PAULINA JASWIEC MBA 535 Management Accounting

AMR Financial Statement Analysis Research:

1. Provide an overview of the company, the type of business it engages in, and any

significant recent events affecting the company’s operations or financial position.

AMR was incorporated in October 1982. Virtually all of AMR’s operations fall within the

airline industry. AMR’s principal subsidiary, American Airlines, Inc. (American), was

founded in 1934, and is one of the largest airlines in the world. American Airlines, (Inc. and

American Eagle Airlines, Inc. are subsidiaries of AMR Corporation). American Airlines,

American Eagle, American Connection, AA.com, and AAdvantage are trademarks of

American Airlines, Inc. AMR Corporation common stock trades under the symbol

"AAMRQ" on the OTCQB marketplace, operated by OTC Markets Group. American,

together with the American Eagle carriers and the third party carriers that provide regional

feed to American, serves more than 250 cities in approximately 50 countries with, on

average, 3,400 daily flights in the Americas, Europe, and Asia/Pacific. The combined

network fleet numbers approximately 900 aircraft. American Airlines is a founding member

of the oneworld® alliance, which brings together some of the best and biggest names in the

airline business, enabling them to offer their customers more services and benefits than any

airline can provide on its own. (Information gathered from Hoovers- AMR Corporate Profile)

American is also one of the largest scheduled airfreight carriers in the world, providing a

wide range of freight and mail services to shippers throughout its system onboard American’s

passenger fleet. (Information gathered from American Airlines website- Corporate

Responsibility)

The company's November 2011 Chapter 11 bankruptcy filing calls for American Airlines and

American Eagle to continue operating as usual while AMR reorganizes. American Airlines

and US Airways have agreed to merge in an $11 billion deal that would create the world's

largest airline. The new airline will take the American Airlines name. The merger would give

AMR creditors 72 percent of ownership in the combined company and US Airways

shareholders the rest. AMR will own, directly or indirectly, all of the equity interests of

American Airlines, Inc. (American), US Airways and their direct and indirect subsidiaries.

(Information gathered from American Airlines -10K)

2. Does the company produce a Corporate Social Responsibility (CSR) Report?

Contrast this report to the 10K.

AMR produces a corporate social responsibility report, which in consists of the corporation’s

initiative to assess and take responsibility for the company's effects on the environment and

impact on social welfare.

CSR is a process with the aim to embrace responsibility for the company's actions and

encourage a positive impact through its activities on the environment, consumers, employees,

communities, stakeholders and all other members of the public sphere who may also be

considered as stakeholders. Corporate social responsibility can involve incurring short-term

costs that do not provide an immediate financial benefit to the company, but instead promote

positive social and environmental change. (Information gathered from Wikipedia- American

Airlines)

CSR is titled to aid an organization's mission as well as a guide to what the company stance

when it comes to believes and mission, all the while to eventually uphold its image to it

consumers. Development business ethics is one of the forms of applied ethics that examines

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ethical principles and moral or ethical problems that can arise in a business

environment. (Information gathered from Wikipedia- CSR)

On the contrary a Form 10-K is an annual report required by the U.S Securities and Exchange

Commission (SEC), that gives a comprehensive summary of a company's performance.

Provides a comprehensive overview of a company's state of business. Must be filed within 90

days after fiscal year-end. (Information gathered from Financial Dictionary- CSR)

All publicly traded companies and any privately traded companies with more than 500

shareholders and $10 million in assets are required to file a 10-K. The 10-k discloses detailed

information about a company's finances, including total sales, sales by product line or

division for the past five years, revenue, operating income, earnings per share, and equity, as

well as other corporate information such as by-laws, organizational structure, holdings,

subsidiaries, lawsuits in which the company is involved, and the company's history. While

similar to the annual report to shareholders, it often contains more information, such as

executive compensation and organizational structure. (Information gathered from Financial

Dictionary- 10k)

Stakeholders are more focused on the activity of the company, which is shown in the 10-K

report. The reason for this is because it exposes the current year financial state. In the

contrary, SCR reports are the most important to the general community because it exposes the

events done, (positive or negative financial gains), its products & services, its impact on the

environment & on local communities, and lastly how it treats and develops its workforce.

3. Discuss the auditor’s report, the role of the auditors, and the significance of the

report

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Recorded in the annual report, the auditor's report tests to see that a corporation's financial

statements comply with Generally Accepted Accounting Principles. The auditor's report is a

formal opinion, issued by either an internal auditor or an independent external auditor as a

result of an audit performed on a legal entity.

One of the main purposes of the auditor’s report is to ensure that the finances of the company,

both the Accounts Payable and the Accounts Receivable, are being conducted in a manner

that is in keeping with legal requirements. An auditor's report is considered an essential tool

when reporting financial information to users, particularly in business.

The auditor’s report also includes what is referred to as an auditor’s opinion, which in essence

reports and comments on the findings of the investigation. It is important to note that auditor's

reports on financial statements are neither evaluations nor any other similar determination

used to evaluate entities in order to make a decision. The report is only an opinion on whether

the information presented is correct and free from material misstatements, whereas all other

determinations are left for the user to decide. (Information gathered from Investopedia-

Auditor’s Report Definition)

Audit reports are required by law if a company is publicly traded or in an industry regulated

by the Securities and Exchange Commission (SEC). Companies seeking funding, as well as

those looking to improve internal controls, also find this information valuable. The role of an

auditor is to evaluate several aspects of the business, or of ongoing projects and even

employees. Another responsibility of auditors is to ensure the efficient use of material and

human resources in order to serve an organization best. Auditors are in charge of checking the

financial records of a business also. Following these roles, he or she must make evaluations

and recommend solutions for correcting unprofitable aspects or procedures inside the

company. (Information gathered from Chron- What are the 4 Types of Auditor’s Report)

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There are four common types of auditor's reports, each one presenting a different situation

encountered during the auditor's work. The four reports are as follows:

- An unqualified opinion is an audit report that is issued when an auditor determines that each

of the financial records provided by the small business is free of any misrepresentations. This

is the best type of report a business can receive. In accordance with the standards known as:

Generally Accepted Accounting Principles (GAAP).

In situations when a company’s financial records have not been maintained in

accordance with GAAP but no misrepresentations are identified, an auditor will issue

a qualified opinion. The writing of a qualified opinion is extremely similar to that of

an unqualified opinion.

The worst type of financial report that can be issued to a business is an adverse

opinion. This indicates that the firm’s financial records do not conform to GAAP. In

addition, the financial records provided by the business have been grossly

misrepresented.

On some occasions, an auditor is unable to complete an accurate audit report. This

may occur for a variety of reasons, such as an absence of appropriate financial

records. When this happens, the auditor issues a disclaimer of opinion, stating that an

opinion of the firm’s financial status could not be determined.

(note: Information copied from Chron- What are the 4 Types of Auditor’s Report)

4. How many shares of common stock did the company have outstanding?

Out of 750,000,000 shares authorized:

In the balance sheet Shares Outstanding 335,271,557 dollars  

Common Stock, $1 par value per share

Number of shares from common stock is

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335,271,557 / 1 = 335,271,557 shares.

5. Does the company have any preferred stock outstanding?

The company AMR doesn’t have any preferred stock outstanding. In the annual report, it says

that 20,000,000 shares of preferred stock are authorized but none of them have been issued.

6. What is the company’s total paid-in capital?

In 2012, AMR has $-7,987,000,000 in total stockholders’ equity, $-9,462,000,000 in retained

earnings and $-367,000,000 in treasury stock.

Formula is stockholders’ equity - retained earnings + treasury stock.

Companies total paid-in capital: -7,987,000,000 - (-9.462.000,000) + (-367,000,000) =

1,108,000,000

Treasury stock: -367,000,000

Retained earnings: -9,462,000,000

Stockholders equity: -7,987,000,000

Shares issued in 2012: 341,232,637

Additional Paid-in Capital 4,481,000,000

(341,232,637 * 1) + 4,481,000,000

7. What was the average price per share received by the Company for all common

stock issued since inception of the Corporation?

Preferred stock- 20,000,000 shares authorized, none issued

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Common stock- $1 par value; 750,000,000 shares authorized; shares issued: 2012: -

341,232,637; - 341,207,797

Market Capital/ # of Shares= 11,200,000,000/ 341,232,637= 3.28

8. What was the total dollar amount of dividends declared in the most recent year

reported?

The total dollar amount of dividend declared in the most recent year is 0.AMR lost

1,876,000,000 dollars in 2012. AMR suffered net losses of almost $2 billion in 2011 and

$1.876 billion in 2012.

9. Evaluate and comment on the following:

a. Liquidity – ability to meet short-term obligations as they come due;

INTRO: The following ratios are used to determine a company's ability to pay off its short-

terms debts obligations. The higher the value of the ratios, the larger the margin of safety the

company possesses to cover short-term debts. Common liquidity ratios include the current

ratio, the quick ratio and the operating cash flow ratio. A company's ability to turn short-term

assets into cash to cover debts is of the utmost importance when creditors are seeking

payment. Bankruptcy analysts and mortgage originators frequently use the liquidity ratios to

determine whether a company will be able to continue as a going concern.

The current ratio is the ratio of current assets of a business to its current liabilities. It is the

most widely used test of liquidity of a business and measures the ability of a business to repay

its debts over the period of next 12 months.

Current Ratio

=

Current Assets

Current

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Liabilities

Curent Ratio: 23,510,000,000 / 31,497,000,000 = 0.746

We can see that the current assets are too small enough to settle current liabilities. This shows

critical liquidity problems because it means that total current liabilities exceed total current

assets.

Quick ratio measures the liquidity of a business by measuring the amount of the most liquid

current assets there are to cover current liabilities.

Quick Ratio = Cash & Equivalents + Short-term Investments + Accounts Receivable

Current Liabilities

Quick ratio = 0,54

Current Liabilities: Total Liabilities -

The quick ratio is more conservative than the current ratio, because it excludes inventory

from current assets. Inventory is excluded because some companies have difficulty turning

their inventory into cash. In the event that short-term obligations need to be paid off

immediately, there are situations in which the current ratio would overestimate a company's

short-term financial strength.

A quick ratio of 1.00 means that the most liquid assets of a business are equal to its total debts

and the business will just manage to repay all its debts by using its cash, marketable securities

and accounts receivable. Thus we conclude that, generally, a higher quick ratio is preferable

because it means greater liquidity. In our case the quick ratio is less than one. It indicates that

AMR would not be able to repay all its debts by using its most liquid assets.

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b. Solvency –asset management, debt management and interest coverage;

INTRO: Solvency ratios are the methods used to find out the firm’s ability to meet its long-

term requirement obligations and thus remain solvent and avoid insolvency or bankruptcy. In

general, the lower the business organization’s reliance on debt to finance its assets the lower

is the risk to work with this firm.

The debt to equity ratio measure how much the business has been financed in form of debt

when compared with how much cash has been invested in the business. This ratio assesses the

risk involved in lending to AA and gauges the ability of the company to repay the amount.

The debt-to-equity ratio is a measure of the relationship between the capital contributed by

creditors and the capital contributed by shareholders. It also shows the extent to which

shareholders' equity can fulfill a company's obligations to creditors in the event of a

liquidation.

Formula is: Debt-to-Equity Ratio = Total Debt / Total Equity

Short-Term Debt: 1,419,000,000

Long-Term Debt: 7,116,000,000

Total Equity: -7,987,000,000

Debt to equity = (1,419,000,000+7,116,000) / -7,987,000,000 = -1.07

This ratio

A high debt to equity ratio generally means that a company has been aggressive in financing

its growth with debt. This can result in volatile earnings as a result of the additional interest

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expense. If a lot of debt is used to finance increased operations, the company could

potentially generate more earnings than it would have without this outside financing.

If this were to increase earnings by a greater amount than the debt cost (interest), then the

shareholders benefit as more earnings are being spread among the same amount of

shareholders. However, the cost of this debt financing may outweigh the return that the

company generates on the debt through investment and business activities and become too

much for the company to handle. This can lead to bankruptcy, which would leave

shareholders with nothing.

Debt ratio is similar to which shows the same proportion but in different way. The debt ratio

is calculated by dividing total liabilities (i.e. long-term and short-term liabilities) by total

assets: Debt ratio = Liabilities / Assets

total Liabilities: 31,497

total Assets: 23510

31,497,000,000 / 23,510,000,000= 1.3

Answer:

With our answer being 1.3, most of the company assets are financed through debt

About the Ratios

The optimal debt ratio is determined by the same proportion of liabilities and equity as a

debt-to-equity ratio. If the ratio is less than 0.5, most of the company's assets are financed

through equity. If the ratio is greater than 0.5, most of the company's assets are financed

through debt.

Maximum normal value is 0.6-0.7. But it is necessary to take into account industry specific,

explained in the article about debt-to-equity ratio.

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c. Profitability – this should include return on assets and equity, and earnings per

share;

INTRO: A class of financial metrics that are used to assess a business's ability to generate

earnings as compared to its expenses and other relevant costs incurred during a specific

period of time. For most of these ratios, having a higher value relative to a competitor's ratio

or the same ratio from a previous period is indicative that the company is doing well.

ROA. An indicator of how profitable a company is relative to its total assets. The return on

assets (ROA) gives an idea as to how efficient management is at using its assets to generate

earnings. Calculated by dividing a company's annual earnings by its total assets, ROA is

displayed as a percentage. Sometimes this is referred to as "return on investment".

The formula for return on assets is: Net Income / Total Assets

ROA = -1,876,000,000 / 23,510,000,000 = - 0.079

ROA = - 8 %

ROA tells us what earnings were generated from invested capital (assets). The ROA is

slightly better in comparison with 2011 (-8.3 %) but we can see that on the year before the

bankruptcy 2010 the ROA was -1.9 %. The assets of the company are comprised of both debt

and equity. Both of these types of financing are used to fund the operations of the company.

The ROA figure gives investors an idea of how effectively the company is converting the

money it has to invest into net income.

Return on equity (ROE) breaking into three parts.

ROE (DuPont formula) = (Net profit / Revenue) * (Revenue / Total assets) * (Total assets /

Equity) =Net profit margin * Asset Turnover * Financial leverage

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ROE: (-1876/ 24,855)*(24,855/ 23,510)*(23,510/ -7,987) =

=(0.0754)*(1.0572)*(2.9435)*

=0.234

DuPont model tells that ROE is affected by three things:

Operating efficiency, which is measured by net profit margin;

Asset use efficiency, which is measured by total asset turnover;

Financial leverage, which is measured by the equity multiplier;

The portion of a company's profit allocated to each outstanding share of common stock.

Earnings per share serves as an indicator of a company's profitability.

Calculated as:

EPS: Net Income/ # of Shares

= (1,876,000,000 - 0) / (335,271,557)

= 5.59

LISTED ON AAM’s STATEMNETS AS: 5.6

d. Cash position – this should include a discussion of the Statement of Cash Flows,

whether it is in the direct or indirect format, and the primary sources and uses of cash

for the period.

The method the company uses is known as direct, as it breaks down all the section into three

parts in the cash flow statement: operations, investments, and financing.

Cash at the beginning = 283,000,00

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Operating costs = 1,279,000,000

investment costs = (1,571,000,000)

financing costs 489,000,000.

Cash at the end of the year is 480,000,000

We can see in the Consolidated statements of cash flows that:

Operating costs are positive due to high reorganization items (non-cash)

2,066,000,000 that cover the net losses.

Investment costs are negative because of high capital expenditures, including aircraft

lease deposits: – 1,888,000,000

Financing costs are positive due to high Sale-leaseback transactions

10. How does the company’s performance compare to similar companies and/or

industry standards?

INTRO: The domestic airline industry is fiercely competitive. For example, four main airline

companies uniquely merged in their own separate ways (they include: American Airlines,

Delta Air Lines, Southwest Airlines and United Continental) in affect to this resolution, now

have control over 70 percent of the U.S. market. Little do they know, but as competition

grow so do the competitive factors..ie cutting rates and price war all in the desired outcome of

gaining consumers. The top competitors of AMR are Air France-KLM, Delta Airlines, United

Continental Holdings, Inc. American Airline is an timeworn airline, yet a know ‘legacy’ for

its achievements, yet unfortunately due to little completion dominated over the industry

locally and now hold a access portfolio aftermath. Now in the days of quick/ local flights

allows for a cheaper ticket price with adds value the modern day traveler on a budget.

Examples: Southwest and JetBlue. Unfortunately most large legacy carriers have gone

bankrupt due to these changes in the industry.

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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: Alaska Airlines (Alaska),

Delta Air Lines (Delta), Frontier Airlines, Hawaiian Airlines, JetBlue Airways (JetBlue),

Southwest Airlines (Southwest), Spirit Airlines, United Airlines (United), US Airways,

Virgin America Airlines and each of their affiliated regional carriers. Competition is even

greater between cities that require a connection, where the major airlines compete via their

respective hubs.

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 Airline operates in five

primary domestic markets: Dallas/Fort Worth, Chicago O’Hare, Miami, New York City and

Los Angeles. The American Eagle carriers and the third party carriers that provide regional

feed to American increase the number of markets the Company serves by providing

connections at American’s primary markets. American’s competitors also own or have

marketing agreements with regional carriers, which provide similar services at their major

hubs and other locations.

The airline industry is characterized by substantial and intense price competition. Fare

discounting by competitors has a negative effect on the American Airline’s financial results

because the Company is generally required to match competitors’ fares, as failing to match

would provide even less revenue due to customers’ price sensitivity. Consumers have now the

choice, the airlines can probably look forward to much more intense price competition.

There are a number of low-cost carriers (LCCs) in the domestic market and AA competes

with LCCs over a very large part of its network. Several major airlines, including AA, have

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implemented efforts to lower their costs since lower cost structures enable airlines to offer

lower fares. AMR's operational costs for labor, fuel, aircraft fleet, and facilities are far larger

than its rivals, and the company saw bankruptcy protection as the only way to get back on its

feet. AA is weighed down by high labor costs, mainly for an underfunded pension. Delta's

labor costs per flying hour, adjusted for productivity, are 14 percent lower than American's.

US Airways' costs are 34 percent lower, Southwest's 36 percent lower and JetBlue's 51

percent lower.

Several air carriers have reorganized in recent years under Chapter 11, including United

Airlines, Delta Air Lines, and US Airways. These cost reduction efforts, bankruptcy

reorganizations and subsequent consolidations (e.g., United/Continental; Delta/Northwest)

have allowed carriers to decrease operating costs. Over the past several years, the American

Airline was unable to offset its substantial cost disadvantage through increases in passenger

traffic, changes in the mix of traffic that improve yields and/or cost reductions. Consequently,

the Company filed the Chapter 11 Cases to become a more efficient, financially stronger and

more competitive airline.

Labor is actually the smaller part of American's troubles. American Airline does not generate

as much revenue as the other airlines, see the following chart.

Firms Gross Revenue in 2012

Air France-KLM $24,762,370,000

Delta Air Lines $36,670,000,000

United Continental $37,152,000,000

American Airline $24,855,000,000

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AA has begun to add capacity back in 2011 by placing an order for 460 new Boeing and

Airbus narrow body planes to be delivered 2012 through 2022. It is the second largest aircraft

order in history. It's part of AA's strategy, to concentrate on moving people to its giant hubs

in Chicago and Dallas, as well as to Los Angeles, New York and Miami. The question to the

company would be: If it makes sense to add service in cities such as Los Angeles, where

competition is stiff and American has in general higher costs?

In addition, the Company faces competition on some of its connecting 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.

Despite high fuel costs and the recession, some things are moving in the airline industry's

direction. Carriers have trimmed seat capacity. American's capacity is down 9 percent since

2006, while other legacy carriers trimmed 5 percent. Fewer seats mean fuller airplanes and

more pricing power.

(NOTE: All information above was retrieved from over 4 sources and my own analysis)

11. Does this company observe socially responsible operating policies? Give examples.

INTRO: As one of the largest airlines, AA’s business creates value but also causes a lot of

damage to the environment. In order to counter balance this facts, AA is committed to

designing and implementing initiatives to reduce their impact on the environment. They have

to organize to reduce emissions, to conserve resources, and to behave in other ways that

lessen our impact on the earth.

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The main socially responsible project that are on the following areas: Climate and energy,

utilities management, waste minimization and charity actions. AA’s business requires a lot of

energy and their largest potential impact on the environment as the results from the burning

of jet fuel. AA have established programs and initiatives and made significant investments to

maximize fuel efficiency, reduce greenhouse gas emissions, and minimize energy use across

their fleet. One of their biggest business initiatives is called Fuel Smart. It has benefited both

the company through millions of dollars of cost savings and the environment. The fuel-

conservation program Fuel Smart exceeded its 2011 goal by achieving an annual fuel savings

rate of 141 million gallons

AA is working toward achieving a corporate goal of reducing greenhouse gas emissions by

30 percent by 2025 and encourages aircraft and engine manufacturers to increase the speed of

deploying technological innovations that will make aircrafts more environmentally efficient.

American retired for example 21 MD-80 aircrafts from service and introduced 15 Next-

Generation Boeing 737-800s, which improves carbon dioxide (CO2) efficiency.

The Utilities Management Council focuses on sharing best practices and implementing

initiatives to minimize resource use and identify cost savings with regard to energy, materials

and water use, and related emissions and waste. American and American Eagle have many

well-established programs for resource recovery and recycling for such materials as engine

oil, petroleum-based chemicals, batteries, and lamps. They have for example a voluntary

program onboard aircraft that encourages flight attendants to recycle aluminum cans. They

annually harvest about 10 million cans, and donate the proceeds from the sale of the metal to

the Wings Foundation, which assists flight attendants who have critical needs.

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The operations inflight and on the ground generate significant amounts of waste. Through

source minimization, recycling and reclamation, AA is cutting the amount of materials that

end up as waste. They have reduced in recent years the use of solvents and other materials

with high amounts of volatile organic compounds in various maintenance procedures.

In order to reduce the aircraft noise, the major initiative here is the gradual replacement of

older aircraft with quieter and more energy-efficient models. This process has been underway

for more than 30 years. American’s fleet today is substantially quieter than at any time since

the dawn of jet travel, and they comply with U.S. and international standards for aircraft

noise. American works collaboratively with airports and noise-mitigation entities in many

cities to find operational procedures that will reduce noise emissions without compromising

aircraft safety.

At their main maintenance base in Tulsa, Oklahoma, they have recently opened a new

wastewater treatment plant capable of separating organic and in organic contaminants from

water, at a rate of 500 gallons per minute. The treated water then flows into the municipal

sanitary sewer system, eliminating the need for deep-well injection.

American was recognized for exceptional performance with regard to diversity and inclusion

by many external organizations, including the Human Rights Campaign (HRC), Black

Enterprise, Equal Opportunity Magazine and Diversity MBA Magazine. AA gives money to

hundreds of nonprofit organizations in all of the country they serve. Though varied in size,

mission, and geographical scope, most of these organizations fell into three major categories:

Arts and Culture, Education and Health and Human Services.

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AMR employees donated nearly $1 million to charitable organizations through the American

Giving Program and increased volunteer hours from 38,000 in 2010 to 41,000 in 2011.

American Airline increased participation in customer giving initiatives and raised nearly $7

million in total customer giving. AA people donate personal time to a multitude of causes:

Local charities, disaster relief efforts, coaching and mentoring, and service on boards and

civic organizations. AA is also helping to distribute food, medicine, school supplies,

wheelchairs, clothing and toys to orphanages, clinics, and other places in poor countries,

especially in Latin America.

(NOTE: All information above was retrieved from over 4 sources and my own analysis)

12. Describe unique opportunities available to this company or industry. Has the

company capitalized on these opportunities?

INTRO: A major strength of any airline is the product itself air travel. Despite downturns,

over time air travel continues to grow, not only due to population growth, but also due to an

increased propensity to fly, Airline market growth offers continual expansion opportunities

for both leisure and business destinations. This is particularly true for international

destinations.

Another strength is the safety record, and the associated public acceptance of air travel as

both a fast and safe way to travel. Both traditional, brand recognized airlines and new low

cost carriers share this strength. One big opportunity for airlines is that they have the ability

to segment the market, even on the same routes. This allows airlines to establish different

levels of service and make associated pricing decisions.

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Technology advances can result in cost savings, from more fuel-efficient aircraft to more

automated processes on the ground. Technology can also result in increased revenue due to

customer-friendly service enhancements like inflight Internet access and other value added

products for which a customer will pay extra. In the current years American Airlines already

ordered such planes with less emissions, and fuel consumptions.

In order to meet demand for access to an even larger number of points across the globe, many

carriers have entered into commercial relationships. These complex arrangements, often the

product of unique competitive forces, take the form of code shares, alliances, joint ventures,

or other cooperative arrangements. These agreements often require review to ensure

compliance with competition policies and laws in the jurisdictions of the air carriers involved.

Thus, there is a significant need to foster compatible regulatory approaches to the review,

evaluation, and monitoring of commercial relationships between air carriers based in different

States.

American Airlines is a founding member of oneworld® alliance, along with British

Airways, Cathay Pacific, Iberia,Qantas,and others which enables member airlines to offer

their customers more services and benefits than any member airline can provide individually.

Together, oneworld members serve more than 800 destinations in nearly 150 countries, with

about 9,000 daily departures. This opportunity is special to this industry. These services

include a broader route network, opportunities to earn and redeem frequent flyer miles across

the combined oneworld network and more airport lounges.

That is why optimization is the key. AMR has some opportunities to optimize the Degree of

capacity utilization of his planes. For destination where the full capacity of their planes is by

organizing, for example Optimization techniques in the customer service for example. They

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can group their personal capacity. Link-ups with other carriers can greatly increase passenger

volumes. By coordinating schedules, airlines can offer service to destinations via a code share

agreement with a partner carrier. The rapid consolidation has allowed the surviving airlines to

offer bigger route networks that appeal to high-paying business travelers. And it has allowed

them to limit the supply of seats, which helps prop up fares and airline profits capitalized on

this opportunity: American introduced a number of new products and services to enhance the

travel experience for customers, including Preferred Seats, Inflight Wi-Fi and Priority

Boarding.

Opportunity to group their services with other airlines. They can save cost through

consolidation of the two operations, for example for the preparation of meal or the order of

tickets by the customers. They can use the capacity of the airlines where they normally don’t

have connections. Optimize the fleet assignment by reorganizing their fleet assignment

depending of the number of checked passengers, weather, aircraft capacities etc. You can

propose much more connections and destination using the network of your partners and it will

directly available when booking the ticket. (Utilized capacity) Better crew planning. If it is

not likely that production can be amended to more closely match demand, then promotion

should be used to affect demand.

American established the AAdvantage® frequent flyer program (AAdvantage) to develop

passenger loyalty by offering awards to travelers for their continued patronage. The Company

believes that the AAdvantage program is one of its competitive strengths. AAdvantage

benefits from a growing base of approximately 72 million members with desirable

demographics who have demonstrated a strong willingness to collect AAdvantage miles over

other loyalty program incentives and are generally disposed to adjusting their purchasing

behavior in order to earn additional AAdvantage miles.

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AAdvantage members earn mileage credits by flying on American, the American Eagle

carriers, and the third party regional airlines or by using services of other participants in the

AAdvantage program. Mileage credits can be redeemed for free, discounted or upgraded

travel on American, the American Eagle carriers or other participating airlines, or for other

awards.

Other revenues, which approximate 10.2 percent of total revenues, includes revenue from the

marketing services related to the sale of mileage credits in the AAdvantage program as

discussed above, membership fees and related revenue from the Company’s Admirals Club

operations, and other miscellaneous service revenue, including administrative service charges

and baggage handling fees.

American Airline industry has turned to merger in hopes of achieving economies of scale.

The new American will be slightly bigger than United Airlines by passenger traffic; not

counting regional affiliates airlines. The new airline will keep all of American's and US

Airways' hubs. They expect that the bigger airline to lure corporate travelers away from

competitors, contributing to $900 million in additional revenue. They also anticipate cost

savings of roughly $150 million. They also said they expect to spend $1.2 billion on

transition costs over the next three years.

AMR has now more buying power after the merging to secure supplier discounts. Rising fuel

prices are making profitability on individual flights a challenge. This would be especially

useful when it comes to buy fuel. They have now ability to phase-out redundancies and save

costs (i.e., by having one head office). A larger firm is stronger against competition. An

enhanced talent base. Higher buying power after merge.

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An Airline has the opportunity to transport passengers, cargo and mail. American is one of

the largest scheduled airfreight carriers in the world, providing a wide range of freight and

mail services to shippers throughout its system onboard American’s passenger fleet.

American’s cargo network is one of the largest air cargo networks in the world, with facilities

and interlines connections available across the globe.

American Airlines Cargo, a division of American, provides over 100 million pounds of

weekly cargo lift capacity to major cities in the United States, Europe, Canada, Mexico, the

Caribbean, Latin America and Asia.  During 2012, American Airlines Cargo accounted for

approximately 2.7 percent of the Company’s operating revenues by generating $669

million in freight and mail revenue, a decrease of 4.8 percent versus 2011.

13. What current or potential threats exist for this company or industry?

INTRO: The things plaguing airline executives is well-known: high labor costs, volatile fuel

prices, thorny legislation, not to mention trying to sell a highly commoditized product to

customers that love to hate them. Particularly in the airline industry where the margin are

very small, maximizing revenue and reducing costs is a big deal. American Airlines needs to

minimize their costs and maximize revenue to be able to compete with the concurrence. The

Airline industry is characterized by the following fact: for every second the planes sat on the

ground, airplanes and people are costing money but aren’t generating any revenue.

The price of fuel is now the greatest cost for many airlines. An upward spike can destabilize

the business model. Their 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

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largely beyond control. Newer Airlines, started in the last decade or two, have considerably

lower operational costs than legacy companies such as American Airlines. Old firm like

American Airlines aren’t competitive enough anymore because of their high costs.

An Aircraft is expensive and requires huge capital outlays. The return on investment can be

different than planned. While the business climate can change quickly, airlines have difficulty

making quick schedule and aircraft changes due to leases, staffing commitments and other

factors. A global economic downturn negatively affects leisure, optional travel, as well as

business travel. One particularity of this industry is that airlines have a high "spoilage" rate

compared to most other industries. Once a flight leaves the gate, an empty seat is lost and

non-revenue producing. Large workforces spread over large geographic areas, including

international points, require continual communication and monitoring. This can be

exacerbated during operational irregularities, such as bad weather.

One threat that AMR is facing is that his customers and investors have lost faith in American

Airlines because of the bankruptcy. The main challenge for American Airlines is to regain the

thrust of customers. Customer satisfaction being one of the most important factors

International air transportation is subject to extensive government regulation. The Company’s

operating authority in international markets is subject to aviation agreements between the

U.S. and the respective countries or governmental authorities. In some cases, fares and

schedules require the approval of DOT and/or the relevant foreign governments. Moreover,

alliances with international carriers may be subject to the jurisdiction and regulations of

various foreign agencies. Bilateral and multilateral agreements among the U.S. and various

foreign governments of countries served by the Company are periodically subject to

renegotiation. Government intervention can result in new costly rules or unexpected new

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international competition. A plague, a serine of plane incidents or terrorist attack anywhere in

the world can negatively affect air travel.

The airline industry is intensely competitive. Over the past decade, the airline industry has

turned to mergers in hopes of achieving economies of scale. In the last ten years, US Airways

and America West, Delta Air Lines and Northwest, Southwest and AirTran, Air France and

KLM, and, now, Continental and United (UAL) have hooked up. Branding consultants say

the big airlines have lost focus on their brands as a result of their drive to make operational

gains. If three airlines are flying between New York and Chicago, the only reason to pick one

over the other is because it's cheaper. Smaller airlines have generally been more skilled at

wielding their brands to differentiate and sustain their businesses. Of course, such airlines are

much smaller than American, United or Delta, which each permanently employ about 80,000

people. Southwest, for example, has slightly over half that number of employees; JetBlue

employs some 12,000 permanent workers.

Southwest, JetBlue and Virgin have also made an effort to steep employees in their respective

corporate cultures from the outset. Their approach was to prioritize the customer experience

to know what customers look forward to. Effective customer service begins with personnel.

Many larger airlines like AA have a complicated relationship with their employees. Shifting

around heavily unionized labor forces can be difficult. Many employees at newly re-shuffled

major airlines are the ones who have weathered the worst including seismic layoffs.

AA knows that branding is important. AA is now in the middle of the restructuring process

and plans to emerge a very different airline. The airline looks forward to emerging from the

restructuring process with something new and different for its customers. Creating a coherent

corporate culture is the key, because of the risk in any integration of ending up with

mediocrity.

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For now, the success of small airlines with strong brands is likely to begin pushing against the

branding approach of larger airlines. The pressure is going to come from the regional guys

that are getting pretty good at creating a unique experience and delivering around it.

Without a coherent brand strategy, those major carriers will continue to play the price game.

And, in this market, with fuel costs and customer behavior difficult to predict, a broken brand

is the last problem that American Airline wants on top of everything else.

14. Based on all your analysis, what strengths and weaknesses, if any, do you see in the

financial status, operating performance, or cash position of the company, and what

steps would you recommend for improvement?

Cost control and debt reduction continues to be a focus for AMR as it restructures and

prepares for its merger with US Airways announced in early 2013. While its net revenues

have gradually increased over the last four years, AMR hasn't been profitable since before the

recession.

The company suffered net losses of almost $2 billion in 2011 and $1.9 billion in 2012. The

net loss for 2012 reflects $2.2 billion in charges of reorganization items and significant year-

over-year fuel price increases ($413 million), offset by the 4% increase in total net revenues.

With its many alliances and code share agreements, American Airlines generates the lion's

share of revenues for its parent (about 75%). American's 2012 year-over-year mainline

passenger revenues increased 4% due in part loan increase in year-over-year passenger yield.

The regional affiliates' passenger revenue rose 7% year-over-year in 2012.

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AMR lost money for five straight years and piled up debt. Short lived, the gains

were followed by alarming net losses of more than $2 billion in 2008, and $1.5 billion in

2009, primarily driven by a drop in traffic and passenger yields (tied to ticket discounting)

and a sharp rise in fuel costs.

American Airlines and JAL began joint sales of airfares in 2011, the same year American

began a Los Angeles-to-Shanghai service. AMR's growth strategy revolves around its $11

billion proposed merger with US Airways, which was announced in February 2013.

Hastening AMR's exit from bankruptcy, the historic deal is expected to close in the third

quarter of2013. The combination is also projected to provide substantial cost savings and

synergistic benefits to AMR.

Earlier in 2012 AMR announced a plan to create $2 billion in annual savings and $1 billion in

revenue enhancement. The plan includes proposed job cuts of about 13,000. The company

also launched an effort to obtain union or court approval of changes in union contracts that

will pave the way for the proposed job eliminations. As a result, a federal judge terminated

the pilots' union contract, and the company has won concessions from the unions of flight

attendants, maintenance workers, and other employees. Soon after those developments, AMR

announced it was laying off more than 11,000 workers, but added that actual job cuts would

affect about 4,400 employees.

AMR plans to use alliances and network scale to increase service from its five key markets of

DFW, Chicago, Miami, Los Angeles, and New York, by about 20% over five years.

American Airlines is also engaged in marketing relationships with about 30 airlines, many of

them based overseas, such as Air Berlin and China Eastern Airlines. In2011 American added

30 new destinations through relationships with other airlines, such as JAL and Qantas.

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New procedures for checking in passengers, cooking and serving food, and maintaining and

scheduling the plans.

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