AMR Corporation (Dallas/Fort Worth) today reported its financial results for the first quarter. The holding company of American Airlines (Dallas/Fort Worth) and American Eagle Airlines (Dallas/Fort Worth) issued this statement:

In the first quarter, AMR reported a net profit of $8 million, excluding reorganization and special items, a $256 million improvement compared to the prior-year period. AMR incurred a GAAP net loss of $341 million versus a GAAP net loss of $1.7 billion in the first quarter of 2012.  First quarter results were negatively impacted by $349 million of reorganization and special items, which are detailed below.

Restructuring Progress

AMR is on track to realize savings targeted in the restructuring process. To date, AMR has completed the majority of its financial restructuring, including reducing debt, renegotiating aircraft leases and facilities agreements, grounding older aircraft, rationalizing the regional fleet, renegotiating supplier relationships, and making a number of other important changes.

“The fundamental changes we have been able to achieve in streamlining our cost structure and making our operations more efficient are yielding substantial results,” said Bella Goren, AMR’s chief financial officer. “Building on the substantial progress that is evident in our results, we are continuing to implement initiatives that create greater value for our financial stakeholders, employees and customers.”

Year-over-year cost reductions in salary, benefit and non-operating expenses were driven by AMR’s restructuring efforts. Through the restructuring process, American reached six-year agreements with all workgroups and reduced management positions, making American’s management staffing the leanest among network carriers.

AMR also realized improvements in depreciation and amortization expense, offset by increased aircraft rent expense with the company taking delivery of a combined 36 new modern, fuel efficient Boeing 737-800 and 777-300ER aircraft over the past 12 months, all of which have been leased. American is in the midst of significant renewal and transformation of its fleet and expects to take delivery of 59 new mainline aircraft during 2013.

Throughout the remainder of the year, AMR expects to realize additional savings improvements as the company gains court approval to implement new terms negotiated with certain vendors and suppliers. It also plans to build on momentum from restructuring by implementing new scope clauses established in new labor agreements that will enable AMR to compete more effectively in certain markets by better matching aircraft size with demand as American begins operating larger regional jets and expands codeshare agreements.

Revenue Performance

For the first quarter of 2013, AMR reported consolidated revenue of $6.1 billion, approximately 1.0 percent higher compared to the prior-year period on 1.3 percent less capacity. First quarter consolidated and mainline passenger revenue per available seat mile (PRASM) increased 2.6 percent and 2.7 percent year-over-year, respectively.  Consolidated revenue performance was driven by record passenger yield, or average fares paid, of 16.27 cents per mile, a 0.6 percent year-over-year improvement, and strong consolidated and mainline load factors, or percentage of seats filled, of 79.9 percent and 80.6 percent, respectively.

Domestic PRASM improved 2.7 percent in the first quarter versus the first quarter of 2012, with PRASM increases across all five of American’s hubs, with the Los Angeles and Chicago hubs showing particular strength. International PRASM increased 2.6 percent in the first quarter of 2013 over the prior-year period, driven by strong performance in the Atlantic entity. Absolute PRASM and yields in the Latin entity remain robust and further American’s belief that targeted growth in the region will be accretive to earnings.

Other revenues in the first quarter increased 1.2 percent compared to the prior period, driven primarily by an increase in AAdvantage^® miles sold to partners and by growth in American Eagle’s ground-handling business performed for third parties.

“We achieved a quarterly yield that was the highest in company history for any quarter, and an all-time first quarter record in revenue,” said Virasb Vahidi, American’s chief commercial officer. “As we look to the second quarter, we remain focused on delivering for our customers through new products and services, the renewal of our fleet and greater access to more destinations across our growing global network.”

Operating Expense

For the first quarter, AMR’s consolidated operating expenses decreased $80 million, or 1.3 percent, versus the same period in 2012. Excluding special items, AMR’s consolidated operating expenses decreased $142 million, or 2.3 percent, year-over-year.  American’s mainline cost per available seat mile (unit cost) in the first quarter decreased 0.6 percent, including special items in both periods, and 1.7 percent versus the same period last year, excluding special items. Taking into account the impact of fuel hedging, AMR paid $3.26 per gallon for jet fuel in the first quarter of 2013 versus $3.24 per gallon in the first quarter of 2012, a 0.7 percent increase. As a result, the company paid $14 million more for fuel in the first quarter of 2013 than it would have paid at prevailing prices from the prior-year period.

Excluding fuel and special items, mainline and consolidated unit costs in the first quarter of 2013 decreased 4.1 percent and 3.2 percent year-over-year, respectively, primarily driven by the company’s restructuring efforts. Despite lower capacity, this was the second consecutive quarter of non-fuel unit cost reduction. In addition, AMR achieved an operating profit of $125 million and an operating margin of approximately 2.0 percent, an improvement of approximately $203 million and 3.3 points, respectively, over the prior-year period, excluding special items.

An unaudited summary of first quarter 2013 results, including reconciliations of non-GAAP to GAAP financial measures, is available in the tables at the back of this press release.

Cash Position

AMR ended the first quarter with approximately $5.1 billion in cash and short-term investments, including a restricted cash balance of $853 million, compared to a balance of approximately $5.6 billion in cash and short-term investments, including a restricted balance of approximately $771 million, at the end of the first quarter of 2012.

Operational Performance

American ran a strong operation in the first quarter, achieving an on-time arrival rate of 80.8 percent. In the month of March, 81.8 percent of American’s mainline flights arrived on time, American’s best March performance since 2003. American’s solid operational results for the quarter also include posting a completion factor of 98.4 percent.

Other First Quarter Highlights

• In January, American Airlines became the first and only U.S. airline to introduce the Boeing 777-300ER (Extended Range) aircraft – the new flagship of American’s fleet. The company now has five 777-300ER aircraft in service, operating between New York Kennedy and both London Heathrow and Sao Paulo, and between Dallas/Fort Worth and London Heathrow.
• LATAM Airlines Group announced it will join oneworld^®, and American filed applications with regulators for codeshare agreements with TAM and LAN Colombia. Pending approval, this will strengthen American’s existing service to Latin America by offering customers greater travel options and convenience.
• American and Finnair announced Finnair’s intent to join the transatlantic joint business American shares with British Airways and Iberia, providing our North American and European customers more choices and better connections across the Atlantic.
• American signed agreements with oneworld member-elect Qatar Airways, based in Doha, Qatar, and the newest oneworld member, Malaysia Airlines, to codeshare on each other’s flights, which will provide new growth opportunities for American in the Middle East and Southeast Asia, as well as for our new partners in the United States.
• American and Alaska Airlines announced an expanded codeshare agreement
• American filed an application with the U.S. Department of Transportation for the right to fly additional frequencies from its Los Angeles and Chicago hubs to Brazil, beginning in 2013 and 2014, respectively.
• American completed its private offering of two tranches of enhanced equipment trust certificates (EETC) in the amount of $664.4 million. This marked the first EETC financing in history for an airline in restructuring.

Pending Merger Transaction

On Feb. 14, AMR and US Airways Group, Inc. (Phoenix) announced that the boards of directors of both companies unanimously approved a definitive merger agreement under which the companies will combine to create one of the world’s largest global airlines, which will have an implied combined equity value of approximately $11 billion based on the price of US Airways stock as of Feb. 13, 2013. The merger will offer benefits to both airlines’ customers, communities, employees, investors and creditors. Among other things, the combined company is expected to:

• Benefit customers due to an expanded global network and investment in new aircraft, technology, products and services
• Enhance the oneworld alliance, offering a seamless global network
• Improve loyalty benefits for both airlines’ members by expanding opportunities to earn and redeem miles
• Provide a path to improved compensation and benefits with greater long-term opportunities for employees of both companies
• Enhance recoveries for financial stakeholders – AMR stakeholders to own 72 percent and US Airways shareholders to own 28 percent of the combined company’s diluted common stock
• Build upon the iconic, globally recognized American Airlines brand
• Be headquartered in Dallas/Fort Worth, with a significant operational presence in Phoenix

American’s proposed Plan of Reorganization provides the potential for full recovery for American’s creditors and a recovery of at least 3.5 percent of the aggregate diluted common stock of the combined airline for the company’s shareholders. It is unusual in Chapter 11 cases – and unprecedented in recent airline restructurings – for shareholders to receive meaningful recoveries.

Merger Milestones

The following merger milestones have been achieved to date:

• Jan. 31: Filed the required notification materials under the Hart-Scott-Rodino Act (HSR) with the U.S. Department of Justice and U.S. Federal Trade Commission
• Feb. 14: Announced the definitive merger agreement between AMR and US Airways
• Feb. 25: AMR and US Airways announced that Beverly Goulet, senior vice president and chief integration officer for American Airlines, and Scott Kirby, president of US Airways, will jointly lead a transition-planning team to design and oversee the new American integration
• March 21: AMR and US Airways announced the creation of the Integration Management Office (IMO) to support the transition team and the selection of McKinsey & Company to advise the IMO
• March 28: AMR received court approval to merge with US Airways
• April 15: AMR filed its Chapter 11 Plan of Reorganization, Disclosure Statement and Registration Statement; a hearing to consider approval of the Disclosure Statement is scheduled for June 4

The merger is conditioned on the approval by the Court, regulatory approvals, approval by US Airways shareholders, other customary closing conditions, and confirmation and consummation of the Plan of Reorganization in accordance with the provisions of the Bankruptcy Code. The combination is expected to be completed in the third quarter of 2013. Prior to closing of the transaction, the transition-planning team composed of leaders from both companies will develop an integration plan designed to assure a smooth and sustainable transition with a focus on maximizing the potential value of the merger.

Reorganization and Special Items

AMR’s first quarter 2013 results include the impact of $349 million in reorganization and special items.

• Of that amount, AMR recognized a $160 million loss in reorganization items resulting from certain of its direct and indirect U.S. subsidiaries’ voluntary petitions for reorganization under Chapter 11 on Nov. 29, 2011. These items primarily result from an adjustment to previously recorded estimated allowed claim amounts for certain special facility revenue bonds, as well as for professional fees.
• The company recognized interest charges of $116 million to recognize post-petition interest expense on unsecured obligations which is to be allowed pursuant to the company’s Plan of Reorganization filed on April 15.
• The company’s operating expenses for the first quarter also include special charges and merger-related expenses of $28 million, and a $45 million charge to benefits expense due to an increase in workers’ compensation claims in recent months, as well as adverse developments on older claims.

Capacity Guidance

AMR estimates consolidated capacity in the second quarter of 2013 to be up approximately 1.0 percent versus the second quarter of 2012. For the full year 2013, consolidated capacity is estimated to increase approximately 1.5 percent versus the prior year.

American continues to make progress in implementing Main Cabin Extra, removing certain seats to provide customers with more leg room in the Main Cabin. To date, American has completed the retrofit of its Boeing 757 and 767 fleets and more than 90 percent of its 737 fleet.  The retrofit of the MD-80 fleet commenced in January 2013, and to date, Main Cabin Extra has been added to approximately two-thirds of the MD-80 fleet with completion targeted for the second quarter of this year.

Copyright Photo: Brian Peters. Boeing 777-323 ER N718AN (msn 41665) climbs gracefully into the sky from the Dallas/Fort Worth main hub.

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