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1998 Annual Report

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1998 Annual Report AMR CORPORATION 1998 ANNUAL REPORT AMR Corporation is a worldwide leader in scheduled air transportation, in the development and application of information technology for aviation, travel and tourism, and in a wide range of other aviation-related activities. C ONTENTS Consolidated Highlights 1 Letter from the Chairman 2 1998 Quarterly Highlights 6 Shareholder Essay 8 Customer Essay 12 Employee Essay 16 The Sabre Group Essay 20 Financial Information 23 Eleven-Year Comparative Summary 58 Board of Directors and AMR Officers 60 Management–Divisions and Subsidiaries 61 Corporate Information 62 C OVER American Airlines’ new Boeing 777 CONSOLIDATED HIGHLIGHTS (Dollars in millions, except per share amounts) Percent Year Ended December 31, 1998 1997 Change Total operating revenues $ 19,205 $ 18,184 5.6 Total operating expenses $ 16,867 $ 16,277 3.6 Operating income $ 2,338 $ 1,907 22.6 Operating margin 12.2% 10.5% 1.7 pts. Income from continuing operations $ 1,306 $ 973 34.2 Net earnings $ 1,314 $ 985 33.4 Average shares of common stock outstanding (in thousands) 168,750 178,304 (5.4) Earnings per common share (basic) From continuing operations $ 7.73 $5.45 41.8 Net earnings $ 7.78 $5.52 40.9 Earnings per common share (diluted) From continuing operations $ 7.48 $5.32 40.6 Net earnings $ 7.52 $5.39 39.5 Return on equity 20.4% 16.6% 3.8 pts. Ratio of current assets to current liabilities at year-end 0.86 0.89 (3.4) 1 Average equivalent number of employees 116,300 113,900 2.1 Approximate number of common shareholders of record at year-end 14,000 14,300 (2.1) AMR EMPLOYEE PROFILE Increase/(Decrease) Increase/(Decrease) Increase/(Decrease) From From From Average Equivalent Headcount 1998 Previous Year 1997 Previous Year 1996 Previous Year Management/Specialist 19,300 5.5% 18,300 7.0% 17,100 5.6% Agent/Support Staff 32,600 1.6% 32,100 (1.2)% 32,500 2.2% Pilots* 10,900 (0.9)% 11,000 (1.8)% 11,200 (1.8)% Flight Attendants* 19,000 3.3% 18,400 (0.5)% 18,500 (3.1)% Mechanics, Ramp Service, Other Ground Personnel* 34,500 1.2% 34,100 6.6% 32,000 1.6% Total 116,300 2.1% 113,900 2.3% 111,300 1.2% *The majority are represented by a labor union. Following is a list of the status of major existing contracts: Allied Pilots Association. Contract amendable August 31, 2001. Association of Professional Flight Attendants. Contract became amendable November 1, 1998. Flight Engineers International Association. Contract amendable August 31, 2001. Transport Workers Union. Contract amendable March 1, 2001. AMR is an equal opportunity employer. L ETTER F ROM T HE C HAIRMAN To our Stockholders, Customers and Employees: am pleased to report that 1998 was a very good likely familiar with the Transition Plan — the AMR year for AMR Corporation. From a financial strategy launched in the early 1990s, while the airline perspective, the company’s net earnings of $1.3 industry was in the midst of a depression. The Transition billion were by far its best ever, a result which Plan had three main tenets. The first tenet was to Ireflects the commitment of every member of the AMR strengthen our airline businesses — American Airlines family to our customers and to our shareholders. and our regional affiliate American Eagle — wherever we Our record financial performance was also a func- could do so profitably. The second part of the plan was tion, in part, of a very favorable economic environment to withdraw from airline markets where our financial enjoyed by AMR’s largest business, American Airlines. performance was unsatisfactory and where we did not 2 The continued health of the U.S. economy resulted in believe we could compete effectively. And the third strong demand for air travel, in turn enabling American tenet was to invest in and grow our profitable and most other carriers to fill their aircraft without non-airline businesses. dramatic fare discounting. Full aircraft and stable ticket The Transition Plan had some very positive results. prices led to a very good year on the revenue side of By focusing on our areas of strength, AMR was able to the ledger, while lower fuel prices helped offset cost survive some very difficult years and become profitable increases in other areas. again. Another very important result was that during The improved economic fundamentals of the this period, we developed a stable of successful non- airline industry have given us greater confidence airline businesses. in the future success of our largest business, and that While the Transition Plan served AMR well, by confidence is reflected in a new strategic plan we 1998, the time had come for a new strategic plan. The launched in 1998. plan we have put in place has four key objectives. Long-time observers of our company are The first objective is to invest in and grow American and American Eagle — consistent with market information technology solutions business while sustain- conditions — to preserve and enhance our leadership in ing its leadership in electronic travel distribution. For the U.S. airline industry. To that end, we have committed the year, Sabre’s revenues increased by 29 percent to billions of investment dollars for the new jet aircraft, $2.3 billion, and its pre-tax margin was 16.1 percent. facilities, technology and training we think we will need Since its 1996 initial public offering, The Sabre Group’s to keep American and American Eagle at the industry revenues have grown by more than 40 percent, and as forefront. However, while our capital commitments are it has grown, American Airlines — Sabre’s largest significant, the flip side of our plan’s first objective is that customer — has benefited from the group’s new-found we will return to shareholders any capital in excess of market efficiencies. 3 what we think is necessary for prudent growth. Our fourth major objective is to create a corporate Our second objective is to offer our customers the culture within AMR that involves and excites every world’s most comprehensive and powerful airline employee in every one of our businesses. Involving and network through a combination of the industry’s exciting every member of the AMR team is fundamentally strongest domestic route system, the premier regional important to providing outstanding customer service carrier, increased international flying, and the broadest — which, in turn, is critically important to delivering — and best-executed — set of airline alliances. top-notch financial performance. The third objective of our plan is to make AMR’s new strategic plan is sharply focused on The Sabre Group — which is the largest of AMR’s non- our core airline and technology businesses. In keeping airline businesses — the world’s leading provider of with that focus, we decided, in the fall of 1998, to sell information technology for the travel and transportation three of the company’s smaller, less-strategically impor- industry. In its second full year as a publicly traded tant businesses: AMR Services, AMR Combs and company, Sabre attracted many new clients for its TeleService Resources. These three businesses — each of which we expect will have been sold by the end of the take care of each other. first quarter in 1999 — are all viable companies with Doing our jobs well means constantly trying to good prospects for success, but their activities, in our balance the needs of all three constituencies, and it is a view, were non-strategic, or not fundamental to meeting real challenge. But I hope you will find, as you read the our four key objectives. following essays, that we made significant progress in When it comes to setting and meeting objectives 1998 with regard to all three groups. for our company, there are three groups of people we For our shareholders, we delivered, among other keep in the front of our minds: AMR’s customers, things, record earnings, a two-for-one stock split, and an employees, and of course, our shareholders. Clearly, as aggressive share repurchase program. For our customers, 4 the company’s managers, it is our duty to reward our we improved the quality of our products by strengthen- shareholders by producing the best financial results pos- ing our network, upgrading our fleet and offering a sible. However, in any service business, the best way to myriad of other enhancements. And for our employees, ensure a satisfactory level of profitability is to attract the we distributed an industry-record profit-sharing fund largest possible share of the market — and in particular, and forged a renewed commitment to building the the higher paying customers who demand outstanding industry’s best corporate culture. service. Thus, to take care of the shareholders, we must In the pages to come, you will read about these first take care of our customers. initiatives and a lot more, and as you do so, I hope it At the same time, the quality of any airline’s becomes clear that the creation, enhancement and product is greatly dependent on the performance of its preservation of value for our shareholders, customers people. We have to make sure our people are focused, and employees is the impetus behind everything we do motivated, enthusiastic and enjoy their work. Thus, in — whether it’s buying back stock, building the industry’s order to take excellent care of our customers, we must premier airline network, investing in new aircraft and technology, or tending to the spirit and motivation of transform American into one of the world’s leading our people.
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