitted. We expect we will adopt this standard effective January 1, 2019. The adoption of the standard may impact tax amounts stranded in accumulated other comprehensive income related to our pension and retiree medical and other postretirement benefit plans.
2. Special Items, Net
Special items, net in the condensed consolidated statements of operations consisted of the following expenses (income) (in millions):
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2018
 
2017
 
2018
 
2017
Fleet restructuring expenses (1)
$
109

 
$
62

 
$
275

 
$
174

Merger integration expenses (2)
68

 
62

 
188

 
192

Severance expenses (3)
20

 

 
20

 

Mark-to-market adjustments on bankruptcy obligations, net (4)
17

 
(12
)
 
(39
)
 
7

Litigation settlement

 

 
45

 

Intangible asset impairment (5)

 

 
26

 

Labor contract expenses

 

 
13

 
45

Other operating charges, net
1

 

 
35

 
14

Mainline operating special items, net
215

 
112

 
563

 
432

 
 
 
 
 
 
 
 
Regional operating special items, net
2

 
(5
)
 
1

 
(1
)
 
 
 
 
 
 
 
 
Mark-to-market adjustments on equity investments, net (6)
15

 

 
82

 

Debt refinancing and extinguishment charges

 
3

 
13

 
12

Nonoperating special items, net
15

 
3

 
95

 
12

 
 
 
 
 
 
 
 
Income tax special items, net (7)

 

 
40

 


     
(1) 
Fleet restructuring expenses principally included accelerated depreciation and remaining lease payments for aircraft and related equipment grounded or expected to be grounded earlier than planned.
(2) 
Merger integration expenses included costs associated with our integration projects, principally our flight attendant, human resources and payroll, and technical operations integrations.
(3) 
Severance expenses primarily included costs associated with reductions in headcount of management and support staff team members.
(4) 
Bankruptcy obligations will ultimately be settled in shares of our common stock. Accordingly, fluctuations in our stock price result in mark-to-market adjustments to these obligations.
(5) 
Intangible asset impairment includes a non-cash charge to write-off our Brazil route authority as a result of ratification of the U.S.-Brazil open skies agreement.

11


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS OF AMERICAN AIRLINES GROUP INC.
(Unaudited)


(6) 
Mark-to-market adjustments on equity investments relate to net unrealized losses resulting from the change in market value primarily associated with our equity investments in China Southern Airlines and Mesa Air Group, Inc.
(7) 
Income tax special items for the nine months ended September 30, 2018 included a $22 million charge to income tax expense to establish a required valuation allowance related to our estimated refund for Alternative Minimum Tax (AMT) credits and an $18 million charge related to an international income tax matter.
3. Earnings Per Common Share
The following table sets forth the computation of basic and diluted earnings per common share (EPS) (in millions, except share and per share amounts):
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2018
 
2017
 
2018
 
2017
Basic EPS:
 
 
 
 
 
 
 
Net income
$
341

 
$
661

 
$
1,094

 
$
1,865

Weighted average common shares outstanding (in thousands)
460,526

 
484,772

 
465,452

 
493,164

Basic EPS
$
0.74

 
$
1.36

 
$
2.35

 
$
3.78

 
 
 
 
 
 
 
 
Diluted EPS:
 
 
 
 
 
 
 
Net income for purposes of computing diluted EPS
$
341

 
$
661

 
$
1,094

 
$
1,865

Share computation for diluted EPS (in thousands):
 
 
 
 
 
 
 
Basic weighted average common shares outstanding
460,526

 
484,772

 
465,452

 
493,164

Dilutive effect of stock awards
981

 
1,853

 
1,456

 
2,632

Diluted weighted average common shares outstanding
461,507

 
486,625

 
466,908

 
495,796

Diluted EPS
$
0.74

 
$
1.36

 
$
2.34

 
$
3.76

 
 
 
 
 
 
 
 
Restricted stock unit awards excluded from the calculation of diluted EPS because inclusion would be antidilutive (in thousands)
1,694

 
66

 
1,128

 
432

4. Share Repurchase Programs and Dividends
In April 2018, we announced that our Board of Directors authorized a new $2.0 billion share repurchase program that expires on December 31, 2020. Since July 2014, our Board of Directors has approved seven share repurchase programs aggregating $13.0 billion of authority. As of September 30, 2018, there was $1.7 billion remaining authority to repurchase shares under our new $2.0 billion share repurchase program. Share repurchases under our repurchase programs may be made through a variety of methods, which may include open market purchases, privately negotiated transactions, block trades or accelerated share repurchase transactions. Any such repurchases will be made from time to time subject to market and economic conditions, applicable legal requirements and other relevant factors. We are not obligated to repurchase any specific number of shares and our repurchase of common stock may be limited, suspended or discontinued at any time at our discretion.
During the nine months ended September 30, 2018, we repurchased 16.6 million shares of AAG common stock for $800 million at a weighted average cost per share of $48.15. Since the inception of our share repurchase programs in July 2014, we have repurchased 278.9 million shares of AAG common stock for $11.3 billion at a weighted average cost per share of $40.69.
Our Board of Directors declared a cash dividend of $0.10 per share for stockholders of record as of August 7, 2018 and paid on August 21, 2018, totaling $46 million. For the first nine months of 2018, we paid total quarterly cash dividends of $140 million.

12


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS OF AMERICAN AIRLINES GROUP INC.
(Unaudited)


5. Revenue Recognition
(a) Revenue
Effective January 1, 2018, we adopted the New Revenue Standard using the full retrospective method, which resulted in the recast of prior reporting periods. See Recent Accounting Pronouncements in Note 1(b) above for effects of adoption on our condensed consolidated statement of operations for the three and nine months ended September 30, 2017 and on our consolidated balance sheet as of December 31, 2017. Under the New Revenue Standard, revenue is recognized upon transfer of control of promised products or services to our customers in an amount that reflects the consideration we expect to receive in exchange for those products or services.
The following are the significant categories comprising our reported operating revenues (in millions):
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2018
 
2017
 
2018
 
2017
Passenger revenue:
 
 
 
 
 
 
 
Passenger travel
$
9,790

 
$
9,400

 
$
28,278

 
$
27,179

Loyalty revenue - travel (1)
771

 
696

 
2,436

 
2,268

Total passenger revenue
10,561

 
10,096

 
30,714

 
29,447

Cargo
260

 
223

 
748

 
633

Other:
 
 
 
 
 
 
 
Loyalty revenue - marketing services
613

 
527

 
1,765

 
1,574

Other revenue
125

 
119

 
376

 
357

Total other revenue
738

 
646

 
2,141

 
1,931

Total operating revenues
$
11,559

 
$
10,965

 
$
33,603

 
$
32,011

 
    
(1) 
Loyalty revenue included in passenger revenue is principally comprised of mileage credit redemptions for air travel awards from mileage credits earned through travel and mileage credits sold to co-branded card and other partners. See discussion of Loyalty Revenue below.
The following is our total passenger revenue by geographic region (in millions):
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2018
 
2017
 
2018
 
2017
Domestic
$
7,424

 
$
7,162

 
$
22,071

 
$
21,522

Latin America
1,210

 
1,183

 
3,939

 
3,622

Atlantic
1,504

 
1,363

 
3,471

 
3,170

Pacific
423

 
388

 
1,233

 
1,133

Total passenger revenue
$
10,561

 
$
10,096

 
$
30,714

 
$
29,447

We attribute passenger revenue by geographic region based upon the origin and destination of each flight segment.
Passenger Revenue
We recognize all revenues generated from transportation on American and our regional flights operated under the brand name American Eagle, including associated baggage fees, ticketing change fees and other inflight services, as passenger revenue when transportation is provided. Ticket and other related sales for transportation that has not yet been provided are initially deferred and recorded as air traffic liability on the condensed consolidated balance sheets. The air traffic liability principally represents tickets sold for future travel dates and estimated future refunds and exchanges of tickets sold for past travel dates.

13


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS OF AMERICAN AIRLINES GROUP INC.
(Unaudited)


The majority of tickets sold are nonrefundable. A small percentage of tickets, some of which are partially used tickets, expire unused. Due to complex pricing structures, refund and exchange policies, and interline agreements with other airlines, certain amounts are recognized in passenger revenue using estimates regarding both the timing of the revenue recognition and the amount of revenue to be recognized. These estimates are generally based on the analysis of our historical data. We have consistently applied this accounting method to estimate revenue from forfeited tickets at the date of travel. Estimated future refunds and exchanges included in the air traffic liability are routinely evaluated based on subsequent activity to validate the accuracy of our estimates. Any adjustments resulting from periodic evaluations of the estimated air traffic liability are included in passenger revenue during the period in which the evaluations are completed.
Various taxes and fees assessed on the sale of tickets to end customers are collected by us as an agent and remitted to taxing authorities. These taxes and fees have been presented on a net basis in the accompanying condensed consolidated statements of operations and recorded as a liability until remitted to the appropriate taxing authority.
Loyalty Revenue
We currently operate the loyalty program, AAdvantage. This program awards mileage credits to passengers who fly on American, any oneworld airline or other partner airlines, or by using the services of other program participants, such as the Citi and Barclays US co-branded cards, hotels and car rental companies. Mileage credits can be redeemed for travel on American and other participating partner airlines as well as other non-air travel awards such as hotels and rental cars. For mileage credits earned by AAdvantage loyalty program members, we apply the deferred revenue method in accordance with the New Revenue Standard.
Mileage credits earned through travel
For mileage credits earned through travel, we apply a relative selling price approach whereby the total amount collected from each passenger ticket sale is allocated between the air transportation and the mileage credits earned. The portion of each passenger ticket sale attributable to mileage credits earned is initially deferred and then recognized in passenger revenue when mileage credits are redeemed and transportation is provided. The estimated selling price of mileage credits is determined using an equivalent ticket value approach which uses historical data, including award redemption patterns by geographic region and class of service as well as similar fares as those used to settle award redemptions. The estimated selling price of miles is adjusted for an estimate of miles that will not be redeemed based on historical redemption patterns.
Mileage credits sold to co-branded cards and other partners
We sell mileage credits to participating airline partners and non-airline business partners including our co-branded card partners, under contracts with terms extending generally for one to nine years. Consideration received from the sale of mileage credits is variable and payment terms typically are within 30 days subsequent to the month of mileage sale. Sales of mileage credits to non-airline business partners are comprised of two components, transportation and marketing. We allocate the consideration received from these sales of mileage credits based on the relative selling price of each product or service delivered.
Our most significant partner agreements are our co-branded card program agreements with Citi and Barclays US that we entered into in 2016. We identified the following revenue elements in these co-branded card agreements: the transportation component; and the use of intellectual property including the American brand and access to loyalty program member lists, which is the predominant element in the agreements, as well as advertising (collectively, the marketing component). Accordingly, we recognize the marketing component in other revenue in the period of the mileage sale following the sales-based royalty method.
The transportation component represents the estimated selling price of future travel awards and is determined using the same equivalent ticket value approach described above. The portion of each mileage credit sold attributable to transportation is initially deferred and then recognized in passenger revenue when mileage credits are redeemed and transportation is provided.
For the portion of our outstanding mileage credits that we estimate will not be redeemed, we recognize the associated value proportionally as the remaining mileage credits are redeemed. Our estimates are based on analysis of historical redemptions.
Cargo Revenue
Cargo revenue is recognized when we provide the transportation.

14


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS OF AMERICAN AIRLINES GROUP INC.
(Unaudited)


Other Revenue
Other revenue includes revenue associated with our loyalty program, which is comprised principally of the marketing component of mileage sales to co-branded card and other partners and other marketing related payments. For the three and nine months ended September 30, 2018, loyalty revenue included in other revenue was $613 million and $1.8 billion, respectively. For the three and nine months ended September 30, 2017, loyalty revenue included in other revenue was $527 million and $1.6 billion, respectively. The accounting and recognition for the loyalty program marketing services are discussed above in Loyalty Revenue. The remaining amounts included within other revenue relate to airport clubs, advertising and vacation-related services.
(b) Contract Balances
Our significant contract liabilities are comprised of (1) outstanding loyalty program mileage credits that may be redeemed for future travel and other non-air travel awards, reported as loyalty program liability on our condensed consolidated balance sheet and (2) ticket sales for transportation that has not yet been provided, reported as air traffic liability on our condensed consolidated balance sheet.
 
September 30, 2018
 
December 31, 2017
 
(In millions)
Loyalty program liability
$
8,559

 
$
8,822

Air traffic liability
5,040

 
4,042

Total
$
13,599

 
$
12,864

The balance of the loyalty program liability fluctuates based on seasonal patterns, which impact the volume of mileage credits issued through travel or sold to co-branded card and other partners (deferral of revenue) and mileage credits redeemed (recognition of revenue). Changes in loyalty program liability are as follows (in millions):
Balance at December 31, 2017
$
8,822

Deferral of revenue
2,302

Recognition of revenue (1)
(2,565
)
Balance at September 30, 2018 (2)
$
8,559

 
(1) 
Principally relates to revenue recognized from the redemption of mileage credits for both air and non-air travel awards. Mileage credits are combined in one homogenous pool and are not separately identifiable. As such, the revenue is comprised of miles that were part of the loyalty program deferred revenue balance at the beginning of the period as well as miles that were issued during the period.
(2) 
Mileage credits can be redeemed at any time and do not expire as long as that AAdvantage member has any type of qualifying activity at least every 18 months. As of September 30, 2018, our current loyalty program liability was $3.2 billion and represents our current estimate of revenue expected to be recognized in the next twelve months based on historical trends, with the balance reflected in long-term loyalty program liability expected to be recognized as revenue in periods thereafter.
The air traffic liability principally represents tickets sold for future travel dates and estimated future refunds and exchanges of tickets sold for past travel dates. The balance in our air traffic liability also fluctuates with seasonal travel patterns. The contract duration of passenger tickets is one year. Accordingly, any revenue associated with tickets sold for future travel dates will be recognized within twelve months. For the nine months ended September 30, 2018, $3.1 billion of revenue was recognized in passenger revenue that was included in our air traffic liability at December 31, 2017.
With respect to contract receivables, reflected as accounts receivable, net on the accompanying condensed consolidated balance sheet, these primarily include receivables for tickets sold to individual passengers through the use of major credit cards. These receivables are short-term, mostly settled within seven days after sale. Bad debt losses, which have been minimal in the past, have been considered in establishing allowances for doubtful accounts.

15


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS OF AMERICAN AIRLINES GROUP INC.
(Unaudited)


6. Debt
Long-term debt and capital lease obligations included in the condensed consolidated balance sheets consisted of (in millions):
 
September 30, 2018
 
December 31, 2017
Secured
 
 
 
2013 Credit Facilities, variable interest rate of 3.98%, installments through 2025
$
1,825

 
$
1,825

2014 Credit Facilities, variable interest rate of 4.13%, installments through 2021
1,228

 
728

April 2016 Credit Facilities, variable interest rate of 4.24%, installments through 2023
980

 
990

December 2016 Credit Facilities, variable interest rate of 4.16%, installments through 2023
1,238

 
1,238

Aircraft enhanced equipment trust certificates (EETCs), fixed interest rates ranging from 3.00% to 9.75%, averaging 4.24%, maturing from 2018 to 2029
11,884

 
11,881

Equipment loans and other notes payable, fixed and variable interest rates ranging from 2.18% to 8.48%, averaging 4.00%, maturing from 2018 to 2029
5,078

 
5,259

Special facility revenue bonds, fixed interest rates ranging from 5.00% to 8.00%, maturing from 2019 to 2035
815

 
857

Other secured obligations, fixed interest rates ranging from 3.81% to 12.24%, maturing from 2021 to 2028
711

 
773

 
23,759

 
23,551

Unsecured
 
 
 
5.50% senior notes, interest only payments until due in 2019
750

 
750

4.625% senior notes, interest only payments until due in 2020
500

 
500

6.125% senior notes, interest only payments until due in 2018

 
500

 
1,250

 
1,750

Total long-term debt and capital lease obligations
25,009

 
25,301

Less: Total unamortized debt discount, premium and issuance costs
242

 
236

Less: Current maturities
2,493

 
2,554

Long-term debt and capital lease obligations, net of current maturities
$
22,274

 
$
22,511

The table below shows the maximum availability under revolving credit facilities, all of which were undrawn, as of September 30, 2018 (in millions):
2013 Revolving Facility
$
1,200

2014 Revolving Facility
1,000

April 2016 Revolving Facility
300

Total
$
2,500

The December 2016 Credit Facilities provide for a revolving credit facility that may be established in the future.

16


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS OF AMERICAN AIRLINES GROUP INC.
(Unaudited)


2018 Aircraft Financing Activities
2017-2 EETCs
In August and October 2017, American created three pass-through trusts which issued approximately $1.0 billion aggregate face amount of Series 2017-2 Class AA, Class A and Class B EETCs (the 2017-2 EETCs). Of the approximately $1.0 billion 2017-2 EETCs, approximately $735 million of such proceeds were used in 2017 to purchase equipment notes issued by American in connection with the financing of 24 aircraft. The remaining approximately $283 million was used in the first six months of 2018 to purchase equipment notes issued by American in connection with financing the remaining 6 of 30 aircraft financed under the 2017-2 EETCs. Interest and principal payments on equipment notes issued in connection with the 2017-2 EETCs are payable semi-annually in April and October of each year, which interest payments began in April 2018 and principal payments will begin in October 2018. These equipment notes are secured by liens on the aircraft financed with the proceeds of the 2017-2 EETCs.
Certain information regarding the 2017-2 EETC equipment notes as of September 30, 2018 is set forth in the table below.
 
2017-2 EETCs
 
Series AA
 
Series A
 
Series B
Aggregate principal issued
$545 million
 
$252 million
 
$221 million
Fixed interest rate per annum
3.35%
 
3.60%
 
3.70%
Maturity date
October 2029
 
October 2029
 
October 2025
2012-2C(R) EETCs
On May 15, 2018, American created a pass-through trust which issued $100 million aggregate face amount of the Series 2012-2 Class C(R) EETCs (the 2012-2C(R) EETCs). Interest and principal payments on equipment notes issued in connection with the 2012-2C(R) EETCs are payable semiannually in June and December of each year, beginning in December 2018.
American had previously issued $100 million aggregate face amount of Series 2012-2 Class C Certificates on June 6, 2013 (the 2012-2C Certificates) in connection with the financing of 11 aircraft previously delivered to American between May 2013 and October 2013. On June 1, 2018, American redeemed the Series C Equipment Notes relating to such 2012-2C Certificates (the 2012-2C Equipment Notes), which were scheduled to mature on June 3, 2018. The proceeds received from the 2012-2C(R) EETCs were used for the redemption of the 2012-2 Series C Equipment Notes and the repayment of the 2012-2C Certificates.
Certain information regarding the 2012-2 Class C(R) EETC equipment notes as of September 30, 2018 is set forth in the table below.
 
2012-2C(R) EETCs
 
Series C(R)
Aggregate principal issued
$100 million
Fixed interest rate per annum
4.70%
Maturity date
June 2021
Other Equipment Notes Issued in 2018
In the first nine months of 2018, American entered into agreements under which it borrowed $1.3 billion in connection with the financing of certain aircraft and pre-delivery purchase deposits. Debt incurred under these agreements matures in 2021 through 2029 and bears interest at fixed and variable rates of LIBOR plus an applicable margin averaging 4.09% at September 30, 2018.

17


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS OF AMERICAN AIRLINES GROUP INC.
(Unaudited)


2018 Other Financing Activities
2013 Credit Facilities
In May 2018, American and AAG entered into a Fourth Amendment (the Fourth Amendment) to the Amended and Restated Credit and Guaranty Agreement, amending the Amended and Restated Credit and Guaranty Agreement dated as of May 21, 2015, which amended and restated the Credit and Guaranty Agreement dated as of June 27, 2013 (as previously amended, the Credit Agreement, and the term loan and revolving credit facilities established thereunder, the 2013 Credit Facilities), pursuant to which American refinanced $1.8 billion of the existing term loans outstanding under the 2013 Credit Facilities with proceeds of term loans incurred under the Fourth Amendment (the Replacement Term Loans). The interest rate margin on the Replacement Term Loans was reduced from 2.00% to 1.75% for those loans with interest rates based on LIBOR and from 1.00% to 0.75% for those loans with interest rates based on an index. Additionally, the Fourth Amendment extended the maturity date of the Replacement Term Loans to June 2025.
2014 Credit Facilities
In September 2018, American and AAG entered into a Fifth Amendment (the Fifth Amendment) to the Amended and Restated Credit and Guaranty Agreement, amending the Amended and Restated Credit and Guaranty Agreement dated as of April 20, 2015 (as previously amended, the 2014 Credit Agreement, and the term loan and revolving credit facilities established thereunder, as amended by the Fifth Amendment, the 2014 Credit Facilities). The Fifth Amendment provides for incremental term loans in the amount of $500 million. The terms are substantially similar to the terms of the existing term loans under the 2014 Credit Agreement including in relation to maturity and interest rate. As of September 30, 2018, approximately $1.2 billion was outstanding under the term loan portion of the 2014 Credit Facilities and there were no other borrowings or letters of credit outstanding thereunder.
7. Income Taxes
At December 31, 2017, we had approximately $10.0 billion of federal net operating losses (NOLs) carried over from prior taxable years (NOL Carryforwards) to reduce future federal taxable income, substantially all of which we expect to be available for use in 2018. The federal NOL Carryforwards will expire beginning in 2022 if unused. We also had approximately $3.4 billion of NOL Carryforwards to reduce future state taxable income at December 31, 2017, which will expire in years 2018 through 2037 if unused.
At December 31, 2017, we had an AMT credit carryforward of approximately $339 million available for federal income tax purposes, which is expected to be substantially refunded no later than 2021 as a result of the repeal of corporate AMT.
During the three and nine months ended September 30, 2018, we recorded an income tax provision of $115 million and $404 million, respectively, which was substantially non-cash as we utilized our NOLs described above. For the nine months ended September 30, 2018, our income tax provision included a $22 million special income tax charge to establish a required valuation allowance related to our estimated refund for AMT credits, which is now subject to a sequestration reduction rate of approximately 6% and an $18 million special income tax charge related to an international income tax matter. Substantially all of our income before income taxes is attributable to the United States.
The 2017 Tax Act was enacted on December 22, 2017. The 2017 Tax Act is the most comprehensive tax change in more than 30 years. As of September 30, 2018, we have not completed our evaluation of the 2017 Tax Act; however, to the extent possible, we have made a reasonable estimate of its effects, including the impact of lower corporate income tax rates (21% vs. 35%) on our deferred tax assets and liabilities and the one-time transition tax on earnings of certain foreign subsidiaries that were previously tax deferred.
The 2017 Tax Act is unclear in many respects and could be subject to potential amendments and technical corrections, as well as interpretations and implementation guidance by the U.S. Department of Treasury and the Internal Revenue Service. In addition, it is unclear how these U.S. federal income tax changes will affect state and local taxation, which often uses federal taxable income as a starting point for computing state and local tax liabilities. Accordingly, we have not yet been able to make a reasonable estimate of the impact of certain items and continue to account for those items based on the tax laws in effect prior to the 2017 Tax Act.
As further interpretations, clarifications and amendments to the 2017 Tax Act are made, our future financial statements could be materially impacted.

18


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS OF AMERICAN AIRLINES GROUP INC.
(Unaudited)


8. Fair Value Measurements
Assets Measured at Fair Value on a Recurring Basis
We utilize the market approach to measure fair value for our financial assets. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets. Our short-term investments classified as Level 2 primarily utilize broker quotes in a non-active market for valuation of these securities. No changes in valuation techniques or inputs occurred during the nine months ended September 30, 2018.
Assets measured at fair value on a recurring basis are summarized below (in millions):
 
Fair Value Measurements as of September 30, 2018
 
Total
 
Level 1
 
Level 2
 
Level 3
Short-term investments (1) (2):
 
 
 
 
 
 
 
Money market funds
$
68

 
$
68

 
$

 
$

Corporate obligations
1,443

 

 
1,443

 

Bank notes/certificates of deposit/time deposits
2,801

 

 
2,801

 

Repurchase agreements
240

 

 
240

 

 
4,552

 
68

 
4,484

 

Restricted cash and short-term investments (1)
154

 
12

 
142

 

Long-term investments (3)
211

 
211

 

 

Total
$
4,917

 
$
291

 
$
4,626

 
$

 
     
(1) 
Unrealized gains or losses on short-term investments are recorded in accumulated other comprehensive loss at each measurement date.
(2) 
All short-term investments are classified as available-for-sale and stated at fair value. Our short-term investments mature in one year or less except for $942 million of bank notes/certificates of deposit/time deposits and $150 million of corporate obligations.
(3) 
Long-term investments primarily include our equity investment in China Southern Airlines and are classified in other assets on our condensed consolidated balance sheets.
Fair Value of Debt
The fair value of our long-term debt was estimated using quoted market prices or discounted cash flow analyses, based on our current estimated incremental borrowing rates for similar types of borrowing arrangements. If our long-term debt was measured at fair value, it would have been classified as Level 2 in the fair value hierarchy.
The carrying value and estimated fair value of our long-term debt, including current maturities, were as follows (in millions): 
 
September 30, 2018
 
December 31, 2017
 
Carrying
Value
 
Fair
Value
 
Carrying
Value
 
Fair
Value
Long-term debt, including current maturities
$
24,767

 
$
24,932

 
$
25,065

 
$
25,848


19


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS OF AMERICAN AIRLINES GROUP INC.
(Unaudited)


9. Employee Benefit Plans
The following table provides the components of net periodic benefit cost (income) (in millions):
 
 
Pension Benefits
 
Retiree Medical and Other
Postretirement Benefits
Three Months Ended September 30,
 
2018
 
2017
 
2018
 
2017
Service cost
 
$
1

 
$
1

 
$
1

 
$
1

Interest cost
 
169

 
180

 
9

 
10

Expected return on assets
 
(226
)
 
(198
)
 
(6
)
 
(5
)
Amortization of:
 
 
 
 
 
 
 
 
Prior service cost (benefit)
 
7

 
7

 
(59
)
 
(59
)
Unrecognized net loss (gain)
 
36

 
36

 
(5
)
 
(6
)
Net periodic benefit cost (income)
 
$
(13
)
 
$
26

 
$
(60
)
 
$
(59
)
 
 
 
 
 
 
 
 
 
 
 
Pension Benefits
 
Retiree Medical and Other
Postretirement Benefits
Nine Months Ended September 30,
 
2018
 
2017
 
2018
 
2017
Service cost
 
$
2

 
$
2

 
$
3

 
$
3

Interest cost
 
507

 
541

 
26

 
29

Expected return on assets
 
(678
)
 
(592
)
 
(17
)
 
(16
)
Amortization of:
 
 
 
 
 
 
 
 
Prior service cost (benefit)
 
21

 
21

 
(178
)
 
(178
)
Unrecognized net loss (gain)
 
108

 
108

 
(15
)
 
(17
)
Net periodic benefit cost (income)
 
$
(40
)
 
$
80

 
$
(181
)
 
$
(179
)
Effective November 1, 2012, substantially all of our defined benefit pension plans were frozen.
The components of net periodic benefit income other than the service cost component are included in nonoperating other income, net in the condensed consolidated statements of operations.
During the first nine months of 2018, we contributed $467 million to our defined benefit pension plans, including supplemental contributions of $425 million in addition to a $42 million minimum required contribution.
10. Accumulated Other Comprehensive Loss
The components of accumulated other comprehensive loss (AOCI) are as follows (in millions):
 
Pension, Retiree
Medical and
Other
Postretirement
Benefits
 
Unrealized Loss on Investments
 
Income Tax
Benefit
(Provision) 
(1)
 
Total
Balance at December 31, 2017
$
(4,523
)
 
$
(1
)
 
$
(630
)
 
$
(5,154
)
Amounts reclassified from AOCI
(64
)
 

 
15

(2)
(49
)
Net current-period other comprehensive income (loss)
(64
)
 

 
15

 
(49
)
Balance at September 30, 2018
$
(4,587
)
 
$
(1
)
 
$
(615
)
 
$
(5,203
)
 
     
(1) 
Relates principally to pension, retiree medical and other postretirement benefits obligations that will not be recognized in net income until the obligations are fully extinguished.
(2) 
Relates to pension, retiree medical and other postretirement benefits obligations and is recognized within the income tax provision on the condensed consolidated statement of operations.

20


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS OF AMERICAN AIRLINES GROUP INC.
(Unaudited)


Reclassifications out of AOCI are as follows (in millions):
 
 
Amounts reclassified from AOCI
 
Affected line items on the
condensed consolidated
statements of operations
AOCI Components
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2018
 
2017
 
2018
 
2017
 
Amortization of pension, retiree medical and other postretirement benefits:
 
 
 
 
 
 
 
 
 
 
Prior service benefit
 
$
(40
)
 
$
(33
)
 
$
(121
)
 
$
(100
)
 
Nonoperating other income, net
Actuarial loss
 
23

 
19

 
72

 
57

 
Nonoperating other income, net
Total reclassifications for the period, net of tax
 
$
(17
)
 
$
(14
)
 
$
(49
)
 
$
(43
)
 
 
11. Regional Expenses
Expenses associated with American Eagle operations are classified as regional expenses on the condensed consolidated statements of operations. Regional expenses consist of the following (in millions):
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2018
 
2017
 
2018
 
2017
Aircraft fuel and related taxes
$
506

 
$
352

 
$
1,369

 
$
999

Salaries, wages and benefits
403

 
369

 
1,175

 
1,074

Capacity purchases from third-party regional carriers
363

 
404

 
1,081

 
1,210

Maintenance, materials and repairs
83

 
74

 
251

 
209

Other rent and landing fees
155

 
159

 
455

 
466

Aircraft rent
8

 
9

 
25

 
26

Selling expenses
94

 
95

 
276

 
269

Depreciation and amortization
76

 
79

 
241

 
235

Special items, net
2

 
(5
)
 
1

 
(1
)
Other
143

 
118

 
449

 
361

Total regional expenses
$
1,833

 
$
1,654

 
$
5,323

 
$
4,848

12. Legal Proceedings
Chapter 11 Cases. On November 29, 2011, AMR, American, and certain of AMR’s other direct and indirect domestic subsidiaries (the Debtors) filed voluntary petitions for relief under Chapter 11 of the United States Bankruptcy Code in the United States Bankruptcy Court for the Southern District of New York (the Bankruptcy Court). On October 21, 2013, the Bankruptcy Court entered an order approving and confirming the Debtors’ fourth amended joint plan of reorganization (as amended, the Plan). On the Effective Date, December 9, 2013, the Debtors consummated their reorganization pursuant to the Plan and completed the Merger.
Pursuant to rulings of the Bankruptcy Court, the Plan established the Disputed Claims Reserve to hold shares of AAG common stock reserved for issuance to disputed claimholders at the Effective Date that ultimately become holders of allowed claims. As of September 30, 2018, there were approximately 24.5 million shares of AAG common stock remaining in the Disputed Claims Reserve. As disputed claims are resolved, the claimants will receive distributions of shares from the Disputed Claims Reserve. However, we are not required to distribute additional shares above the limits contemplated by the Plan, even if the shares remaining for distribution are not sufficient to fully pay any additional allowed unsecured claims. To the extent that any of the reserved shares remain undistributed upon resolution of all remaining disputed claims, such shares will not be returned to us but rather will be distributed to former AMR stockholders.

21


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS OF AMERICAN AIRLINES GROUP INC.
(Unaudited)


DOJ Antitrust Civil Investigative Demand. In June 2015, we received a Civil Investigative Demand (CID) from the United States Department of Justice (DOJ) as part of an investigation into whether there have been illegal agreements or coordination of air passenger capacity. The CID seeks documents and other information from us, and other airlines have announced that they have received similar requests. We are cooperating fully with the DOJ investigation.
Private Party Antitrust Action. Subsequent to announcement of the delivery of CIDs by the DOJ, we, along with Delta Air Lines, Inc., Southwest Airlines Co., United Airlines, Inc. and, in the case of litigation filed in Canada, Air Canada, have been named as defendants in approximately 100 putative class action lawsuits alleging unlawful agreements with respect to air passenger capacity. The U.S. lawsuits have been consolidated in the Federal District Court for the District of Columbia. On June 15, 2018, we reached a preliminary settlement agreement with the plaintiffs in the amount of $45 million that, once approved, will resolve all claims in the U.S. lawsuits. That settlement received preliminary approval from the Court on June 18, 2018. We expect the Court to issue final approval of the settlement later this year.
Private Party Antitrust Action Related to the Merger. On August 6, 2013, a lawsuit captioned Carolyn Fjord, et al., v. AMR Corporation, et al., was filed in the United States Bankruptcy Court for the Southern District of New York. The complaint named as defendants US Airways Group, US Airways, AMR and American, alleged that the effect of the Merger may be to create a monopoly in violation of Section 7 of the Clayton Antitrust Act, and sought injunctive relief and/or divestiture. On November 27, 2013, the Bankruptcy Court denied plaintiffs’ motion to preliminarily enjoin the Merger. On August 29, 2018, the Court denied in part defendants' motion for summary judgment, and fully denied plaintiffs' cross-motion for summary judgment. A bench trial is expected to be scheduled in the next few months. We believe this lawsuit is without merit and intend to vigorously defend against the allegations.
DOJ Investigation Related to the United States Postal Service. In April 2015, the DOJ informed us of an inquiry regarding American’s 2009 and 2011 contracts with the United States Postal Service for the international transportation of mail by air. In October 2015, we received a CID from the DOJ seeking certain information relating to these contracts and the DOJ has also sought information concerning certain of the airlines that transport mail on a codeshare basis. The DOJ has indicated it is investigating potential violations of the False Claims Act or other statutes. We are cooperating fully with the DOJ with regard to its investigation.
General. In addition to the specifically identified legal proceedings, we and our subsidiaries are also engaged in other legal proceedings from time to time. Legal proceedings can be complex and take many months, or even years, to reach resolution, with the final outcome depending on a number of variables, some of which are not within our control. Therefore, although we will vigorously defend ourselves in each of the actions described above and such other legal proceedings, their ultimate resolution and potential financial and other impacts on us are uncertain but could be material. See Part II, Item 1A. Risk Factors – “We may be a party to litigation in the normal course of business or otherwise, which could affect our financial position and liquidity” for additional discussion.
13. Subsequent Events
Dividend Declaration
In October 2018, we announced that our Board of Directors declared a $0.10 per share dividend for stockholders of record as of November 6, 2018, and payable on November 20, 2018. Any future dividends that may be declared and paid from time to time will be subject to market and economic conditions, applicable legal requirements and other relevant factors. We are not obligated to continue a dividend for any fixed period, and the payment of dividends may be suspended at any time at our discretion.
Equipment Notes
In October 2018, American issued equipment notes in the principal amount of $74 million in connection with the financing of certain aircraft. These equipment notes are secured by liens on the aircraft financed and mature in October 2023.




22



ITEM 1B. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS OF AMERICAN AIRLINES, INC.
AMERICAN AIRLINES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In millions)(Unaudited)
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2018
 
2017
 
2018
 
2017
Operating revenues:
 
 
 
 
 
Passenger
$
10,561

 
$
10,096

 
$
30,714

 
$
29,447

Cargo
260

 
223

 
748

 
633

Other
735

 
643

 
2,132

 
1,923

Total operating revenues
11,556

 
10,962

 
33,594

 
32,003

Operating expenses:
 
 
 
 
 
 
 
Aircraft fuel and related taxes
2,234

 
1,570

 
6,100

 
4,481

Salaries, wages and benefits
3,127

 
3,027

 
9,231

 
8,920

Regional expenses
1,810

 
1,662

 
5,275

 
4,860

Maintenance, materials and repairs
526

 
487

 
1,499

 
1,474

Other rent and landing fees
497

 
471

 
1,448

 
1,363

Aircraft rent
312

 
304

 
921

 
892

Selling expenses
395

 
400

 
1,136

 
1,094

Depreciation and amortization
473

 
433

 
1,382

 
1,255

Special items, net
215

 
112

 
563

 
432

Other
1,298

 
1,247

 
3,885

 
3,652

Total operating expenses
10,887

 
9,713

 
31,440

 
28,423

Operating income
669

 
1,249

 
2,154

 
3,580

Nonoperating income (expense):
 
 
 
 
 
 
 
Interest income
85

 
56

 
240

 
158

Interest expense, net
(262
)
 
(250
)
 
(771
)
 
(738
)
Other income, net
44

 
48

 
102

 
112

Total nonoperating expense, net
(133
)
 
(146
)
 
(429
)
 
(468
)
Income before income taxes
536

 
1,103

 
1,725

 
3,112

Income tax provision
133

 
417

 
467

 
1,170

Net income
$
403

 
$
686

 
$
1,258

 
$
1,942

See accompanying notes to condensed consolidated financial statements.


23



AMERICAN AIRLINES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In millions)(Unaudited)
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2018
 
2017
 
2018
 
2017
Net income
$
403

 
$
686

 
$
1,258

 
$
1,942

Other comprehensive loss, net of tax:
 
 
 
 
 
 
 
Pension, retiree medical and other postretirement benefits
(17
)
 
(15
)
 
(50
)
 
(44
)
Total comprehensive income
$
386

 
$
671

 
$
1,208

 
$
1,898

See accompanying notes to condensed consolidated financial statements.


24



AMERICAN AIRLINES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In millions, except shares and par value)
 
September 30, 2018
 
December 31, 2017
 
(Unaudited)
 
 
ASSETS
 
 
 
Current assets
 
 
 
Cash
$
294

 
$
287

Short-term investments
4,542

 
4,768

Restricted cash and short-term investments
154

 
318

Accounts receivable, net
2,222

 
1,755

Receivables from related parties, net
10,525

 
8,822

Aircraft fuel, spare parts and supplies, net
1,506

 
1,294

Prepaid expenses and other
739

 
647

Total current assets
19,982

 
17,891

Operating property and equipment
 
 
 
Flight equipment
40,669

 
39,993

Ground property and equipment
8,906

 
8,006

Equipment purchase deposits
1,330

 
1,217

Total property and equipment, at cost
50,905

 
49,216

Less accumulated depreciation and amortization
(16,964
)
 
(15,354
)
Total property and equipment, net
33,941

 
33,862

Other assets
 
 
 
Goodwill
4,091

 
4,091

Intangibles, net of accumulated amortization of $653 and $622, respectively
2,147

 
2,203

Deferred tax asset
1,429

 
2,071

Other assets
1,280

 
1,283

Total other assets
8,947

 
9,648

Total assets
$
62,870

 
$
61,401

 
 
 
 
LIABILITIES AND STOCKHOLDER’S EQUITY
 
 
 
Current liabilities
 
 
 
Current maturities of long-term debt and capital leases
$
2,497

 
$
2,058

Accounts payable
1,822

 
1,625

Accrued salaries and wages
1,332

 
1,613

Air traffic liability
5,040

 
4,042

Loyalty program liability
3,242