美國航空 (AAL) 2001 Q3 法說會逐字稿

Good afternoon, and welcome to the American Airlines third-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 American Airlines this conference is being recorded. If you have any objections we ask that you disconnect at this time. I would now like to introduce today's speaker, Mr. Tom Horton, Senior Vice President of Financial and Chief Financial Officer of AMR. Mr. Horton, you may begin.

Thanks, (indiscernible), and good afternoon, everyone. Thanks for joining us on the call today. Before I get into the results for the quarter, I need to start off with the required Safe Harbor Disclosure. Many of my comments today on matters related to our outlook for revenue and earnings growth, cost estimates a forecasts of capacity, traffic, load factor and fuel costs, as well as the integration of TWA's operations into Americans, 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 regulations, uncertainty, and domestic and international operations and changes in the Company's business strategy, any of which could affect our actual results. With that behind us, let me first say that the events of September 11th were clearly a turning point for all of us. For our company, for this industry, and for our nation. The recent weeks have certainly taken an emotional and financial toll on all of us. We remain focused on, and committed to, the business of running the world's largest airline. However, in light of recent events, our business and our priorities have changed, at least for the near-term. After a review of our third-quarter results, I'll walk you through some of those changes, and what they mean as we go forward. But first let's start off with the numbers. AMR on a consolidated basis reported a third quarter net loss of $525 million, excluding special items, which was $847 million below last year's third quarter earnings, before special items. On an earnings per share basis, that equates to a loss $3.40 per share for the quarter, down $5.36 from last year. Including special items, AMR lost $414 million or 268 a share in the third quarter, down from 726 million or $4.59 from last year, also including special items. Let me take a few minutes to walk through the various special items that impacted our results for the quarter. The first special item is the airline assistance grant. Our ultimate share of this money will be over nine hundred million dollars. And this quarter, we recorded $809 million as a contra-expense in the operating expense section of the P&L. The remainder of that $900 million will be booked in the fourth quarter. Consistent with the accounting guidelines, we recorded a portion of the grant sufficient to offset losses incurred for third-quarter, including lost revenues and special charges. Even though it is greater than the actual amount of cash we've collected so far from the government. Or said differently, we recognize one dollar of aid per dollar of loss associated with September 11th, even though not all of the funds have been received. In addition to the airline assistance grant, we also recorded some special charges related to the events of September 11th. These charges are summarized in one line on the P&L, under operating expenses. I'll give you a quick rundown on the charges; they're also listed in the press release. The first charge is in addition to the impairment charge we recorded in the second quarter, to write down the value of our F100, SAB340 and ATR42 aircraft. This charge amounted to $423 million pretax, or $265 million on an after-tax basis. The second charge is for leased aircraft, which we are retiring ahead of plan. On a pretax basis this came to $73 million, or $46 million net of tax. The third item included in this line is a charge of $61 million pretax, related to facilities and other fixed assets that we have closed down as a result of the September 11th capacity reduction. On an after tax basis that charge was $38 million. Another charge included in this line relates to personnel costs incurred, primarily related to the workforce reduction accompanying the capacity pulleddown. These items amounted to a charge of $55 million pretax, or 35 million after-tax. And finally, there are a variety of other miscellaneous charges related to the September 11th event that collectively amounted to $20 million pretax or $13 million net of tax. Taken collectively, these special charges and the airline assistance grant, represented a net credit for the third-quarter of $177 million pretax, or $111 million after-tax, or 72 cents per share. Let me now turn to our revenue performance. Prior to September 11th, we were certainly seeing a softer revenue environment, as the economic slowdown had resulted in a sharp drop in business travel. However, the events of September 11th, eclipsed any trends that previously existed. Due to the distortion this has caused, for our revenue performance in the third-quarter, I'm going to briefly run through the unit revenue results but will save most of my time for a discussion on where we go from here. For the third-quarter, our system load factor came in at 72.3 percent, down almost four points from last year. Yields fell just over 12 percent in the quarter, which combined with the load factor decline, drove a unit revenue decrease of 16.6 percent. On a year over year basis, revenue comparisons for the third quarter were already going to be more challenging before September 11th, due in part to the benefit we received last year from the labor disruptions at our biggest competitor. We had estimated that impact at 80 to $100 million for last year's third-quarter, which equates to a little over one and a half points of the unit revenue change. Though absent that year over year distortion, unit revenues would've been down about 15 percent for the quarter. Additionally, our unit revenue results in the third-quarter were also affected, somewhat, by the more room in coach, that pulled ASMs down by 1 1/2 points. Clearly, though, the largest impact on revenues this quarter came from the events of September 11th. While it's difficult to pin down the exact revenue impact, we've estimated our total revenue shortfalls for the third quarter at between 550 and $650 million. This revenue shortfall resulted in unit revenue declines of over 40 percent during the last two weeks of September, versus a decline of about 16 percent in the first ten days of September. Domestically unit revenues for the third-quarter were down almost 21 percent from last year, driven by a yield decline of 16 percent, and a load factor drop of over four points. The domestic weakness was spread pretty evenly across most of the network. However, the Trans CON markets have remained a bit weaker than most, which is consistent with the drop-off in business demand. Internationally, results for the quarter fared a little better. In total, unit revenues were down about 8 percent from the third quarter last year, driven by declines in both load factor and yield. While most regions were generally weaker this quarter, the results did vary somewhat, so I'll run through the entity numbers pretty quickly. Europe was clearly one of the weakest points during the quarter. Even before September 11th, trans-Atlantic demand was down from last year's level. After that, the effect just magnified. But for the quarter, unit revenue in Europe was down just over 14 percent on a yield decline of nine percent, and a load factor drop of almost five points. However, it does appear that most carriers, both in the U.S. and in Europe, are feeling a lot of pain, and as a result, most carriers are in the process of adjusting their trans-Atlantic capacity levels. In Latin America, our results actually get fared a little better. Unit revenue was flat, with last year's third quarter. However, the outlook for the fourth quarter does appear a fair bit softer. Asia, on the other hand, was particularly hard hit during the third quarter. A weak business environment before September 11th, and a very dramatic drop-off in traffic after the 11th, resulted in a unit revenue decline of almost 17 percent. A portion of that was driven by our new route to Taiwan which we are canceling in November as part of our capacity reduction. However, the Japan market itself still remains very weak. As you can see from the financial statements we released today, American Eagle and our cargo operations were not immune from the revenue declines we saw in the third quarter. At Eagle, unit revenues fell by 15 percent during the quarter, from last year's levels, due to both weaker yield and traffic. In light of the reduced demand, both at American and at Eagle, we have pulled down Eagle's capacity as well. For the fourth quarter, I would expect Eagle's capacity to be down about seven percent from last year, or about 15 percent from where it would have been, absent the events of September 11th. Most of this reduction is coming from reduced turboprop lines. As we discussed before, our long-term plan is to replace fuel turboprops with regional jets, and this pulldown will likely accelerate that schedule. Our cargo operation also took a hit this quarter. Revenues were down over 14 percent, driven by both a general softening in cargo demands and the events of September 11th. Looking forward, it's probably safe to assume that cargo revenues will remain weak into the fourth quarter as added security measures and changes to shipping policy continue to impact cargo volume. As we saw with the revenue number, the cost side of the equation has also been impacted buy recent events. Again I'll run through the third-quarter numbers pretty quickly, and focus most of my remaining time on our outlook going forward. Before the quarter, our reported unit cost came in a 7.6 percent higher than last year's third quarter. Prior to the 11th, we would have expected unit cost to be up about 3 to 3 1/2 percent from last year's levels. And that normalized unit cost increase, is attributable to two factors: first, as we saw with unit revenues, the more room in coach program, caused unit cost to rise by about 1.5 points during the third quarter. Second, fuel price was higher for most of the fuel price was higher for most of the quarter. Our fuel costs, including the effects of our hedging program, came in at 81.4 cents per gallon, up 5.2 percent from last year. For those who track it in the third-quarter, we recorded a $15 million benefit from our hedging program, which equates to about 2 cents per gallon. Let me shift gears a little bit now, and talk about the steps we have been taking to address the recent decline in demand. As all of you know, the economy was weakening well before the September 11th attack, and we were taking action to adjust to this new demand environment. Prior to the 11th, we had reduced planned capacity growth at American and TWA by almost four percent year over year, through an acceleration of aircraft retirements. We had trimmed back our aircraft and non aircraft capital spending for this year, and next, by almost $1 billion. We had made cuts in management support staff headcount and pulled back on our hiring for flight crews, and we were cutting back on all controllable lines of expense in every department. However, the events of September 11th, required us to take much more drastic actions. Clearly, the first order of business was to adjust our capacity to the new lower demand in the market. So we've trimmed our capacity by about 20 percent from the level it was right before the 11th. To accomplish this

reduction, we adjusted the schedule in a number of ways: first off, we cut back on the number of trips we flew in high frequency markets; next, we trimmed back our point-to-point flying in areas where the new demand levels just didn't justify nonstop service. Third, we cut out the last bank of the day at our hubs in Chicago, St. Louis, and Dallas. Finally, we also cut back on our international flying. The international reductions were focused on either markets where we had the ability to recapture traffic over other gateways, or where the demand was so weak that it just didn't make sense to continue operating. The current reduced level of flying, obviously requires fewer aircraft. Given that, we have further advanced the retirement of American's remaining 50 727s, as well as TWA's DC-9s. In addition we have trimmed about 10 MD-80s or MD-90 model aircraft from the fleet plan through lease returns. So all told, we're trimming our physical fleet by about 70 aircraft. For the time being, the rest of the capacity reduction is being accomplished through a general reduction in utilization across the remaining aircraft fleet. Given our reduced schedule, it was also imperative that we cut back spending as much as possible. To do this, we've taken a number of steps to get our costs more in line with our capacity, and to reflect the softer revenue environment. One of the first steps we took, was to trim back further on capital spending. As you may recall from our last conference call, we had already trimmed close to $1 billion capital from our 2001 to 2002 plan. Based on that revised plan, we expected capital spending of $3.9 billion in 2001, and $3.6 billion in 2002. However, in light of resent events, it is necessary to cut capital much deeper. Our additional reduction in capital spending effects both aircraft and non aircraft capital. We've been working hard with Boeing, and our other key suppliers to revise our fleet plan down to a level more consistent with the expected demand. But while we'll take our remaining deliveries this year, we will for defer least 29 of our 45 firm deliveries for 2002, to some time beyond 2003. To reduce non aircraft capital spending, we have made some fairly significant cutbacks in our aircraft modifications that aren't absolutely necessary. Our facility plans have been scaled back in a number of cities; we cut our IT development budget, and we've eliminated virtually all spending on ground equipment and training simulators. So taken together, this latest round of capital spending cuts represents another 2 1/2 billion dollar reduction in our 2001 and 2002 capital plan. This is on top of the one billion we cut during the second quarter. But when you add up the pieces, it looks like we will have capital spending this year, 2001, of approximately 3.5 billion and just 1.7 billion next year. That's down from over $4.3 billion as initially planned for next year. And of that $1.7 billion in 2002, about $600 million of it is for regional jets, which we've already financed at fairly attractive rates. So there is no meaningful impact on cash flows. Our cost controls obviously aren't limited to just capital spending. We've all taken steps to reduce our operating expenses. All of our operating groups were tasked with looking for ways to cut spending in light of the difficult challenges we face. As a result we've cut back on our food and beverage costs and adjusted other in-flight product offerings to save money. We closed the majority of our city ticket offices around the country, as well as some of our lesser used airport lounge facilities. Our marketing folks have also cut back on advertising and promotional spending. We've cut IT spending, corporate overhead, and we've negotiated with many of our suppliers for further cost reductions on much of what we buy. Clearly, however, the most painful action we've had to take so far was in reducing our work force. In conjunction with our plan to reduce capacity by 20 percent, we also announced that we would be forced to eliminate the equivalent of approximately 20,000 jobs, or roughly 70 percent of AMR's work force. These reductions were across the board, impacting about 15,000 positions at American, 3000 at TWA, and 1,700 or so at Eagle. The reductions also spread across every department, and at every level, with over 2000 management positions being cut as part of the total reduction. Clearly, this is something we all wished we could have avoided doing. Our cost structure just doesn't permit operating with that amount of extra spending in this environment. However, we have bee able to mitigate some of the necessary job reductions through voluntary leaves, reduction in overtime, and shorter work days. Taken collectively, these expense reductions should save about $250 million in the fourth quarter, and almost $1.3 billion in 2002. Before I move on, I should also acknowledge all of the AMR employees who have followed Don Carty's lead, and taken voluntary pay cuts to help the Company through this very difficult period. Today, we've had over 1500 employees, just in the management ranks, sign up for voluntary pay reduction. Let me now take a minute to update you on what additional steps we've taken to address the short term liquidity needs that have risen from the events of last month. Obviously cutting capital spending and operating expenses is a significant piece. However, we've also been working diligently to build up a cash cushion, to help us weather the storm. As I've talked about on prior calls, AMR has had in place a $1 billion bank revolver. September 12th we drew down $820 million from that revolver. Additionally, we were able to complete a double ETC secured aircraft financing which provided $1.6 billion in financing, albeit it it was a bit more costly than it would've been prior to the 11th. We have been carefully managing our working capital. And finally, of course, we got some relief from Washington through the Airline Stabilization Act, which has both helped to secure our cash position, and has also removed most of the uncertainty regarding liability surrounding the events of the 11th. Going forward, we're taking a number of actions to further shore up the Company's financial position. We're reviewing additional cost savings initiatives, across all departments, to help stem the cash burn. And, of course, we're also reviewing a variety of additional financing options in order to build our liquidity as we move into the seemingly slower winter months. Where does all this leave the balance sheet? Well, we ended the quarter with $2.3 billion in cash, and about $8 billion remaining in unencumbered aircraft assets. With the additional financing, we put in place during the third quarter, we ended September with $17.7 billion of debt, and our net debt to total capital ratio was just under 70 percent. While our balance sheet has clearly taken a hit as a result of recent events, we are carefully managing our way through the financial challenge that faces us. I'll be happy to take questions in a few minutes, but for those of you who would like more detail on the balance sheet, we will go ahead and also file our 10Q today, as an additional source of them information. Before I move onto our outlook for the fourth quarter, let me briefly update you on the TWA integration. Despite the operational challenges resulting from the September 11th attacks, we are progressing ahead of schedule with the integration. And moving the integration along rapidly should help us both maximize the revenue benefits from a combined network, and also allow to eliminate as much excess cost as possible. We've already begun interim codesharing, and now have the AA code on about 300 TWA flights in over 30 markets out of St. Louis. All TWA flights will carry the AA code, once the complete the cutover from Worldspan to Sabre, and that will occur no later than January. As part of the capacity reduction we have implemented, we've advanced the DC-9 fleet retirement, and will have all those aircraft on the round by next month. For the aircraft that will remain in the fleet, we're reviewing all the capital spending needs related to transitioning those aircraft into American's fleet. However, some of the more visible changes are progressing pretty quickly. The More room product is now on 100 percent of TWA's narrow body aircraft, and the wide body 767s will be completed by the end of this month. Additionally, our maintenance folks from Kansas City, have just finished the polished aluminum delivery change on about 20 of the TWA aircraft, and are moving ahead on most of the other aircraft and should have them completed by May. As part of the (indiscernible) capacity reduction we implemented, we'll be closing down all TWA operations at JFK in November. Our overall JFK service is being reduced as part of the schedule reduction. American will assume flying that TWA has been doing in a number of markets, including JFK to St. Louis, and to the Caribbean. These changes will allow to consolidate operations into American's facilities at JFK, thereby allowing us to close the TWA terminal and maintenance base at Kennedy, which will provide us with some unique cost efficiencies. As we go forward, we'll continue adjusting the combined schedule to better optimize our expanded network. In addition to the changes in Kennedy, we're making some other long-term adjustments that will help streamline the combined maintenance operations. First off, we will close the engine repair shop at Kansas City in December, and integrate that work into our existing Tulsa maintenance facilities. At as we go forward with the integration, we will move the 737 maintenance operation to Kansas City, which will allow us to accommodate the TWA MD-80s at Tulsa, where the American MD-80s are already maintained. We have also begun to consolidate some field operations in a variety of (indiscernible) and our reservations organization, which will help reduce costs. And on the headquarters side, we should have all but a few TWA staff departments consolidated at American by the end of the year. And as a result of our ability to leverage our combined size, we're able to reduce management and support staff headcount by almost a thousand. Now let me turn to our outlook for the fourth quarter. Capacity for American and TWA collectively, will down about 20 percent from last year's level in the fourth quarter. At this point we're still working on our plans for 2002, but I would expect the first quarter '02 capacity to be down approximately 20 percent from the year earlier level, as well. Eagle capacity for the fourth quarter will be down over five percent from last year, and down about 13 percent from their original plan. Clearly, it's difficult to tell where traffic will come in for the fourth quarter, although there's been some modest pickup in activity in the last couple of weeks, our current advance bookings are down six points in November, and down four points in December. Unfortunately, with the continued uncertainty surrounding events in our country, we have noticed an increase in the number of no shows. So if this trend continues, we would still have lower load factors than we otherwise would have expected, despite the reduction in capacity. Yields have also suffered since the attacks. This decline has been due to both a greater level of discounting on the leisure side than we saw last year, as well as well as a weaker mix of business passengers. While it is simply too early to tell, if these trends hold up, we'll see a steeper decline in yield in the fourth quarter than that we experienced in the third. On the cost side, we should see some help in the fourth quarter, both as a result of the cost reduction initiatives we have put in place, and lower year over year fuel prices. At the AMR level, unit costs are expected to come in about 2 percent higher than last year, at 11.8 cents, despite the 20 percent cut in capacity. For those of you who model American on a stand-alone basis, fourth quarter unit cost will be about 11.2 cents, up about two percent from last year. At this point, we expect fuel to come in at around 76 cents per gallon in the fourth quarter, down about 16 percent from last year. However, given the current environment, fuel price could change quickly. If fuel prices were to rise significantly, we do have some protection. We have hedges in place at below $25 per barrel that would cover over 56 percent of our expected fourth quarter consumption, and about 38 percent of our planned 2002 consumption. Before I stop and take your questions, I know a number of you have asked for information on how to model the various expense lines on the P&L, given the dramatic change in our operations. Let me give you some general guidance on a couple of the major expense lines. Obviously, while we've pulled out about 20 percent of our capacity, we won't necessarily be able to get all of the associated costs out of the system, at least not in the short-term. One good example of this is on the salary and benefit line. While we have taken the very painful action of trimming our work force, some of this reduction in labor expense comes on the margin, which is at a below average cost. Additionally, not all of the expense will come out that once, so there is some timing impact as well. Before the fourth quarter, I would expect our salaries and benefits to be about 12 percent below what they otherwise would have been. On the other hand, I would expect the food and beverage line to go down a bit more than capacity, as we adjust our service level to both trim expenses and minimize any operational impacts from the new security measures. Other expenses, like booking fees and commission, should vary proportionally to passengers and revenue. Although we should continue to see and improvement in the unit expenses of both of these lines as more bookings move to new, less expensive distribution channels. And finally, expenses such as landing fees and maintenance, should very more proportionally with capacity. Now with all of that as background, I'd be happy to stop and take your questions.

Thank you. (CALLER INSTRUCTIONS) Our first question comes from Brian Harris from Solomon Smith Barney.

Tom, I was wondering if you could comment a little bit regarding the operational strains that you folks and that in the industry, in general, are facing at the airports. If you can comment on how your hubs are holding up as far as boarding times, whether that's improving. And sense of how much that's responsible for the slowing down of the improvement in revenues, and then related to that, any comments regarding the security cost of 3 billion, how that's going to play out, as well.

Sure, Brian. Clearly, all of the new security measures have had an impact on everyone's operations the past month or so as we've had to work very hard to adapt to the new procedures. And training to the new guidelines. Adding to this has been the fact that the FAA procedures have been continually revised since September 11. So while all the changes are certainly adding to our costs, it's a little too early, I think, to try and quantify what the steady-state impact of this is going to be because everything is still in flux. From American's standpoint, the biggest impact to our operations were felt in the first weeks after the attacks. Since then, things have improved somewhat as the FAA regulations have been adjusted, and as our staff and customers have become more accustomed to the new procedures. And as we've been able to implement some new automation that saves time during the preflight process. For example the resumption of curbside check-in has reduced some of the backlog we were seeing at the ticket counter, and in addition, eligible customers are back to using automated kiosks to check-in which further reduces the number of people needing to queue at the counter. We've also had to make some adjustments to our staffing levels, at various points in the airport, which is helping us make sure we've got more people where they're needed. But I think it's clearly fair to say that things are not back to normal quite yet. In light of the new model we're operating under at the airport, we're undertaking a pretty broad review of ways to cut down delays even further and smooth out the passenger flow. Some of the things we're looking at are whether we could make physical adjustments to any of the security positions or ticket counters at the airports, or if we need to make further adjustments to our staffing models to help us make sure we've got agents where they're needed as traffic patterns change. All in all, who are making some progress; it's going to take time and money, but the bottom line here is safety and security and that's going to remain our first and foremost priority.

Okay, and that 3 billion additional security cost that the government's going to kick in, is it your expectation that those costs will ultimately be borne by the airline industry through additional ticket charges or landing fees, or what have you?

Very much unclear, Brian. As you know, the APA has publicized kind of a pre-September 11th security cost number for the industry of around $1 billion, and I think that's about right. We had a proportional share of that. There hasn't been sort of a new official estimate of the industry's cost, with all of the added security. However ATA has put together a security cost working group to try and get a fix on that, and we're participating in that working group. As to how that cost is going to be paid for, I think that very much remains to be seen. As you probably know the Senate's Aviation Security Bill proposes a $2.50 surcharge for each passenger to offset the cost. However, since the House is still working on their bill, I think that issue remains up in the air for now.

Okay, thank you.

Our next comes from Michael Linenberg from Merrill Lynch.

Hey, Tom. Just two quick ones, here. You talked about some of the aircrafts that you were going to be accelerating retirement. Of the 20 percent capacity cut, could you breakout maybe what percentage of that cut is related to aircrafts that are being parked that are going to the desert, and what percentage is related to reduce utilization. And then, my second question, if you could just give us a sense of maybe where cash burn was a couple of weeks ago, and sort of the daily cash burn that you're seeing now, as we move through October into November.

Yes. On the aircraft as I mentioned, we're actually putting on the ground about 70 airplanes. And if you sort of rough out 20 percent capacity, if we've got a little under 900 airplanes, that would imply 180 planes worth of capacity, so the balance of it is coming through reduced utilization. As we said here today, our plan is to get the 727s out by the first of May of next year. We're doing a little bit more work to sharpen our pencil there, and see if we can get those on the ground a little sooner than that.

And then on the question regarding the cash burn?

It looks like our fourth-quarter cash burn is going to be in the 10 to $15 million a day range. That's down a fair bit from where it started out, obviously during the shutdown that was a pretty scary number, but it's down to about 15 million a day. If you look at the fourth quarter of last year, sort of put that in perspective, we generated 4 or $5 million a day.

Okay, thanks a lot.

Our next question comes from Sam Butricks from UBS Warburg.

Hi, Tom. A general question: how do you see your current financial predicament impacting the tenor of labor relations, labor negotiations?

Well, you know, Sam, that's a great question. As you know, we've got some contracts that have recently been ratified. Our flight attendants, last month, ratified the tentative agreement which we negotiated with them. In fact, that passed with overwhelming -- 96 percent vote in favor of the new agreement. That deal runs through 2004. And just a couple of weeks ago, we also had a new contract ratified by our mechanics and related employees, and that vote was also a fairly resounding almost 90 percent in favor. That deal runs through March 2004. As you probably recall, we've also got a number of other workgroups represented by the TW, not just our mechanics. And later this week, we expect to hear the results of the vote being taken by our stock and fleet service clerks, dispatchers, flight instructors, and simulator technicians. Now, if that contract is ratified, and I would expect it would be, this would leave us with just one open contract and that's the pilots. And I'm sure all of you can imagine, given the events of the past month, both sides to these discussions have been focused on a variety of other issues. So at this point, it's probably a little early to try and speculate about where things will go from here. But we'll update you as things change.

Secondly, you're building a higher unit cost product, the airline, higher unit cost airline, and offering overall a lower service level, the airport experience and the onboard experience -- that just doesn't strike me as a formula for success. Can you model yourself for profitability. Do you have a business plan that produces profits?

I think, Sam, the question is what is equilibrium in our industry, and clearly you know, I think it's important for us to remember that the industry's problems didn't start on September 11. We were on track to lose 2 to $3 billion prior to the attacks, so it was broken then, and it's in a crisis now. I think the question is, how much capacity is the right level of capacity in the marketplace, and at the end of the day, if revenues continue to be weak, as weak as they are today -- then 20 percent capacity cuts may not be enough. Obviously, as you continue to reduce capacity, unit costs, like it or not, will rise. I think what that probably means is at the end of the day, when equilibrium is reached, the cost of flying will go up to reflect the cost of providing the product.

The problem with that, that spiral, is that you just price yourself out of the market. The other people do it for less, whether it's South West or Frontier or whomever. Or a reorganized United with new labor contracts.

Well, you know Sam, that is the predicament the industry finds itself in; I think you've accurately depicted it. This industry and our company are in the midst of an unprecedented financial crisis. We are literally losing billions of dollars each day. That is unsustainable, and something's got to change. At our company, fortunately we entered the crisis with one of the strongest balance sheets in the industry, we had over a billion in cash, and a billion dollar revolver, and a big stockpile of unencumbered aircraft. We've since drown down the revolver, and we've gotten some government aid money, and we've borrowed against our unencumbered aircraft, so the liquidity situation's fairly stable, but that doesn't mean our problems are solved. It just means we've borrowed a bunch of money, and borrowing money to fund losses is a little bit like heating your house by throwing the furniture in the fireplace. It's not a long-term strategy, so we're going to have to stem the losses, and I think that means doing all we can to get our customers back on airplanes, and by managing our cost and capacity with great care and discipline, and that's what were doing. And that's what we're going to continue to do.

Thanks, Tom

Our next question comes from Helene Becker from Buckingham Research Group.

Thank you very much, operator. Two questions, Tom. First of all, in looking at the fourth quarter from an expense standpoint, can you be a little more specific about what we do from a line item basis with items like maintenance and related cost landing fees, depreciation. How in the model that you're describing that will shakeout?

I think, Helene, it's going to be a little tricky for you to model the costs. But I think you can assume that materials, maintenance costs are going to be down a bit, but not down as much as capacity is down, because, obviously, much of what we're doing to bring capacity down is reducing utilization, and when you do that you don't get the full benefit of pulling aircraft our of the fleet. So that decline in cost is going to be probably something around half the decline in capacity. Likewise, with depreciation and amortization, the airplanes we're retiring are effectively fully depreciated, so there really isn't much pickup in that line either.

Okay, and then from an employee standpoint, can talk about -- I think you said in your comments that you were doing some mitigating factors to ease the employ pain. Is that what you were talking about when you said that management people were taking pay cuts and stuff? Is that what you were referring to?

I was referring to a bunch of things, Helene. As I mentioned before, we're working with our employee groups to minimize the number of employees impacted by these reductions. We're also providing job search assistance, and career counseling, and help with securing unemployment relief for those employees who will lose their job. As you might expect, our ability to reduce the actual number of people laid of does vary a bit by work group. For example, look at our pilots, we have about 16 1/2 thousand between American Eagle and TWA, and if you look at just the AA pilot work force alone, our target reduction, given that pulldown would be about 1500 equivalent positions. But for this group, we're able to reduce the minimum monthly hours for each American Airline's pilot, and that allows us to spread the flying that does remain out across more pilots, and it also minimizes the need to retrain pilots, who otherwise would be moving across equipment ties. And in addition we've go a number of pilots, almost 300, who have been called up for active military service from the reserves, and this, at least for the time being, also reduces the number of required furloughs. So between reduced hours, and the military call ups, actual furloughs will be about half what they otherwise would have been at American. Within our mechanics ranks, the reduced workload has allowed us to cut out just about all over time, and that allows us to spread the remaining work over a few more employees, and thereby reduce the number of furloughs or layoffs. So while we still needed to reduce about 2600 equivalent heads, we've been able to avoid furloughing over 25 percent of those people, by cutting out over time. And of course, that's a win-win, because in doing so, we've reduced our most expensive labor hours. And maybe the most significant area is with flight attendants. We've been working with our flight attendants union to implement a voluntary leave program for flight attendants, which dramatically reduces the number of involuntary reductions needed to get our equivalent headcount target of about 5,000. Based on the most recent numbers I've seen there, over 2600 flight attendants have signed up for voluntary leaves, and almost another hundred have agreed to something called partnership flying, where two employees split a bid schedule between them. So as a result of those two programs, we'll be able to offset our flight attendant furloughs by almost 2700. So, there's a lot you can do here if you're creative, and you really focus on minimizing the impact on the employees. So while we're still reducing AMR's equivalent headcount by about 20,000, we have found ways to significantly mitigate the impact on thousands of our own employees. All of those efforts, I should point out, wouldn't have been possible without a lot of collaborative work and creative thinking by our (indiscernible) management, employees, and Employee paying, is that what you were talking about when you said that management people were taking pay cuts and stuff? Is that what you were referring to?

I was referring to a bunch of things, Elaine. As I mentioned before, we are working with our employee groups to minimize the number of employees impacted by these reductions. We're also providing job search assistance and career counseling and help with securing unemployment relief for those employees who will lose their job. As you might expect, our ability to reduce the actual number of people laid off does vary a bit by workgroup. For example, look at our pilots. We have about 16-1/2 thousand between American Eagle and TWA. And if you look at just the AA pilot workforce alone, our target reduction, given that pulldown, would be about 1500 equivalent positions. But for this group, we are able to reduce the minimum monthly hours for each American Airlines pilot, and that allows us to spread the flying that does remain out across more pilots, and it also minimizes to re-train pilots, who otherwise would be moving across equipment ties. And, in addition, we've got a number of pilots -- almost 300 -- who have been called up for active military service from the reserves and this, at least for the time being, also reduces the number of required furloughs. So, between reduced hours and the military callups, actual furloughs will be about half of what they otherwise would have been at American. Within our mechanics ranks, the reduced workload has allowed us to cut out just about all overtime, and that allows us to spread the remaining work over a few more employees, and thereby reduce the number of furloughs or layoffs. So while we still needed to reduce about 2600 equivalent head, we have been able to avoid furloughing over 25 percent of those people by cutting out over time. And of course that's a win-win, because in doing so, we have reduced our msot expensive labor hours. And maybe the most significant area is with flight attendants. We've been working with our flight attendant union to implement a voluntary leave program for flight attendants, which dramatically reduces the number of involuntary reductions needed to get our equivalent head count target of about 5,000. But based on the most recent numbers I've seen there, over 2,600 flight attendants have signed up for voluntary leave, and almost another hundred have agreed to something called partnership flying where two employees split a bid schedule between them. So, as a result of thsoe two programs, we'll be able to offset our flight attendant furloughs by almost 2,600. So, there is a lot you can do here if you're creative and you really focus on minimizing the impact on the employees. So, while we are still reducing AMR's headcount by about 20,000, we have found ways to significantly mitigate the impact of thousands of our own employees. All of those efforts, I should point out, would not have been possible without a lot of collaborative work and creative thinking by our line management employees and the union leadership.

Then you still have, by keeping so many on, you still have the issue of benefits, right?

You do have the benefits. That is an offset but, obviously, in the case of, say, the mechanics, where you're eliminating overtime at the most senior levels, it has vastly more than offset.

I have more questions, but I know time is getting short, so I'll move on.

Susan D'Onofrio from Deutshce Bank.

Hi, Tom. I have two questions. I think you made the statement that there appears to be a number of no-shows. Have you noticed any other changes in passenger booking patterns?

Yes. I guess the most notable change is that the mix between leisure and business traffic hasn't returned to what we would like it to be. That is obviously having a disproportionate impact on our yield

What percentage would that be, versus a year ago?

We don't really have a lot of good data in the last couple of weeks. Things are moving around so fast. But, if you look at just before September 11th, our percent of traffic that was full-fare was under nine percent. Historically, that's more like 14 percent or so. You know the leverage that that number has, so that's a pretty significant impact on a yield.

Another question that I have is for capacity. You said that, at least for first-quarter next year, I think it's going to be down 20 percent as well. Based on what you're giving us, with respect to retirements and decreased airfare utilization, what would you anticipate '02 capacity to look like, more of an annual number?

Don't really have a sense of that at this point, Susan, we are sort of taking this one step at a time here. We're going to go off and build an operating plan for the first-quarter, based on the capacity that I just gave you. And, as the demand situation, economic situation develops little bit, we're quite to decide how to map out the rest of the year. But, as I mentioned to Sam, and I think all of you know, this industry was in a pretty awful state before September 11th, and one man's view is that we probably had 5 to 10 percent too much capacity in the industry to start with. So, I would be very surprised to see capacity come back above that sort of level.

Thank you.

You bet.

Glen Engels from Goldman Sachs.

Good afternoon, Tom. Follow-up something more on what Sam was saying. You're cutting food now; on the other hand, you have more room in coach, first-class cabins have been getting bigger. Is there going to be a change, really, in food longer-term? Is there going to be a change longer-term inn how much room you have in the plane, how big first-class is, whether international cabin mix has changed?

Well, Glen, you've just asked a pretty important question. I'm not sure I know the answer, it's going to evolve over time. Obviously, September 11th has changed just about everything in our industry. One of the things that it has done is that it has made it more difficult for us to measure the effectiveness of the more room product. That is a good question. What is clear is that our customer survey data, among our most frequent flier shows that our ratings for coach seat comfort and overall travel experience continue to trend up very sharply, as have our intent to repurchase ratings. In fact, we're now number one in onboard service and intent to repurchase. Something like eight points above number two Delta on the ladder.

But, for all that, it seems like your load factors are not doing as well as the the industry.

Well, I think prior to the events of September 11th, our load factors were pretty much on the industry. The third quarter American's load factor averaged 70.8 percent on a domestic load factor; that was down about 4.2 points year-over-year. The industry's was 70.9, down about 3.3 year-over-year. But, if you exclude the impact of United's labor action from our third quarter, last year load factor was about 3.1. So, roughly in line with the industry. We would like that to be a bit higher because of more room; your point is valid. So, I think we're just going to have to keep watching that. And having said all of that, the fundamentals of our industry have changed dramatically, and that is going to cause us to continually scrutinize every aspect of our product pricing and service in the coming months. It is not clear to me that foodservice is where it is going to be for the long-term. It is clear to me that it is where needs to be while airlines sort out their cash situation.

And you have flexibility in your 717 fleet to return planes, but I don't really hear anything there.

Yes, we do have flexibility. We can return those at the rate of three every two months, and that starts -- our first ability to do that is in October of '02. So, we don't yet have the ability to enact that, absent another deal with Boeing. And we have had some discussions with creative ideas there. So, you'll have to stay tuned on that one.

Thank you.

You bet.

Jim Higgins from Credit Suisse.

A few questions, all related around cash items. Your air traffic liability reversal; can you give us a sense of how much that was? How much notice -- how much you think you had to refund?

As you probably know, Jim, our traffic liability is a bit larger than most in our relative sizes. And the key driver of that is that the ATL line also includes liability for frequent flier, given the size of the advantage, relative to other programs, ours is disportionately large. But, that portion oof the air traffic liability, or about a billion dollars, as you can guess, is not at risk from a cash flow standpoint. Beyond that difference, there's probably very little difference across the carriers, in terms of refund or risk. As you probably know, right after the September 11th events, most carriers made refunds available to people traveling within the next week or two. And beyond that window, the the only real risk is from fully-refundable tickets, which tend to be booked and used in a fairly close period. So, I would expect, going forward, not to see that much risk. And in fact, for September travel, our total refunds were just over $200 million, which is about 2-1/2 times the normal rate. So, as we move into October, that rate is down significantly and trending towards the level of refunds we expect in a normal month.

In addition, I think excise taxes are not being remitted at this point; is that correct?

That is right. We were given (indiscernible) a 60-day deferral period for not only ticket taxes, but also payroll taxes, and that will be remitted in November.

The special charges -- the complete impairment charges, etc., do you have a cash number on that? How much of that is actually cash, as opposed to just an accounting writeoff?

Really, the cash is the employer-related cost. Most everything else is write-downs.

Right. Thank you very much.

Ray Neidle (phonetic) from ABN.

I'm just wondering, with the TWA integration process and some of the labor groups, I guess, haven't settled on a seniority system. Is that creating problems in (technical difficulty) this massive layoff environment? Are more TWA employees being laid off and, in effect, creating some ill will? How are you handling that?

Well, it is tricky. Although, thus far, I think has worked reasonably well. As some of you know, we have implemented a plan for integrating our airport agents. The plan that we put in place created a safe haven in St. Louis for TWA agents where their seniority would be preserved for shift-bidding purposes, and that will provide a great deal of protection for a good number of TWA agents while not disrupting agents at American. There has also been some recent developments on the pilot side. As we have talked about before, there have been ongoing discussions to try and reach an agreement on integrated TWA and American's pilots. Unfortunately, extensive discussions between APA, Apla (phonetic) (technical difficulty) TWA and American have not led to an agreement on an integrated seniority list. So, we worked hard to facilitate the negotiation, and we're certainly disappointed that no agreement was reached. However, American has reached an agreement, in principal, with APA regarding an integrated seniority list. So, while we're still finalizing the details of the agreement, I would expect to have a completed agreement within the next week. However, I should point out that because no agreement was reached between APA and Apla (phonetic), the integrated list agreed to buy American and APA will only be effective when the National Mediation Board determines that American and TW are a single carrier, and that APA is the designated representative of the pilot employees. And that will take at least a number of weeks. At this point, we're still waiting on integration agreements between TW and IAM for the mechanics, as well as between APFA and IAM for flight attendant groups. We think there's a decent chance that those will be resolved this quarter.

Just as a general question, being that the industry is in a crisis mode right now and the opportunity may never come up again, would you go to your unions to look for some changes in work rules or some changes in increasing productivity? With the argument justifiably so that the future of the Company and the future of their jobs is at stake, and from how you've been talking earlier with the conference call, it sounds like this industry is not going to be the same for a couple of years, and maybe some basic changes are needed in some of the labor rules? Or, is that something where you just don't want to open a can of worms?

Well, clearly there needs to be some restructuring in the industry, both in terms of both capacity and cost, and so I think that things like that are something that can't be ruled out as alternatives down the line.

Thank you.

Kevin Murphy from Morgan Stanley.

Thank you. Continental announced the elimination of online agency commissions today. What is your view or response towards that?

We are evaluating that, Kevin. We haven't made the decision as of yet.

In total, what portion of your bookings are online; just not to your own website, but all websites?

It is about 10 to 12 percent now, and it has been growing pretty rapidly. It is still growing yearly at a 100 percent base, year-over-year. So, we're right around 11 percent now.

What would be the savings to you if you went to zero commission?

I don't have that number in front of me, Kevin.

Thank you, Tom, best of luck.

With thank, I would like to thank you all for being on a pretty long call today. We appreciate your patience. Thank you.