American Airlines 2007 Annual Report Download - page 4

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PART I
ITEM 1. BUSINESS
AMR Corporation (AMR or the Company) was incorporated in October 1982. AMR’s operations fall almost
entirely in the airline industry. AMR's principal subsidiary, American Airlines, Inc. (American), was founded in
1934. American is the largest scheduled passenger airline in the world in terms of available seat miles and
revenue passenger miles. At the end of 2007, American provided scheduled jet service to approximately 170
destinations throughout North America, the Caribbean, Latin America, Europe and Asia. American is also one of
the largest scheduled air freight carriers in the world, providing a wide range of freight and mail services to
shippers throughout its system onboard American’s passenger fleet.
AMR Eagle Holding Corporation (AMR Eagle), a wholly-owned subsidiary of AMR, owns two regional airlines
which do business as "American Eagle” -- American Eagle Airlines, Inc. and Executive Airlines, Inc. (Executive)
(collectively, the American Eagle® carriers). American also contracts with two independently owned regional
airlines, which do business as “American Connection” (the American Connection® carriers). The American Eagle
carriers and the American Connection carriers provide connecting service from eight of American's high-traffic
cities to smaller markets throughout the United States, Canada, Mexico and the Caribbean.
AMR Eagle currently operates a fleet of 294 aircraft. The AMR Eagle fleet is operated to feed passenger traffic to
American pursuant to a capacity purchase agreement between American and AMR Eagle under which American
receives all passenger revenue from flights and pays AMR Eagle a fee for each flight. In July 2007, the capacity
purchase agreement was amended to reflect what the Company believes are current market rates received by
other regional carriers for similar flying. Amounts paid to AMR Eagle under the capacity purchase agreement are
for various operating expenses of AMR Eagle, such as crew expenses, maintenance and aircraft ownership,
some of which are calculated based on specific operating statistics (e.g. block hours, departures) and others of
which are fixed monthly amounts. As of December 31, 2007, AMR Eagle averaged over 1,700 daily departures,
offering scheduled passenger service to over 150 destinations in North America, Mexico and the Caribbean. On a
separate company basis, AMR Eagle reported $2.3 billion in revenue and $114 million of income before income
taxes in 2007. However, AMR Eagle’s historical financial information is not indicative of the AMR Eagle’s future
results of operations, financial position and cash flows if AMR Eagle had been a stand-alone entity.
As discussed in the Recent Events section of this Item 1., the Company plans to divest AMR Eagle in 2008.
Material modifications could be made to the business and operations of AMR Eagle, and to the capacity purchase
agreement between American and AMR Eagle, prior to any such divestiture.
American Beacon Advisors, Inc. (American Beacon), a wholly-owned subsidiary of AMR, is responsible for the
investment and oversight of assets of American’s U.S. employee benefit plans, as well as AMR’s short-term
investments. It also serves as the investment manager of the American Beacon Funds, a family of mutual funds
with both institutional and retail shareholders, and provides customized fixed income portfolio management
services. American Beacon’s average assets under management for 2007 was $65 billion, an increase of 27
percent from 2006 and are almost evenly split between equities and fixed income investments. American Beacon
has been particularly successful in growing its third party business, as average third-party assets under
management increased by approximately 39 percent in 2007. Third-party assets under management accounted
for $37 billion of average assets under management and $90 million of 2007 gross revenue. For 2007, on a
separate company basis, American Beacon’s gross revenue was $101 million and income before income taxes
was approximately $48 million, both of which increased approximately 40 percent over 2006.
Recent Events
The Company recorded net earnings of $504 million in 2007, its second consecutive annual profit and a $273
million increase over 2006. Improved results reflected an increase in operating revenue of $372 million, or 1.6
percent on 2.3 percent less capacity, partially offset by higher fuel prices and increases in certain other costs.
American’s passenger revenues increased 2.1 percent despite a capacity (available seat mile) decrease of 2.4
percent. While passenger yield showed significant year-over-year improvement as American implemented fare
increases to partially offset the continuing rise in the cost of fuel, passenger yield remains low by historical
standards.