American Airlines 2005 Annual Report Download - page 5

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2
• American purchased certain obligations due October 2006 with a face value of $261 million at par value from
an institutional investor. In conjunction with the purchase, American borrowed an additional $245 million
under an existing mortgage agreement with a final maturity in December 2012 from the same investor.
• AMR issued 13 million shares of common stock for net proceeds of $223 million.
• AMR Eagle borrowed approximately $319 million (net of discount), under various debt agreements, related to
the purchase of regional jet aircraft.
The Company’s ability to become profitable and its ability to continue to fund its obligations on an ongoing basis
will depend on a number of factors, many of which are largely beyond the Company’s control. Some of the risk
factors that affect the Company’s business and financial results are discussed in the Risk Factors listed in Item
1A. As the Company seeks to improve its financial condition, it must continue to take steps to generate additional
revenues and significantly reduce its costs. Although the Company has a number of initiatives underway to
address its cost and revenue challenges, the ultimate success of these initiatives is not known at this time and
cannot be assured. It will be very difficult, absent continued restructuring of its operations, for the Company to
continue to fund its obligations on an ongoing basis, or to become profitable, if the overall industry revenue
environment does not continue to improve and fuel prices remain at historically high levels for an extended
period.
Competition
Domestic Air Transportation The domestic airline industry is fiercely competitive. Currently, any U.S. air
carrier deemed fit by the U.S. Department of Transportation (DOT) is free to operate scheduled passenger service
between any two points within the U.S. and its possessions. Most major air carriers have developed hub-and-
spoke systems and schedule patterns in an effort to maximize the revenue potential of their service. American
operates five hubs: Dallas/Fort Worth (DFW), Chicago O'Hare, Miami, St. Louis and San Juan, Puerto Rico.
United Air Lines (United) also has a hub operation at Chicago O'Hare. Delta Air Lines (Delta) previously operated
a hub at DFW. In January 2005, however, Delta ceased hub operations at DFW.
The American Eagle® carriers increase the number of markets the Company serves by providing connections at
American’s hubs and certain other major airports -- Boston, Los Angeles, Raleigh/Durham and New York’s
LaGuardia and John F. Kennedy International Airports. The American Connection® carriers provide connecting
service to American through St. Louis. American's competitors also own or have marketing agreements with
regional carriers which provide similar services at their major hubs and other locations.
On most of its domestic non-stop routes, the Company faces competing service from at least one, and sometimes
more than one, domestic airline including: AirTran Airways, Alaska Airlines, ATA Airlines, Continental Airlines
(Continental), Delta, Frontier Airlines, JetBlue Airways, Northwest Airlines (Northwest), Southwest Airlines
(Southwest), United, US Airways and their affiliated regional carriers. Competition is even greater between cities
that require a connection, where the major airlines compete via their respective hubs. In addition, the Company
faces competition on some of its routes from carriers operating point-to-point service on such routes. The
Company also competes with all-cargo and charter carriers and, particularly on shorter segments, ground and rail
transportation. On all of its routes, pricing decisions are affected, in large part, by the need to meet competition
from other airlines.
The Company must also compete with carriers that have recently reorganized or are reorganizing, including under
the protection of Chapter 11 of the Bankruptcy Code. It is possible that one or more other competitors may seek
to reorganize in or out of Chapter 11. Successful reorganizations present the Company with competitors with
significantly lower operating costs derived from renegotiated labor, supply and financing contracts.
International Air Transportation In addition to its extensive domestic service, the Company provides
international service to the Caribbean, Canada, Latin America, Europe and Asia. The Company's operating
revenues from foreign operations were approximately 36 percent of the Company’s total operating revenues in
2005, and 35 and 27 percent of the Company’s total operating revenues in 2004 and 2003, respectively.
Additional information about the Company's foreign operations is included in Note 14 to the consolidated financial
statements.