American Airlines 2008 Annual Report Download - page 5

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In addition, the Company’s 2008 operating results were impacted by three special items:
In the second quarter, the Company announced capacity reductions due to unprecedented high fuel costs
and the other challenges facing the industry. In connection with these capacity reductions, the Company
concluded that a triggering event had occurred, requiring that fixed assets be tested for impairment. As a
result of this test, the Company concluded the carrying values of its McDonnell Douglas MD-80 and the
Embraer RJ-135 aircraft fleets were no longer recoverable. Consequently, the 2008 results include an
impairment charge of $1.1 billion to write these and certain related long-lived assets down to their
estimated fair values. Also in connection with these capacity reductions, the Company recorded $71
million in expense for employee severance costs and a $33 million expense related to the grounding of
leased Airbus A300 aircraft prior to lease expiration. These charges are described in Note 2 to the
consolidated financial statements.
The Company completed the sale of American Beacon Advisors (American Beacon) receiving total
proceeds of $442 million and realizing a net gain of $432 million. This transaction is described in Note 14
to the consolidated financial statements.
AMR recorded a settlement charge totaling $103 million related to lump sum distributions from the
Company’s defined benefit pension plans to pilots who retired. Pilot retirements resulted in $917 million in
total lump sum payments to pilot retirees. The charge is further described in Note 10 to the consolidated
financial statements.
In August 2008, AMR retired, by purchasing with cash, $75 million of the $300 million principal amount of the 4.25
percent senior convertible notes due 2023 (the 4.25 Notes). In September 2008, the remaining holders of the 4.25
Notes exercised their elective put rights and the Company purchased and retired these notes at a price equal to
100 percent of their principal amount, totaling $225 million. Under the terms of the 4.25 Notes, the Company had
the option to pay the purchase price with cash, stock, or a combination of cash and stock, and the Company
elected to pay for the 4.25 Notes solely with cash.
AMR continues to take steps to strengthen its balance sheet, and in the third quarter of 2008 issued 27.1 million
shares of common stock generating net proceeds of $294 million. The Company reduced long-term debt and
capital lease obligations (including current maturities) by $185 million during the year and ended the year with $3.1
billion in unrestricted cash and short-term investments and $459 million in restricted cash and short-term
investments. In 2008, American also raised approximately $500 million under a loan secured by aircraft, due in
installments through 2015, and raised approximately $424 million utilizing various transactions including additional
loans secured by aircraft and sale leasebacks of certain aircraft, including regional aircraft.
In 2008, American entered into a joint business agreement and related marketing arrangements with the UK
carrier British Airways and the Spanish carrier Iberia, providing for commercial cooperation by the carriers on
flights between North America (consisting of the United States, Canada and Mexico) and Europe (consisting of the
European Union, Switzerland and Norway) and beyond. The agreement contemplates the pooling and sharing of
certain revenues and costs on transatlantic flights, expanded codesharing on each other’s flights, enhanced
frequent flyer program reciprocity, and cooperation in the areas of planning, marketing and certain operations. The
agreement was signed in connection with an application to the U.S. Department of Transportation by the carriers
for antitrust immunity to permit global cooperation. The application also included the Finnish carrier, Finnair, and
the Jordanian carrier, Royal Jordanian. If granted (which cannot be assured), antitrust immunity would permit the
five carriers, all of whom are members of the oneworld airline alliance, to deepen cooperation on a bilateral and
multilateral basis. Implementation of the joint business agreement and related arrangements is subject to
conditions, including various U.S. and foreign regulatory approvals, successful negotiation of certain detailed
financial and commercial arrangements, and other approvals. Agencies from which regulatory approvals must be
obtained may impose requirements or limitations as a condition of granting such approvals, such as requiring
divestiture of routes, gates, slots or other assets.
The Company continued its fleet renewal strategy during 2008 as it entered into amendments to its 737-800
purchase agreement with the Boeing Company. Giving effect to the amendments and considering the impact of
delays caused by the recent machinist strike at Boeing, the Company is now committed to take delivery of a total
of 29 737-800 aircraft in 2009, 39 737-800 aircraft in 2010 and eight 737-800 aircraft in 2011. These orders are in
addition to eleven 737-800 aircraft and seven Boeing 777 aircraft scheduled to be delivered in 2013 – 2016.