Edgar Filing: American Airlines Group Inc.

Document

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549




	FORM 10-Q



☒	Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the Quarterly Period Ended September 30, 2017



☐	Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the Transition Period From to

Commission file number 1-8400




American Airlines Group Inc. (Exact name of registrant as specified in its charter)



Delaware		75-1825172
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)
4333 Amon Carter Blvd., Fort Worth, Texas 76155		(817) 963-1234
(Address of principal executive offices, including zip code)		(Registrant’s telephone number, including area code)

Commission file number 1-2691




American Airlines, Inc. (Exact name of registrant as specified in its charter)



Delaware		13-1502798
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)
4333 Amon Carter Blvd., Fort Worth, Texas 76155		(817) 963-1234
(Address of principal executive offices, including zip code)		(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.



American Airlines Group Inc.	☒	Yes	☐	No
American Airlines, Inc.	☒	Yes	☐	No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).



American Airlines Group Inc.	☒	Yes	☐	No
American Airlines, Inc.	☒	Yes	☐	No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.



American Airlines Group Inc.	☒ Large Accelerated Filer	☐ Accelerated Filer	☐ Non-accelerated Filer	☐ Smaller Reporting Company	☐ Emerging Growth Company
American Airlines, Inc.	☐ Large Accelerated Filer	☐ Accelerated Filer	☒ Non-accelerated Filer	☐ Smaller Reporting Company	☐ Emerging Growth Company

If an emerging growth company, indicate by checkmark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.



American Airlines Group Inc.	☐
American Airlines, Inc.	☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).



American Airlines Group Inc.	☐	Yes	☒	No
American Airlines, Inc.	☐	Yes	☒	No

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 12, 13, or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.



American Airlines Group Inc.	☒	Yes	☐	No
American Airlines, Inc.	☒	Yes	☐	No

As of October 20, 2017, there were 478,499,073 shares of American Airlines Group Inc. common stock outstanding.

As of October 20, 2017, there were 1,000 shares of American Airlines, Inc. common stock outstanding, all of which were held by American Airlines Group Inc.

American Airlines Group Inc.

American Airlines, Inc.

Form 10-Q

Quarterly Period Ended September 30, 2017

Table of Contents



		Page
PART I: FINANCIAL INFORMATION
Item 1A.	Condensed Consolidated Financial Statements of American Airlines Group Inc.	4
	Condensed Consolidated Statements of Operations	4
	Condensed Consolidated Statements of Comprehensive Income	5
	Condensed Consolidated Balance Sheets	6
	Condensed Consolidated Statements of Cash Flows	7
	Notes to the Condensed Consolidated Financial Statements	8
Item 1B.	Condensed Consolidated Financial Statements of American Airlines, Inc.	20
	Condensed Consolidated Statements of Operations	20
	Condensed Consolidated Statements of Comprehensive Income	21
	Condensed Consolidated Balance Sheets	22
	Condensed Consolidated Statements of Cash Flows	23
	Notes to the Condensed Consolidated Financial Statements	24
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	35
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	60
Item 4.	Controls and Procedures	60
PART II: OTHER INFORMATION
Item 1.	Legal Proceedings	62
Item 1A.	Risk Factors	63
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	79
Item 6.	Exhibits	79
SIGNATURES		82

This combined Quarterly Report on Form 10-Q is filed by American Airlines Group Inc. (formerly named AMR Corporation) (AAG) and its wholly-owned subsidiary American Airlines, Inc. (American). References in this Quarterly Report on Form 10-Q to “we,” “us,” “our,” the “Company” and similar terms refer to AAG and its consolidated subsidiaries. “AMR” or “AMR Corporation” refers to the Company during the period of time prior to its emergence from Chapter 11 and its acquisition of US Airways Group, Inc. (US Airways Group) on December 9, 2013 (the Merger). References to “US Airways Group” and “US Airways,” a subsidiary of US Airways Group, represent the entities during the period of time prior to AAG’s internal corporate restructuring on December 30, 2015. References in this Quarterly Report on Form 10-Q to “mainline” refer to the operations of American only and exclude regional operations.

Note Concerning Forward-Looking Statements

Certain of the statements contained in this report should be considered forward-looking statements within the meaning of the Securities Act of 1933, as amended (the Securities Act), the Securities Exchange Act of 1934, as amended (the Exchange Act), and the Private Securities Litigation Reform Act of 1995. These forward-looking statements may be identified by words such as “may,” “will,” “expect,” “intend,” “anticipate,” “believe,” “estimate,” “plan,” “project,” “could,” “should,” “would,” “continue,” “seek,” “target,” “guidance,” “outlook,” “if current trends continue,” “optimistic,” “forecast” and other similar words. Such statements include, but are not limited to, statements about our plans, objectives, expectations, intentions, estimates and strategies for the future, and other statements that are not historical facts. These forward-looking statements are based on our current objectives, beliefs and expectations, and they are subject to significant risks and uncertainties that may cause actual results and financial position and timing of certain events to differ materially from the information in the forward-looking statements. These risks and uncertainties include, but are not limited to, those described below under Part I, Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations, and Part II, Item 1A. Risk Factors, and other risks and uncertainties listed from time to time in our filings with the Securities and Exchange Commission (the SEC).

All of the forward-looking statements are qualified in their entirety by reference to the factors discussed in Part II, Item 1A. Risk Factors and elsewhere in this report. There may be other factors of which we are not currently aware that may affect matters discussed in the forward-looking statements and may also cause actual results to differ materially from those discussed. We do not assume any obligation to publicly update or supplement any forward-looking statement to reflect actual results, changes in assumptions or changes in other factors affecting such statements other than as required by law. Forward-looking statements speak only as of the date of this Quarterly Report on Form 10-Q or as of the dates indicated in the statements.

PART I: FINANCIAL INFORMATION

This combined Quarterly Report on Form 10-Q is filed by both AAG and American and includes the Condensed Consolidated Financial Statements of each company in Item 1A and Item 1B, respectively.

ITEM 1A. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS OF AMERICAN AIRLINES GROUP INC.

AMERICAN AIRLINES GROUP INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In millions, except shares and per share amounts)(Unaudited)



	Three Months Ended September 30,						Nine Months Ended September 30,
	2017			2016			2017			2016
Operating revenues:
Mainline passenger	$	7,628		$	7,419		$	21,981		$	21,192
Regional passenger	1,749			1,731			5,133			5,040
Cargo	200			171			568			506
Other	1,301			1,273			3,924			3,653
Total operating revenues	10,878			10,594			31,606			30,391
Operating expenses:
Aircraft fuel and related taxes	1,570			1,393			4,481			3,736
Salaries, wages and benefits	2,995			2,772			8,824			8,094
Regional expenses	1,654			1,538			4,848			4,488
Maintenance, materials and repairs	487			481			1,474			1,352
Other rent and landing fees	471			463			1,363			1,342
Aircraft rent	304			299			892			908
Selling expenses	400			347			1,094			990
Depreciation and amortization	433			399			1,255			1,128
Special items, net	112			289			432			450
Other	1,220			1,182			3,575			3,386
Total operating expenses	9,646			9,163			28,238			25,874
Operating income	1,232			1,431			3,368			4,517
Nonoperating income (expense):
Interest income	25			16			70			45
Interest expense, net	(266		)	(250		)	(787		)	(738		)
Other, net	13			(8		)	8			(25		)
Total nonoperating expense, net	(228		)	(242		)	(709		)	(718		)
Income before income taxes	1,004			1,189			2,659			3,799
Income tax provision	380			452			998			1,412
Net income	$	624		$	737		$	1,661		$	2,387

Earnings per common share:
Basic	$	1.29		$	1.40		$	3.37		$	4.23
Diluted	$	1.28		$	1.40		$	3.35		$	4.20
Weighted average shares outstanding (in thousands):
Basic	484,772			525,415			493,164			564,886
Diluted	486,625			528,510			495,796			568,679
Cash dividends declared per common share	$	0.10		$	0.10		$	0.30		$	0.30

See accompanying notes to condensed consolidated financial statements.

AMERICAN AIRLINES GROUP INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In millions)(Unaudited)



	Three Months Ended September 30,						Nine Months Ended September 30,
	2017			2016			2017			2016
Net income	$	624		$	737		$	1,661		$	2,387
Other comprehensive loss, net of tax:
Pension, retiree medical and other postretirement benefits	(15		)	(17		)	(44		)	(52		)
Investments	—			2			—			6
Total other comprehensive loss, net of tax	(15		)	(15		)	(44		)	(46		)
Total comprehensive income	$	609		$	722		$	1,617		$	2,341

See accompanying notes to condensed consolidated financial statements.

AMERICAN AIRLINES GROUP INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In millions, except shares and par value)



	September 30, 2017			December 31, 2016
	(Unaudited)
ASSETS
Current assets
Cash	$	340		$	322
Short-term investments	5,428			6,037
Restricted cash and short-term investments	393			638
Accounts receivable, net	1,700			1,594
Aircraft fuel, spare parts and supplies, net	1,315			1,094
Prepaid expenses and other	826			639
Total current assets	10,002			10,324
Operating property and equipment
Flight equipment	39,545			37,028
Ground property and equipment	7,902			7,116
Equipment purchase deposits	1,280			1,209
Total property and equipment, at cost	48,727			45,353
Less accumulated depreciation and amortization	(15,416		)	(14,194		)
Total property and equipment, net	33,311			31,159
Other assets
Goodwill	4,091			4,091
Intangibles, net of accumulated amortization of $612 and $578, respectively	2,214			2,173
Deferred tax asset	538			1,498
Other assets	2,245			2,029
Total other assets	9,088			9,791
Total assets	$	52,401		$	51,274

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities
Current maturities of long-term debt and capital leases	$	2,467		$	1,855
Accounts payable	1,638			1,592
Accrued salaries and wages	1,413			1,516
Air traffic liability	4,653			3,912
Loyalty program liability	2,893			2,789
Other accrued liabilities	2,243			2,208
Total current liabilities	15,307			13,872
Noncurrent liabilities
Long-term debt and capital leases, net of current maturities	22,217			22,489
Pension and postretirement benefits	7,467			7,842
Other liabilities	3,462			3,286
Total noncurrent liabilities	33,146			33,617
Commitments and contingencies
Stockholders’ equity
Common stock, $0.01 par value; 1,750,000,000 shares authorized, 479,999,894 shares issued and outstanding at September 30, 2017; 507,294,153 shares issued and outstanding at December 31, 2016	5			5
Additional paid-in capital	5,918			7,223
Accumulated other comprehensive loss	(5,127		)	(5,083		)
Retained earnings	3,152			1,640
Total stockholders’ equity	3,948			3,785
Total liabilities and stockholders’ equity	$	52,401		$	51,274

See accompanying notes to condensed consolidated financial statements.

AMERICAN AIRLINES GROUP INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In millions)(Unaudited)



	Nine Months Ended September 30,
	2017			2016
Net cash provided by operating activities	$	4,307		$	5,897
Cash flows from investing activities:
Capital expenditures and aircraft purchase deposits	(4,563		)	(4,271		)
Purchases of short-term investments	(4,093		)	(5,078		)
Sales of short-term investments	4,714			4,587
Purchase of equity investment	(203		)	—
Decrease in restricted cash and short-term investments	245			60
Proceeds from sale of property and equipment and sale-leaseback transactions	831			60
Net cash used in investing activities	(3,069		)	(4,642		)
Cash flows from financing activities:
Proceeds from issuance of long-term debt	2,160			5,392
Payments on long-term debt and capital leases	(1,813		)	(2,534		)
Deferred financing costs	(66		)	(39		)
Treasury stock repurchases	(1,372		)	(3,931		)
Dividend payments	(150		)	(172		)
Other financing activities	21			20
Net cash used in financing activities	(1,220		)	(1,264		)
Net increase (decrease) in cash	18			(9		)
Cash at beginning of period	322			390
Cash at end of period	$	340		$	381

Non-cash investing and financing activities:
Settlement of bankruptcy obligations	$	15		$	3
Supplemental information:
Interest paid, net	778			714
Income taxes paid	15			10

See accompanying notes to condensed consolidated financial statements.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS OF AMERICAN AIRLINES GROUP INC.

(Unaudited)

1. Basis of Presentation

The accompanying unaudited condensed consolidated financial statements of American Airlines Group Inc. (we, us, our and similar terms, or AAG) should be read in conjunction with the consolidated financial statements contained in our Annual Report on Form 10-K for the year ended December 31, 2016. The accompanying unaudited condensed consolidated financial statements include the accounts of AAG and its wholly-owned subsidiaries. AAG’s principal subsidiary is American Airlines, Inc. (American). All significant intercompany transactions have been eliminated.

On December 9, 2013, a subsidiary of AMR Corporation (AMR) merged with and into US Airways Group, Inc. (US Airways Group), a Delaware corporation, which survived as a wholly-owned subsidiary of AAG, and AAG emerged from Chapter 11 (the Merger). Upon closing of the Merger and emergence from Chapter 11, AMR changed its name to American Airlines Group Inc. On December 30, 2015, in order to simplify AAG’s internal corporate structure, US Airways, Inc. (US Airways), a wholly-owned subsidiary of US Airways Group, merged with and into American, with American as the surviving corporation.

Management believes that all adjustments necessary for the fair presentation of results, consisting of normally recurring items, have been included in the unaudited condensed consolidated financial statements for the interim periods presented. The preparation of financial statements in accordance with accounting principles generally accepted in the United States (GAAP) requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities, revenues and expenses, and the disclosure of contingent assets and liabilities at the date of the financial statements. Actual results could differ from those estimates. The most significant areas of judgment relate to passenger revenue recognition, impairment of goodwill, impairment of long-lived and intangible assets, the loyalty program, valuation allowance for deferred tax assets, as well as pension and retiree medical and other postretirement benefits. Certain prior period amounts have been reclassified to conform to the current year presentation.

Recent Accounting Pronouncements

Revenue

In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2014-09, “Revenue from Contracts with Customers (Topic 606).” ASU 2014-09 completes the joint effort by the FASB and International Accounting Standards Board (IASB) to improve financial reporting by creating common revenue recognition guidance for GAAP and International Financial Reporting Standards (IFRS). Subsequently, the FASB has issued several additional ASUs to clarify the implementation. The new revenue standard applies to all companies that enter into contracts with customers to transfer goods or services and is effective for public entities for interim and annual reporting periods beginning after December 15, 2017. We will adopt the new revenue standard effective January 1, 2018. Entities have the choice to apply the new revenue standard either retrospectively to each reporting period presented or by recognizing the cumulative effect of applying the new revenue standard at the date of initial application and not adjusting comparative information. We will adopt the new revenue standard using the full retrospective method.

We are in the process of finalizing how the application of the new revenue standard will impact our condensed consolidated financial statements. We currently expect that the new revenue standard will materially impact our liability for outstanding mileage credits earned by AAdvantage loyalty program members. We currently use the incremental cost method to account for this portion of our loyalty program liability, which values these mileage credits based on the estimated incremental cost of carrying one additional passenger. The new revenue standard will require us to change our policy and apply a relative selling price approach whereby a portion of each passenger ticket sale attributable to mileage credits earned will be deferred and recognized in passenger revenue upon future mileage redemption. The carrying value of the earned mileage credits recognized in loyalty program liability is expected to be materially greater under the relative selling price approach than the value attributed to these mileage credits under the incremental cost method. The new revenue standard will also require us to reclassify certain ancillary fees to passenger revenue, which are currently included within other operating revenue. See Part I, Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations - “Recent Accounting Pronouncements” for our preliminary assessment of the quantitative impacts of the new revenue standard on our consolidated financial statements.

Leases

In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842).” ASU 2016-02 requires lessees to recognize a lease liability and a right-of-use asset on the balance sheet and aligns many of the underlying principles of the new lessor model with those in Accounting Standards Codification Topic 606, Revenue from Contracts with Customers. ASU 2016-02

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS OF AMERICAN AIRLINES GROUP INC.

(Unaudited)

is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted. We expect we will adopt the new lease standard effective January 1, 2019. Entities are required to adopt the new lease standard using a modified retrospective approach for all leases existing at or commencing after the date of initial application with an option to use certain practical expedients. We are currently evaluating how the adoption of the new lease standard will impact our condensed consolidated financial statements. Interpretations are on-going and could have a material impact on our implementation. Currently, we expect that the adoption of the new lease standard will have a material impact on our condensed consolidated balance sheet due to the recognition of right-of-use assets and lease liabilities principally for certain leases currently accounted for as operating leases.

Statement of Cash Flows

In November 2016, the FASB issued ASU 2016-18, “Statement of Cash Flows (Topic 230): Restricted Cash.” ASU 2016-18 requires that the change in total cash, cash at beginning of period and cash at end of period on the statement of cash flows include restricted cash and restricted cash equivalents. ASU 2016-18 also requires companies who report cash and restricted cash separately on the balance sheet to reconcile those amounts to the statement of cash flows. This standard is to be applied retrospectively to each period presented and is effective for public entities for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted. We expect we will adopt this new standard effective January 1, 2018. This standard is not expected to have a material impact on our condensed consolidated financial statements.

Retirement Benefits

In March 2017, the FASB issued ASU 2017-07, “Compensation – Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost.” ASU 2017-07 requires an entity to present the service cost component of net benefit cost in the income statement line items where it reports compensation cost. Entities will present all other components of net benefit cost outside of operating income, if this subtotal is presented. This standard is to be applied retrospectively to each period presented and is effective for public entities for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. We will adopt this standard on January 1, 2018. The new standard will require all components of our net periodic benefit cost (income), with the exception of service cost, currently reported within operating expenses as salaries, wages and benefits, to be reclassified and reported within nonoperating income (expense). The adoption of this new standard will have no impact on pre-tax income or net income reported. See Note 8 for our current components of net periodic benefit cost (income).

Financial Instruments

In January 2016, the FASB issued ASU 2016-01, “Financial Instruments - Overall (Subtopic 825-10)." ASU 2016-01 makes several modifications to Subtopic 825-10, including the elimination of the available-for-sale classification of equity investments, and it requires equity investments with readily determinable fair values to be measured at fair value with changes in fair value recognized in net income. ASU 2016-01 is effective for interim and annual periods beginning after December 15, 2017. We will adopt this standard on January 1, 2018. Based on our portfolio of investments as of September 30, 2017, we do not expect the adoption of ASU 2016-01 to have a material impact on our condensed consolidated financial statements.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS OF AMERICAN AIRLINES GROUP INC.

(Unaudited)

2. Special Items, Net

Special items, net on the condensed consolidated statements of operations consisted of the following (in millions):



	Three Months Ended September 30,					Nine Months Ended September 30,
	2017			2016		2017			2016
Merger integration expenses ⁽¹⁾	$	62		$	194	$	192		$	395
Fleet restructuring expenses ⁽²⁾	62			31		174			72
Mark-to-market adjustments for bankruptcy obligations and other	(12		)	39		7			(22		)
Labor contract expenses ⁽³⁾	—			—		45			—
Other operating charges, net	—			25		14			5
Mainline operating special items, net	112			289		432			450

Regional operating special items, net ⁽⁴⁾	(5		)	5		(1		)	13
Nonoperating special items, net ⁽⁵⁾	3			—		12			36


⁽¹⁾	Merger integration expenses included costs related to information technology, professional fees, re-branding of aircraft and airport facilities and training. Additionally, the 2016 periods also included costs related to alignment of labor union contracts, re-branded uniforms, relocation and severance.


⁽²⁾	Fleet restructuring expenses driven by the Merger principally included the acceleration of aircraft depreciation and impairments for aircraft grounded or expected to be grounded earlier than planned.


⁽³⁾	Labor contract expenses primarily included one-time charges to adjust the vacation accruals for pilots and flight attendants as a result of the mid-contract pay rate adjustments effective in the second quarter of 2017.


⁽⁴⁾	Regional operating special items, net principally related to a gain on the sale of certain aircraft in the 2017 period and Merger integration expenses in the 2016 period.


⁽⁵⁾	Nonoperating special items, net primarily consisted of debt issuance and extinguishment costs associated with term loan refinancings. Additionally, the 2016 nine-month period included costs associated with a bond refinancing.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS OF AMERICAN AIRLINES GROUP INC.

(Unaudited)

3. Earnings Per Common Share

The following table sets forth the computation of basic and diluted earnings per common share (EPS) (in millions, except share and per share amounts):



	Three Months Ended September 30,				Nine Months Ended September 30,
	2017		2016		2017		2016
Basic EPS:
Net income	$	624	$	737	$	1,661	$	2,387
Weighted average common shares outstanding (in thousands)	484,772		525,415		493,164		564,886
Basic EPS	$	1.29	$	1.40	$	3.37	$	4.23

Diluted EPS:
Net income for purposes of computing diluted EPS	$	624	$	737	$	1,661	$	2,387
Share computation for diluted EPS (in thousands):
Basic weighted average common shares outstanding	484,772		525,415		493,164		564,886
Dilutive effect of stock awards	1,853		3,095		2,632		3,793
Diluted weighted average common shares outstanding	486,625		528,510		495,796		568,679
Diluted EPS	$	1.28	$	1.40	$	3.35	$	4.20

Restricted stock unit awards excluded from the calculation of diluted EPS because inclusion would be antidilutive (in thousands)	66		1,623		432		1,771

4. Share Repurchase Programs and Dividends

Since July 2014, our Board of Directors has approved six share repurchase programs aggregating $11.0 billion of authority. As of September 30, 2017, $677 million remained unused under a repurchase program that expires on December 31, 2018. Share repurchases under our share repurchase programs may be made through a variety of methods, which may include open market purchases, privately negotiated transactions, block trades or accelerated share repurchase transactions. Any such repurchases will be made from time to time subject to market and economic conditions, applicable legal requirements and other relevant factors. Our share repurchase programs do not obligate us to repurchase any specific number of shares and may be suspended at any time at our discretion.

During the three months ended September 30, 2017, we repurchased 7.7 million shares of AAG common stock for $362 million at a weighted average cost per share of $46.97. During the nine months ended September 30, 2017, we repurchased 29.4 million shares of AAG common stock for $1.3 billion at a weighted average cost per share of $45.05. Since the inception of our share repurchase programs in July 2014, we have repurchased 257.7 million shares of AAG common stock for $10.3 billion at a weighted average cost per share of $40.05.

Our Board of Directors declared the following cash dividends during the first nine months of 2017:



Period	Per share		For stockholders of record as of	Payable on	Total (millions)
First Quarter	$	0.10	February 13, 2017	February 27, 2017	$	51
Second Quarter	0.10		May 16, 2017	May 30, 2017	50
Third Quarter	0.10		August 14, 2017	August 28, 2017	49
Total					$	150

Any future dividends that may be declared and paid from time to time will be subject to market and economic conditions, applicable legal requirements and other relevant factors. We are not obligated to continue a dividend for any fixed period, and payment of dividends may be suspended at any time at our discretion.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS OF AMERICAN AIRLINES GROUP INC.

(Unaudited)

5. Debt

Long-term debt and capital lease obligations included in the condensed consolidated balance sheets consisted of (in millions):



	September 30, 2017		December 31, 2016
Secured
2013 Credit Facilities, variable interest rate of 3.24%, installments through 2020	$	1,825	$	1,843
2014 Credit Facilities, variable interest rate of 3.24%, installments through 2021	735		735
April 2016 Credit Facilities, variable interest rate of 3.74%, installments through 2023	990		1,000
December 2016 Credit Facilities, variable interest rate of 3.73%, installments through 2023	1,250		1,250
Aircraft enhanced equipment trust certificates (EETCs), fixed interest rates ranging from 3.00% to 9.75%, maturing from 2018 to 2029	11,396		10,912
Equipment loans and other notes payable, fixed and variable interest rates ranging from 2.34% to 8.99%, maturing from 2018 to 2029	5,330		5,343
Special facility revenue bonds, fixed interest rates ranging from 5.00% to 8.00%, maturing from 2018 to 2035	857		891
Other secured obligations, fixed interest rates ranging from 3.60% to 12.24%, maturing from 2017 to 2028	789		849
	23,172		22,823
Unsecured
5.50% senior notes, interest only payments until due in 2019	750		750
6.125% senior notes, interest only payments until due in 2018	500		500
4.625% senior notes, interest only payments until due in 2020	500		500
	1,750		1,750
Total long-term debt and capital lease obligations	24,922		24,573
Less: Total unamortized debt discount, premium and issuance costs	238		229
Less: Current maturities	2,467		1,855
Long-term debt and capital lease obligations, net of current maturities	$	22,217	$	22,489

The table below shows the maximum availability under revolving credit facilities, all of which were undrawn, as of September 30, 2017 (in millions):



2013 Revolving Facility	$	1,200
2014 Revolving Facility	1,000
April 2016 Revolving Facility	300
Total	$	2,500

The December 2016 Credit Facilities provide for a revolving credit facility that may be established in the future.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS OF AMERICAN AIRLINES GROUP INC.

(Unaudited)

2017 Aircraft Financing Activities

2017-2 EETCs

In August 2017, American created two pass-through trusts which issued approximately $797 million aggregate principal amount of Series 2017-2 Class AA and Class A EETCs (the 2017-2 EETCs) in connection with the financing of 30 aircraft previously delivered to American or scheduled to be delivered to American through April 2018 (the 2017-2 Aircraft). A portion of the net proceeds received from the sale of the 2017-2 EETCs has been used to acquire Series AA and A equipment notes issued by American to the pass-through trusts and the balance of such proceeds is being held in escrow for the benefit of the holders of the 2017-2 EETCs until such time as American issues additional Series AA and A equipment notes to the pass-through trusts, which trusts will purchase such additional equipment notes with the escrowed funds. These escrowed funds are not guaranteed by American and are not reported as debt on our condensed consolidated balance sheet because the proceeds held by the depository are not American's assets.

As of September 30, 2017, approximately $253 million of the escrowed proceeds from the 2017-2 EETCs have been used to purchase equipment notes issued by American. Interest and principal payments on equipment notes issued in connection with the 2017-2 EETCs are payable semi-annually in April and October of each year, with interest payments beginning in April 2018 and principal payments beginning in October 2018. These equipment notes are secured by liens on the aircraft financed with the proceeds of the 2017-2 EETCs.

Certain information regarding the 2017-2 EETC equipment notes and the remaining escrowed proceeds of the 2017-2 EETCs, as of September 30, 2017, is set forth in the table below.



	2017-2 EETCs
	Series AA	Series A
Aggregate principal issued	$545 million	$252 million
Remaining escrowed proceeds	$372 million	$172 million
Fixed interest rate per annum	3.35%	3.60%
Maturity date	October 2029	October 2029

2017-1 EETCs

In January 2017, American created three pass-through trusts which issued approximately $983 million aggregate principal amount of Series 2017-1 Class AA, Class A and Class B EETCs (the 2017-1 EETCs) in connection with the financing of 24 aircraft delivered to American through May 2017 (the 2017-1 Aircraft).

During the first six months of 2017, all of the net proceeds received from the sale of the 2017-1 EETCs were used to purchase equipment notes issued by American in connection with the financing of the 2017-1 Aircraft. Interest and principal payments on equipment notes issued in connection with the 2017-1 EETCs are payable semi-annually in February and August of each year, with interest payments that began in August 2017 and principal payments beginning in February 2018. These equipment notes are secured by liens on the 2017-1 Aircraft.

Certain information regarding the 2017-1 EETC equipment notes, as of September 30, 2017, is set forth in the table below.



	2017-1 EETCs
	Series AA	Series A	Series B
Aggregate principal issued	$537 million	$248 million	$198 million
Fixed interest rate per annum	3.65%	4.00%	4.95%
Maturity date	February 2029	February 2029	February 2025

2016-3 EETCs

During the first quarter of 2017, all remaining net proceeds of the Series 2016-3 Class AA and Class A EETCs (the 2016-3 EETCs), in the amount of $109 million, were used to purchase equipment notes issued by American in connection with the financing of two of the 25 aircraft financed under the 2016-3 EETCs (such 25 aircraft, the 2016-3 Aircraft). Interest and principal payments on equipment notes issued in connection with the 2016-3 EETCs are payable semi-annually in April and October of each year, with interest payments that began in April 2017 and principal payments beginning in October 2017. These equipment notes are secured by liens on the 2016-3 Aircraft.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS OF AMERICAN AIRLINES GROUP INC.

(Unaudited)

Certain information regarding the 2016-3 EETC equipment notes, as of September 30, 2017, is set forth in the table below.



	2016-3 EETCs
	Series AA	Series A
Aggregate principal issued	$558 million	$256 million
Fixed interest rate per annum	3.00%	3.25%
Maturity date	October 2028	October 2028

Equipment Loans and Other Notes Payable Issued in 2017

In the first nine months of 2017, American entered into agreements under which it borrowed $815 million in connection with the financing of certain aircraft. Debt incurred under these agreements matures in 2021 through 2029.

2017 Other Financing Activities

2013 Credit Facilities

In March 2017, American and AAG entered into the Second Amendment to the Amended and Restated Credit and Guaranty Agreement, amending the Amended and Restated Credit and Guaranty Agreement dated as of May 21, 2015 (which amended and restated the Credit and Guaranty Agreement dated as of June 27, 2013), as previously amended by the First Amendment to Amended and Restated Credit and Guaranty Agreement dated as of October 26, 2015, pursuant to which we refinanced the $1.8 billion term loan facility due June 2020 established thereunder (the 2013 Term Loan Facility and, together with the $1.4 billion revolving credit facility established under such agreement (the 2013 Revolving Facility), the 2013 Credit Facilities) to reduce the LIBOR margin from 2.50% to 2.00% and the base rate margin from 1.50% to 1.00%.

In August 2017, American and AAG entered into the Third Amendment to the Amended and Restated Credit and Guaranty Agreement pursuant to which the maturity date of the 2013 Revolving Facility was extended to October 2022, the LIBOR margin thereon was reduced from 3.00% to 2.25%, and the maximum principal amount of such facility was reduced to $1.2 billion. As of September 30, 2017, approximately $1.8 billion of principal was outstanding under the 2013 Term Loan Facility and there were no borrowings or letters of credit outstanding under the 2013 Revolving Facility.

2014 Credit Facilities

In June 2017, American and AAG entered into the Third Amendment to the Amended and Restated Credit and Guaranty Agreement, amending the Amended and Restated Credit and Guaranty Agreement dated as of April 20, 2015 (which amended and restated the Credit and Guaranty Agreement dated as of October 10, 2014), as previously amended by the First Amendment to Amended and Restated Credit and Guaranty Agreement dated as of October 26, 2015 and the Second Amendment to Amended and Restated Credit and Guaranty Agreement dated as of September 22, 2016, pursuant to which we refinanced the $735 million term loan facility due October 2021 established thereunder (the 2014 Term Loan Facility and, together with the $1.025 billion revolving credit facility established under such agreement (the 2014 Revolving Facility), the 2014 Credit Facilities) to reduce the LIBOR margin from 2.50% to 2.00% and the base rate margin from 1.50% to 1.00%.

In August 2017, American and AAG entered into the Fourth Amendment to the Amended and Restated Credit and Guaranty Agreement pursuant to which the maturity date of the 2014 Revolving Facility was extended to October 2022, the LIBOR margin thereon was reduced from 3.00% to 2.25%, and the maximum principal amount of such facility was reduced to $1.0 billion. As of September 30, 2017, approximately $735 million of principal was outstanding under the 2014 Term Loan Facility and there were no borrowings or letters of credit outstanding under the 2014 Revolving Facility.

April 2016 Credit Facilities

In August 2017, American and AAG entered into the Second Amendment to the Credit and Guaranty Agreement, amending the Credit and Guaranty Agreement dated as of April 29, 2016 (the April 2016 Credit Facilities), as previously amended by the First Amendment to the Credit and Guaranty Agreement, dated as of October 31, 2016, pursuant to which a new $300 million revolving credit facility (the April 2016 Revolving Facility) was established with a maturity date of October 2022 and a LIBOR margin of 2.25%. As of September 30, 2017, approximately $990 million of principal was outstanding under the term loan facility under the April 2016 Credit Facilities and there were no borrowings or letters of credit outstanding under the April 2016 Revolving Facility.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS OF AMERICAN AIRLINES GROUP INC.

(Unaudited)

6. Income Taxes

At December 31, 2016, we had approximately $10.5 billion of gross net operating losses (NOLs) carried over from prior taxable years (NOL Carryforwards) to reduce future federal taxable income, substantially all of which are expected to be available for use in 2017. The federal NOL Carryforwards will expire beginning in 2022 if unused. We also had approximately $3.7 billion of NOL Carryforwards to reduce future state taxable income at December 31, 2016, which will expire in years 2017 through 2036 if unused.

At December 31, 2016, we had an alternative minimum tax credit carryforward of approximately $339 million available for federal income tax purposes, which is available for an indefinite period.

During the three and nine months ended September 30, 2017, we recorded an income tax provision of $380 million and $998 million, respectively, which was substantially non-cash due to the utilization of the NOLs described above. Substantially all of our income before income taxes is attributable to the United States.

7. Fair Value Measurements and Other Investments

Assets Measured at Fair Value on a Recurring Basis

We utilize the market approach to measure fair value for our financial assets. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets. Our short-term investments classified as Level 2 primarily utilize broker quotes in a non-active market for valuation of these securities. No changes in valuation techniques or inputs occurred during the nine months ended September 30, 2017.

Assets measured at fair value on a recurring basis are summarized below (in millions):



	Fair Value Measurements as of September 30, 2017
	Total		Level 1		Level 2		Level 3
Short-term investments ^(1) (2):
Money market funds	$	170	$	170	$	—	$	—
Corporate obligations	2,320		—		2,320		—
Bank notes/certificates of deposit/time deposits	2,738		—		2,738		—
Repurchase agreements	200		—		200		—
	5,428		170		5,258		—
Restricted cash and short-term investments ⁽¹⁾	393		104		289		—
Total	$	5,821	$	274	$	5,547	$	—


⁽¹⁾	Unrealized gains or losses on short-term investments and restricted cash and short-term investments are recorded in accumulated other comprehensive loss at each measurement date.


⁽²⁾	All short-term investments are classified as available-for-sale and stated at fair value. Our short-term investments mature in one year or less except for $1.2 billion of bank notes/certificates of deposit/time deposits and $341 million of corporate obligations.

Fair Value of Debt

The fair value of our long-term debt was estimated using quoted market prices or discounted cash flow analyses, based on our current estimated incremental borrowing rates for similar types of borrowing arrangements. If our long-term debt was measured at fair value, it would have been classified as Level 2 in the fair value hierarchy.

The carrying value and estimated fair value of our long-term debt, including current maturities, were as follows (in millions):



	September 30, 2017				December 31, 2016
	Carrying Value		Fair Value		Carrying Value		Fair Value
Long-term debt, including current maturities	$	24,684	$	25,681	$	24,344	$	24,983

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS OF AMERICAN AIRLINES GROUP INC.

(Unaudited)

Other Investments

We have an approximate 25% ownership interest in Republic Airways Holdings Inc. (Republic), which we received in the second quarter of 2017 in consideration for our unsecured claim in Republic’s bankruptcy case. This ownership interest is accounted for under the equity method and our portion of Republic’s financial results is recognized within other, net on the condensed consolidated statements of operations.

Additionally, in the third quarter of 2017, we acquired 2.7% of the outstanding shares of China Southern Airlines Company Limited for $203 million. Since our subscription agreement restricts the sale or transfer of these shares for three years, we account for this investment under the cost method.

8. Employee Benefit Plans

The following tables provide the components of net periodic benefit cost (income) (in millions):



	Pension Benefits						Retiree Medical and Other Postretirement Benefits
Three Months Ended September 30,	2017			2016			2017			2016
Service cost	$	1		$	1		$	1		$	1
Interest cost	180			187			10			12
Expected return on assets	(198		)	(188		)	(5		)	(5		)
Amortization of:
Prior service cost (benefit)	7			7			(59		)	(60		)
Unrecognized net loss (gain)	36			32			(6		)	(4		)
Net periodic benefit cost (income)	$	26		$	39		$	(59	)	$	(56	)

	Pension Benefits						Retiree Medical and Other Postretirement Benefits
Nine Months Ended September 30,	2017			2016			2017			2016
Service cost	$	2		$	2		$	3		$	2
Interest cost	541			562			29			36
Expected return on assets	(592		)	(562		)	(16		)	(15		)
Amortization of:
Prior service cost (benefit)	21			21			(178		)	(180		)
Unrecognized net loss (gain)	108			95			(17		)	(12		)
Net periodic benefit cost (income)	$	80		$	118		$	(179	)	$	(169	)

Effective November 1, 2012, substantially all of our defined benefit pension plans were frozen.

During the first nine months of 2017, we contributed $281 million to our defined benefit pension plans, including supplemental contributions of $256 million in addition to a $25 million minimum required cash contribution.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS OF AMERICAN AIRLINES GROUP INC.

(Unaudited)

9. Accumulated Other Comprehensive Loss

The components of accumulated other comprehensive income (loss) (AOCI) are as follows (in millions):



	Pension, Retiree Medical and Other Postretirement Benefits			Income Tax Benefit (Provision) ⁽¹⁾				Total
Balance at December 31, 2016	$	(4,406	)	$	(677	)		$	(5,083	)
Other comprehensive loss before reclassifications	(1		)	—				(1		)
Amounts reclassified from AOCI	(66		)	23			(2)	(43		)
Net current-period other comprehensive income (loss)	(67		)	23				(44		)
Balance at September 30, 2017	$	(4,473	)	$	(654	)		$	(5,127	)


⁽¹⁾	Relates principally to pension, retiree medical and other postretirement benefits obligations that will not be recognized in net income until the obligations are fully extinguished.


⁽²⁾	Relates to pension, retiree medical and other postretirement benefits obligations and is recognized within the income tax provision on the condensed consolidated statement of operations.

Reclassifications out of AOCI are as follows (in millions):



	Amounts reclassified from AOCI												Affected line items on the condensed consolidated statements of operations
AOCI Components	Three Months Ended September 30,						Nine Months Ended September 30,
AOCI Components	2017			2016			2017			2016
Amortization of pension, retiree medical and other postretirement benefits:
Prior service cost (benefit)	$	(33	)	$	(33	)	$	(100	)	$	(100	)	Salaries, wages and benefits
Actuarial loss	19			17			57			52			Salaries, wages and benefits
Total reclassifications for the period, net of tax	$	(14	)	$	(16	)	$	(43	)	$	(48	)

10. Regional Expenses

Expenses associated with our wholly-owned regional airlines and third-party regional carriers operating under the brand name American Eagle are classified as regional expenses on the condensed consolidated statements of operations. Regional expenses consist of the following (in millions):



	Three Months Ended September 30,					Nine Months Ended September 30,
	2017			2016		2017			2016
Aircraft fuel and related taxes	$	352		$	303	$	999		$	801
Salaries, wages and benefits	369			337		1,074			990
Capacity purchases from third-party regional carriers	404			378		1,210			1,164
Maintenance, materials and repairs	74			82		209			264
Other rent and landing fees	159			143		466			413
Aircraft rent	9			9		26			26
Selling expenses	95			90		269			256
Depreciation and amortization	79			78		235			218
Special items, net	(5		)	5		(1		)	13
Other	118			113		361			343
Total regional expenses	$	1,654		$	1,538	$	4,848		$	4,488

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS OF AMERICAN AIRLINES GROUP INC.

(Unaudited)

11. Legal Proceedings

Chapter 11 Cases. On November 29, 2011, AMR, American, and certain of AMR’s other direct and indirect domestic subsidiaries (the Debtors) filed voluntary petitions for relief under Chapter 11 of the United States Bankruptcy Code in the United States Bankruptcy Court for the Southern District of New York (the Bankruptcy Court). On October 21, 2013, the Bankruptcy Court entered an order approving and confirming the Debtors’ fourth amended joint plan of reorganization (as amended, the Plan). On the Effective Date, December 9, 2013, the Debtors consummated their reorganization pursuant to the Plan and completed the Merger.

Pursuant to rulings of the Bankruptcy Court, the Plan established the Disputed Claims Reserve to hold shares of AAG common stock reserved for issuance to disputed claimholders at the Effective Date that ultimately become holders of allowed claims. As of September 30, 2017, there were approximately 24.5 million shares of AAG common stock remaining in the Disputed Claims Reserve. As disputed claims are resolved, the claimants will receive distributions of shares from the Disputed Claims Reserve on the same basis as if such distributions had been made on or about the Effective Date. However, we are not required to distribute additional shares above the limits contemplated by the Plan, even if the shares remaining for distribution are not sufficient to fully pay any additional allowed unsecured claims. To the extent that any of the reserved shares remain undistributed upon resolution of all remaining disputed claims, such shares will not be returned to us but rather will be distributed to former AMR stockholders.

There is also pending in the Bankruptcy Court an adversary proceeding relating to an action brought by American to seek a determination that certain non-pension, postemployment benefits are not vested benefits and thus may be modified or terminated without liability to American. On April 18, 2014, the Bankruptcy Court granted American’s motion for summary judgment with respect to certain non-union employees, concluding that their benefits were not vested and could be terminated. The summary judgment motion was denied with respect to all other retirees. The Bankruptcy Court has not yet scheduled a trial on the merits concerning whether those retirees’ benefits are vested, and American cannot predict whether it will receive relief from obligations to provide benefits to any of those retirees. Our financial statements presently reflect these retirement programs without giving effect to any modification or termination of benefits that may ultimately be implemented based upon the outcome of this proceeding.

DOJ Antitrust Civil Investigative Demand. In June 2015, we received a Civil Investigative Demand (CID) from the United States Department of Justice (DOJ) as part of an investigation into whether there have been illegal agreements or coordination of air passenger capacity. The CID seeks documents and other information from us, and other airlines have announced that they have received similar requests. We are cooperating fully with the DOJ investigation. In addition, subsequent to announcement of the delivery of CIDs by the DOJ, we, along with Delta Air Lines, Inc., Southwest Airlines Co., United Airlines, Inc. and, in the case of litigation filed in Canada, Air Canada, have been named as defendants in approximately 100 putative class action lawsuits alleging unlawful agreements with respect to air passenger capacity. The U.S. lawsuits have been consolidated in the Federal District Court for the District of Columbia. On October 28, 2016, the Court denied a motion by the airline defendants to dismiss all claims in the class actions. Both the DOJ investigation and these lawsuits are in their relatively early stages and we intend to defend these matters vigorously.

Private Party Antitrust Action. On July 2, 2013, a lawsuit captioned Carolyn Fjord, et al., v. US Airways Group, Inc., et al., was filed in the United States District Court for the Northern District of California. The complaint named as defendants US Airways Group and US Airways, alleged that the effect of the Merger may be to create a monopoly in violation of Section 7 of the Clayton Antitrust Act, and sought injunctive relief and/or divestiture. On August 6, 2013, the plaintiffs re-filed their complaint in the Bankruptcy Court, adding AMR and American as defendants. On November 27, 2013, the Bankruptcy Court denied plaintiffs’ motion to preliminarily enjoin the Merger. On May 12, 2017, defendants filed a motion for summary judgment. On June 23, 2017, plaintiffs filed an opposition to defendants’ motion and cross-motion for summary judgment. Briefing of the parties’ respective motions concluded on September 1, 2017; a hearing date has not yet been set. We believe this lawsuit is without merit and intend to vigorously defend against the allegations.

DOJ Investigation Related to the United States Postal Service. In April 2015, the DOJ informed us of an inquiry regarding American’s 2009 and 2011 contracts with the United States Postal Service for the international transportation of mail by air. In October 2015, we received a CID from the DOJ seeking certain information relating to these contracts and the DOJ has also sought information concerning certain of the airlines that transport mail on a codeshare basis. The DOJ has indicated it is investigating potential violations of the False Claims Act or other statutes. We are cooperating fully with the DOJ with regard to its investigation.

General. In addition to the specifically identified legal proceedings, we and our subsidiaries are also engaged in other legal proceedings from time to time. Legal proceedings can be complex and take many months, or even years, to reach resolution, with the final outcome depending on a number of variables, some of which are not within our control. Therefore,

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS OF AMERICAN AIRLINES GROUP INC.

(Unaudited)

although we will vigorously defend ourselves in each of the actions described above and such other legal proceedings, their ultimate resolution and potential financial and other impacts on us are uncertain but could be material. See Part II, Item 1A. Risk Factors – “We may be a party to litigation in the normal course of business or otherwise, which could affect our financial position and liquidity” for additional discussion.

12. Subsequent Events

Dividend Declaration

In October 2017, we announced that our Board of Directors had declared a $0.10 per share dividend for stockholders of record on November 13, 2017, and payable on November 27, 2017. Any future dividends that may be declared and paid from time to time will be subject to market and economic conditions, applicable legal requirements and other relevant factors. We are not obligated to continue a dividend for any fixed period, and payment of dividends may be suspended at any time at our discretion.

2016-3 Class B EETCs

In October 2017, American created one additional pass-through trust which issued approximately $193 million aggregate principal amount of Series 2016-3 Class B EETCs (the 2016-3 Class B EETCs) in connection with the financing of the 2016-3 Aircraft. The proceeds received from the sale of the 2016-3 Class B EETCs were used on the date of issuance of the 2016-3 Class B EETCs to acquire Series B equipment notes issued by American in connection with the financing of the 2016-3 Aircraft.

These Series B equipment notes bear interest at 3.75% per annum. Interest and principal payments on equipment notes issued in connection with the 2016-3 Class B EETCs are payable semi-annually in April and October of each year, beginning in April 2018.

2017-2 Class B EETCs

In October 2017, American created one additional pass-through trust which issued approximately $221 million aggregate principal amount of Series 2017-2 Class B EETCs (the 2017-2 Class B EETCs) in connection with the financing of the 2017-2 Aircraft. A portion of the net proceeds received from the sale of the Series 2017-2 Class B EETCs was used on the date of issuance of the 2017-2 Class B EETCs to acquire Series B equipment notes issued by American in connection with the financing of certain 2017-2 Aircraft, and the balance of such proceeds is being held in escrow for the benefit of the holders of the 2017-2 Class B EETCs until such time as American issues additional Series B equipment notes to the pass-through trust, which trusts will purchase such additional equipment notes with the escrowed funds. These escrowed funds are not guaranteed by American and are not reported as debt on our condensed consolidated balance sheet because the proceeds held by the depository are not American's assets.

These Series B equipment notes bear interest at 3.70% per annum. Interest and principal payments on equipment notes issued in connection with the 2017-2 Class B EETCs are payable semi-annually in April and October of each year, with interest payments beginning in April 2018 and principal payments beginning in October 2018.

ITEM 1B. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS OF AMERICAN AIRLINES, INC.

AMERICAN AIRLINES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In millions)(Unaudited)



	Three Months Ended September 30,						Nine Months Ended September 30,
	2017			2016			2017			2016
Operating revenues:
Mainline passenger	$	7,628		$	7,419		$	21,981		$	21,192
Regional passenger	1,749			1,731			5,133			5,040
Cargo	200			171			568			506
Other	1,298			1,270			3,916			3,639
Total operating revenues	10,875			10,591			31,598			30,377
Operating expenses:
Aircraft fuel and related taxes	1,570			1,393			4,481			3,736
Salaries, wages and benefits	2,991			2,770			8,816			8,087
Regional expenses	1,662			1,534			4,860			4,480
Maintenance, materials and repairs	487			481			1,474			1,352
Other rent and landing fees	471			463			1,363			1,342
Aircraft rent	304			299			892			908
Selling expenses	400			347			1,094			990
Depreciation and amortization	433			399			1,255			1,128
Special items, net	112			289			432			450
Other	1,220			1,184			3,575			3,391
Total operating expenses	9,650			9,159			28,242			25,864
Operating income	1,225			1,432			3,356			4,513
Nonoperating income (expense):
Interest income	56			28			158			74
Interest expense, net	(250		)	(229		)	(738		)	(674		)
Other, net	13			(8		)	8			(27		)
Total nonoperating expense, net	(181		)	(209		)	(572		)	(627		)
Income before income taxes	1,044			1,223			2,784			3,886
Income tax provision	395			465			1,046			1,445
Net income	$	649		$	758		$	1,738		$	2,441

See accompanying notes to condensed consolidated financial statements.

AMERICAN AIRLINES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In millions)(Unaudited)



	Three Months Ended September 30,						Nine Months Ended September 30,
	2017			2016			2017			2016
Net income	$	649		$	758		$	1,738		$	2,441
Other comprehensive loss, net of tax:
Pension, retiree medical and other postretirement benefits	(15		)	(17		)	(44		)	(53		)
Investments	—			2			—			6
Total other comprehensive loss, net of tax	(15		)	(15		)	(44		)	(47		)
Total comprehensive income	$	634		$	743		$	1,694		$	2,394

See accompanying notes to condensed consolidated financial statements.

AMERICAN AIRLINES, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In millions, except shares and par value)



	September 30, 2017			December 31, 2016
	(Unaudited)
ASSETS
Current assets
Cash	$	328		$	310
Short-term investments	5,425			6,034
Restricted cash and short-term investments	393			638
Accounts receivable, net	1,705			1,599
Receivables from related parties, net	8,457			6,810
Aircraft fuel, spare parts and supplies, net	1,252			1,032
Prepaid expenses and other	820			633
Total current assets	18,380			17,056
Operating property and equipment
Flight equipment	39,214			36,671
Ground property and equipment	7,661			6,910
Equipment purchase deposits	1,280			1,209
Total property and equipment, at cost	48,155			44,790
Less accumulated depreciation and amortization	(15,127		)	(13,909		)
Total property and equipment, net	33,028			30,881
Other assets
Goodwill	4,091			4,091
Intangibles, net of accumulated amortization of $612 and $578, respectively	2,214			2,173
Deferred tax asset	903			1,912
Other assets	2,177			1,979
Total other assets	9,385			10,155
Total assets	$	60,793		$	58,092

LIABILITIES AND STOCKHOLDER’S EQUITY
Current liabilities
Current maturities of long-term debt and capital leases	$	1,970		$	1,859
Accounts payable	1,580			1,546
Accrued salaries and wages	1,366			1,460
Air traffic liability	4,653			3,912
Loyalty program liability	2,893			2,789
Other accrued liabilities	2,132			2,106
Total current liabilities	14,594			13,672
Noncurrent liabilities
Long-term debt and capital leases, net of current maturities	20,942			20,718
Pension and postretirement benefits	7,426			7,800
Other liabilities	3,421			3,253
Total noncurrent liabilities	31,789			31,771
Commitments and contingencies
Stockholder’s equity
Common stock, $1.00 par value; 1,000 shares authorized, issued and outstanding	—			—
Additional paid-in capital	16,690			16,624
Accumulated other comprehensive loss	(5,226		)	(5,182		)
Retained earnings	2,946			1,207
Total stockholder’s equity	14,410			12,649
Total liabilities and stockholder’s equity	$	60,793		$	58,092

See accompanying notes to condensed consolidated financial statements.

AMERICAN AIRLINES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In millions)(Unaudited)



	Nine Months Ended September 30,
	2017			2016
Net cash provided by operating activities	$	2,738		$	1,769
Cash flows from investing activities:
Capital expenditures and aircraft purchase deposits	(4,501		)	(4,219		)
Purchases of short-term investments	(4,093		)	(5,078		)
Sales of short-term investments	4,714			4,587
Purchase of equity investment	(203		)	—
Decrease in restricted cash and short-term investments	245			60
Proceeds from sale of property and equipment and sale-leaseback transactions	816			50
Net cash used in investing activities	(3,022		)	(4,600		)
Cash flows from financing activities:
Proceeds from issuance of long-term debt	2,160			5,392
Payments on long-term debt and capital leases	(1,813		)	(2,534		)
Deferred financing costs	(66		)	(39		)
Other financing activities	21			20
Net cash provided by financing activities	302			2,839
Net increase in cash	18			8
Cash at beginning of period	310			364
Cash at end of period	$	328		$	372

Non-cash investing and financing activities:
Settlement of bankruptcy obligations	$	15		$	3
Supplemental information:
Interest paid, net	718			653
Income taxes paid	13			9

See accompanying notes to condensed consolidated financial statements.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS OF AMERICAN AIRLINES, INC.

(Unaudited)

1. Basis of Presentation

The accompanying unaudited condensed consolidated financial statements of American Airlines, Inc. (American) should be read in conjunction with the consolidated financial statements contained in American’s Annual Report on Form 10-K for the year ended December 31, 2016. American is the principal wholly-owned subsidiary of American Airlines Group Inc. (AAG). All significant intercompany transactions have been eliminated.

Recent Accounting Pronouncements

Revenue

In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2014-09, “Revenue from Contracts with Customers (Topic 606).” ASU 2014-09 completes the joint effort by the FASB and International Accounting Standards Board (IASB) to improve financial reporting by creating common revenue recognition guidance for GAAP and International Financial Reporting Standards (IFRS). Subsequently, the FASB has issued several additional ASUs to clarify the implementation. The new revenue standard applies to all companies that enter into contracts with customers to transfer goods or services and is effective for public entities for interim and annual reporting periods beginning after December 15, 2017. American will adopt the new revenue standard effective January 1, 2018. Entities have the choice to apply the new revenue standard either retrospectively to each reporting period presented or by recognizing the cumulative effect of applying the new revenue standard at the date of initial application and not adjusting comparative information. American will adopt the new revenue standard using the full retrospective method.

American is in the process of finalizing how the application of the new revenue standard will impact its condensed consolidated financial statements. American currently expects that the new revenue standard will materially impact its liability for outstanding mileage credits earned by AAdvantage loyalty program members. American currently uses the incremental cost method to account for this portion of its loyalty program liability, which values these mileage credits based on the estimated incremental cost of carrying one additional passenger. The new revenue standard will require American to change its policy and apply a relative selling price approach whereby a portion of each passenger ticket sale attributable to mileage credits earned will be deferred and recognized in passenger revenue upon future mileage redemption. The carrying value of the earned mileage credits recognized in loyalty program liability is expected to be materially greater under the relative selling price approach than the value attributed to these mileage credits under the incremental cost method. The new revenue standard will also require American to reclassify certain ancillary fees to passenger revenue, which are currently included within other operating revenue. See Part I, Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations - “Recent Accounting Pronouncements” for American's preliminary assessment of the quantitative impacts of the new revenue standard on its consolidated financial statements.

Leases

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS OF AMERICAN AIRLINES, INC.

(Unaudited)

adoption is permitted. American expects to adopt the new lease standard effective January 1, 2019. Entities are required to adopt the new lease standard using a modified retrospective approach for all leases existing at or commencing after the date of initial application with an option to use certain practical expedients. American is currently evaluating how the adoption of the new lease standard will impact its condensed consolidated financial statements. Interpretations are on-going and could have a material impact on American’s implementation. Currently, American expects that the adoption of the new lease standard will have a material impact on its condensed consolidated balance sheet due to the recognition of right-of-use assets and lease liabilities principally for certain leases currently accounted for as operating leases.

Statement of Cash Flows

In November 2016, the FASB issued ASU 2016-18, “Statement of Cash Flows (Topic 230): Restricted Cash.” ASU 2016-18 requires that the change in total cash, cash at beginning of period and cash at end of period on the statement of cash flows include restricted cash and restricted cash equivalents. ASU 2016-18 also requires companies who report cash and restricted cash separately on the balance sheet to reconcile those amounts to the statement of cash flows. This standard is to be applied retrospectively to each period presented and is effective for public entities for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted. American expects to adopt this new standard effective January 1, 2018. This standard is not expected to have a material impact on American’s condensed consolidated financial statements.

Retirement Benefits

In March 2017, the FASB issued ASU 2017-07, “Compensation – Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost.” ASU 2017-07 requires an entity to present the service cost component of net benefit cost in the income statement line items where it reports compensation cost. Entities will present all other components of net benefit cost outside of operating income, if this subtotal is presented. This standard is to be applied retrospectively to each period presented and is effective for public entities for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. American will adopt this standard on January 1, 2018. The new standard will require all components of American’s net periodic benefit cost (income), with the exception of service cost, currently reported within operating expenses as salaries, wages and benefits, to be reclassified and reported within nonoperating income (expense). The adoption of this new standard will have no impact on pre-tax income or net income reported. See Note 6 for American’s current components of net periodic benefit cost (income).

Financial Instruments

In January 2016, the FASB issued ASU 2016-01, “Financial Instruments - Overall (Subtopic 825-10)." ASU 2016-01 makes several modifications to Subtopic 825-10, including the elimination of the available-for-sale classification of equity investments, and it requires equity investments with readily determinable fair values to be measured at fair value with changes in fair value recognized in net income. ASU 2016-01 is effective for interim and annual periods beginning after December 15, 2017. American will adopt this standard on January 1, 2018. Based on American's portfolio of investments as of September 30, 2017, it does not expect the adoption of ASU 2016-01 to have a material impact on its condensed consolidated financial statements.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS OF AMERICAN AIRLINES, INC.

(Unaudited)

2. Special Items, Net

Special items, net on the condensed consolidated statements of operations consisted of the following (in millions):



	Three Months Ended September 30,					Nine Months Ended September 30,
	2017			2016		2017		2016
Merger integration expenses ⁽¹⁾	$	62		$	194	$	192	$	395
Fleet restructuring expenses ⁽²⁾	62			31		174		72
Mark-to-market adjustments for bankruptcy obligations and other	(12		)	39		7		(22		)
Labor contract expenses ⁽³⁾	—			—		45		—
Other operating charges, net	—			25		14		5
Mainline operating special items, net	112			289		432		450

Regional operating special items, net ⁽⁴⁾	(1		)	3		3		11
Nonoperating special items, net ⁽⁵⁾	3			—		12		36


⁽¹⁾	Merger integration expenses included costs related to information technology, professional fees, re-branding of aircraft and airport facilities and training. Additionally, the 2016 periods also included costs related to alignment of labor union contracts, re-branded uniforms, relocation and severance.


⁽²⁾	Fleet restructuring expenses driven by the Merger principally included the acceleration of aircraft depreciation and impairments for aircraft grounded or expected to be grounded earlier than planned.


⁽³⁾	Labor contract expenses primarily included one-time charges to adjust the vacation accruals for pilots and flight attendants as a result of the mid-contract pay rate adjustments effective in the second quarter of 2017.


⁽⁴⁾	Regional operating special items, net principally related to Merger integration expenses.


⁽⁵⁾	Nonoperating special items, net primarily consisted of debt issuance and extinguishment costs associated with term loan refinancings. Additionally, the 2016 nine-month period included costs associated with a bond refinancing.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS OF AMERICAN AIRLINES, INC.

(Unaudited)

3. Debt

Long-term debt and capital lease obligations included in the condensed consolidated balance sheets consisted of (in millions):



	September 30, 2017		December 31, 2016
Secured
2013 Credit Facilities, variable interest rate of 3.24%, installments through 2020	$	1,825	$	1,843
2014 Credit Facilities, variable interest rate of 3.24%, installments through 2021	735		735
April 2016 Credit Facilities, variable interest rate of 3.74%, installments through 2023	990		1,000
December 2016 Credit Facilities, variable interest rate of 3.73%, installments through 2023	1,250		1,250
Aircraft enhanced equipment trust certificates (EETCs), fixed interest rates ranging from 3.00% to 9.75%, maturing from 2018 to 2029	11,396		10,912
Equipment loans and other notes payable, fixed and variable interest rates ranging from 2.34% to 8.99%, maturing from 2018 to 2029	5,330		5,343
Special facility revenue bonds, fixed interest rates ranging from 5.00% to 5.50%, maturing from 2018 to 2035	828		862
Other secured obligations, fixed interest rates ranging from 3.60% to 12.24%, maturing from 2017 to 2028	788		848
Total long-term debt and capital lease obligations	23,142		22,793
Less: Total unamortized debt discount, premium and issuance costs	230		216
Less: Current maturities	1,970		1,859
Long-term debt and capital lease obligations, net of current maturities	$	20,942	$	20,718

The table below shows the maximum availability under revolving credit facilities, all of which were undrawn, as of September 30, 2017 (in millions):



2013 Revolving Facility	$	1,200
2014 Revolving Facility	1,000
April 2016 Revolving Facility	300
Total	$	2,500

The December 2016 Credit Facilities provide for a revolving credit facility that may be established in the future.

2017 Aircraft Financing Activities

2017-2 EETCs

In August 2017, American created two pass-through trusts which issued approximately $797 million aggregate principal amount of Series 2017-2 Class AA and Class A EETCs (the 2017-2 EETCs) in connection with the financing of 30 aircraft previously delivered to American or scheduled to be delivered to American through April 2018 (the 2017-2 Aircraft). A portion of the net proceeds received from the sale of the 2017-2 EETCs has been used to acquire Series AA and A equipment notes issued by American to the pass-through trusts and the balance of such proceeds is being held in escrow for the benefit of the holders of the 2017-2 EETCs until such time as American issues additional Series AA and A equipment notes to the pass-through trusts, which trusts will purchase such additional equipment notes with the escrowed funds. These escrowed funds are not guaranteed by American and are not reported as debt on American's condensed consolidated balance sheet because the proceeds held by the depository are not American's assets.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS OF AMERICAN AIRLINES, INC.

(Unaudited)

Certain information regarding the 2017-2 EETC equipment notes and the remaining escrowed proceeds of the 2017-2 EETCs, as of September 30, 2017, is set forth in the table below.



	2017-2 EETCs
	Series AA	Series A
Aggregate principal issued	$545 million	$252 million
Remaining escrowed proceeds	$372 million	$172 million
Fixed interest rate per annum	3.35%	3.60%
Maturity date	October 2029	October 2029

2017-1 EETCs

Certain information regarding the 2017-1 EETC equipment notes, as of September 30, 2017, is set forth in the table below.



	2017-1 EETCs
	Series AA	Series A	Series B
Aggregate principal issued	$537 million	$248 million	$198 million
Fixed interest rate per annum	3.65%	4.00%	4.95%
Maturity date	February 2029	February 2029	February 2025

2016-3 EETCs

Certain information regarding the 2016-3 EETC equipment notes, as of September 30, 2017, is set forth in the table below.



	2016-3 EETCs
	Series AA	Series A
Aggregate principal issued	$558 million	$256 million
Fixed interest rate per annum	3.00%	3.25%
Maturity date	October 2028	October 2028

Equipment Loans and Other Notes Payable Issued in 2017

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS OF AMERICAN AIRLINES, INC.

(Unaudited)

2017 Other Financing Activities

2013 Credit Facilities

In March 2017, American and AAG entered into the Second Amendment to the Amended and Restated Credit and Guaranty Agreement, amending the Amended and Restated Credit and Guaranty Agreement dated as of May 21, 2015 (which amended and restated the Credit and Guaranty Agreement dated as of June 27, 2013), as previously amended by the First Amendment to Amended and Restated Credit and Guaranty Agreement dated as of October 26, 2015, pursuant to which American refinanced the $1.8 billion term loan facility due June 2020 established thereunder (the 2013 Term Loan Facility and, together with the $1.4 billion revolving credit facility established under such agreement (the 2013 Revolving Facility), the 2013 Credit Facilities) to reduce the LIBOR margin from 2.50% to 2.00% and the base rate margin from 1.50% to 1.00%.

2014 Credit Facilities

In June 2017, American and AAG entered into the Third Amendment to the Amended and Restated Credit and Guaranty Agreement, amending the Amended and Restated Credit and Guaranty Agreement dated as of April 20, 2015 (which amended and restated the Credit and Guaranty Agreement dated as of October 10, 2014), as previously amended by the First Amendment to Amended and Restated Credit and Guaranty Agreement dated as of October 26, 2015 and the Second Amendment to Amended and Restated Credit and Guaranty Agreement dated as of September 22, 2016, pursuant to which American refinanced the $735 million term loan facility due October 2021 established thereunder (the 2014 Term Loan Facility and, together with the $1.025 billion revolving credit facility established under such agreement (the 2014 Revolving Facility), the 2014 Credit Facilities) to reduce the LIBOR margin from 2.50% to 2.00% and the base rate margin from 1.50% to 1.00%.

April 2016 Credit Facilities