American Airlines, Inc.

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American Airlines, Inc.

also known as: amr corporation

founded: 1934 as american airways, inc.

Contact Information:

headquarters: 4333 amon carter blvd.
fort worth, tx 76155 phone: (817)963-1234 fax: (817)967-9641 url: http://www.aa.com http://www.amrcorp.com

OVERVIEW

American Airlines, Inc. is the principal subsidiary of AMR Corporation (AMR). In 1982 stockholders voted to approve a plan of reorganization under which they formed a new holding company, AMR Corp., which became the parent company to American Airlines Inc. They took the name "AMR" from the airline's three-letter New York Stock Exchange symbol. For financial reporting purposes, AMR's operations fall within three major lines of business: the Airline Group (American), The SABRE Group, and the Management Services Group. American operates American Eagle, a group of four small regional airlines that connect passengers from smaller markets into American's hub system. AMR also provides leasing; airport ground management; and consulting, information, and telemarketing services. Additionally, the company developed the SABRE reservation system, the world's largest privately owned real-time computer network in the world. Management believes the holding company structure improves the company's ability to manage separate business segments effectively and provides a platform for further expansion of the company's businesses.

American's passenger division is one of the largest scheduled passenger airlines in the world. American provides scheduled jet service to more than 160 destinations throughout North America, the Caribbean, Latin America, Europe, and the Pacific. American's cargo division is one of the largest scheduled air freight carriers in the world. It provides a full range of freight and mail services to shippers throughout the airline's system. In addition, through cooperative agreements with other carriers, it can transport shipments to any country in the world. On an average day American Airlines receives more than 343,000 reservation calls and flies more than 2,200 flights.

COMPANY FINANCES

In 1997, the AMR Corp. generated revenues of $18.5 billion, up 4.6 percent from $17.7 billion in 1996. Of that, the Airline Group (which consists of American Airlines, Inc., AMR Eagle, Inc., and American's Cargo Division) brought in combined revenues of $16.9 billion in 1997, versus $16.2 billion in 1996 and $15.5 billion in 1995. The Airline Group accounted for 88 percent of 1997 sales. The SABRE group had 1997 sales of $1.8 billion, accounting for 9 percent of total sales, and the Management Services Group accounted for 3 percent of sales with $610 million in sales. In the first quarter of 1998, AMR reported earnings of $290 million, 91 percent growth over first quarter 1997 earnings of $152 million.

From 1990 to 1993, the airline industry experienced unprecedented losses due to high fuel costs, general economic conditions, intense price competition, and other factors. As a result of price competition, American could not raise prices to compensate for the escalating fuel costs. During this period, AMR lost more than $1.3 billion.

AMR's reported earnings per share was $10.90 in 1997, up from $9.92 in 1996. By May of 1998 that figure rose to $12.37 per share. The actual stock price per share has been rising steadily since 1995, when it ranged from a low of $54 7/8 per share to a high of $78 per share. In the second quarter of 1996 that high reached $96 3/4 per share, and in the fourth quarter of 1997 AMR's stock price reached a high of $131 13/16 per share. Stock prices have continued to rise in 1998, ranging from $150 to $153 13/16 per share. It is currently the highest-priced airline stock in the United States. In order to make its stock more accessible to small investors, AMR announced a 2-for-1 stock split. This will reward current shareholders with double the number of shares they currently own, and split the purchase price of AMR stock per share in half.

In 1996 American derived 69.6 percent of its passenger revenues from domestic operations and 30.4 percent from international operations versus 68.9 percent of its passenger revenues from domestic operations and 31.1 percent from its international operations in 1995.

FAST FACTS: About American Airlines, Inc.

Ownership: American Airlines is a publicly owned company traded on the New York Stock Exchange and Zurich, Basel, and Geneva Stock Exchanges. American Airlines' stocks are also traded unlisted on the Midwest Stock Exchange and the Pacific Stock Exchange.

Ticker symbol: AMR

Officers: Robert L. Crandall, Chmn., Pres., & CEO, 62; Donald J. Carty, Pres., American Airlines, Inc., AMR Airline Group,51; Gerald J. Arpey, Sr. VP & CFO, 38; Anne H. McNamara, Sr. VP & Gen. Counsel, 49

Employees: 113,900

Principal Subsidiary Companies: AMR's selected subsidiaries and affiliates include: American Airlines, Inc., AMR Eagle, Inc. (commuter services), AMR Investment Services, Inc. (investment management), AMR Services Corp. (ground services), SABRE Computer Services (data processing), SABRE Decision Technologies (consulting to travel and other industries), SABRE Interactive (PC-based travel services), and SABRE Travel Information Network (reservations).

Chief Competitors: As a major airline, American Airlines' competitors include: United Airlines; USAir; Continental Airlines; TWA; Delta; Southwest Airlines; Northwest Airlines; America West; and Air France.

ANALYSTS' OPINIONS

In June of 1997, Standard & Poor's raised the corporate credit ratings and senior debt ratings of AMR Corp. and subsidiary American Airlines Inc. to "investment grade" with an outlook of "stable." The upgrade was based on stronger industry conditions and the company's concentration on core markets and profitable international routes. This resulted in improved earnings and cash flow. AMR's new corporate credit rating was also based on strong revenue and cash flow generation from the airline, an improving balance sheet, and earnings contributions from small, but profitable, nonairline businesses such as the SABRE reservations system. Additional elements cited in American's favor included a revenue edge from its extensive route network—one of three largest domestic carriers, largest in Latin America, and second-largest to Europe. The company's alliance with British Airways PLC also helps form a strong competitor in that market and generate added revenues. Reasons the airline did not get an even higher rating were attributed to the high industry risk of airlines, rising labor costs, and a possible sale of its computerized reservation system unit. The overall ratings for AMR Corp. and American Airlines will likely improve if the company's performance continues at its current trend.

HISTORY

Robertson Aircraft Corporation and about 85 other small airline companies were consolidated in 1929 and 1930 into the Aviation Corporation, which eventually formed American Airways, the immediate predecessor of today's American Airlines. It was in 1934 that the company reorganized American Airways and became American Airlines, Inc. Not long after, American developed an air traffic control system that would later be used by all airlines and administered by the U.S. government. The company also introduced the first domestic scheduled U.S. freight service in 1944. The Douglas 7Aircraft Company and American took the initiative and debuted the first commercial flight with the Douglas DC-3 between Chicago and New York on June 25, 1936. American focused on the innovation and modernization of its fleet and acquired its first McDonnell Douglas MD-11 in 1991, which accommodated 251 passengers. They constructed this type of aircraft for long-hauls, which made it possible for American to venture into the international markets.

In 1989, AMR bought Eastern Air Lines' Latin American routes, the U.S.-London routes from TWA, and Continental's Seattle-Tokyo routes. In addition, they got approval to fly to Manchester, England, from the Department of Transportation. These and other expansion efforts into international markets helped the company's renewed growth and continue to do so throughout the 1990s.

STRATEGY

American maximizes passenger traffic and revenue potential by channeling into or through its hubs, which serve as gateways for the airlines route network. Through its hub-and-spoke system, American serves more markets with greater frequency than would be possible with the same number of aircraft in a point-to-point route system. At American's largest hub, the Dallas/Fort Worth International Airport, they operate more than 750 flights per day to 128 domestic and 17 international destinations. Additional hubs include Chicago, Miami, and San Juan. The company believes these hubs are well positioned as geographically favorable locations for continued growth. American Airlines has many cooperative-service relationships (sometimes called code shares) with selected airlines across the world. These airlines service many destinations worldwide that American does not serve itself. Through these relationships, American can offer service to destinations throughout the world. Although tickets show American Airlines' flight numbers, all or part of the journey might be on one of their cooperative partners.

Further efforts toward continued growth for the company include expanding foreign routes in areas such as Latin America, Asia, and Europe and alliances with carriers such as British Airways. In addition, American plans to upgrade its air fleet, and ordered 103 aircraft from Boeing and the right to purchase more than 527 additional jets during the next 22 years. This arrangement would allow the airline to move gradually toward a very high level of fleet commonality, and provide for modest capacity growth in future years.

CHRONOLOGY: Key Dates for American Airlines, Inc.

1934:: American Airways, Inc. reorganizes to form American Airlines, Inc.
1936:: American uses Douglas DC-3 for first domestic flight between Chicago and New York
1944:: The first domestic scheduled freight service is introduced
1953:: An 80-passenger DC-7 makes the first scheduled non-stop transcontinental flight
1959:: The first Boeing 707s enter into service for American
1968:: President C.R. Smith leaves to join the Johnson Administration
1974:: C.R. Smith returns to bring American out of its financial crisis
1981:: AADVANTAGE Program is introduced
1989:: Expands into Latin America, The United Kingdom, and Japan
1991:: Purchases McDonnell Douglas MD-11, which carried 251 passengers
1994:: Chemical Product Control Program is initiated
1998:: First flight attendant class in which all attendants will be bi- or multi-lingual

In a new marketing venture, American Airlines teamed up with the MGM Grand to offer what the MGM Grand termed an "exclusive and unprecedented agreement." Beginning in May of 1998, the MGM Grand began offering AADVANTAGE members mile points for hotel stays, theatre tickets, and gambling activity. MGM Grand President Dan Wade speculated that the alliance reinforces "the power of global branding among the leaders in the travel industry."

INFLUENCES

American Airlines attributes its recent successes to several factors, including sensible pricing and favorable fuel prices. The company also gave a nod to its employees around the world, adding that it was their dedication and teamwork that gave American's customers the good service that keeps them coming back.

Compared to its competition American has certain advantages. Its fleet is young (average aircraft age—eight years), efficient, and quiet. It has an immense domestic and international route structure, secured by efficient hubs. In addition, the company's AADVANTAGE frequent flyer program is the largest in the industry. American established this program to develop passenger loyalty by offering awards to travelers for their continued patronage. AADVANTAGE members earn mileage credits for flights on American and American Eagle.

Also contributing significantly toward AMR's success is the SABRE reservations system (of which AMR owns 80 percent, and 20 percent is publicly owned). Though it accounted for a small percentage of overall sales in 1997, that percentage is growing—Fortune magazine reported in its 1998 Fortune 500 issue that AMR receives 20 percent of its profits from the SABRE system. The system is used by 45 percent of U.S. travel agencies to book reservations, according to Fortune magazine.

CURRENT TRENDS

A key element of Americans' strategic growth plan took place in 1996, when the company announced its plans to create a worldwide alliance between American and British Airways. Subject to regulatory approval, the two carriers will introduce extensive code sharing across each other's networks and establish full reciprocity between frequent flyer programs. Additionally, the carriers will combine passenger and cargo activities between the United States and Europe and share the resulting profits on these services. This alliance positions American to compete in thousands of new markets and make them fully competitive with the existing global alliances of other major U.S. carriers, such as that of United with Lufthansa and SAS, Northwest with KLM, and Delta with Austrian, Swissair, and Sabena. As of September 1997, this alliance was under review by the U.S. Department of Transportation.

Due to competition, fares have fallen substantially in the past 10 years, and that trend should continue. To fill seats on weekend flights, for which there is typically little demand and which normally go empty, American is promoting special fares via the Internet. Participants in its NetsAAvers program register through Americans' Web site to receive a weekly E-mail message outlining fare offerings.

PRODUCTS

While focusing on air safety, American is currently equipping its 649 planes with early warning devices called Enhanced Ground Proximity Warning Systems. The new system will give flight crews a map-like display of nearby terrain on all sides of the aircraft. Existing ground proximity systems, by contrast, can only read terrain that is directly below the aircraft.

CORPORATE CITIZENSHIP

Environmental awareness is promoted throughout the company. In the late 1990s the company was committed to developing and carrying out business practices that help safeguard the earth's environment. They started the in-flight recycling program that recycles more than 336,000 pounds of aluminum annually. Also, the Chemical Product Control Program, started in 1994, has reduced the number of various types of chemicals at American from 15,000 to 2,000. The company will invest more than $20 million by the end of 1997 in environmental systems and clean up programs. For example, American is in the process of removing and/or upgrading underground storage tanks. This effort is 95 percent complete. In addition, American was the first airline to receive the Animal Transportation Association's Animal Welfare Award. They recognized the Passenger and Cargo Divisions for "outstanding work" supporting animal welfare projects, including the dramatic rescue of three African lions from a Mexico City zoo.

GLOBAL PRESENCE

American provides service to and from cities in various other countries, across the Atlantic and the Pacific, and also between the United States and the Caribbean, and Central and South America. International travel accounted for 30 percent of American's passenger revenue in 1996. American continues to be the dominant carrier in Latin America with 64 percent of total U.S. airline traffic. The company continues to add to its international network by entering into a code share agreement with Chinese Eastern Airlines in March 1997.

American is also the dominant U.S. carrier to Latin America, serving 27 nations in the Caribbean, Mexico, Central and South America, and the number two U.S. carrier to Europe. Current American code share alliances include South African Airways, British Midland Airways, Gulf Air, Quantas Airways, Canadian Airlines, Singapore Airlines, LOT Polish Airlines, China Airlines, El Al Israel Airlines, and TACA Group. The TACA group is composed of TACA International Airlines of El Salvador and its affiliate partners-AVIATECA of Guatemala, COPA of Panama, LACSA of Costa Rica, NICA of Nicaragua, and TACA de Honduras. Current additional partners pending with the TACA Group of Central America carriers include LAPSA of Paraguay, BWIA, Transaero Airlines, EL AL, and Avianca.

AIRLINE FOOD GETS FIRST CLASS UPGRADE

Everything on the menu sounds so appetizing, it's hard to decide which entree to order: Maple barbecue chicken with sauteed yellow squash served with zucchini and a cornbread pilaf, salmon with Shangdon sauce and stir fried vegetable rice, or penne pasta with balsamic broth and goat cheese garnish. Must be the menu at a fancy gourmet restaurant, right? Guess again. These are just some of the new meals being offered by American Airlines to its first class passengers. American consulted with chefs Larry Forgione of American Place in New York, and Jasper White of Legal Sea Foods in Boston to revamp over half of its first class dinner lineup. Other airlines, including Delta, U.S. Airways, and Continental have redesigned their menus as well. Why the change? Customers want better food.

A survey of 1,000 frequent flyers by LSG-Sky Chefs revealed that 56 percent would consider changing airlines if they could expect better food. Forty-three percent want airlines to come up with new food, while 67 percent desire healthy foods. Other factors relating to customer satisfaction while dining in the sky were frequency and variety of drinks, cloth napkins, and hot towels.

For the most part, airlines have been very responsive to their customers' desires. In addition to the changes to its first class menu, American now offers Bistro service on flights that last two to three hours. The service allows customers to grab their own sack of food from a cooler on the jetway before boarding. Some of the Bistro sacks include Lender's bagels, full-sized deli sandwiches, side salads, and pasta salad to name a few. United Airlines has hired Sheila Lukins, co-author of the Silver Palate cookbooks, to come up with 25 hot meals for coach-class customers. Starting in October 1998, Delta Air Lines' coach fliers will be treated to steak from Michael Jordan's Steak House NYC. Travelers flying in U.S. Airways Envoy class can choose from four entrees and hors d'oeuvres and desserts from Philadelphia's Le BeeFin restaurant. With its Chef on Board program for Business First flights, Continental Airlines has an actual chef on the plane to help serve and prepare food.

Airlines have answered the call for healthier foods as well. In 1997 United was ranked first for the third year in a row in a study conducted by the Physicians Committee for Responsible Medicine (PCRM) to determine the availability of low-fat and vegetarian foods served by airlines. One of United's healthy entrees included cholesterol-free, mushroom-filled ravioli in marinara sauce served with a zucchini, yellow squash, and carrot medley with only 2.5 grams of fat. Numbers two and three in the study were American and Northwest Airlines, respectively. All of the airlines that participated in the study offered cholesterol-free meals with no more than 28 percent of calories coming from fat.

Customers have apparently noticed the difference in airline food quality. In 1997, food satisfaction ratings on United flights featuring Sheila Lukins' meals improved by 27 percent from the previous year among coach fliers. American must be doing something right, too. It announced in 1997 that it was releasing the second edition of the American Airlines cookbook, "A Taste of Something Special," featuring recipes from American's most popular entrees.

EMPLOYMENT

The airline business is labor intensive. American has employees based in the Americas, Asia, the Caribbean, Europe, and the Middle East. In addition, the company has 194 City Ticket Office locations in the United States and Canada. American distributed almost $61 million in profit-sharing and bonus checks to more than 21,700 employees in the Dallas-Fort Worth base in March 1997 for contributions to American's 1996 performance. American launched its profit-sharing programs in 1984.

On March 2, 1998, American Airlines began its first flight attendant training class in the company's history in which all the prospective U.S.-based attendants have either bilingual or multilingual skills. The first class included 52 new hires who were expected to begin work on flights in the spring. This group of flight attendants speak Spanish, French, Japanese, German, Portugese, Italian, and Swedish; all also speak English and some speak additional languages. This is American's way of working towards a goal of 50 percent of the flight staff speaking second or third languages, a goal the company hopes to continue moving toward when hiring 1,600 new employees in 1998. American is looking for diversity in its workforce, and not only in language skills. Recent hires ranged in age from 21 to 52, more than half of whom were men. And they came from places as far as Austria, Ecuador, and Costa Rica.

SOURCES OF INFORMATION

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For an annual report:

on the internet at: http://www.amrcorp.com/air/investor/investor. htmor write: amr corporation, mail drop 5651, po box 619616, dallas/ft. worth airport, tx 75261-9616