American Airlines 2003 Annual Report Download - page 28

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In addition to the commitments summarized above, the Company is required to make contributions to its defined
benefit pension plans. These contributions are required under the minimum funding requirements of the
Employee Retirement Pension Plan Income Security Act (ERISA). The Company’s estimated 2004 minimum
required contributions to its defined benefit pension plans are approximately $600 million. (This estimate assumes
Congress passes legislation providing certain technical corrections to current ERISA funding requirements.) Due
to uncertainties regarding significant assumptions involved in estimating future required contributions to its defined
benefit pension plans, such as interest rate levels, the amount and timing of asset returns and the impact of
proposed legislation, the Company is not able to reasonably estimate its future required contributions beyond
2004. However, based on the current regulatory environment and market conditions, the Company expects that
its 2005 minimum required contributions will significantly exceed its 2004 minimum required contributions.
Congress is also considering other legislation that, if passed, would further modestly reduce the Company’s 2004
minimum required contributions and significantly reduce its 2005 minimum required contributions.
Agreements with Lessors and Lenders
As discussed in Note 5 to the consolidated financial statements, the Company reached concessionary agreements
with certain lessors in 2003. Certain of the Vendor Agreements provide that the Company’s obligations under the
related lease revert to the original terms if certain events (Events) occur prior to December 31, 2005, including: (i)
an event of default under the related lease (which generally occurs only if a payment default occurs), (ii) an event
of loss with respect to the related aircraft, (iii) rejection by the Company of the lease under the provisions of
Chapter 11 of the U.S. Bankruptcy Code or (iv) the Company’s filing for bankruptcy under Chapter 7 of the U.S.
Bankruptcy Code. If any one of these Events were to occur, the Company would be responsible for approximately
$24 million in additional operating lease payments and $11 million in additional payments related to capital leases
as of December 31, 2003. This amount will increase to approximately $119 million in operating lease payments
and $111 million in payments related to capital leases prior to the expiration of the provision on December 31,
2005. These amounts are being accounted for as contingent rentals and will only be recognized if they become
due.
In addition, as part of the Vendor Agreements, American sold 33 Fokker 100 aircraft (with a minimal net book
value), issued a $23 million non-interest-bearing note, payable in installments and maturing in December 2010,
entered into short-term leases on these aircraft and issued shares of AMR common stock as discussed in Note 9
to the consolidated financial statements. In exchange, approximately $130 million of debt related to certain of the
Fokker 100 aircraft was retired. However, the agreement contains provisions that would require American to repay
additional amounts of the original debt if certain Events occur prior to December 31, 2005. As a result of this
transaction, including the sale of the 33 Fokker 100 aircraft, and the termination of the Company’s interest rate
swap agreements related to the debt that has been retired, the Company recognized a gain of approximately $68
million. If none of the Events occur, the Company expects to recognize an additional gain of approximately $37
million in December 2005.
Results of Operations
The Company’s 2003 results reflect a weak revenue environment, particularly in the first four months of the year.
They also reflect the benefit of the Company’s cost reduction initiatives, especially the reduction in employee costs
due to the Labor Agreements and Management Reductions that came into effect in the second quarter of 2003.
The Company’s unit costs are now among the lowest of the major network air carriers, and the Company believes
it is now better positioned to compete against low-cost carriers (LCCs). However, as discussed in the Overview to
this Item, the Company needs to see continued improvement in the revenue environment, additional cost
reductions and further productivity improvements before it can return to sustained profitability at acceptable levels.