美國航空 (AAL) 0 Q0 法說會逐字稿

All participants will be able to listen only until the question-and-answer session of the call. At the request of American Airlines this conference is being recorded. If you have any objections 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 now begin.

Thanks, Marie (phonetic), and good afternoon, everyone. Thanks for joining us today. Before I get into the quarter results let me start off with the required prelude. Many of my comments today on matters related to our outlook for revenue and earnings growth; cost estimates and forecasts of capacity traffic load factor and fuel costs; as well as the integration of TWA's operations into American's will constitute forward-looking statements. These matters are, of course, subject to a number of factors that could cause actual results to differ materially from our expectations. These factors include -- general economic conditions, commodity prices, general competitive factors, government regulation, uncertainty in domestic or international operations and changes in the company's business strategy; any of which could affect our actual results. As a reminder AMR's results for the second quarter include TWA's operations from April 10th through the end of June; though absent the first nine days, it's pretty much a full quarter of TWA's operation. As you can see from today's release, we have provided AMR's results both with and without TWA. Our plan as we go through the rest of 2001 is to continue providing both sets of numbers. However, next year all results will be reported on a combined basis. Now, turning to the numbers for the second quarter, AMR on a combined basis reported a net loss of $105 million, excluding special items, which was $390 million below last year's second-quarter earnings before special items. On an earnings-per-share basis that equates to a loss of 68 cents per share for the quarter, down $2.43 cents from 2000. Including special items, AMR lost $507 million, or $3.29 per share, in the second quarter of the year, down 828 million, or $5.25 from last year; also including special items. At the operating level, TWA reported a loss of $12 million for the quarter, less the first nine days of April. This compares to AMR's $63 million operating loss for the quarter, excluding TWA. So when you compare these results to the relative capacity of both operations, the operating loss was split proportionately between the two. Before getting to the revenue performance, let me first elaborate on the two special items that impacted our results for the second quarter of the year. The first item, which we called out in our 8-K filing last month, relates to the write-down on our Fokker 100, Saab 340 and ATR 42 aircraft under the FAS 121 accounting rule accounting for the impairment of long-lived assets. This charge, which on an after-tax basis amounted to $430 million, represented $2.79 cents a share. The second special item for the quarter was a gain of $29 million, after-tax, resulting from a legal settlement related to the labor disruption back in 1999. This settlement on a per-share basis represents 19 cents a share, after-tax. So taken collectively, we had special items for the second quarter that represented a charge of $2.60 per share. For comparison, in the second quarter of last year, we had one special item related to the sale of our warrants in Priceline (phonetic). Last year, that special items drove a gain of $36 million after-tax, or 21 cents a share. Now let's turn to AA's revenue performance in the second quarter. Our System Load Factor came in at 71.9 percent, down 4 points year-over-year. Yields fell just over 2 percent in the quarter, which, combined with the traffic traffic drop-off, drove a unit revenue decline of just over 7 percent. As we have discussed before, our more room in coach initiative has an effect on both our reported unit revenue and unit cost numbers. Overall, we are almost 97 percent complete on the entire project, with all but about 25 airplanes having been reconfigured. The last international aircraft, including the remaining 3-class 767s and triple 7s, will be completed by the end of this year. For the second quarter, that program resulted in an ASM reduction of about 3-1/2 percent systemwide from last year. So when you normalize for the more room effect, system unit revenue fell 10.3 percent during the quarter. There was little impact this quarter from labor issues around the industry. We saw only a few million dollars in benefit from the Com (phonetic) airstrike. Additionally, the public perception of labor risk at American was not large. So on balance, the net effect of the two was probably a very modest negative -- something less than $10 million in revenue. So with relatively little impact from labor issues, the revenue decline that I mentioned before is really reflective of the general weakness we have seen in the economy, which has led to a sharp fall-off in business travel seen throughout the industry. In looking at some macro data for the quarter, we estimate corporate travel has declined more than 15 percent from the same period last year. Given the high yielding nature of this traffic, the impact on revenues, obviously, has been significant. Despite this general decline, we did see an increase in our overall share of corporate travel during the quarter in our key markets. This decline in corporate travel, however, was not evenly distributed across the board. When you sample corporate travel by business segment, it is clear that some sectors are contributing more to the decline than others. Certainly, the largest declines have been seen in the technology sector. In fact, a number of our larger technology customers have shown a 50 percent or greater drop in travel from their levels last year, where modest softening can be seen in the banking, accounting and consulting sectors. And there are some sectors, as you might expect, that haven't really shown an impact from the general economic softening. Energy and pharmaceuticals are clear examples of that. These differences in demand across various business sectors have resulted in a disproportionate impact to both yield and load factors in a few key segments of our business. Most notable are the TransCon (phonetic) markets and high-tech centers around the US. In fact, the traffic weakness in these markets alone drove about 2 points of the domestic load factor decline we saw in the quarter. So to address this, we are in the process of adjusting capacity in certain markets by either reducing the size of aircraft we fly or trimming the number of frequencies we operate. By taking this approach, we're basically pulling down some of the capacity we added over the past few years as travel into and out of tech centers like the Bay Area, Austin and Boston had grown substantially. Overall, these changes should have relatively little impact on the customer, but they will allow us to better match capacity and demand in markets where traffic has shown the greatest decline. Turning to the details on revenue for the quarter, our domestic unit revenue was down just under 9 percent for the quarter, on a yield decline of a little over 2 percent, and a load factor drop-off of 5 points. Adjusting for more room, that equates to a 12-percent decline in unit revenue. While the decline in business traffic has had its greatest impact on revenues, we did see an increase in sales activity which affected travel during the second quarter. Domestic fare sales were, in effect, on 50 percent more days for travel during the quarter than was the case last year. Now one silver lining to these clouds has been the growing adoption by our customers of Internet-based booking channels. During the second quarter, a little more than 8 percent of our flown system revenue came from the Internet, which doubled from about 4 percent during the same period last year. And almost half of that volume came through AA.com, which so far this year is still growing flown revenue at triple digit rates. Of course, Orbitz is off to a great start as well. Turning now to our international results, unit revenues were down about 4 percent from the second quarter of last year, driven by a 2 point drop in load factor and a yield decline of just under 2 percent. When adjusted for more room, that unit revenue decline was just under 6 percent. While these overall results indicate that the weakness we have seen domestically has now spread into international markets, there were some international markets that fared better than others during the quarter. Europe was clearly a weak point during the second quarter, with unit revenues declining almost 10 percent from last year. The unit revenue decline was driven by both weaker yield and lighter loads, reflecting lower business demand and the significant increase in capacity the region has experienced. In the second quarter, U.S. industry capacity to Europe rose 6 percent, and we also saw some significant increases by a number of the European carriers as well. As we've mentioned before, part of our pullback in capacity going forward will be in Europe, as we cancel services between L.A. and Paris, as well as Chicago and Rome. In Latin America, our results held up, actually, fairly well; with unit revenue rising 4 percent, or about 1 percent when adjusted for more room. Many Latin markets are still seeing some benefit from the fare increases passed through during the past year. However, traffic volumes, like everywhere else, have softened. And finally, in Asia unit revenue was down by 13 percent. Overall traffic in the Pacific held up fairly well. We added new service from San Jose to Taiwan in April, and despite the increase in capacity that trip drove, overall load factors fell by less than 1 point to 78 percent. Unfortunately, soft full-fare demand and a weak yen resulted in lower yields, which pulled down overall unit revenues. The revenue results at TWA, like the rest of the industry, were clearly challenged during the second quarter. And compounding this, shifts in the route network over the past twelve months make comparisons difficult. However, if you look at the domestic TWA network, there was a measurable narrowing of the revenue gap between TWA and the rest of the industry, despite the general downward trend. As we continue to realign the TWA and American networks, we should see further improvement in TWA's relative unit revenue performance. Now let me turn to the cost side of the equation. Our unit costs came in at 6.4 percent higher than last year's second quarter. Let me highlight some of the factors that impacted that result. First off, as we saw with revenue, the impact from the more room program inflated unit costs by about 3-1/2 points. So if you normalize for the loss of seats, as we do with unit revenue, unit cost would have increased by 2.9 percent. Fuel costs also contributed to unit cost increase. Fuel price for the second quarter, including the effects of our hedging program, came in at 87 cents a gallon, up over 22 percent from last year. For the second quarter, we recorded a $45 million benefit from our hedging program, which equates to just under 6 cents per gallon. However, despite this benefit from our hedging, fuel expense was still $154 million higher than the second quarter of last year. When normalized for both fuel price changes and more room, our second-quarter unit costs were right about flat. As you can see from the P&L, we're beginning to feel the industry effects of higher labor costs. While we are pleased to have reached two tentative agreements during the quarter -- one with our mechanics and the other with our flight attendants -- there will be a continued impact on our unit costs going forward. Relative to last year, we expect the effect of new contracts to increase our 2001 labor expense by about $500 million. This year, much of that added cost will actually be offset by lower profit-sharing. Obviously, giving the differences in timing across the contracts, that does not represent a full-year effect. But next year, 2002, we would expect a full-year impact versus a 2000 baseline to be more in the neighborhood of $700 million. One additional point to make is that with industry wage rates coming in at higher levels than we had expected, our prior estimate of the added labor expense we will incur when TWA employees migrate to American's wage rate may prove a little bit low. We will have a better fix on that as the integration progresses and we see how many TWA folks elect to stay versus retire. On a more positive note, we did see continued benefits from lower commission expenses in the second quarter, which were down approximately 16 percent from last year. While labor costs are clearly on the rise for all carriers, I would like to spend a minute on some of the things we are doing to attack our controllable costs going forward. We talked on the last quarterly call about some of the initiatives we put in place to try and trim costs in light of the soft economic environment. Over the past few months we have been adding to that list, and to date we have trimmed just shy of $250 million in expenses from our 2001 plans. This is being accomplished through a variety of initiatives. First, we froze -- and now we're trimming -- management support staff headcount by about 3 percent, most of which will come through attrition. We have also reduced or delayed some long-term IT and facility spending projects. We implemented a freeze on all discretionary capital spending across the company, and we have trimmed costs like advertising, consulting fees and a host of other controllable lines of expense. In addition to cutting costs, we have also been reducing capacity to better match demand. As we announced last month, we are retiring the entire DC-9 fleet early, and we have chosen not to renew short-term leases on two 727 aircraft; and we grounded one of our Fokker F-100s. More recently, we have arranged not to take delivery of the 5 incremental MD-80s that were part of a package deal when we renegotiated TWA's leases. These MD-80s were scheduled for delivery starting later this year. Finally, we have also trimmed back our capital plan for new aircraft by choosing not to exercise a number of purchase rights that we otherwise would have planned to take. As a result of all of these actions, America's capacity growth for next year should be under 2 percent; and when combined with the various reductions at TWA, the combined American/TWA growth for 2002 should be well under one half of 1 percent. And as industry conditions develop, we will evaluate whether further capacity reductions are prudent. During our analyst meeting in May, we presented our expectation for capital spending in '01 and '02 for all of AMR, including TWA. At that time, we expected capital spending would be 4.1 billion this year and 4.3 billion in 2002. Based on the changes we have made to date through reductions in discretionary capital spending, trimming capacity growth and slowing down some projects already in the works, we now expect capital spending for 2001 of 3.9 billion; and 2002 should come in at around 3.6 billion. Collectively, that represents almost a $1 billion reduction in our capital plan between this year and next. As I had mentioned before, one of the inherent synergies of the TWA transaction is our ability to add size to our network without absorbing all of the associated overhead, particularly in headquarters-type functions. Once we complete the integration of management functions, we should see roughly an 8-percent reduction in the combined management overhead expanse per unit of capacity. As we go forward, we will continue to review the numbers and look for any and all opportunities for sensible cost reduction. Let's move on briefly to the balance sheet. For the quarter, we had an average of 154 million shares used on the basic earnings-per-share calculation. In last year's quarter, we had 164 million shares used in the diluted EPS calculations. We ended the second quarter with $16-1/2 billion of debt, and our net debt to total capital ratio was roughly 70 percent. And despite a fairly challenging economic climate, our financial strength remains very solid. We ended the second quarter with $1-1/2 billion in cash. And with the cost controls and capital spending reductions we put in place, along with our efforts to moderate capacity to better match demand, I think we will pull through this cycle in good shape. However, should times get a lot worse before they get better, our strong liquidity includes an undrawn $1 billion bank revolver and about $9 billion in unencumbered aircraft, which should help us weather the storm. Let me turn to the outlook for the third quarter. Our planned capacity for the third quarter should be up just 2.5 percent from last year. That is down from our original plan of almost 4 percent growth when we put the schedule together last year. Additionally, if you factor in various changes at TWA, the capacity for the combined entities will be up just 4/10 of a percent from last year's third quarter. American's modest capacity growth will be split evenly between the domestic and international markets. Our international growth will be limited to the Pacific, where we just launched service to Taipei in April, and to Europe, where we have added service from San Jose to Paris, and a second Los Angeles/Heathrow trip. However, as we announced a few months ago, capacity will come back down in the fourth quarter as we cancel service from Chicago to Rome and from L.A. to Paris. As we have been mentioning for the past few months, there's no real evidence of an inflection point out there that we concede to indicate a turnaround. However, as you all know, our visibility is limited to just a couple of months. And beyond that, the picture gets pretty hazy. Given where we stand today, I would expect the third quarter to be pretty soft as well. Our advanced bookings, both domestically and internationally, are well below last year's levels, and as a result, we are expecting traffic for the quarter to come in down about 3 percent. On the cost side, America's cost per ASM should be about 10.7 cents in the third quarter; roughly 3 percent higher than last year. For the third quarter, our current fuel price forecast is just over 82 cents a gallon, which includes the effects of our hedging program. That represents about a 6 percent increase from last year's third quarter. For those who track hedging, as of July 1st, we were hedged on about 45 percent of our total fuel needs for the third quarter at accrued equivalent price of about $24 per barrel. If you were to back out the effect of fuel price and our more room program, unit cost for the third quarter should actually be down about half a percent. At TWA, we are expecting unit cost for the third quarter at a little over 9.7 cents. TWA's capacity and traffic forecast will be updated in the Eagle Eye (phonetic) that we issue, which will include the effects of our recent plan changes that we announced last month. And for those who model AMR combined, unit costs are forecasted to be just under 11 cents; up about a half a percent from last year. Before I stop and take your questions, and while I'm on the subject of TWA, let me give you a brief update on how the integration is progressing. Over the course of the past few months, we have made significant progress in a number of areas. What I would like to do is touch on both the more visible changes that are underway, and some of the behind-the-scenes changes that are also occurring. I'll start with the more visible changes. The most visible is the new interim-Liberty (phonetic) for TWA's aircraft that we rolled out last month. As you may have seen, we have begun stripping and polishing TWA's airplanes to have the familiar silver-colored fuselage. The interim-Liberty (phonetic) also includes American's red, white and blue waistband striping, but maintains the TWA logo on the side of the aircraft and on the tail. Ultimately, as those aircraft are ready to be moved across the fence to American's fleet, we will just need to remove the TWA decals and add the American logo and the American eagle. The interim-Liberty (phonetic) should be completed on all aircraft by April of next year. In addition to a new paint scheme, we have started the process of converting TWA's aircraft to have more room in coach as well. This program is running at full steam at the Kansas City maintenance base, and we should have the narrow-body aircraft done by Labor Day and the remaining wide-body aircraft finished by October. The added maintenance lines needed for both the new paint job and the more room program have required that a few more TWA aircraft be out of service than would have otherwise been the case. Much of this capacity has come from some of the recent schedule changes that we made, including some which just went into effect this month. The most substantial schedule change was rationalization of service in the Caribbean. This adjustment pulled down some of TWA's service to San Juan in markets like Orlando, New York, Miami where there was substantial overlap with American. These reductions have also allowed both American and TWA to add some selective new service, including TWA's new daily flight between Boston and Santo Domingo, and American's expanded service between San Juan, Hartford and to the Washington D.C. area. Additional schedule adjustments to the combined network will take place over the next few months, with changes to the TransCon (phonetic) schedule that will better reflect the current level of demand. Another visible change that customers will begin to notice is the process -- the progress on fairport (phonetic) collocation. In fact, just last week we collocated American and TW operations at Nashville, Pittsburgh and Las Vegas. And as we move through the summer, additional airport facilities will be combined, including those in San Juan, Atlanta, Albuquerque, among others. There has been a lot happening behind the scenes as well. On Monday, we completed the first phase of integration that has now officially shifted a number of the headquarter functions from TWA to American, including legal, corporate real estate, finance and investor relations. The second phase of the integration has been kicked off, and will include reservations, customer service, financial planning and interactive marketing. We expect to have this second phase of integration complete by early October. And there has also been some changes taking place behind the scenes out in the field. We started implementing some of American's processes and procedures at TWA that will help facilitate the integration of our ground operations. Additionally, training for our TWA airport and reservations agents will begin shortly so that they can become familiar with the functionality of Sabre and its associated systems. Obviously, one of the big factors driving the integration timeline is being able to switch TWA over from Worldspan to Sabre. We are still on track to have that conversion completed by the first quarter of next year at the latest. Once that change is made, a number of the system's dependent functions, including IT and the residual marketing and finance functions, can be fully transitioned to American. However, we should be able to start some interim codesharing next month, even in advance of the full Sabre cut-over (phonetic). As you may recall, we reached an agreement with our pilots union, the APA, on various integration issues including codesharing. And the APA Board of Directors has now officially ratified that tentative agreement. The initial codesharing will include placing American's code on TWA flights in select markets. We will then add additional markets as we move forward, which should allow us to realize some of the revenue benefits of the larger network sooner rather than later. All in all, while there is still a whole lot of work ahead, the TWA integration is moving along nicely, and we're optimistic that we can start achieving some of the real revenue benefits later this year. Obviously, though, for TWA to contribute as we expect, we'll need to see some improvement in the overall industry revenue environment. Now with all that as background, I would be happy to stop and try and take your questions.

At this time we are ready to begin the formal question-and-answer session. (CALLER INSTRUCTIONS) Your first question comes from Glenn Engel (phonetic) of Goldman Sachs.

Good afternoon. The question I have is -- can you breakout in the June quarter what the profit-sharing was versus last year?

We booked no profit-sharing in the quarter this year, and last year we booked $118 million.

I was a little confused by the labor numbers you gave -- the 500 million increase in 2001.

Yes. That is, Glenn, taking the new contracts -- both the ones we have negotiated and the ones we expect to negotiate with the pilots and with the remainder of the ground workers -- and comparing 2001 labor costs back to a baseline of 2000. It was $500 million in total cost. Obviously, some of those are partial-year effects. So that's why I also alluded to the 2002 number, which, when compared back to a baseline -- a clean basleine -- of 2000, is approximately $700 million.

But the increase from 2000 to 2001 is going to be a lot more than 500 million, right? Because you have added people.

(technical difficulty) pretty small, Glenn.

And the increase would be less than 500, because the profit-sharing isn't going to be there this year?

That's right; that's exactly right. We booked -- as you know -- on the order of $340 million in profit-sharing last year. And current expectation, given the profit outlook, is for that to be zero this year.

I guess, then, what confuses me -- I'm sorry -- is just that if I looked at the wages in the first half, it was up several hundred -- 300 million in the first half. And those numbers you gave me -- the 500 million minus the -- less profit-sharing -- would suggest that your labor costs wouldn't be up much at all in the second half. And that doesn't seem to make much sense.

I'm not completely sure I follow the question, Glenn.

If you say labor costs are going to be up 500 million this year, and that is before the impact of profit-sharing, therefore it's going to be up much less than 500 million. In the first half alone, labor costs seemd to be up about 300 million.

Well, I think one disconnect we might have here is -- what I'm referring to is a rate differential alone.

Okay.

So we've obviously added some people as we've been growing the company.

On the yield sign (phonetic), is there any reason why the yield declines will be worse in the third quarter than the second?

We saw through the second quarter an acceleration of the decline in unit revenue, though by June it seemed to level off a little bit. So at this point I can't say that I see any reason why we would expect the decline to be worse in the third quarter. But I certainly don't see any reason why it would be better in the third quarter.

Thank you.

The next question comes from Brian Harris (phonetic) of Salomon Smith Barney.

Hi, Tom. Just a couple of quick questions here. Could you comment about the relative performance in O'Hare now that United is putting out a decent product again? Have you -- do you think you structurally picked up share that you are able to hold on to? Are you able to sort through that, given the overall economic circumstances?

Yes, if you look at our -- stepping back a little bit, if you look at our corporate travel share versus the rest of the industry, the whole picture is pretty awful. Our share is actually up about a point. And we think some of that has to do with more room. If you look at Chicago in particular -- obviously United is still larger than us in Chicago -- but we continue to see the share gap narrowing, especially for the local Chicago customers. And that holds true for both passenger share and revenue share. In fact, I was looking at some recent data that showed in markets where both we and United fly, our booking share was actually larger than United's. So all in all, we're pretty pleased with our performance there. Whether we have seen a structural shift that will stand the test of time -- I think that remains to be seen.

Okay, and then second question -- have you guys done any thinking about the idea of a business jet proposition that United is doing? Does that make any sense from any of your looks at it?

As some of you veterans may recall, we at one time had a business jet program in partnership with Bombardier, (phonetic). And ultimately, we ended that relationship because the economics really didn't make sense to us. But the business jet market has obviously changed quite a bit since then, so I think the question for us is -- what sort of benefits that kind of relationship would bring, relative to the cost and other implications it might have? Clearly, at least one of our competitors seems to think there is some good synergies between the businesses. But at this point, I am not ready to come to the same conclusion. While both operations are transport -- people by plane; the airline in itself is based on a consistent and predictable schedule, while the premise of the business jet model is really just the opposite. So, while there may be some benefits there, Brian, from cross-selling, I doubt that a lot of companies would make a decision for their entire travel program based solely on the ability to have a few top executives flying on a bizjet (phonetic), something they're already doing today. In addition, our real concern is that buying a bunch of bizjets can put great strain on our balance sheet and increase capital spending, just at a time when we don't want to be doing that. And it clearly adds another level of complexity to labor relations. So if we do consider some sort of a bizjet link-up, it is unlikely to be the model that the United guys came up with.

Okay, thank you.

The next question comes from Michael Linenberg (phonetic) of Merrill Lynch.

Yes, hi, Tom. Good afternoon. I have two questions here. First, your Latin unit revenue was up nicely; it was up 4 percent -- I mean, it was up nicely relative to your other regions. And given that you do have a sizable presence down to Brazil and Argentina, I was curious if some of this -- or maybe a lot of the strong performance there -- was due to the Caribbean -- the rationalization as a result of what you're doing with TWA. Is there any way that you can give us a little bit more color on that number?

Yes, that is actually somewhat true. Let me just make kind of a broader statement about Latin America. It has held up reasonably well. Obviously, we have some concerns about the financial situation in Argentina. We have been somewhat benefited there by the troubles that Aerolineas has had. So we picked up a little bit of their business. So going forward, as we look at Latin America, we clearly have some concerns about the Argentine financial crisis and the potential for contagion there. But if you look at our Latin and Caribbean numbers in the second quarter, we had a very nice improvement in the Caribbean in particular; so, on the order of 15 percent year-over-year.

Okay. And my second question -- earlier in your comments you talked about -- despite it being a difficult quarter, you actually increased your business share in some key markets. And I think in answering Brian's question, Chicago is one. Any other markets that you can share with us?

It's pretty broad-based, Mike. There aren't really any bit outliers (phonetic) one way or the other.

Okay, thank you very much.

The next question comes from Jim Higgins (phonetic) of Credit Suisse.

Thanks. Hi, Tom. Can you review for us what is left to do on the labor integration front? If I recall correctly, most of it is now up to the unions themselves to come up with arrangements on integration, etcetera. Can you run through that for us?

It really comes down, Jim, now, to the not-insignificant task of seniority integration. And the pilots union is working through that right now. APA and ALTA (phonetic) are working on that as we speak. And I think they're making good progress. We would expect to have a proposal from them sometime in the next couple of months, which we will then work with. But I think there is probably a solution there that will be sensible for all parties. Obviously, we need to go through and the TWU (phonetic) needs to do the same thing with IAM (phonetic). And that process will likewise take place over the next couple of months. And as those things come together, then we can really begin the process of integration on a station-by-station basis. And hopefully, if these things work the way we expect them to, that will coincide nicely with the cutover (phonetic) from Worldspan to Sabre. And at the same time, we continue to progress through the collocation efforts. So we are hopeful that, as we move into early next year, the labor integration is going to really begin to take some shape.

The flight attendants integration there -- has that been -- have discussions been put off by the negotiations?

That is Right. The APFA (phonetic) has been very focused on getting the contract done. Now that the contract is done and we all believe it will be ratified, they will turn their attention to working through seniority integration with IAM (phonetic).

And then just to follow-up on the question about third-quarter RAS numbers -- the second quarter -- if I recall correctly, April was considerably better than May and June. And while comparisons may get slightly easier in the third quarter, it would appear on the surface that maybe your year-over-year RASM change in the third quarter might actually be worse than the second quarter. Is that an unreasonable statement?

It could be a bit worse, Jim, because of the April effect. But, offsetting that -- I guess not offsetting, going the same way -- is the fact that last year in the third quarter United was having a very difficult operating environment. And so that is going to make our year-over-year comparisons a little bit more difficult. It could well be a bit more difficult.

Great, thank you very much.

The next question comes from Helene Becker (phonetic) of Buckingham Research Group.

Thank you very much, operator. Hi, Tom. Two questions -- one with respect to the information that we were reported in the income statement. And you have TWI revenues listed separately, then all the expenses are just mixed in on each line items. Is that it?

That's right.

And then is it safe to assume that the differences between page 1 and 2 and the numbers is what TWA expenses on a stand-alone basis would have been?

Yes, you could construct a P&L from that.

Okay, great. And then my other question is -- with respect to goodwill accounting which changes on January 1st, I think there is some goodwill related to TWA on your balance sheet. So I guess on a go-forward basis starting then, you can adopt the new accounting standards.

Yes, that's right. We will book a little bit of goodwill for the back half of this year. And then come January 1 of next year, we will adopt the new standards. And we will no longer amortize it.

Right. So what will that save you on a quarterly basis?

For this year --

And also, Tom -- I'm sorry, not to interrupt, but I think there is Reno (phonetic) goodwill too. So can you just include it all on a roll-up (phonetic) basis?

Yes; the total that we're going to book this year for goodwill for the year is about $30 million. I think there is also some question as to whether rude (phonetic) acquisition costs will be treated the same way under the new rules. And this year we're going to book about $29 million in amortization rude (phonetic) acquisition costs. So conceivably, those two numbers could disappear next year.

Okay. Great. Thanks very much for your help then.

The next question comes from Ray Neidl (phonetic) of ABN Amro.

Yes, Tom; two things. One is -- in light of recent developments with ComAir and what is happening at Continental Express, is American giving any thoughts to American Eagle?

Well, we are. As you know, we analyze a lot of different things all the time. Certainly, the ComAir strike and other developments in the regional businesses have given us some reason to take a fresh look at the commuter operation. But at this point we haven't made any decisions one way or the other. And I think it is probably too early to draw the conclusions as to what the right answer might be. But as I have mentioned before, as we have historically thought and continue to think that commuter ownership does provide some real positive benefits. It allows us to brand the product and be consistent with the mainline operation and control the amount of capacity to fly it where it does fit. But there are some other models that are developing now. One is the fee for departure agreements. And I should probably point out that one of the benefits of our TWA deal is that we did end up having new commercial relationships with three regional carriers in St. Louis, which, in effect, gives us some natural hedging in our commuter operations between the owned model we have with Eagle and the contract model that TWA has employed. So we have got a bit more work to do on this, Ray, and before we determine whether we want to make changes in the nature of our relationship with Eagle, equity ownership or otherwise. But that work is underway.

Okay. Tom I think you said that also you are going to stretch out the delivery of some options on new aircraft coming in. And I'm just wondering -- I know that the economy is weak, and you are doing things for your capacity. But have you run out of flexibility in speeding up the retirement of older aircraft? You would think that the expensive pilot contracts -- you would have an incentive to want to get as many new aircraft in as quickly as possible.

No, not at all, Ray. We have still got a lot of flexibility. We didn't just slide out new deliveries, just to be clear; we elected not to take a number of new deliveries that were in our fleet plan to exercise this year. So that is one step we have taken. The other we had taken was to ground the DC-9s and a couple of 727s. We still have a good deal flexibility, obviously, with the 727s, to ground those much earlier than we've got in the plan now. And, in addition, by virtue of the deal we did with Boeing on the 717s, we have a very flexible arrangement there. So we can turn those airplanes back after 18 months if we like. So, that is 30 units right there. So we've got a whole bunch of flexibility in our fleet plan.

Was there any constraints with the pilots on why you're not returning the 727s earlier and maybe keeping the future new aircraft deliveries that you canceled?

No.

No? Okay. And the last thing -- just a general thing -- back to South America, you are very strong in lower South America, Argentina, Brazil. You have had good results in Latin America. And we talked about that before. But do you see any real problems developing ahead with those economies down there?

Yes, as I mentioned, we are concerned about the situation in Argentina. Unless Cavallo pulls a rabbit out of his hat, it looks like a financial crisis there. And oftentimes in Latin America, when you get a crisis in one country, particularly one as important as Argentina, it spreads to Brazil and perhaps other areas in the region. And so that is of great concern to us. We will continue to monitor the situation; we will continue to try to do the right things with capacity and otherwise to keep our business in good shape there. But it is clearly a concern. And as we look out into the third quarter, we do see some softening in advance bookings.

Great. Thanks, Tom.

The next question comes from Kevin Murphy of Morgan Stanley.

Hi. I'm sorry, Tom, I got in late. Did you talk at all about progress with the U.S. and UK bilateral at all?

I did not talk about that. We have been -- as some of you have read in the press, we have been working very closely with BA (phonetic) to try and put together some enhancements to our ongoing commercial relationship there. And there are a number of reasons driving the timing of those meetings. But in general, we think that the environment right now is right to try and create an agreement that would allow American and BA (phonetic) to level the playing field with the Star (phonetic) alliance. Obviously, to achieve that, there are a bunch of changes that will need to occur on the regulatory front, including changes to the bilateral. And I can't predict, Kevin, how that might ultimately pan out, or what the timing will be. But I can say, we're working very closely with BA (phonetic) to find an agreement that is in the best economic interests of both companies, and recognizing all the industry changes that have taken place over the past five years since we first launched our partnership. So we're working together closely on our bilateral arrangement. And then we are working together on the regulatory front. So a lot of stuff is happening; it is happening pretty quickly. Stay tuned.

Thank you.

I think that is all the questions we have, so I would like to thank everybody for joining us today. And for those of you listening in from the media, please stay on the line. I'll be back with you in just a few minutes, and we'll be happy to try and answer your questions. Thanks.