美國航空 (AAL) 2001 Q1 法說會逐字稿

AMERICAN AIR LINES CONFERENCE CALL

Good afternoon and welcome to the American Airline first quarter earnings release conference call. All participants will be able to listen only until the question and answer session of the call. At the request of America Airlines this conference is being recorded. If you have any objection you may disconnect at this time. I would now like to introduce today's speaker Mr. Tom Horton, Senior Vice President of Finance and Chief Financial Officer of AMR. Mr. Horton you may begin.

Thanks and good afternoon everyone. Thanks for being on one more call today, let me start off with required opening remarks. My comments today on matters related our outlook for revenue and earnings growth, cost estimates and forecast of capacity traffic, load factor, and fuel cost will constitute forward-looking statements. These matters are of course subject to a number of factors that could cause actual result to differ materially from our expectations. These factors include general economic conditions, commodity prices, general competitive factors, government regulations, uncertainty in international operations, and change in the companies business strategy any of which could affect our actual results. Before I move on the first quarter result, let me remind you that since our TWA deal didn't close until April 9th. The results we are announcing today exclude TWAs operation for the first quarter. However, since I am sure you got number of questions on TWA, I will give you an update right after we go through AMRs results and outlook. Getting to our numbers for the quarter AMR reported a net loss of $43 million it is down a 132 million from last year's first quarter. That equates to a loss of 28 cents per share down 85 cents from 2000. Before I move on, let me note that in effect of this quarter we have adopted SFAS 133 accounting for derivatives. Historically, as you know we amortize any option premium payments into expense over the life of the derivative and then recognize any gain or loss at settlement. And we've recorded these items in the same line as the underline hedged items, conventionally with SFAS 133 we have to put all derivatives on our balance sheet and mark them to market each quarter. Although all of our derivatives are affected, we will mostly see the impact in our fuel-hedging program. For financial reporting purposes we have reflected this in two lines. In fuel expense we have recorded the portion of SFAS 133 charge reflecting any gain or loss at settlement, largely again to how we used to account for fuel hedges and hopefully that will provide some comparability year-over-year and in non-operating expense where you the separate line we have recorded the remaining portion of the SFAS 133 charge, which is the incremental volatility driven by the new accounting pronouncement. So with that behind us, since there weren't any special items for the quarter, let's move on to the airline revenues performance.

Our system load factor came in at 67.5 percent up 3 tens of point from last year. Yields remained positive in the quarter rising 6.5 percent but that was below the 9 percent rate we saw in the fourth quarter of last year. In total, unit revenue improved by just over 7 percent. As most of you recall traffic last year was impacted by 2 primary events, the millennium hangover in January and the leap year effect in February. We had estimated the last year's Y2K effect resulted in about $15 million less revenue than we otherwise could have expected for the first quarter and on the flood side we benefited last year by having an extra day in February due to the leap year, which brought us about $40 million in additional revenue. Over the first quarter of last year, we had a net revenue benefit of about $25 million. As we have discussed before our more room through our coach initiative affects both our reported unit revenue and unit cost numbers. But before we get into the detail, let me update where we are on the more room program. Overall we're almost 95 percent complete on the entire project with 681 aircraft having been reconfigured including all of our domestic aircraft as well as all of the airbus and 767-200s. We have less than 40 international aircraft to finish including some of our 3 Class 767-300s and triple sevens (777), but we expect those to be completed by the end of this year. In total the program resulted in ASM reduction about 5.5 percent for the quarter versus what it would have been without the more room product.

But when you normalize for the more room effect system unit revenue increased 1.3 percent during the quarter. Turning to the breakdown of revenue for the quarter, our domestic unit revenue was up about 5.5 percent for the quarter on a yield gain of 6.5 percent despite a slight decline in load factor. Adjusting for more room that equates to a 1.5 percent decline in unit revenue. Clearly most domestic markets showed signs of softness this quarter, in particular the Transcon market shows the greatest declines in unit revenue as companies cut back on business travel. However, we did see improvements in both our domestic airline and Hawaii markets. Despite evidence that over all demand had softened, we have been generally pleased with yield performance, in part yields have held up as a result of fair increases that were put through last year. However, we did see an increase in sales activity affecting the first quarter's travel, which put some pressure on leisure yield. However, when we compare our result with those of industry, we are continuing to see positive trends in our revenue premium. That is our unit revenue compared to the rest of the industry after adjusting for changes in seat pitch while the data is yet in for March, our premium for the quarter today has increased about half a point from last year's level. Let's turn to our international results. International unit revenues were higher than last year rising 11 percent or over 8 percent when adjusted for more room. This increase was driven by strong gains in both load factor and yield.

However, some international markets did experience a softening in unit revenue growth rates during the quarter. In Europe we saw an over 8 percent increase in unit revenue which again while still strong was below the 11 percent increase we saw last quarter of last year. Unit revenue improvement was again driven primarily by stronger yields resulting from an improved fair environment and a greater mix of US point-of-sale traffic. Loads for Europe were up by about half a point, but the yields improved by almost 8 percent. However, we are somewhat cautious going forward as the industry capacity to Europe is on the rise again. In the first quarter, US industry capacity to Europe grew 9 percent and that's on top of the significant increase by some of the European traders. In Latin America our unit revenue was up almost 13 percent or about 8 percent when adjusted for more room. Most Latin markets have benefited from some type of a fair increase during the past year, including a number of increases that were launched during the first quarter of this year. These increases contributed to Latin America's 7 percent yield improvement, but didn't seem to have a great impact on traffic, loads factors rose over 3.5 points. Finally in Japan unit revenue improved by almost 10 percent, as we reported last quarter we continue to see fairly strong traffic results in the Pacific, which drove a 7-point improvement in load factor. However, yields were fairly flat. Turning over to results for American Eagle we saw load factors fall in the first quarter by over 2.5 points as traffic didn't keep pace with the 5 percent capacity increase.

However a 5 percent improvement in yield held unit revenues flat for the quarter and for those who modeled it, total revenue for Eagle increased about 5 percent from last year, and on the regional jet front, Eagle took delivery of seven additional Embraer 135 during the quarter to bring the total of regional jets being flown by Eagle to 90. Eagle's operation in Chicago is jet, old jet and growing. Eagle now serves over 30 cities nonstop from Chicago all with regional jets. Eagles other RJs are being used to help build the network both at the DFW hub and in the Northeast. Turning to the expense side, our unit cost came in just under 12 percent higher than last year's first quarter. Earlier there were a number of factors that impacted this result. First half as we discussed on the revenue side, there is an impact for the more room program. If you neutralize for the loss of seats, as we do with unit revenue, unit cost would have increased by just under 6 percent. Fuel costs also remained a big driver of our unit cost increase. Fuel price for the first quarter came in at 88 cents per gallon up over 21 percent from last year. Both of those yield prices by the way include the impact of our hedging program. In the first quarter, we recorded a $44 million benefit from our hedging program or 6 cents per gallon. However, despite the hedge benefit fuel prices still cost us an extra $115 million, more than it did in the first quarter of last year. Well, if you normalize for fuel changes in addition to the more room impact, our first quarter unit costs were up just under 3 percent.

In light of the changing economic conditions, I wanted to update you on some other actions we've taken recently to keep our cost structure in check as we move through the rest of the year. I think I mentioned on last quarter's call that we actually did a very thorough budget scrubbing as we finalized our plan for 2001. As a result of that exercise, we trimmed close to a $100 million of expenses from the original 2001 plan. While we expected this to be a more difficult year it looks to be a popular ride than we'd thought a couple of months ago. In light of this fact, we've put in place some initiatives to tighten the belt even further. Two weeks ago, we announced a hiring increase for management personnel, and we put in place some moratorium on all discretionary capital spending. To ensure that those changes yield results were requiring that our executive committee approve any hiring exceptions. Additionally, to help reinforce the cutbacks on capital spending, we'll now require an officer approval for all capital requests even the very small ones. We're also taking another look at bigger ticket capital items to ensure we maintain an appropriate level of fiscal discipline going forward. Obviously, we are going to keep an eye on developments and respond accordingly to adjust our capital plan further if the need arises. In the meantime, we will continue to turnover ever rock and scrub out unnecessary spending. Let's move now to the balance sheet. For the quarter we had an average of 154 million shares used in the EPS calculation, which is the same as what we had used in the diluted EPS calculation for the first quarter of last year.

We have $13.5 billion of debt at the end of the first quarter and our net debt of total capital ratio was roughly 64 percent. We ended the quarter with 1.6 billion in cash, obviously a portion of the decline from our year-end number was cash used to provide debt financing to TWA, which accounted towards our purchase price. But despite the economic slowdown, I think it's fair to say our financial strength remains very solid. While we just completed a large acquisition, we did so on exceptional economic terms. We've also put in place a number of our security measure that will help ensure that our costs stay in check and additionally our liquidity remains very strong with our $1 billion revolving credit facility intact, about $9 billion in unencumbered aircraft and in investment-grade credit rating. Now, let me turn to our outlook for the second quarter. Our plan capacity for the second quarter should be up about 3 percent from last year. That increase should be split fairly evenly between domestic and international markets. However, on the international side, we'll grow more in the Pacific where we've added new service to Taipei in early April. Capacity for Latin America and the Caribbean will be down slightly year-over-year with Europe coming in up just about 4 percent. The softer economy has driven our system bookings down from last year's level both domestically and internationally. At this point while it is still difficult to see out to June, it does appear that April and May are seeing more softness than the last month of the quarter. As a result of the decline in bookings, we would expect to see traffic about flat with last year in the second quarter, despite the 3 percent increase in capacity.

Additionally, it looks likes the level of sales activity in discounting we experienced for the first quarter travel will continue into the second quarter. That's just counting we are likely to temper the level of yield improvement we've seen in recent quarters. On the cost side the Jet Airlines cost per ASM should be about 11.2 cents in the second quarter, roughly 8 percent higher than last year. Our current fuel price forecast for the second quarter is 80 cents per gallon, which includes the benefits of our hedging program. That still represents about 13 percent increase from last year's second quarter. Adjusting for more room and fuel that unit cost increase would be up about 2 percent from the second quarter of 2000. And for those who model America and Eagle together, AMR combined unit cost for forecast to be $11.58 cents, up about 7.5 percent from last year or about 1.5 percent after adjusting for fuel and more room. Let me give you a brief update on some changes we've made to our fuel-hedging program during the first quarter. In anticipation of the TWA acquisition going through, we started adjusting our fuel-hedging program, going forward, for the expected additional consumption that TWA would bring. As a result, we're now hedged on 48 percent of what you would consider of AMRs usual fuel needs for the rest of 2001. The hedged position is up from our targeted 40 percent hedge level to account for the expected fuel consumption at TWA LLC. In other words, going forward, we're still targeting a 40 percent hedge level, but on a larger base of consumption due to

TWA. When you add in these extra hedge positions, our second quarter hedges are now at accrued equivalent price of around $24 a barrel. However on the subject of TWA, let me give you a bit of an update on where things stand before I take your questions. As I'm sure you've all read last week, we've now closed on our transaction with TWA. In addition, through a lot of hard work on both sides, we were able to reach a tentative agreement with our pilots, which should help smooth the integration process for our employees and our customers. That agreement does not require membership ratification, but the APA board of directors will vote on the agreement once its been out into contracts language, and we're optimistic that it will be approved. Now with the close behind us we can move forward with the integration process. One thing that I'm sure all of you have a bunch of questions about. However, before I get into integration issues, I want to step back and update you on some of the financials of the transactions that should help you in your modeling going forward. As you probably remember from our announcement meeting in Europe back in January, we presented some information that showed the combined effect of both TWA and the United US Airways deal. Since the TWA transaction has moved forward at a faster pace than the United deal, I thought we should provide some TWA specific guidance. As first re-capital we ended up paying for TWAs assets, when we presented this deal in January, we expected to pay $500 million in cash and assumed about $3 billion in leases for a total deal value of $3.5 billion.

The 3 billion in lease assumptions included our initial estimate of how much we could trim off of TWAs existing $3.6 billion lease obligation or to put it another way, we initially thought we could cut $80 to $100 million per year in lease expense, which on a present value basis worked out to about $600 million. However, at the lease renegotiation process complete, we actually ended up cutting $200 million in lease costs, twice our original estimate. Though our updated present value for the renegotiated lease obligation is now $2.2 billion or $800 million better than our initial estimate. But while we ultimately increased our cash offer by $125 million, the total deal cost still came down from $3.5 billion to just over $2.8 billion. Let's go over a few other facts that may help you in modeling TWA and how we will impact AMR on a consolidated basis. On the revenue side, clearly a big chunk of the synergies will come from having the dilutive Karabu Ticketing Contract voided. TWA had previously estimated the revenue dilution from that agreement to be about $100 million per year. Lowestfare.com the outlook for these tickets, stopped selling tickets under the Karabu Agreement on March 13th, but while there is still some of the stuff on the books of TWA, we expect to see the dilutive effect diminish as we move into summer. We do expect some other revenue synergies to start kicking in, as well. During the first quarter, we implemented an expanded frequent flyer program between AAdvantage and TWA Aviators Program, which allows members from both programs to earn and redeem miles for flying on either network.

This agreement should bring some of the benefits for the combined network. And the tenet of agreement reached was with our pilots union last week, if approved by their board, accommodates code sharing as early of June 1st. Code sharing as you might expect, should provide even a greater revenue benefit than what we'd expect from just a frequent flyer deal. In addition, the expanded network should allow us to capitalize on our corporate account relationship since companies will have even more travel options on American Airlines going forward. In the near term, there should also be benefits from some realignment of the TWA network. All the bulk of TWAs assets are deployed in St. Louis, we had a fair bit of flying in the Transcon and Caribbean markets as well, much of which overlaps AA and is unprofitable. Over the next few months, you'll begin to see some scheduled adjustments taking place as we reallocate flying, which is currently unprofitable. In the longer term, as the networks are integrated, we'll work to optimize the combined network so that we can maximize the strength of all of our hubs including Chicago, Dallas, Miami, and St. Louis. With a larger integrated network, we also expect to see some share shift benefits, particularly as our market presence increases and our focus cities like Boston, New York, LA, and the Bay area. We also expect there to be some synergies on the cost side of the equation. As I noted earlier, we have already started adjusting our fuel-hedging program to include TWA. As all of you know, TWA was not in a position to undertake hedging last year, and that clearly contributed to their results.

In fact, if the same hedging program we had at AMR, had been in place of TWA, it would have saved them over $100 million in fuel expense last year. Last year's one example that would be savings opportunities for a number of other cost lines as well as the role of TWA into our various purchasing contracts. However, we do expect some labor dissynergies to affect the cost line as well, particularly, for the unionized work force, as we bring TWA employees under AA contracts, the first of next year. Nonetheless, we do expect that some of these added costs will eventually be offset with overhead savings, that should phase in over the next 6 to 18 months. So when you roll the dollar up for 2001, we expect the effect of the TWA deal to be, neither significantly accretive nor dilutive. Our role is to move out in 2002 and 2003; we are expecting the transaction to be nicely accretive to earnings. Now before I take your questions, let me give you a brief update on the actual integration process. For the balance of this year and most of next year, TWA will be run as the distinctive city area of American Airlines. To allow us to minimize operational disruptions, we will then phase the integration of TWAs aircraft and functions into American in a very careful and disciplined manner, over time. As some of you may know, our Vice Chairman, Bob Baker, has been placed in charge of the integration effort and is currently serving as Chairman of TWA Airlines LLC, the temporary holding company for TWAs operations. Bob has a tremendous amount of airline experience and has previously served as our EVPF operations. So he knows the airline business inside and out. Assisting Bob in St. Louis, is Bill Compton, who obviously has a lot of experience and knows as much as anyone about TWAs operation.

And in conjunction with Mike Palumbo's resignation, we have moved one of our finance guys Brian [_______________] of St. Louis to manage the finances during the integration process. A number of you have indicated of systems integration are also a concern in airline mergers. While we certainly realize the challenge of merging systems, I should point out that we've got a fair bit of recent experience in undertaking systems cutovers that are required as part of airline integration. Over the past couple of years, we've successfully moved Reno and Business Express over to AA systems. And that's an addition to our prior experience with Canadian Airlines. So from a technical standpoint, I think we are in pretty good shape. As for the conversion of TWA aircraft into Silver Birds as scheduled, it will ultimately take a couple of years to complete. As I'm sure you can imagine, it's not just the pay scheme that needs to change, but for most of the aircraft, that we'll keep in the long term, we'll need to update some of our avionics and interiors as well, before they are moved over and treated like other AA airplanes. Some of you, I know, had asked specifically about more room. Our current plan is to re-pitch all of the former TWA aircraft over the course of the next nine months, with the exception of a few aircraft that will come off lease in the next year. So we are going to get that done pretty quickly. I hope, I have answered a few of your TWA related questions. But since there are a lot of moving parts here, we are working on a presentation that will lay the stuff out in a little more detail, including things like the combined fleet plan, key integration milestones, capacity in traffic guidance in the line, and with any luck, we should be able to share that with you in the next few weeks. So with all of that as background, I'd be happy to try and answer any questions that you might have.

Thank-you. At this time we are ready to begin the question and answer session. If you would like to ask a question, please press *1. You will be announced prior to asking your question. To withdraw the question press *2. Once again, to ask a question, press *1 now. Our first question comes from Mike Linenberg from Merrill Lynch.

Yeah. Hey Tom. I have two questions regarding TWA. With respect to the comment that you made about it being neither EPS dilutive or accretive and I presume year 2001. Is that based on the assumption that TWA will be cash flow positive by the summer? What sort of assumptions are you assuming for the cash flow at the TWA operation?

I think, during the summer, Mike, it is probable that TWA will be both cash flow and earnings positive. I think, as you get out into the fourth quarter it's less clear.

Okay. And then, my second question is, you know, now that as a result of picking up TWA, you've picked up, a significant amount of assets, not only in St. Louis, and some assets on the West Coast, but you have picked up some assets in some of the congested East Coast airports. And you know, given that, your plate will be full with this integration over the next 12 months, would you be less compelled to go after the US Airways assets? I'm just curious about, maybe, how your thinking may have changed recently?

No, I don't think so at all. You know, we think these two deals complement one another very nicely and the fact of the matter is our opinion is really neither here nor there because we have a deal with United that we intend to honor to its fullest extent.

Okay. Thank you very much.

Our next question comes from Sam Buttrick from UBS Warburg.

Yeah. Hi Tom. I just want to follow up on the TWA question with respect to no material impact on earnings in 2001. Are you really saying that you expect TWA to essentially breakeven for the balance of the year from your closing?

Yeah. Well, I think to answer that question than it's probably worthwhile to say a couple of words about why TWA was so consistently unprofitable, very much a productive in history. Because of its previous restructuring, the lower leverage had a balance sheet that was very weak, all of us know that, the only way it could access capital since rate renewal was, the extremely expensive aircraft leases which reflected its risky credit, second also a product of that financial weakness, TWA had no ability to use financial instrument to limit its exposure to fuel price hikes which hit very hard last year and continuing to hit this year, third also as a byproduct of that restructuring the Karabu ticketing agreement, I'm allowed Icahn's online travel agency to buy tickets at a very deep discount settlement market price which obviously had the effect of sizing off revenue. And then finally while the company had a very limited one-hub network, which made it unable to compete it with the big guys, what it really needed was to be plugged into a bigger more comprehensive network. I think we are realistic about M&A deals and our view is that promised synergies tend to be elusive. An express deal is really different in addition to being a very cheap acquisition, this is the first three of those things I just mentioned are almost instantaneous, they are sort of built in synergies, we're already achieving them and the last while equally clear we'll take a little longer to ramp up as we integrate TWAs network into ours through rescheduling corporate contracts and merging the frequent-buyer

programs. We think it makes lot of sense but as you look at this year, it is not just what TWAs sort of standalone results will be but you also have to take into account things like, one-time integration costs, the cost of capital, we did some $625 million of cash that otherwise would have been earnings interest, so there are some other moving parts, they have to take into account when considering accretion/dilution this year.

I understand all those factors, what's your estimate for the annual labor dissynergy in 2001?

Sam, that's something I'd prefer to share with everyone at a later date, we're trying to come up with little bit more comprehensive presentation for everybody which will cover some of those things as well as you know our views on capital spending so forth, so take in for that.

Thank-you.

Thank you, Sam.

Our next question comes from Glen Engel from Goldman Sachs.

Good afternoon.

Hi Glen.

Couple of questions, one, 200 million of lease savings is that just on the planes that you're keeping or does that include the planes you the planes you dropped?

It is on a sort of apples-to-apples basket of airplanes; it's on the airplanes that we will be flying going forward.

So the lease expense drops even more when you take into account, you have not taken 10 planes?

Affirmative.

Two, when you look at, you paid $2.8 billion and what revenues you're taking on, since you're not taking on all the four planes, what percent of the revenues would I assume you have kept from the TWA?

I think you can assume that we haven't lost any revenue, I mean clearly there was some marginal flying there, and I think it is fair to assume that the TWAs revenues from last year are sensible baseline from which to apply at synergy.

Finally, when I look at your unit cost forecast in the June quarter, it looks very similar to the first quarter, typically your utilization is higher in the second quarter, you are seeing in slightly lower fuel prices, why would I be seeing a sequential decline in unit cost from first to second quarter?

We have made some decisions when to trim back our utilization just a little bit, in view of capacity situation in the industry, so with those decisions we are going to pull down capacity by a better percentage point for the rest of the year and that's being done through utilizations adjustments rather than grounding airplanes or delaying aircraft deliveries.

Overall capacity growth will be less this year?

It'll be around 2 percent, 2.5 percent somewhere there.

And kind of question in the, if you look at the profit sharing in the first quarter of 2001 versus 2000, what was the estimate?

Yeah, we brought $37 million dollars in the first quarter of this year that's down from $67 million on first quarter last year.

Thank you very much.

Thank you Glen.

Our next question comes from Ray Neidl from ING Barings.

Well. Congratulations on getting TWA done I think.

Thanks Ray. 0035:55 RAY NEIDL: Okay and I am just wondering Tom, would you want, some of your competitors this morning commented on what the growth chances of the UAL-US air deal being completed were, do you care to offer your opinion?

You know, I am not really good at guessing that sort of thing Ray, so it is hard to say, obviously it's faced an awful lot of opposition by the public and by the congress and by the regulators so it is real hard to forecast.

Okay, Tom your opinion again on some of the competitors were saying that they think that some permanent business travel may have moved over to discounting, in other words some business traveler's are now out chopping for discounts and this may be a permanent trend, what is your opinion on that?

Well I don't know if it's permanent or not but I do know they were saying. There is clearly some buy down going on out there and that's clearly beginning to effect our yield to disappointing trend, I don't think it is terribly surprising given the slowdown in the economy, I think it's, it's a question of when the economy will begin to recover.

Do you think this problem will go away with the better economy then?

Yeah I think it will clearly moderate with better economy.

Okay, great. And finally do you have any rough estimates on what the poor weather in the job action of JFK cost American in the quarter?

Yeah, it was pretty modest, around $15 million something like that, net revenue.

Okay, with good luck with TWA and I look forward to you presentation.

Thanks Ray.

Our next question comes from Brian Harris from Salomon Smith Barney.

Hi, few question regarding TWA, you mentioned that TWA estimated that the Icahn ticket deal was hurting about a $100 million. Do you think that is a good estimate now that you have seen what is going on?

Yeah but I don't think we had enough time to really get in there and poke at that, obviously we didn't have the opportunity to poke around there revenue management systems until after we closed the deal which was just last week so I don't have an opinion whether that is good number or not, but I would be surprised if it's any less than that.

Okay and can you comment on the regarding the timing for when you anticipated you will be integrate this labor union?

I think the integration is going to take place over the next couple of years, on the deal we struck with the pilots which is the only deal within effect today, I can may give you little more color on that and again I should stress at the tentative agreement and depended on board approval but that calls for American's pay rates and work load to be effective at TWA on January 1, 2002. It gives some credit for any time spent on furlough for pay vacation and retirement calculations for American pilots who were previously furloughed.

Okay, this is kind of a conceptual question but regarding Chicago, I assume picked up some share from United, can you comment regarding whether you think there is any permanent pick up there and then where I guess it's a little bit tricky is now that you have St. Louis is this some kind of feedback mechanism or that could improve your performance in Chicago for instance putting more leisure travel over St. Louis or something to that effect?

Yeah, on the first part of your question, we have clearly seen some shift of share from United I think it is as result of some of their problem over the past months and also as a result of our introduction of an all region jet operation there. So, we have clearly seen some nice movement there. And I think not at least of which more room and coach. On the last part of your question, I think we clearly have an opportunity to optimize traffic at Chicago. I mean clearly that is that capacity the slot-and-gate constraint is premium capacity. So, I think there will be some opportunity for us to take more O&D business out of Chicago, at a better perhaps a better yield, and perhaps move some of our flow to St. Louis or to Dallas as we have more sort of East-West connecting capacity.

Is the infrastructure in place to add capacity in St. Louis?

Yeah. I think there is some ability to add some capacity there and there are plans for new runway. So, over the course of time that will be a place what we can build if we feel that's the appropriate thing to do.

Okay. Thanks very much.

Thank you Brian.

Once again, if you would like to ask a question press *1 now. Our next question comes from Kevin Murphy from Morgan Stanley Dean Witter.

Thank-you. Tom let's assume TWA is a breakeven proposition for you, it's for your earnings per share for 2001, but as you look at the second quarter one would suspect that it would probably impact your earnings negatively and just surmising here what you lose in the second quarter from integration cost for TWAs maybe you will get something of a pickup in the third quarter. Would that be a fair tradeoff?

Kevin, it's unclear at this point that's why I am reluctant to answer the question more definitively because we would have to go through some of the details of the purchase price accounting. There are some things that one-time cost may fall into the purchase price accounting as opposed to hitting the P&L on day one and we have really got a little more work to do before I'd be comfortable giving you any sensible guidance there.

Do you have any date when this presentation is going to take place?

Few weeks.

Okay and regarding the flight attendants Leo Mullin was pretty categorical this morning saying that PEB is just around the corner if they need it. What is your sense regarding negotiations with the flight attendants these days?

Well, I think Leo's assessments is probably about right. As everybody knows, we've been in fairly active negotiations with the APFA over the past years. And, we and them have agreed not to talk publicly about the details of discussions. So, I am not going to do that. It is fair to say that those discussions have come a long way over the past few months and we are committed to get the deal done as soon as possible. As you probably read recently, though our mediated discussions had been stalled a bit due to the large number of negotiations the NMB is dealing with today. But nonetheless, we are ready to go as soon as the mediators are available.

Has the atmosphere changed in your favor. Obviously, the flight attendants were negotiating a couple of years ago on the [_______________] record earnings and the environment has changed a lot. Is that sobering them up?

I wouldn't want to put words in their mouth. I think the prospect of PEB is something on either really thinks this is the best way to end the labor negotiations. So, I think that's probably created some motivation on both sides of the table as evidenced by what you saw did not last.

Thank you Tom.

Thank you Kevin.

Our next question comes from Jim Higgins from Credit Suisse First Boston.

Yes. Thank you very much. A couple of questions; Tom, other than moving TWA employees to the American weight scales or whatever the new seniority level is, are there any guarantees anywhere on their pay levels? Are they are going to be maintained at same relative level or is there just nothing guaranteed about that?

Well, the guarantee is that for unionized workforce, we are going to bring them over on to American Airlines pay scales. Beyond that there really aren't any specific guarantees.

And, its basically up to the unions to work out the seniority integration?

Yeah. You are right.

Okay. Secondly, going back a bit to Brian's question, Northwest this morning mentioned that business travel revenues at O'Hare Chicago were really very weak relative to other specific hubs in the country. I wonder how Chicago has performed for you versus the rest of your system?

I don't think we have seen that sort of an effect. Chicago's unit revenue has been comparable to our other hubs. Clearly, we have seen some weakness in technology intensive markets, places where we have added a lot of capacity like San Jose and Austin, and that's a little disappointing, but it's not unexpected.

Thanks. So, it sounds like the weakness in Chicago maybe coming out of your competitors' side rather than your own.

It maybe.

Okay. Thanks a lot.

Thank you Jim.

Our next...

One more question.

Thank-you. Our last question comes from Helane Becker from Buckingham Research.

Thank you very much operator. Hi Tom.

Hi Helane.

Three things. One, what is American Eagles capacity growth rate projected for the second quarter? I think you did give answers for AA but not for Eagle?

That's 7 percent or 7.5 percent.

Okay. And, the other question is on a go forward basis TWA operations are not going to grow anymore or are they? Do they have some 717s and what happens there?

We will take delivery of a few more 717s, but we primarily be replacing some retiring aircraft at TWA. So, over the course of time, the plan is for TWA to downsize as aircraft are transitioned over to American Airlines. So, your premise is correct, TWA will not grow.

Okay. And, then the last question is you really, I am not sure I got all the guidance that you gave us for the second quarter, but in the bottom line are you comfortable with the numbers that are out there for the quarter?

Helane, I don't comment on that. I don't really have anything further to say beyond what I did say, which is that the business environment stuff.

Okay. That's great. Thank-you.

Thank you Helane. Thanks everyone for joining us today.