| AMR CORP ITEM 1A RISK FACTORS Our ability to become profitable and our ability to continue to fund our obligations on an ongoing basis will depend on a number of risk factors, many of which are largely beyond our control |
| Some of the factors that may have a negative impact on us are described below: As a result of significant losses in recent years, our financial condition has been materially weakened |
| As a result, our financial condition has been materially weakened, and we remain vulnerable both to unexpected events (such as additional terrorist attacks or a sudden spike in jet fuel prices) and to general declines in the operating environment (such as that resulting from a recession or significant increased competition) |
| Our initiatives to generate additional revenues and significantly reduce our costs may not be adequate or successful |
| As we seek to improve our financial condition, we must continue to take steps to generate additional revenues and to significantly reduce our costs |
| Although we have a number of initiatives underway to address our cost and revenue challenges, a number of these initiatives involve significant changes to our business which we may be unable to implement |
| The adequacy and ultimate success of our initiatives to generate additional revenues and significantly reduce our costs are not known at this time and cannot be assured |
| Moreover, whether our initiatives will be adequate or successful depends in large measure on factors beyond our control, notably the overall industry environment, including passenger demand, yield and industry capacity growth, and fuel prices |
| It will be very difficult, absent continued restructuring of our operations, for us to continue to fund our 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 |
| Our business is affected by many changing economic and other conditions beyond our control, and our results of operations tend to be volatile |
| Our business, and that of the rest of the airline industry, is affected by many changing economic and other conditions largely outside of our control, including among others: • actual or potential changes in international, national, regional and local economic, business and financial conditions, including recession, inflation and higher interest rates, war, terrorist attacks or political instability; • changes in consumer preferences, perceptions, spending patterns or demographic trends; • actual or potential disruptions to the air traffic control system; • increases in costs of safety, security and environmental measures; • outbreaks of diseases that affect travel behavior; or • weather and natural disasters |
| As a result, our results of operations tend to be volatile and subject to rapid and unexpected change |
| In addition, many of the factors that can have a material impact on our business and our results of operations are beyond our control |
| 11 _________________________________________________________________ [57]Table of Contents Our indebtedness and other obligations are substantial and could adversely affect our business and liquidity |
| We have and will continue to have a significant amount of indebtedness and obligations to make future payments on aircraft equipment and property leases |
| We may incur substantial additional debt, including secured debt, and lease obligations in the future |
| We also have substantial, and increasing, pension funding obligations |
| Our substantial indebtedness and other obligations could have important consequences |
| For example, they could: • limit our ability to obtain additional financing for working capital, capital expenditures, acquisitions and general corporate purposes, or adversely affect the terms on which such financing could be obtained; • require us to dedicate a substantial portion of our cash flow from operations to payments on our indebtedness and other obligations, thereby reducing the funds available for other purposes; • make us more vulnerable to economic downturns; • limit our ability to withstand competitive pressures and reduce our flexibility in responding to changing business and economic conditions; or • limit our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate |
| We may be unable to comply with our financial covenants |
| American has a fully drawn dlra788 million Credit Facility, which consists of a dlra540 million Revolving Facility with a final maturity on June 17, 2009 and a dlra248 million Term Loan Facility with a final maturity on December 17, 2010 |
| The Credit Facility contains a liquidity covenant and a ratio of cash flow to fixed charges covenant |
| We were in compliance with these covenants as of December 31, 2005 and expect to be able to continue to comply with these covenants for the period ending March 31, 2006 |
| However, given the historically high price of fuel and the volatility of fuel prices and revenues, it is difficult to assess whether we will, in fact, be able to continue to comply with these covenants, and there are no assurances that we will be able to comply with these covenants |
| Failure to comply with these covenants would result in a default under the Credit Facility which - - - if we did not take steps to obtain a waiver of, or otherwise mitigate, the default — - could result in a default under a significant amount of our other debt and lease obligations, and otherwise adversely affect our business |
| We are being adversely affected by increases in fuel prices, and we would be adversely affected by disruptions in the supply of fuel |
| Our results are very significantly affected by the price and availability of jet fuel |
| Fuel prices increased significantly in 2005 and remain high |
| Due to the competitive nature of the airline industry, we may not be able to pass on increased fuel prices to customers by increasing fares |
| In fact, recent history would indicate that we have limited ability to pass along the increased costs of fuel |
| If fuel prices decline in the future, increased fare competition and lower revenues may offset any potential benefit of lower fuel prices |
| While we do not currently anticipate a significant reduction in fuel availability, dependency on foreign imports of crude oil, limited refining capacity and the possibility of changes in government policy on jet fuel production, transportation and marketing make it impossible to predict the future availability of jet fuel |
| If there is an outbreak of hostilities or other conflicts in oil producing areas or elsewhere or a reduction in refining capacity (due to weather events, for example), there could be reductions in the supply of jet fuel and significant increases in the cost of jet fuel |
| Major reductions in the availability of jet fuel or significant increases in its cost, or a continuation of current high prices for a significant period of time, would adversely affect our business |
| While we seek to manage the price risk of fuel costs by using derivative contracts, there can be no assurance that, at any given time, we will have derivatives in place to provide any particular level of protection against increased fuel costs |
| In addition, a deterioration of our financial position could negatively affect our ability to enter into derivative contracts in the future |
| 12 _________________________________________________________________ [58]Table of Contents The airline industry is fiercely competitive and fares are at historically low levels |
| Service over almost all of our routes is highly competitive and fares remain at historically low levels |
| We face vigorous, and in some cases, increasing competition from major domestic airlines, national, regional, all-cargo and charter carriers, foreign air carriers, LCCs, and, particularly on shorter segments, ground and rail transportation |
| We also face increasing and significant competition from marketing/operational alliances formed by our competitors |
| In addition, the competitive landscape we face would be altered substantially by industry consolidation, including merger, equity investment and joint venture transactions |
| The percentage of routes on which we compete with carriers having substantially lower operating costs than ours has grown significantly over the past decade, and we now compete with LCCs on 75 percent of our domestic network |
| Certain alliances have been granted immunity from anti-trust regulations by governmental authorities for specific areas of cooperation, such as joint pricing decisions |
| To the extent alliances formed by our competitors can undertake activities that are not available to us, our ability to effectively compete may be hindered |
| Pricing decisions are significantly affected by competition from other airlines |
| Fare discounting by competitors has historically had a negative effect on our financial results because we must generally match competitors’ fares, since failing to match would result in even less revenue |
| More recently, we have faced increased competition from carriers with simplified fare structures, which are generally preferred by travelers |
| Any fare reduction or fare simplification initiative may not be offset by increases in passenger traffic, a reduction in costs or changes in the mix of traffic that would improve yields |
| Moreover, decisions by our competitors that increase – or reduce – overall industry capacity, or capacity dedicated to a particular domestic or foreign region, market or route, can have a material impact on related fare levels |
| We compete with reorganized and reorganizing carriers, which may result in competitive disadvantages for us or fare discounting |
| We must compete with air carriers that have recently reorganized or are reorganizing, including under the protection of Chapter 11 of the Bankruptcy Code, including United, the second largest US air carrier, Delta, the third largest US air carrier and Northwest, the fourth largest US air carrier |
| It is possible that other competitors may seek to reorganize in or out of Chapter 11 |
| With the Chapter 11 filings of Delta and Northwest, two out of the four largest US air carriers are now operating under the protection of the Bankruptcy Code, with United just having emerged from Chapter 11 |
| We cannot reliably predict the outcome of these proceedings or the consequences of such a large portion of the airline industry’s capacity being provided by bankrupt or recently reorganized air carriers |
| Successful reorganizations by other carriers present us with competitors with significantly lower operating costs and a stronger financial position derived from renegotiated labor, supply, and financing contracts, which could lead to fare reductions |
| These competitive pressures may limit our ability to adequately price our services, may require us to further reduce our operating costs, and could have a material adverse impact on us |
| Our reduced pricing power adversely affects our ability to achieve adequate pricing, especially with respect to business travel |
| We believe this depressed passenger yield is due in large part to a corresponding decline in our pricing power |
| Our reduced pricing power is the product of several factors including: greater cost sensitivity on the part of travelers (particularly business travelers); pricing transparency resulting from the use of the Internet; greater competition from LCCs and from carriers that have recently reorganized or are reorganizing including under the protection of Chapter 11 of the Bankruptcy Code; other carriers being well hedged against rising fuel costs and able to better absorb the current high jet fuel prices; and, more recently, fare simplification efforts by certain carriers |
| We believe that our reduced pricing power will persist indefinitely and possibly permanently |
| 13 _________________________________________________________________ [59]Table of Contents We need to raise additional funds to maintain sufficient liquidity, but we may be unable to do so on acceptable terms |
| To maintain sufficient liquidity as we continue to implement our restructuring and cost reduction initiatives, and because we have significant debt, lease, pension and other obligations in the next several years, we will need continued access to additional funding |
| Our ability to obtain future financing has been reduced because we have fewer unencumbered assets available than in years past |
| A very large majority of our aircraft assets (including virtually all of the aircraft eligible for the benefits of Section 1110 of the US Bankruptcy Code) have been encumbered |
| Since the Terrorist Attacks, our credit ratings have been lowered to significantly below investment grade |
| These reductions have increased our borrowing costs and otherwise adversely affected borrowing terms, and limited borrowing options |
| Additional reductions in our credit ratings could further increase borrowing or other costs and further restrict the availability of future financing |
| A number of other factors, including our recent financial results, our substantial indebtedness, the difficult revenue environment we face, our reduced credit ratings, high fuel prices, and the financial difficulties experienced in the airline industry, adversely affect the availability and terms of financing for us |
| An inability to obtain additional financing on acceptable terms would have a material adverse impact on us and on our ability to sustain our operations over the long term |
| Our business strategy may change |
| We evaluate our assets on an ongoing basis with a view to maximizing their value to us and determining which are core to our operations |
| We may change our business strategy in the future and may not pursue our current goals |
| Our business is subject to extensive government regulation, which can result in increases in our costs, limits on our operating flexibility and competitive disadvantages |
| Airlines are subject to extensive domestic and international regulatory requirements |
| Many of these requirements result in significant costs |
| For example, the FAA from time to time issues directives and other regulations relating to the maintenance and operation of aircraft, and compliance with those requirements drives significant expenditures |
| In addition, the ability of US carriers to operate international routes is subject to change because the applicable arrangements between the United States and foreign governments may be amended from time to time, or because appropriate slots or facilities are not made available |
| Moreover, additional laws, regulations, taxes and airport rates and charges have been enacted from time to time that have significantly increased the costs of airline operations, reduced the demand for air travel or restricted the way we can conduct our business |
| For example, the Aviation and Transportation Security Act, which became law in 2001, mandates the federalization of certain airport security procedures and imposes additional security requirements on airlines |
| Similar laws or regulations or other governmental actions in the future may adversely affect our business and financial results |
| 14 _________________________________________________________________ [60]Table of Contents Our results of operations may be affected by changes in law and future actions taken by governmental agencies having jurisdiction over our operations, including: • changes in the law which affect the services that can be offered by airlines in particular markets and at particular airports; • the granting and timing of certain governmental approvals (including foreign government approvals) needed for codesharing alliances and other arrangements with other airlines; • restrictions on competitive practices (for example court orders, or agency regulations or orders, that would curtail an airline’s ability to respond to a competitor); • the adoption of regulations that impact customer service standards (for example new passenger security standards); or • the adoption of more restrictive locally-imposed noise restrictions |
| In November 2005, the United States and the European Union reached a tentative air services agreement that would provide airlines from the United States and EU member states open access to each other’s markets, with freedom of pricing and unlimited rights to fly beyond the United States and both within and beyond the EU The tentative agreement is subject to approval by the EU Transport Council of Ministers |
| Under the agreement, every US and EU airline would be authorized to operate between airports in the United States and London’s Heathrow Airport |
| Only three airlines besides American are currently allowed to provide that service and Heathrow routes have historically been among our most profitable |
| The agreement, if approved, would result in our facing increased competition in serving Heathrow if additional carriers are able to obtain necessary slots and terminal facilities |
| We currently serve the Dallas/Fort Worth area solely from Dallas/Fort Worth International Airport (DFW) |
| Southwest Airlines is actively seeking repeal of the Wright Amendment, which is a law that authorizes flight operations at Dallas Love Field within limited geographic areas |
| In November 2005, legislation was passed that added the State of Missouri to the areas that may be served to and from Love Field, and we subsequently announced that we plan to provide service at Love Field in order to protect market share |
| Splitting our Dallas/Fort Worth operations between DFW and Love Field impairs the efficiency and profitability of our hub operations at DFW, and further expansion of the authorized geographic service areas could have an adverse financial impact on us |
| We could be adversely affected by conflicts overseas or terrorist attacks |
| The increased threat of US military involvement in overseas operations has, on occasion, had an adverse impact on our business, financial position (including access to capital markets) and results of operations, and on the airline industry in general |
| Furthermore, during 2003, the war in Iraq had a significant adverse impact on international and domestic revenues and future bookings |
| The continuing conflict in Iraq, or other conflicts or events in the Middle East or elsewhere, may result in similar adverse impacts |
| The Terrorist Attacks had a material adverse impact on us |
| The occurrence of another terrorist attack (whether domestic or international and whether against us or another entity) could again have a material adverse impact on us |
| Our international operations could be adversely affected by numerous events, circumstances or government actions beyond our control |
| Our current international activities and prospects could be adversely affected by factors such as reversals or delays in the opening of foreign markets, exchange controls, currency and political risks, taxation and changes in international government regulation of our operations, including the inability to obtain or retain needed route authorities and/or slots |
| 15 _________________________________________________________________ [61]Table of Contents We could be adversely affected by an outbreak of a disease that affects travel behavior |
| In 2003, there was an outbreak of Severe Acute Respiratory Syndrome (SARS), which primarily had an adverse impact on our Asia operations |
| More recently, there have been concerns about a potential outbreak of avian flu |
| If there were another outbreak of a disease (such as SARS or avian flu) that affects travel behavior, it could have a material adverse impact on us |
| We could be adversely affected if we are unable to maintain satisfactory relations with any unionized or other employee work group |
| Our operations could be adversely affected if we fail to maintain satisfactory relations with any labor union representing our employees |
| In addition, any dispute we have with, or any disruption by, an employee work group (outside the confines of a collective bargaining agreement) could adversely impact us |
| Moreover, one of the fundamental tenets of our strategic Turnaround Plan is increased union and employee involvement in our operations |
| To the extent we are unable to maintain satisfactory relations with any unionized or other employee work group, our ability to execute our strategic plans would be adversely affected |
| Our insurance costs have increased substantially and further increases in insurance costs or reductions in coverage could have an adverse impact on us |
| We carry insurance for public liability, passenger liability, property damage and all-risk coverage for damage to our aircraft |
| As a result of the Terrorist Attacks, aviation insurers significantly reduced the amount of insurance coverage available to commercial air carriers for liability to persons other than employees or passengers for claims resulting from acts of terrorism, war or similar events (war-risk coverage) |
| At the same time, these insurers significantly increased the premiums for aviation insurance in general |
| The US government has agreed to provide commercial war-risk insurance for US based airlines until August 31, 2006, covering losses to employees, passengers, third parties and aircraft |
| In addition, the Secretary of Transportation may extend the policy until December 31, 2006, at his discretion |
| If the US government does not extend the policy beyond August 31, 2006, we will attempt to purchase similar coverage with narrower scope from commercial insurers at an additional cost |
| To the extent this coverage is not available at commercially reasonable rates, we would be adversely affected |
| While the price of commercial insurance has declined since the premium increase immediately after the Terrorist Attacks, in the event commercial insurance carriers further reduce the amount of insurance coverage available to us, or significantly increase its cost, we would be adversely affected |
| We may be unable to retain key management personnel |
| Since the Terrorist Attacks, several of our key management employees have elected to retire early or leave for more financially favorable opportunities at other companies |
| There can be no assurance that we will be able to retain our key management employees |
| Any inability to retain our key management employees, or attract and retain additional qualified management employees, could have a negative impact on us |
| We could be adversely affected by a failure or disruption of our computer, communications or other technology systems |
| We are increasingly dependent on technology to operate our business |
| The computer and communications systems on which we rely could be disrupted due to events beyond our control, including natural disasters, power failures, terrorist attacks, equipment failures, software failures and computer viruses and hackers |
| We have taken certain steps to help reduce the risk of some (but not all) of these potential disruptions |
| There can be no assurance, however, that the measures we have taken are adequate to prevent or remedy disruptions or failures of these systems |
| Any substantial or repeated failure of these systems could impact our operations and customer service, result in the loss of important data, loss of revenues, increased costs and generally harm our business |
| Moreover, a catastrophic failure of certain of our vital systems (which we believe is a remote possibility) could limit our ability to operate our flights for an indefinite period of time, which would have a material adverse impact on our operations and our business |