American Airlines 2008 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. At the
end of 2008, American provided scheduled jet service to approximately 150 destinations throughout North
America, the Caribbean, Latin America, Europe and Asia.
American, AMR Eagle Holding Corporation (AMR Eagle) and the AmericanConnection® airlines serve 250 cities in
40 countries with, on average, more than 3,400 daily flights. The combined network fleet numbers approximately
900 aircraft. American Airlines is also a founding member of oneworld® Alliance, which enables member airlines
to offer their customers more services and benefits than any member airline can provide individually. These
services include a broader route network, opportunities to earn and redeem frequent flyer miles across the
combined oneworld network and more airport lounges. Together, oneworld members serve nearly 700
destinations in over 150 countries, with 8,500 daily departures. 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, 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
“AmericanConnection” (the AmericanConnection® carriers). The American Eagle carriers and the
AmericanConnection® carriers provide connecting service from ten of American's high-traffic cities to smaller
markets throughout the United States, Canada, Mexico and the Caribbean.
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. The capacity purchase agreement reflects 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. This capacity purchase agreement was
renewed in July 2008. As of December 31, 2008, AMR Eagle operated over 1,400 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 $2.5 billion in revenue and $30 million of income before income
taxes in 2008. However, this historical financial information is not indicative of what AMR Eagle’s future results of
operations, financial position and cash flows might be if AMR Eagle was a stand-alone entity.
Recent Events
The Company recorded a net loss of $2.1 billion in 2008 compared to net earnings of $504 million in 2007. These
results reflect a dramatic year-over-year increase in fuel prices from an average of $2.13 per gallon in 2007 to an
average of $3.03 per gallon in 2008. Fuel expense was the Company’s largest single expense category and the
fuel price increase resulted in $2.7 billion in incremental year-over-year fuel expense in 2008 (based on the year-
over-year increase in the average price per gallon multiplied by gallons consumed). In addition, the Company paid
11.7 cents more per gallon in 2007 than in 2006, which drove a $268 million negative impact to fuel expense in
2007. Although fuel prices have abated considerably from the record prices recorded in July 2008, fuel prices
remain volatile. Fuel price volatility, additional increases in the price of fuel, and/or disruptions in the supply of fuel
would further adversely affect the Company’s financial condition and its results of operations.
The significant rise in fuel price was partially offset by higher unit revenues (passenger revenue per available seat
mile). Mainline passenger unit revenues increased 7.3 percent in 2008 due to an 8.6 percent increase in
passenger yield (passenger revenue per passenger mile) partially offset by a 0.9 point load factor decrease
compared to 2007. Although passenger yield showed year-over-year improvement, passenger yield remains
essentially flat with 2000 levels, despite cumulative inflation of approximately 25 percent over the same time
frame.