美國航空 (AAL) 2002 Q1 法說會逐字稿

Welcome to AMR Corporations first quarter earnings release conference call. All participants will be able to listen only until the question and answer section of the call. At the request of American Airlines this conference is being recorded. If you have any objections we ask you to disconnect at this time.

I would now like to introduce today's speaker Mr. Thomas W. Horton, Senior Vice President of Finance and Chief Financial Officer of AMR. Mr. Horton, you may begin.

Thank you and good afternoon everyone. Thanks for joining us on the call.

Before I get into the numbers for the quarter, let me run through the required safe harbor disclosure. Many of my comments today on matters related to our outlook for revenue and earnings growth, cost estimates, forecast of capacity, traffic load factor and fuel costs, and integration of TWAs 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.

Let's move on. As I mentioned last quarter, American along with the entire industry has been facing some of the largest challenges in the industry's history following the events of last September, the impacts of which are clearly visible in our first quarter results. However, we are making some progress and I will talk more about that in a minute. But, first let me walk you through the numbers for the quarter. AMR on a consolidated basis reported a first quarter net loss of 548 million, excluding a special tax charge, which was 504 million dollars below last year's first quarter loss before special items. On an EPS basis that equates to a loss of 3 dollars and 53 cents per share for the quarter, down 3 dollars and 25 cents from the first quarter of 2001. Including the special item AMR lost 575 million dollars or 3.71 a share in the quarter, down from 532 million dollars or 3 dollars 43 cents from last year also including special items.

Let me take a minute to walk through the special tax charge that impacted our results for the quarter. As you may have read in our 8-k filing last month, the recently passed economic stimulus package contains a provision regarding net operating loss or NOL carry backs which provide a near-term benefit for AMR. Previously tax law allowed NOLs to be carried back two years and carried forward for 20 years. The new law passed last month extends the carry back period from two to five years for NOLs arising in 2001 and 02. Under the new law AMR will be able to use its large 2001 loss and any 2002 NOL to recover the federal income tax paid from 1996 through 2000. In January we used a portion of our 2001 NOL to obtain a 265 million dollar tax refund, which was the maximum available under the old two-year rule. Under the new law of five-year carry back period we were able to use the remainder of our 2001 NOL to obtain a 393 million dollar tax refund that we received earlier this month. Today we have received tax refunds totaling 658 million dollars. Some of you may recall that in our 8-k filing, we indicated the benefit of this new tax law to AMR was 200 million dollars on a present value basis. This represents the PV benefit of accelerating the use of our 2001 and possible 2002 NOLs versus the projected use of these NOLs if the old two-year rule was still in effect. In other words we are getting the PV benefit of being able to reach back further down to reclaim previous taxes paid rather than waiting to capture that benefit in future years. Now if all that wasn't head hurting enough there was one more intricacy of this, which actually drove the $27m charge we took this quarter and that relates to foreign tax credits. We anticipate that the five-year carry back of our '01and likely '02 NOLs may result in the complete elimination of AMR's federal tax liability from 1996 to 2002. During these years a tax benefit was reported for foreign income taxes paid, which were used as a credit against AMR's US tax liability, but the elimination of our 1996 to 2000 tax liability means that the foreign tax credits cannot be used in those years and must be carried forward to future years. And five years for those tax credits will expire before all of the tax credits can be used. While the reversal of these credits does drive a charge of 18 cents a share in the quarter and will drive a similar charge again in next quarter, it is quite small in comparison to the benefit we received from the expanded look back period for the NOL under the new tax law.

Now with that out of the way let me turn to American's revenue performance. As I mentioned last quarter, unit revenues did show improvements sequentially during the quarter. While that positive trend continued again in the first quarter we are climbing out of a very very deep hole. To highlight this, let me remind you that in October we had a system unit revenue declined almost 30 percent. While that decline improved to mid-teens by December, it was on a substantial 16 percent reduction in capacity. During the first quarter we have seen year over year unit revenue results improved further as some of the capacities have been added back to the system. For the quarter as a whole, unit revenues were down about 14 percent.

A clearly balancing supply with demand right now is as much an art as a science. However, it does seem that the industry has got a reasonably good job of restraining capacity to a level more consistent with the diminished demand we are experiencing. While we are encouraged by the trend we have seen in the first quarter we still have a very long way to go. For the first quarter we reported a system load factor of 69.4 percent, up 1.5 points from last year. While load factors were positive that volume did come at the expense of yield, which fell 15.8 percent in the quarter. Combined with the traffic numbers this produced a unit revenue decline of just under 14 percent for the quarter as a whole, but still better than the 21 percent decline experienced in the fourth quarter. As we pointed out in a recent filing, the addition of TWA and the St. Louis hub this quarter did have the effect of increasing our reported unit revenue decline, as average unit revenues from St. Louis are below the rest of the system. If you adjust it for the addition of TWA our unit revenue decline in the quarter would have been less than 10.5 percent. While the addition of St. Louis clearly contributed to our unit revenue performance in the first quarter, we are seeing some encouraging market share trends, which should help us going forward.

In a few minutes I will talk a bit more about the integration and the trends we are seeing. Let me first breakdown the revenue results by region. Our domestic unit revenues for the first quarter were down a little over 15 percent from last year, but improved from 22 percent decline that we experienced in the fourth quarter. The first quarter results were a mix of positive load factor performance and continued weak yields. Our load factor for the quarter rose 2.3 points from last year, while yields were down 18 percent. While the domestic weakness was generally spread across most of the network, we did see weaker performance in the key business markets relative to the leisure markets, particularly Florida and Hawaii. Internationally results for the quarter were slightly better than our domestic results, but still well below year-ago levels. Overall unit revenues were down 10.6 percent in the first quarter, which was an improvement from the 20 percent decline we saw in the fourth quarter of last year. Yield performance held up better than in the domestic markets down almost 11 percent, but load factors were flat with last year. Europe remained the weakest international entity in the first quarter. The traffic declines while not as weak in the fourth quarter as in the fourth quarter, we are still down 10 percent from last year's first quarter level. Yields also remained very weak, down 18 percent from the year ago level. So taken together this represented a unit revenue decline of 14 percent despite a capacity reduction of 14 percent. It does appear that there remains some lingering book-away effect following the events of last year, however this appears to be diminishing. Another area of weakness in the quarter was Latin America, and in particular deep South America. Clearly despite our strong position in the region, the economic troubles in Argentina and Venezuela have had an impact on both business and leisure traffic, as have relatively limited industry capacity reductions in the region. For the quarter our overall unit revenues in Latin America were down about 11 percent from last year on a load factor decline of just over 3 points and a yield decline of about 8 percent. By contrast our Deep South American unit revenues were disproportionately hit, down 21 percent versus a decline of less than 6 percent for the rest of the Latin America entity. Asia on the other hand faired significantly better. Unit revenues for the first quarter were actually up about 4 percent from last year due both to capacity reductions and somewhat easier year over year comparisons. During January we eliminated service to Osaka and cancelled service from Seattle to Tokyo, both of which contributed to a significant reduction in industry capacity to Asia during 1Q02. Driving to the unit revenue performance was strong load factor gain, up 10.5 points from last year's first quarter.

Let me quickly turn to the results for our Eagle and Cargo operations, which also remained weak during the first quarter. At Eagle we saw a unit revenue decline of 13 percent year over year during the first quarter, a little better than the domestic revenue per ASM decline experienced by the main-line operation. The Eagle's results were driven by weaker yields due in part to a longer average

. Load factors on the other hand were fairly strong showing an increase of 4.5 points from last year's first quarter level. Capacity at Eagle was down by about 1.3 percent from last year's first quarter level, as we continued to operate under the restrictions implicit in our main-line pilot contract that limits Eagle's growth while main-line pilots are on furlough. At our Cargo division revenues were down almost 24 percent during the first quarter. Key drivers for Cargo remain the reduced level of international capacity that limits available lift and certain restrictions on cargo and parcel shipments that remain in effect following the events of last September. But going forward while the re-introduction of some international flying will increase cargo capacity, the restrictions on cargo shipment will continue to depress revenue. On the cost side of the equation, unit cost for the first quarter came in better than we expected back in early January, up under 1 percent from last year's first quarter. While clearly fuel was a help in the quarter, we were certainly pleased that our various cost cutting initiatives have begun to bear fruit.

Once I run through the cost number, I will talk a little bit more about where we stand with our cost reduction program. Fuel prices did help during the first quarter, but recent trends may limit some of that help going forward. Our fuel costs for the quarter including the effects of our hedging program came in at just over 67 cents per gallon, down 23 percent from last year.

We also saw a significant contribution from reduced fuel consumption. With the addition of TWA, American's reported ASMs for the first quarter were up almost 3percent from last year's level without TWA. However, our fuel consumption was up just 0.4percent from last year's level. While the generally favorable operating environment clearly helped, we are also seeing benefits from our younger, more fuel-efficient fleet, now that we have retired the majority of our older 727 aircraft.

A number of other expense lines also contributed to our unit cost performance. One of the largest variances was in salaries and benefits. As we discussed last quarter we brought all the former TWA employees to American Airline's pay scales as of January, 01, which increased our labor cost relative to the fourth quarter. Additionally we have had many of our pilot crews flying shortened monthly schedules to avoid additional, more costly training expenses. While we have not called this number out as the special item, it did add well over 40 million dollars to expenses in the first quarter. The change to base commissions which took effect in March really had very little impact in the first quarter. Even though commission expense was much lower year over year, it reflected the relatively weak revenue environment and the mix that we have experienced recently. During the first quarter, we continued to see a significant portion of our revenue coming from online channels, which helped reduce our commission expenses. Our revenues through online channels were over 12percent of total flown revenue in the first quarter and that's up from under 6percent last year. Materials and repairs were lower than last year due to lower shop volumes and some benefit from our younger fleet as well. During the quarter we also reached an agreement on a settlement with some of our insurers regarding environmental re-mediation expenses mostly from our major facility projects at JFK and else where around the system. This resulted in a credit during the quarter, which offset expenses we have incurred in the past. We also performed better than expected in the other expense line, where a number of our cost savings initiatives roll up. These include items such as purchased supplies, outsourced services, costs associated with dependability, and a number of our TWA-related integration costs. However, as expected we continued to see much higher cost for insurance and security.

As I have mentioned before, our financial recovery over the past few months has been focused around what we refer to as the four Cs, Cost, Capacity, Capital, and Cash. Let me take just a minute to run you through where we stand on those various items. First, with regard to cost. As I have talked about before, our broad efforts to reduce operating costs wherever possible. Today we have identified a 175 initiative to cut cost and these cut across all departments and really focused on what we do, how we do it, and what value we or our customers derive from various activities. While we still have a number of initiatives under review we have implemented about a 120 of these ideas so far and collectively these initiatives should save us well in excess of 1.7 billion dollars during 2002, with a bit more than half of these savings independent from our capacity reduction. That means we should continue to see benefits even as we gradually restore the size and scope of the network over time. We should also see some benefit from the recently implemented commission cut as we move into the second quarter. Our second area of financial focus has been on capital spending. Clearly as we talked about last quarter, we have made some pretty dramatic cuts to our capital spending plans for 2002 and '03. In fact we have cut about 5 billion dollars in spending from our early plans for these two years. Certainly, a big chunk of those spending cuts were in the form of reduced aircraft deliveries, while we have also reduced facility and infrastructure cost as well. One additional area that has received a lot of internal focus lately has been our capital spending plans related to the TWA integration. As a result of our recent review we have been able to reduce our expected capital spending related to the integration by about 200 million dollars.

I will touch on this a little bit more when I give you an integration update. Clearly in this climate, it only makes sense to keep capital spending locked down. However, we will continue to invest in areas that are key to our recovery and long-term future.

As part of this plan we have actually increased our expected spending on things like check-in kiosks at the airport, and a totally revamped website at `AA.com` which was just re-launched last week. Both of these initiatives should enhance the customer experience and reduce operating costs. We are continuing to prudently invest for the future in airport facilities like the new JFK terminal, which is well underway and a new Eagle terminal facility at Boston, which should be completed later this year. The third leg of our financial recovery plan has been to do our part to match capacity with demand. As you know, we worked quickly to cut about 20percent of our capacity after the events September 11. However, as traffic has begun to return we have added back capacity where demand has warranted, while still keeping an eye on the total industry supply and demand balance. Despite the recent comments by other, we have not seen any surprises in the case of industry capacity restoration. Based on our analysis it looks like the industry's second quarter capacity will be down by about 11 to 12percent from last year's level. And at this point I anticipate that our capacity will be down a little over 11percent as well, normalizing for TWA. While it's still a bit early to look out much farther than that we would hope that the industry environment would be conducive to some degree of pricing recovery as we move into the peak summer months. Finally, the fourth part of our financial recovery plan has been to bolster cash and liquidity. While it does seem much of the industry has moved beyond the initial liquidity crisis that it says, we continue to burn cash each day although at a lower rate than in the fourth quarter. In addition, we had over 600 million dollars of capital spending during the first quarter. As our aircraft delivery deferral don't really kick in until the second quarter and beyond, we completed several financings in the first quarter in the form of tax-exempt debt and aircraft mortgages. The net effect is that we have allowed our cash balance to normalize the debt from the 3 billion that we carried at year-end.

But where does all this leave the balance sheet at the end of the quarter. While, we ended the first quarter with a little over 2.3 billion dollars of cash and about 6 billion dollars in unencumbered aircraft assets and as I mentioned last quarter we still have a 1 billion dollar uncapped short-term credit facility that gives us added flexibility with immediate access to that aircraft financing capacity. We received a second tax refund I mentioned earlier, which has added almost 400 million dollars in additional cash to the

. While we have been fairly successful in raising cash during the few quarters it has impacted our financial ratios. We ended the first quarter with 17.6 billion dollars of net debt, which put our net debt to total capital ratio at 78 percent, it's highest level in several years. Now clearly this level of debt is well above where would like to see it. However our debt-to-cap ratio remains one of the strongest in the industry and we intend to remain prudent with our balance sheet as we work to recover from the horrific events of past year.

Before I get into our outlook for the second quarter and take some of your questions, let me briefly update you on the TWA integration, which I mentioned earlier. As part of our effort to cut our capital spending requirements, we have done a review of our integration planning for TWA. Most of you already know that we stead up the integration following September 11 to help us both cut cost, but also begin to realize some of the revenue synergies. However, until this quarter we have not made any significant adjustment to the capital plan laid out for the TWA integration. But after a pretty thorough review we have made some changes that should save us well right around 200 million dollars in capital relative to what was expected to spend back when we announced the transaction details last May. We have also been successful in integrating all the headquarters' function, which has allowed us to reduce management support staff headcount that was associated with the former TWA by about 1,500 equivalent positions. While we have maintained a small group necessary to support the technical operations under TWA L.L.C's operating certificate, we are basically done with this part of the integration. Additionally, during March, the National Mediation Board declared single-carrier representation for our three major employee work groups - pilots, flight attendants, and mechanic and ramp employees. Under the NMB ruling, there is still a period of about 30 days during which the unions that formerly represented TWA employees can submit some sufficient showing of interest in the former TWA union to trigger a representation or election. In most cases, that would require a showing of interest in the form of at least 35percent of the combined work force. While Alpha has indicated that it will not seek representation, for the period filing will not expire for the flight attendants until next week and in two weeks for the mechanics.

So with the other work groups including our airport and reservation agents and those limited management heads that we brought over to American already integrated, the majority of the labor integration is behind us.

Let me also give you a brief update on the St. Louis hub and its performance. From an operational standpoint, the folks at St. Louis have been doing a fantastic job keeping the operation running smoothly and efficiently for our customers. In fact, St. Louis has had some of the best dependability numbers of any of our hubs over the past few months. Additionally with the integrated schedule we have put in place at St. Louis, we are beginning to see some positive market share trends. While the overall revenue environment is still a very big challenge, we are laying the groundwork for improvement as overall demand recovers. While we still have some work to do on the former TWA aircraft, the integration remains very much on track.

Before I move on to our outlook for the second quarter, I want to give you a brief update on our operational performance over the past few months. As you may recall from previous discussions, we have implemented a variety of initiatives during the end of last year that were designed to shot up our operational performance. Despite the complexity of our operation, our people around the system have been able to dramatically improve our DOT performance statistics and to improve our relative ranking versus our key competitors. During the first quarter it looks like American will rank second in on-time performance, with over 83percent of our flights operating on time. That's almost a 10 point increase from the same period last year, when we ranked fifth and contributing to that performance was the completion factor of almost 99percent for the quarter, up over 3 points from last year. Additionally, we have also seen a complete turnaround in our consumer complaint numbers. Our firm line people are doing a terrific job and it's really showing through now. Since December, we have ranked No.1 or No. 2 in the lowest number of DOT complaints, up from fifth or sixth place

during the same period last year and we continue to have the lowest tonight boarding rate of any large network carrier. While the demand environment for air travel still remains weak we are continuing to deliver great service to our customers, who of course also have been

from the best coach product in the sky with more room.

Let me now turn to our outlook for the second quarter. As I mentioned earlier, we expect total American capacity, including TWA to be down about 11percent from last year's level in the second quarter. Since a number of you have asked, I will give you our current estimate of capacity for the remainder of the year recognizing that it's still subject to change. For the third quarter, I expect we will see capacity down about 2 to 3percent from last year's actual levels, recognizing that last year's third quarter included the shut down of the ATC system and reduced capacity for the remainder of September. For the fourth quarter it looks like the reported capacity will be up about 12 to 13percent, but that still represents a reduction of about 7percent from our pre-September 11, capacity level. For the Eagle, capacity will be restricted given the scope limitation we have in place currently. I would expect Eagle's reported capacity to be down about 3percent from last year's level in the second quarter and then up about 7percent and 14percent respectively in the third and fourth quarter as we lap the post-September 11 reductions from last year. At this point we expect mainline traffic to be down about 11percent from last year's second quarter, similar to our capacity decline and at this point, our booked load factor for the quarter is below last year by about 1.5. Domestically bookings are down less than a point from last year. However, we have seen additional weakness internationally where bookings were up 3.5 points from last year's level, driven in large part by our Latin American markets. Turing to expenses for the second quarter, we expect to see some continued unit cost pressure from the reduced levels of capacity as well as the recent run up in fuel prices. At this point, we would expect second quarter unit cost to be up about 2 to 3percent from last year's level at around 11 cents. Obviously, we will continue doing everything we can to keep cost under control. At the AMR consolidated levels, which includes Eagle, our unit cost will be about 11.5 cents, also up roughly 2 to 3percent up from last year. As I mentioned, fuel costs are on the rise, we are now expecting to pay about 78 cents a gallon in the second quarter, which is well above our previous expectation, but still down about 6 to 7percent from last year. I should point out that we do have some protection in place against rising fuel costs primarily through options. We are currently hedged on about 45percent of our anticipated second quarter fuel consumption at about 25 dollars per barrel of oil. We are also hedged on about 40percent of planned consumption for the back half of '02 at the equivalent of about 23.50 per barrel. Though costs should remain under control I expect the revenue recovery to continue to be painfully slow. At this point, we expect to report another loss again in the second quarter, though it should represent a similar sequential improvement to what we experienced this quarter. While it looks like the rest of 2002 will remain extremely challenging American is relatively well positioned in the industry. Our operations are running smoothly and our employees are delivering great service to our customers. The successful integration of TWA also gives us one of the pre-eminent route networks that will serve us well as the demand of air travel continues to return. And we are continuing to invest in products that makes sense in today's environment like our new `AA.com`, which we launched this week as well as the OneStop airport devices. We still have one of the strongest balance sheets in the industry, which allows us considerable flexibility in these tough times and we have a stable of other assets like our young streamlined fleet, the advantage program, and some of the most professional employees in the business all of which should help us capitalize on the industry's recovery.

Now I will be happy to take any questions you might have.

At this time, we will begin the formal question and answer section of the call. If you would like to ask a question, press star one. You will be announced prior to asking your question. To withdraw the question, press star two. Once again, to ask a question, press start one now.

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

Hey Tom, just a few quick questions. You did respond to the unusually high unit labor costs, you know, reflecting the 40 million, I guess you call it semi-unusual expenses. But nevertheless still short of larger year over year increase in the fourth quarter and I assume you would have had similar expense issues there and you think that TWA would have no more junior work force, I believe when they were combined with AMR pay scale. Could just elaborate a little bit more on that?

Yeah I can. Brian, if you look at our labor costs for the first quarter versus last year, it's up around 340 million dollars year over year. And if you break that apart, about 150 million of that is because of rate increases year over year. A chunk of that are our new contracts and a chunk of that is the fact that we brought the TWA folks on to the AA labor rates, which obviously raised the average costs. We also have, as I mentioned about 40 million dollars in there for the cost of carrying extra pilots. Our pension costs were up year over year pretty considerably and that accounts for about 50 million dollars in the quarter and then about another 50 million or so is due to seniority increased year over year because of the way the contracts are structured. So, there are lots of things going on in those numbers. If you look at the productivity numbers, year over year our ASMs are up a little under 3%, comparing this year with TWA to last year without TWA. And our headcount is actually down about 0.5%. So, productivity is moving in the right direction, but we have obviously got some wage-rate pressure and pension costs aren't helping us out.

Ok. That's helpful. Just one other quick question. Don Carty has been quoted that you folks are going to be looking at potential fundamental changes to the way you do business. Is that a general statement or should we expect some dramatic changes over the next few months?

I think it is a general statement, Brian. You know, we obviously, you know, given the losses that our company and the other bigger airlines are sustaining now, we certainly have to go about looking at every aspect of our product and cost structure. And we have to look at it through the lens of where we stand versus our low cost competition. Obviously South West has been doing pretty well throughout this difficult time. So I think the challenge for us is going to be to build and fortify those aspects of our product, service, and network, which drive revenue premium without driving disproportionate costs and those that generate more costs than revenue we are just going to have to eliminate. On the cost side, if you sort of look at our model versus. South West for example, the advantage they have is largely driven by product and fleet simplicity, labor rates and flexibility, distribution costs and asset utilization. Overtime, I think there is going to be a fair amount of convergence in each of those areas and we are going to need to drive that convergence. Obviously, we have made a big step towards fleet simplification, cutting in half the number of fleet types we operate over the past year. And that generates some big savings in training, maintenance, inventory and it ultimately drives some more dependable operations and we are looking for every opportunity to simplify the product without sacrificing what's most important to our customers. If you look at the labor cost difference, I would expect some form of pattern bargaining, which is now emerging in the industry. We will tend to narrow that labor cost up in the next contract around. With the latest move on commissions and the push of more of our revenue through online channels, the distribution cost gap is closing very rapidly. And I think, as we move to a more streamlined fleet and as we sit down and reevaluate the way we operate our hubs, we are going to have to find ways, we are going to have to find ways to drive greater asset utilization. Overlying all of this, we as an industry are going to have to come up with a more sensible way to prize our product. Clearly, we are in a very painful period of adjustment as an industry and as a company. But, I think we are going to come through it okay. But you will see some changes.

Ok. Thanks, Tom.

You bet, Brian.

Our next question comes from Gary Chase from Lehman Brothers.

I am just wondered, on a couple of things that you had mentioned. First, when you were just breaking out the labor variance year over year, the 340 million. Did the 150 million include, that you mentioned on rate increases, does that include any assumptions on accrual for the pilot contracts that's amendable currently?

Yeah, Gary. For obvious reasons, it is not something we typically disclose with a lot of specificity. This is obviously a pretty unusual situation and that the industry is in crisis with our two largest competitors trying to cope with recent pilot contracts, a pretty big way to increase. And at least one of them appears to have concluded those increases as not affordable. In situations with odds as that, we are of course committed to paying market wages for market productivity and flexibility. It's just a little unclear what's affordable and what's market at this point. But, I think It's also important to point out that while we currently have a wage weight advantage versus United and Delta, we are disadvantaged in the form of work rules and regional jet limitations, both of which costs us lot of money. While, at this point I think it is unclear whether the United and Delta contracts will stand the test of time. If they do, it is going to be essential that we get the work rules and regional jet

to go along with the pay in those contracts. Now all of that is backgrounded. It's a way of saying, you know, It's obviously not possible to enact those sorts of things retroactively from contract date. Accruing for a new contract is a bit of an art. Having said that, we have included our best gaps that where we think that is going to shake up.

Just a more general question. I mean, the industry has seen really strong loads in the last couple of months. You know, you had mentioned, as everybody has, yield really is the problem. Is there a solution in sight as you see it? Is there something that the industry can do to address this right now or is this a simple matter of demand recovery? You know, if demand is just too far off now given where we are with capacity that took, you know, in order for anything that you could do to be effective.

I think it is going to take a lot of things. You know the come together here. Clearly the supply and demand equation as you look out later in the year is going to be a bit more favorable than it is today. I think that is going help restore a little bit of order to the pricing equation. That is going to help the top line. You have seen some efforts by some around the industry to firm up pricing. I think you will continue to see that sort of thing and at some point the supply/demand equation would be such that those things will begin to stick. It is also encouraging that, you know, a fair bit of cost has been taken out of this industry and a fair bit of fleet streamlining has been done. So all of those things, I think are going to help the industry's recovery along. But as we have said before, it is a very very deep hole that we are coming out of now. I don't know how quickly the economy is going to recover, what sort of demand, particularly business travel demand, that's going to produce. But we continue to take pretty cautious approach looking ahead.

One last quick one Tom. You had mentioned some P&L drag from TWA. I was under the impression that most of that was capitalized. Is there any thing significant in the quarter that we should be thinking relative to integration cost that are at drop out, going forward?

There is a little bit in there. You are right, most of it is capitalized. The couple of hundred of million that I was talking about was mostly capital type stuff like aircraft configurations and systems cut over work. I think it maybe worthwhile commenting a little bit more on how we are coming sort of overall in the capturing the economic benefits we had expected from TWA. Clearly on the cost side, I think the news is pretty good because we were able to cut over TWA from

sooner than we expected. We were able to get its cost saving center and we are driving greater labor efficiencies than we originally anticipated when we shared the numbers with you last year. For example, we initially thought, we will be able to eliminate about 1,100 heads from staff overhead. We actually got 1,500. By putting our airport operations together and staff more efficiently, we will save about 1,200 positions that we have not anticipated. Taken together, that is about another 80 million in cost savings than we have projected and that is setting aside the 200 million dollars reduction and the integration cost. So I think the cost story is coming together reasonably well. The big question for us Gary is revenue synergy. With the revenue environment and the industry is such disarray that is pretty hard to measure. We keep a very close eye on the revenue premium versus the industry. What we have seen is that after September of last year our unit revenue versus the industry took ahead. And that impacted

little bit in December - January time frame and by February our combined American TWA unit revenue premium vs. the industry in now in positive territory year over year. We are starting to see our share data improve not only at St. Louis but also some of our big focus cities. I guess the punch line all that is, while it's pretty early days in the integration, it is starting to look like a reasonably well positioned with the TWA integration.

Thanks, Tom.

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

Good Afternoon. Couple of things. This is just a housekeeping, where on the income statement was this special charge reported?

It's in the tax line.

Can you just update us on what is happening with RJ capacity relative to your pilots contract? I know there has been a fair amount of shuffling of pieces around. I just wondered where you are on that front?

Yeah. Let's see if I have got it here handy. I guess probably the best answer to that question Jim, by giving a little bit background on the total Eagle scope issue, which is a little bit head hurting. So just let me just run through it, so everybody is clear on where we are. As I think everybody knows following the events of last September, we unfortunately furloughed about 13,000 employees including some number of pilots in October of last year. Furloughing of pilots in both the provision of the scope clause and the ABA contract which limited our ability to code share on commuter affiliates including Eagle and the other American connection carriers, which are

, Corporate, and Trans State. The scope provision sets a maximum limit or a cap on the number of commuter ASMs that can operate with the AA code so long as any APA pilots are on furlough. Before September 11, Eagle's original '02 plan called for some growth as it continued to accept new RJ deliveries. In addition, we expected some modest growth in '02 from the American connection carriers, which leaves the St. Louis hub. So keeping those original growth plans in place would have caused our commuter ASM to exceed the cap. That's where the crux of the problem. So to honor that contract provision, we began looking at ways to reduce AA coded commuter ASMs while minimizing the impact on our customers and the network and our other employees. We took a couple of steps here. First step was back in February were we removed a roll of seats from Eagle Turbo Prop Airplanes. We cancelled some select routes and we reduced frequencies in certain markets and closed three stations to keep the ASMs below the cap while still letting Eagle keep taking RJ deliveries. As I mentioned before, we have been looking at a number of other options to maintain compliance for the remainder of '02 including the possible sale of Executive Airlines and

. This month though we decided that the next option for maintaining compliance with the cap would be to remove in phases the AA code from the American connection carriers at St. Louis. Our plan will remove the AA code from those markets that will impact the least amount of theatre traffic and thus revenue if those passengers chose to move to another carrier. But in an effort to preserve that theatre revenue to American's mainline service, we are going to enter into a code sharing and frequent flyer arrangement with American connection carriers and Corporate Airline to permit that carrier to market American's mainline services under their three C designated code. That is going to allow Corporate to market its brand between the spoke cities it operates and points beyond St. Louis operated by American. While none of that stuff is great and it is going to slow the rate of our recovery we think it's the next best option to remain in compliance with the APA contract while minimizing the impact on our customers and revenue loss.

Just one final question, just to clarify something you said earlier. I thought I heard you say that you expected a similar sequential improvement in results from the first quarter to second quarter, as you would have seen from the fourth to the first. Is that correct?

Yeah. That is correct.

Ok. Great. Thank you very much.

You bet, Jim.

Our next question comes from Michael Linenberg from Merrill Lynch

Hey Tom. Jut a couple of questions. Looking at the income statement, your other revenues were down about 28%. Can you talk about what was behind that sizeable fall off?

There's a bunch of stuff in there. The biggest piece of it is some of our contract maintenance work i.e., maintenance work we do for other airlines has been off a bit year over year subsequent to September, 11. Code share revenue falls in that line. That is also down year over year.

contracts that we do for other airlines at various airports around the country are down a bit year over year, just on lower capacity. Our charges for non-revenue travel are down a bit year over year because we put some restrictions in place on that following the events of September. So a whole lot of different things in there. Some of that should begin to recover a bit this year.

Ok. Just another question regarding the income statement. Looking at interest expense, that's a result of the amount of debt that you have taken on post 9/11, the 166 million. Is that the level that we should look at going forward, sort of about 160 million per quarter of interest expense?

The guidance I gave on the last call was that we thought that interest expense would be up around 300 million dollars year over year. This is a little bit more than that. I think that's what the guidance is all about, right Michael.

Ok. Then just lastly and this is an add-on to I guess Jim's question about Eagle. You are still on plan in taking delivery of the 70 seaters, right?

Yes. We will continue to take delivery.

Ok. Thank You.

You bet.

Our next question comes from Sam Buttrick from UBS Warburg

Hai Tom. I am a little confused by your comment on similar sequential improve if by that you mean in dollar term. That surprised me because you have got more seasonal sequential improvement from Q1 to Q2 than you had for Q4 to Q1. That statement strikes me suggesting that the rate of recovery slows remarkably from Q1 to Q2, and I am not sure that's really what you are saying?

I would stand by what I said there. We are expecting sort of a similar sequential rate of recovery. That may be conservative, I hope it is, but at this point we are yet to see the sort of yield improvement that I think is going to lead to the sort of recovery that we would all like to see. So until we see that sort of thing, I think I would be reluctant to make a more aggressive forecast into the second quarter.

Secondly, the company has consistently scribed more room in

to the `win-win` program and all that stuff. I know there is a lot going on, plus and minus in the revenue line. Can you point to anything that, you know revenue shares dipped in specific markets, whatever it is you want to look at that quantifies the benefit associated with that product enhancement?

Yeah. You hit the nail on the head, Sam. It is so difficult to measure anything in this sort of environment. Certainly we have seen some improvement in share versus our biggest competitor. Again there are a whole lot of variables in that equation. We have made a number of big wins of corporate account. We are continuing to see our market share recover from a hit that it did take subsequent to September of last year. We are particularly encouraged by the gains we have made in our focused city markets like Boston, L.A., San Jose and elsewhere along the West Coast. We have been able to hold on in most of our share gains in Chicago and we have actually increased our share in St. Louis or South West. All in all the share gap data is improving. Domestic share gains are positive in the first quarter on a year over year basis. We've got more corporate share in Chicago than does United. They don't give you the answer, but they seem to suggest that more room in having some of those desired effect. Having said all that, Sam. I think, as I mentioned earlier on the call, you know, everything is on the table right now as we re-evaluate our business. We are going to continue to take a long, hard look at our rooms. The message to everyone listening is, if you like it's

.

Ok. Thanks very much.

You bet.

Our next question comes from Helane Becker from Buckingham Research Group

Thank you very much operator. Hai Tom.

Hai Elane.

You mentioned about pension and you talked about TWA being a cause of that. I noticed in your 10-k that you are using 9.5% as your rate of return. It currently varies between airlines, some use 9% and some 10%. You are kind of in the middle. Could you address some of those issues and maybe talk about how much of the pension under funding is actually related to TWA versus AA?

At the beginning of this year we decided to reduce our long-term rate of return assumption from 9.5% to 9.25%, which as I understand is a low end of our industry and more towards the low-end of what most of corporate America uses. We have always been very conservative in our accounting assumptions and we think this is a sensible thing to do in line with that practice. Our pension asset return at this company under the management of AMR Investment Services has consistently been among the best in the Fortune 500. We have ranked in the top 10% of all companies pensions returns over the past year, over the past five years, and over the past 10 years. As a point of reference, our past five-year return was 10.5% and over the past 10 years was 11.5%. We think what we have done here is very conservative, but given the world we live in right now we think being very conservative is the place to be.

Ok. How much of it do you think will be under finance related to TWA?

It was not part of the liability as of year-end. Our funding was a little over 90% on an AVO basis.

Ok. Thanks very much. I appreciate your help.

Thank you, Helane.

Our next question comes from Glenn Engel from Goldman Sachs & Co.

Good Afternoon.

Hai Glenn.

Can you talk about how many people come back when you get back to the schedule that you were talking about this summer?

Yeah. If you look at right after September 11, we eliminated little under 20,000 positions. As of this point, at the end of March about 5000 have returned mostly at the airports and agents and ground handlers and some mechanics. As you look out towards the end of the year, I would anticipate maybe another 3000 would be back. So we are going to be pretty considerably small on a headcount basis rolling forward than we have been. A lot of that has to do with some of the productivity initiatives that we have put in place in rolling out technology and so forth.

Can you give us a sense of how the

proceeded through the quarter?

I will see whether I have got it handy here. It was down almost 17 percent in January, down about 12.5 percent in February, and down about 12.5 percent in March.

So no improvement from February to March?

No.

Thanks.

You bet.

Our next question comes from Jamie Baker from JP Morgan

Hai Tom. I am still unclear about your cost performance in the quarter. If I remember correctly, January and February cost per

ex-Eagle was 11.4 and 11.8 cents respectively and your guidance for March was 11.5 cents. Based on the reported cost per ASM today of 11.3, March would have had to be something like 10.6 or 10.7 per mile which is a positive variance of about 100 million dollars, which seems like a lot to me. Was there anything unusual about March to explain this apparent cost variance?

I think the only thing unusual is the one I mentioned earlier and that is the environmental re-mediation recovery. It wasn't a big number. It was about 15 million dollars pre-tax. Let me just back up a thinking on that Jamie, because I think it is worth commenting on. When we closed the year last year, I think at the last call I said I thought unit cost would be up in the neighborhood of 5 to 6 percent. Obviously we did a lot better than that. There were a couple of key reasons. The most significant was, with a more dependable operation, our completion factor was up about 3 points year over year. We threw about 3 percent more capacity than we had originally thought and that obviously had some effect on cost. But because of less disruption we also saved a lot of money in terms of the regular operations pay and passing the hotel cost. So it really had a double whammy effect on our cost. In addition, we have been cutting costs here pretty quickly. It is also worth saying that we deferred our budgeting and planning cycle a couple of months earlier this year and we had all of our departments around the company, busy grinding away on costs rather than doing detailed budget. That had a sort of two effects. The first effect was we had a less detailed forecast to operate on than we typically do. So it was a little less precise forecast of cost. But more importantly I think we generated a lot more cost savings opportunity around the company, which is really what we are after. We now have a plan in place. I think we will have a little bit more precision.

I guess I am just surprised because it was March, 22 when you provided the update for the month of March. So I was just surprised to see so much variance. Second question and again I botherize for a follow-up, yet again on Jim and Sam's regarding your comment on sequential earnings improvement, are you are looking net income ex-charges? So on an EPS basis, second quarter loss will be about twice where the street currently is. Is that correct?

I am not sure I will go quite that far. But it is on an ex-special charges basis. We will try and get you a little bit more specifics about what happened in March.

Ok. Thanks a lot.

Let's take one more question.

Our last question comes from Phillip Bagley from Standard & Poor's

Hai Tom.

Hai Phil, how are you?

Good. You mentioned that cash usage has declined through the quarter. Is there a number that you are attributing as daily cash operating loss at this point?

Our cash burn was about 5 million dollars a day in the first quarter, that's down from close 9 million dollars in the fourth quarter. As we discussed before, those cash burn numbers are heavily seasonal and tend to jump around a little bit. However, we did continue to see sequential improvement in our cash burn throughout the quarter. January and February were the toughest months. However, by March cash burn was much lower than 5 million that I gave you. It's probably worth clarifying how we define cash burn. I think everybody might have a little different definition of that and it's important for comparison purposes. We use a very simple definition. We define it as pre-tax loss less depreciation and amortization, divided by the number of days. That's how we get to the roughly 5 million dollars a day. It's unclear to me that the same definitions are being used across the industry based on some of the things I referred to earlier this week.

Ok. Thanks very much.

You bet, Phil.

Thank you all for being on the call today. Those of you listening it from the media hang on the line and I will be back with you in just a few minutes and will be happy to answer your questions. Thanks.

This concludes today's conference call. Media please stand by your question and answer session will begin shortly. Thank you.