美國航空 (AAL) 2002 Q2 法說會逐字稿

Good afternoon and welcome

to the American Airlines second 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, you may disconnect at this time. I would

like to introduce today's speaker, Mr. Jeff Campbell,

senior vice president of finance and CFO of AMR.

Mr. Campbell, you may begin.

Thanks and good

afternoon, everyone. Thanks for joining us on the

call today. As most of you know, I took over as

AMR's CFO last month and I have the task of

filling Tom Whorton's shoes. I have had a few weeks

to get settled in and Tom passed on one key bit of

advice. The advice was if you are going to say anything,

make sure you run through the safe harbor disclosure

first. Let me start there.

Many comments today on matters related to earnings

growths, cost estimates and traffic will factor and

fuel costs will constitute forward-looking statements.

These matters are subject to a number of factors

that could cause actual results to differ materially

from our expectations, including general economic conditions,

commodity conditions, government regulation, uncertainty

and domestic or international operations and changes

in the company's business strategy, any of which could

affect our actual results.

Now, with that out of the way, there are a few things

I would like to accomplish on the call today. First

off, I want to run through the second quarter results

and provide color on what drove our performance. Second,

I would like to talk about the efforts we are undertaking

at AMR to address the financial situation, both

near-term changes and longer-term structural adjustments.

I will also talk a little about trends for the third

quarter and take any questions you might have.

First, let me walk you through the numbers for the

quarter. As you can see from the results we released

this morning, the second quarter was clearly a very

challenging one for American. AMR on a consolidated

basis reported net loss of $465 million, excluding

special tax charge, which was 360 million below last

yore's second quarter loss before special items. On

EPS basis, that equates to a loss of $3 per share

for the quarter, down $2.32 cents from the second

quarter of 2001. Including special items, AMR

lost $495 million or $3.19 this year, up 10 cents

per share from last year, also including special items.

Let me take a minute to remind you about the special

tax charge that impacted our results for the second

quarter. As Tom would have talked about last quarter,

the economic stimulus package contained provision regarding

net operating loss or NOL carrybacks which provided

benefits to us at AMR. Under the old tax law,

NOLs could be carried back and carried forward for

20. The new law extends it from two to five years

for NOLs arising in 2001 and 2002. Under the new

law, AMR was able to use large 2001 loss and any

2002 NOLs to recover the federal income paid from

1996 through 2000. In January, we used a portion

of the 2001 NOL to obtain $265 million tax refund,

which was the maximum available under the old two-year

rule. Under the expanded five-year carry back period

we were able to use the 2001 NOL to obtain a $393

million tax refund in April. Collectively, we have

received tax refunds totaling $658 million.

However, a few things in life are ever free. By

taking advantage of the expanding NOL period, we

had to undo foreign tax credits we used in years '96

through 2000. During these years, tax benefit was

reported before income tax was paid and used as credit

against the U.S. tax liability. The elimination

of '96 to 2000 tax liability means the forward tax

credits cannot be used in those years and must be carried

forward to future years. We expect the carry-ford

period of five years for the tax credits will expire

before the credits can be used. While the reversal

of credits does drive a charge of $30 million or 19

cents per share in the quarter, it is pretty small

in comparison to the roughly $250 million present

value we received for NOLs under the new tax law.

Let me turn to American's revenue performance. For

the second quarter, our system unit revenue was down

10%, versus 14% decline in the first quarter. Our

system load factor for the second quarter of this year

was 71.4%, down 0.4% from last year. We were able

to fill about as many seats as last year, they were

with much weaker deals. 9.5% down in the quarter.

To break down these system results by region, we

saw our domestic unit revenues for the second quarter

down 12% f last year, compared to 15 and a half percent

decline we experienced in the first quarter. American's

domestic load factor for the quarter was flat, while

yields fell by 12%. Worth noting, key business markets

remain very weak. Leisure markets in places like

Florida and Hawaii have held up much better. Internationally

our unit revenues were down 5% in the second

quarter, versus over 10% decline we saw in the first

quarter of the year.

This was mostly yield revenue with yield down 4%

and load factors by less than 1 point. To break those

out by region, our European markets were mixed in

the second quarter. Overall load factor in Europe

was up by 1 and a half points from last year's second

quarter, but yields fell 5%. As a result, unit revenue

was up by 3% f last year's level. Total results

in Europe were split between weakness in the U.K.

markets, where unit revenue fell significantly. Strength

in the continental European market where we experienced

increase.

As we have discussed a lot recently, Latin America

and deep South America, remain weak. Mexico and

the Latin entity has held up better. The instability

in Argentina and Venezuela impacted business and

leisure traffic. For second quarter unit revenue

in Latin America was down 9% from last year on low

factor decline of 4 points and a yield decline of 3%.

However, in South America, unit revenues were down

over 15%.

If you were to exclude Argentina, Brazil and zens

Venezuela, the rest of Latin America saw decline

of just 4%. In contrast to the first two international

entities, pacific unit improved in second quarter.

Even as we took advantage of the strength to add

new service from New York to Tokyo. Unit revenue

for second quarter was up 3% f last year, driven by

stronger demand and reduced industry capacity. Despite

starting the new JFK route in April, our load factors

rose 5 points, while yields were up 3%.

Let me now briefly touch on the results for the Eagle

and cargo operations. At Eagle, unit revenues fell

by 11% year over year. While yields fell 18%, in

part due to longer average phase length. Load factors

rose by 5 points during the second quarter. Consistent

with the scope limit, capacity for the second quarter

was down 5% from last year's level. As we have discussed

previously, our Cargo division revenues are impacted

by drop in cargo demand, compounded by the significant

restrictions on cargo shipments for security reasons.

As a result, cargo revenue fell 25% year over year,

during the second quarter.

There is resolution to the cargo resolutions currently

in place, we would expect cargo revenues to remain

depressed. Let me turn briefly to the expense performance

for the second quarter. Unit cost for the quarter

came in better than we expected at the beginning of

the quarter, up only half a percent from last yoor's

second quarter, despite the challenges of being 10%

smaller than we were a year ago, having higher contract

rates with two of our union represented work groups.

Fuel prices during the second quarter remained below

the year ago levels. The second quarter as a whole,

average main line fuel price, including the effects

of hedging program, came in at 75 and a half cents

per gallon, down 9% from last year. While fuel prices

did help in the second quarter, we received less benefit

than we did in the first quarter, when average fuel

price was down 23% from the year ago level.

We also continue to see fuel consumption benefits

during the quarter due to the retirement of last 727

in late April and due in part to myriad of other fuel

conservation efforts we have undertaken. Put that

into perspective. During the second quarter asms

were down 10% from last year. Total fuel consumption

was down 12%. In addition to fuel, the elimination

of base commission that took place in March, began

to have an effect in the second quarter. During the

second quarter of last year commission as percent of

revenue was 5.1%. This year, it is down below 3.8%.

Much of this change is due to the elimination of

base commissions in the U.S., the growth from online

distribution channel did also help it. During the

second quarter, 14% of our flown revenue came from

online sources, which is up significantly from last

year's 8%.

Food and beverage expenses were also lower this quarter

than last year, down 18%. While it appears we will

still see significant savings this year from the changes

we have made to food service, competitive factors on

this one seem to be working against us. Carriers

have recently added back food service, even on short

flights. Most of the other expenses also show the

quarter - (cut out)

this drop in demand affects everyone, there are several

issues causing American's revenue to lag the industry

a bit in the second quarter. The first issue is the

geographic distribution of American's network. We

have more capacity and those entities have been relatively

weak. Latin America, United Kingdom in the domestic

market. We have less capacity than the industry where

revenue performance has been relatively strong, Pacific

and Continental Europe. If you adjust network capacity

mix to the average of the other large domestic carriers

and apply our actual results, our year-over-year unit

revenue decline would have been 2 and a half points

better than we reported.

The second issue driving our under performance is

overall domestic demand for the industry did not return

to the level we had expected in the second quarter,

as I mentioned a minute ago. As a result, we probably

had more capacity in the second quarter than the industry

average and than we needed, but certainly didn't help

our yield.

Third, given traditional focus as a business travel

dominated carrier, we historically scheduled the airline

for the convenience of the business person. Business

travel has fallen more than leisure travel and given

the excruciating slow trend of business traffic, our

network was too heavily skewed to traditional business

markets and not optimized enough. We continued in

the second quarter to see solid marketshare gain in

most of the major markets, as well as from the corporate

accounts.

Finally, the last factor impacting us is the growth

in rj where competitors have clearly hurt us in

the domestic market. The capacity of Delta and Continental,

we have seen increase in the amount of RJ flying

taking traffic, which would otherwise have connected.

No one can be certain how long the overall fall-off

in industry demand is going to last or how much of

the revenue shortfall we have influenced is driven

by difficult secular effects, but we can make changes

at American to address our unique revenue challenges.

We are addressing the entity mix by trimming Latin

America and total capacity beyond the original plan

for the back half of the year to be more in line with

where we think industry should be and demand is likely

to end up. Finally, to address the continued weakness

of business travel, we are reallocating business to

leisure markets where we can better utilize the assets.

All of these changes are going to help us better

balance supply and demand in the near term, they do

not address the underlying shift in consumer behavior

that are impacting industry revenues. Some portion

of the recent revenue environment is certainly cyclical

in nature. Leisure traffic continues to become a

larger portion of carrier's passenger mix. Pricing

transparency has been heightened by the Internet popularity

and the continued growth and consumer acceptance of

discount carriers all are driving secular shifts in

a revenue environment. To demonstrate the impact,

in the last year's second quarter, a bit over 65%

of our domestic ASMs were in competition

can low-cost carriers. Second quarter of this year,

the number is up over 75%. That is a 10-point increase,

just one year.

This is in part, why we have undertaken a comprehensive

review of business, as you heard our chairman talk

about. While we have no intention of becoming a large

discount carrier, it is clear we need to adjust business

and our cost structure to better match the revenue

environment we face. We historically maintained significant

revenue premium to carriers like Southwest, but

at the same time, the cost structure has been higher.

This model has been profitable during periods of

strong demand and limited discount competition, it

clearly has not returned acceptable results during

periods of weak demand, growing price competition.

That being said, there are parts of our structure

that will continue to drive revenue premium, even in

the face of growing discount competition. Our premium

cabins, airport lounges, the reach of our international

network, the strength of loyalty program, all contribute

positively to our revenue results.

However, for a growing percentage of traffic and customers,

particularly domestic coach customers, revenue we

were able to generate does not offset travel cost structure.

To address this imbalance, we are exploring ways

to better align cost structure with the revenue reality

we face. Much of our focus is on finding ways to

improve the productivity of people. In addition,

we are looking at everything we do, processes, procedures,

the products we provide, to understand what value we

are adding at what cost. At the same time, try tog

provide customers with more controlled choice. We

are very focused on cost, we are also focused on the revenue

front, including benefits that may exist for the modified

pricing structure.

We have begun to implement changes designed to simplify

and streamline our operation. Our fleet simplification

program will reduce costs overtime and increase productativity.

We are implementing adjustment to the schedule.

Chicago, we have shifted from a scheduled characterized

by highly-peeked banks designed for optimal schedule

connections to one that better utilizes our assets

both in the air and on the ground. It may take time

to see the benefits, we quantified significant savings

in terms of aircraft, facilities, staffing requirements.

At the same time, our new schedule eases operational

challenges by better disbursing our operations throughout

the day.

In addition to schedule changes, we have accelerated

and enhanced deployment automation technology.

These enhancements both improve the productivity

of our people and simplify and streamline the airport

experience for our customers.

Now, these changes are visible and are just the beginning.

Over the coming months, expect to see us begin to

implement further changes to the way we do business.

Some will be more apparent than others. All are

designed to simplify operations, improve productivity

and reduce cost to better match the revenue environment

we will face in the future. One example of a change

we announced last month is our plan to move to all

electronic ticketing by the end of next year. Being

able to eliminate costly paper tickets will improve

the efficiency of our revenue accounting operation

and will expedite airport agent's ability to check

passengers and address any changes they may need to

make. It will also eliminate the cumbersome task

of translating millions of bits of paper next year.

We have identified 200 unique initiatives being implemented

or in the process of being evaluated. Not all are

large-dollar ideas. Some changes may produce changes

of $4000 a year. Collectively, they can make a substantive

contribution. More importantly, however, is the

fact we are approaching our business in an entirely

different way, simplicity will be paramount. We will

use technology wherever possible, to enhance productativity

and to focus on driving value our customers desire

and are willing to pay for.

While I am not yet ready to quantify these efforts,

I think it is fair to say we expect them to be very

significant. Other results will show up as reduced

operating costs. Some will result in enhanced revenue

and others will materialize over time as a more efficient

use of assets requires less in the way of capital spending

and infrastructure. Moving forward with this effort,

we will certainly communicate progress and highlight

some of the changes we have implemented.

Now, let me turn briefly and run through the balance

sheet at the end of the second quarter. We finished

June with $2.6 billion in cash and $6 billion in

aircraft assets. Additionally we are in the midst

of marketing a tax exempt deal at JFK and I encourage

any of you interested to call. (inaudible). We

expect to price and close this transaction shortly.

We also continue to have good access to capital markets

through the added debt we have taken on. The debt

is negatively impacted our financial ratios. We ended

second quarter with 17.7 billion in debt, putting net

debt to 80%. While this is clearly higher than

in many years, it is still below the level we were

at during the downturn of the early 1990s. Overall,

our balance sheet and cap ratio and liquidity remain

amongst the strongest in the industry, despite the

challenges we have faced the past year.

Now, before I move on to the outlook for third quarter,

let me take just a minute to update our operational

performance over the past few months.

As you are aware, we have been very focused over the

past few quarters of ensuring operational performance

is running as smooth as possible. To help with this,

we implemented a variety of initiatives designed to

shore up our operational performance. I am pleased

to say we continue to see good results. Our people

all around the network have done a great job improving

DOT performance statistics on absolute basis and

relative to our competitors. During the second quarter,

it looks like American will rank second or third in

all-time performance among the big six carriers with

83% of flights operating on time. That is about

a 5 point increase from the same period last year,

when we ranked fifth. Contributing to the performance

completion factor of 99% for the quarter, up from

97% last year.

We have also reported solid performance in both consumer

complaint and denied boarding metrics. Based on available

data through May, we ranked second in fewest consumer

complaints and best in denied boarding. Let me turn

to outlook for the third quarter.

As I discussed earlier, we adjusted capacity expectations

for the third quarter. Based on revised plan, I

would expect our reported mainline ASMs to be down

2% from last year's third quarter. Given the capacity

restrictions we face, I would expect to see Eagle

capacity down about 1% in the third quarter. Our

systemwide book load factor is currently down 4 and

a half points from where it was last year.

Since we have seen general shift toward closer in

booking, I would expect the traffic for the third

quarter will be about flat to last year's levels.

This would indicate a slight increase in system load

factors year over year for the third quarter. In

looking at our advanced bookings by entity, we continue

to see the most weakness in the international market,

in can the Latin America, in particular. Domestic

bookings are below last year's levels. It appears

the traffic will remain weak into the third quarter,

we do expect to see continued improvement in the unit

cost.

Despite having more challenging fuel comparisons for

the third quarter, we currently expect mainline cost

for ASM to come in at 10.6%, down 3 and a half

percent from last year's third quarter. For those

who model ams costs on consolidated basis, we expect

to see amr unit costs down 3 and a half percent from

last year at 11%. Our expectation for unit cost

include benefits from both the easier year over year

comparison from last September, as well as the many

cost reduction initiatives that have been implemented

already.

Moving through the quarter, we will continue to update

the unit costs and where they are coming in. As I

said earlier, fuel cost comparisons are getting more

challenging. For third quarter we are expecting to

pay 80 cents for gallon, which is down from last year.

Fuel prices have stabilized, but we have hedges in place

should there be a spike in price. For the back half

of 2002 in total, we were hedged on 43% the planned

consumption at $24 per barrel of crude and for 2003,

we are hedged up 29% of expected consumption at under

$23 per barrel. When you roll together all of these

numbers, it is clear we will likely report a sizable

loss for the third quarter.

While I hope it will be smaller than we have just

reported for the second quarter, it will depend on

what happens with demand from here on out, as well

as continued success of our ongoing cost reduction

efforts.

Clearly, the back half of 2002 will remain significant

challenge. I am confident, however, that we are moving

in the right direction to maintain our leadership position

in the industry. When I look at all of the business

changes we are contemplating, you will see us implement

over the coming months. At the same time, our great

team of employees continue to deliver professional,

courteous and on-time service to customers, which is

absolutely critical in this challenging and competitive

environment. We have maintained one of the strongest

balance sheets in the industry, giving us real flexibility

in difficult times should it become necessary. We

have a variety of untapped assets we can call upon.

On the road ahead, holds a number of significant challenge

s, I am convinced we have the people and the strength

here at AMR to see us through successfully. With

that, I will be happy to take any questions you may

have.

Thank you. If you would

like to ask a question, please press * 1. You will

be announced prior to asking your question. To withdraw

the question, press * 2. Once again, to ask a question

press * 1 now. Our first question comes from Michael

Linenberg from Merrill Lynch.

Hi. Jeff, good afternoon.

I am just two quick questions here. First, you

elaborate or commented about gains in various business

markets that you had seen I guess this quarter over

the last sort of in the post niner-11 environment.

Can you elaborate on what business markets you have

gained share in?

Mike, let me answer

a little generally because I want to be careful about

giving you the precise markets so that our competitors

grasp them. Overall, we are very encouraged by share

data we are seeing. Look across the domestic markets,

we should strong growth in all four key hubs, dollars,

Chicago, St. Louis and Miami, even with the various

schedule adjustments, we have positive trends on the

west coast and up and down the west coast, as well

as San Jose and Los Angeles. We clearly lost share

at JFK, and also due to service build up, our shares

in LaGuardia and Boston are doing very well. So,

it is that kind of share outlook that - while clearly

we are discouraged in the overall revenue performance,

it gives us pretty strong degree of comfort with where

we are going on relative basis.

Okay. My second question

with respect to scope, I know as a result of having

pilots on furlough, there have been restrictions placed

on Eagle and its ability to expand. Where are you

on that front and at least with the respect to delivery

of regional jets? As we move through the year, should

we expect that you will have to slow down your delivery

of regional jets?

Bear with me, Mike

because that question is complicated answer.

Okay.

I suspect you and

many others on the call know. I think as you know,

following the events of last September, we furloughed

13,000 employees, including pilots, in October of

last year. While we brought back a number of these

employees, we still have many pilots on furlough.

The furloughing of pilots envokes provision of the

scope clause in our ATA contract, the contract which

limits commuter affiliates, including Eagle and the

American connection carrier in St. Louis. The

scope provision sets maximum limit or cap on the number

of commuter ASMs that can operate with the designator

code as long as pilots are on furlough. Before September

11th, Eagle's original plan called for some growth

as it continued to accept new RJ delivery. In addition,

we expected modest growth in 2002 from the American

connection barriers, which provide fees to the St.

Louis hub.

Keeping the plans in place would have caused commuter

ASMs to exceed the cap. To honor the contract

provision, we began looking at ways to reduce AA-coded

ASMs while minimizing the impact on customers and

other employees. We took steps back in February,

including removing seats in Eagle turbo props, cancelling

select routes, producing frequency to certain routes

to keep our ASMs below the cap and (inaudible)

deliveries. These changes have kept us in compliance

with the cap provision so far. As we continue to

take RJ deliveries, we needed to define additional

ways to keep within the limit of the scope provision

in the contract. We reviewed a number of options

and decided the next step in maintaining compliance

would be to remove in phases the AA code from the

American connection carriers in St. Louis, beginning

August 1.

This approach will remove the AA code from markets

that will impact the least amount of feeder traffic

and revenue, should passengers choose to move to another

carrier. In an effort to preserve feeder revenue

to American mainline services, we have entered into

a code-sharing and frequent flier agreement with the

American Trans C. Trans C would market mainline

services under AX designated code. This will allow

Trans B to market its brand between the cities it

operates and the points beyond St. Louis, operated

by American.

Additionally they have agreed with corporate and

other connections on partners in St. Louis, which

will permit broader network of service under Trans X

code. Now, clearly if you just think about how long

it took me to explain this, this is not the optimal

structure, but think it is the next best option to

remain in compliance with the contract and minimize

the amount of passenger and revenue loss to American

arising from the cap and while allowing us to do as

much as we can to be competitive against the growth

you are seeing in RJ's everywhere else in the industry.

Thank you. That was helpful.

Our next question comes from

Sam Buttrick from UBS Warburg.

Hi. Three separate things.

First, you mentioned the probability of a significant

goodwill break down in the third quarter. Are there

any covenant or other tests or other issues related

to this potentiality that we should be aware of?

No, Sam. In addition

to being a non-cash charge, nothing in our financing

or covenants that will be impacted by this. It will

be a pure accounting issue.

Secondly, could you comment

on the performance of your St. Louis hub?

I think, Sam, one

of the challenges we have when we think about our domestic

system is it is one integrated system. Today we have

three hub that is we use to connect traffic that is

going from the east to the west or west to the east,

Chicago, St. Louis and Dallas. So, it is analytically

and practically from the way we run business, we can't

break apart the performance and look at one hub versus

the other. From a revenue management perspective,

we could make any hub look bad or worse, depending

on how we optimize the traffic and optimize the hubs

and any comment I would make about St. Louis, specifically

would be one of the general comments I made about

the overall domestic market.

As I said, clearly we underperformed in domestic

market in the second quarter. And that is driven

by the fact that overall, Chicago, St. Louis and

Dallas, we probably got ahead of ourselves in capacity.

We probably were not as quick as we should have been

to begin redeploying incremental or marginal frequencies

to the leisure markets and of course, we have continuing

RJ challenges, which I just went through in detail.

I would point out, though, one of the encouraging

things is the fact in all three markets, as I

pointed out earlier in response to Mike, our share

is better today than it was September 11th and was

last year at this time. In addition, in particular

our share in the corporate market.

Three of the cities, as well as elsewhere throughout

the domestic system, we are seeing very strong share

trends. It is those share trends, Sam, in both overall

and in the corporate market that have led us to the

conclusion that we haven't been as quick as we should

have been to move capacity into the right places because

we just don't see anything in the share data that would

be driving underperformance.

I mention that because the

share gains in those markets are coming by virtue of

dumping the crud in St. Louis. Lastly, could you

comment on the impact of what seems to be highly likely

United U.S. Airways coach chair on your network,

please?

Well, I guess I

shouldn't 85le with your assumption it is highly likely.

I will accept that at face value. Clearly a

United U.S. Air co-chair would be something that

would hurt us. I don't think it would hurt us as

much as other domestic carriers. Clearly U.S.

Air has done out talking to every other carrier in

the U.S. about doing some kind of co-chair arrangement

as part of its restructuring. And certainly at times,

we have talked to U.S. Air. I think you know,

the scope clause in our contract hinders our ability

to do domestic co-chair that make our ability to talk

to U.S. Air about such an arrangement a little problematic,

obviously and makes us perhaps a more problematic

chair for them. All that said, I guess I think

that agreement is a long ways from being done. I

think Sam, you know well our views on both of those

carriers applications with the government for a particular

since the aid is supposed to be for carriers who cannot

access the carrier markets and who have a business

problem that was caused exclusive by September 11th.

I struggle with how certainly in the case of United,

those conditions might apply. I think I will point

out even if they go, you have potentially DOJ issues.

We ended up when United and U.S. Air were going

to merge, doing a complicated transaction where we

were going to take certain parts of U.S. Air's network

and assets specifically to alleviate some of the DOJ's

concerns with the power or strength a combined United

and U.S. Air would have.

So, I think there is still a lot of wood to chop

before we see the final way that all of this plays

out. Clearly, it is something to us. But, we

will have to do the best we can given the constraints

we have to compete against whatever the field looks

like going forward.

Great. Thanks very much.

Our next question comes from

Jamey Baker from J.P. Morgan.

Good afternoon, Jeff. This

is the second quarter in a row where you have had a

substantial positive cost variance in the last month

of the quarter. First question is if you could share

more light on what in particular came in better than

planned, just so we can better digest the guidance

which thankfully you provide throughout the quarter?

Jamey, that is a

good question. I wish I had a perfect vision where

our unit cost performance would come in. I will be

honest, I think it is fair to say that the focus of

our company right now is on so many different kinds

of cost reduction efforts and we are so focused on

finding ways to change our business quickly to get

costs out that I think in deference to my predecessor,

it is a difficult environment to be as accurate as

we have historically been. Clearly, we are going

to continue to go as fast and furious as we can on

finding better ways and more productive ways to run

business. If it means we are going to beat unit cost

forecast.

So, really, if you look at what drove our better cost

performance in the second quarter, to be honest, it

is a lot of little things all over the place. It

wasn't driven by any one or two big things that I

think is helpful or insightful to relate to you. I

would just lead you back to the fact that we are doing

lots of little things all over the company and intend

to continue to do that and we will through the AK

process, try to give you - keep you as surprised as

we can each month where we are going.

Okay. Fair enough. Second

question. I guess I don't understand how you can

improve demand for your product simply by rescheduling

it. It seems price matters to people, not high tight

the Chicago connections are. Can you comment on

the overall state of affairs structure? Is there

opportunity for simplification? Are you (inaudible)

what do you see out there?

Couple of different

things there, Jamey. Let me start with a comment

you made about Chicago. What our structure new schedule

structure in Chicago actually does is it greatly improves

our asset productivity on the airplanes and with fewer

planes and fewer employees and fewer days. The trade-off

as we did that, is that depending on your itinerary,

there are certain itineraries where you will have longer

connect time. We feel comfortable making that trade-off,

where historically we have not because of the things

you just stated, Jimmy. That is clearly consumers

driven by the way Internet search engines work, as

well as many other factors in the environment are

more focused on price and less on lapse time and what

pops up on the first screen than they have been. What

we are trying to do in Chicago is find a way to run

the airline more productively, while not losing revenue.

For now, if people care about the last minute or

connect time, they have other connect options. That

is what we are trying to do at Chicago.

You also talked about - let me make one other comment

on Chicago. The changing of the schedule so we are

less focused on the tightness of the bank has allowed

us to optimize the schedule more for the local market.

We are certainly of the belief some of our market

share gain in Chicago versus United, have been driven

by the schedule change.

The second thing you talked about, how can scheduling

change demand? Well, scheduling can't change demand,

but moving marginal capacity out of the night-frequency

and has been a business market where we want lots

of frequency and into a Florida or caribbean or sun

destination in Arizona or California are all things

that can allow us to make better use of the assets.

It is really the same pool of revenue floating around

the industry. Deploying our assets to get a better

share of them. That is really where we are going

when I talk about the business to leisure move on

scheduling. I think the third thing you're talking

about is pricing.

Yeah.

I don't think it

will be a surprise to anyone on the call, we have acknowledged

on many occasions, the current pricing model used

by the legacy carriers like American, is probably

not the greatest thing in the world. We have also

talked about what happened the last time we tried to

do something dramatic to change that structure. You

know, if we thought the revenue environment could be

fixed easily by change in pricing structure, obviously

we would have tried to do something. All that said,

we still think there are a number of things about the

business model that need to be changed. That is why

we are in the midst of rethinking everything in the

business. Part of that rethinking will be a change

that impacts pricing.

It could, but clearly, before we do anything,

we want to make sure any adjustments are consistent

with what we are try tog accomplish overall as a company.

I suspect before six lawyers tell me you are not

supposed to talk about future pricing, I better end

it there. I hope that is a little responsive to what

you are trying to get at.

It is. Thanks.

Our next question comes from

Jim Higgins, from Credit Suisse.

Hi. On the subject of competitors'

reaction to your moves, I am wondering what your

thinking is as you modify your schedule in places like

Chicago, which is obviously highly competitive market.

Are you assuming anything in particular about what

competitors do or are they moves that work regardless

of what they do? I am try tog probe the inner play

of the competitor issue a bit?

I think our view

- that is an excellent question, Jim. I think this

is one where we think we win either way. What I

mean by that is in the current environment, given where

we think customers are going and how they might ticket

what they care about, whether they are choosing based

on last minute of connection time or price, we are

pretty comfortable that a schedule that allows us assets

and ability, people productivity, all of which get

us closer to the kind of productivity low-cost carriers

get, is a big win and can be accomplished without sacrificing

anything material in terms of revenue. I would

suggest that if it works and if you saw other large

hub carriers move to such schedules, I think all of

the older legacy carriers like American, would benefit.

I suspect what would happen is we are still all going

to compete on the same basis we are competing today.

We would be more productive, though, and all end up

with cost structures a little closer to low-cost carriers,

which would probably be a good thing in terms of evening

out the competitive balance in the industry. And

I suspect you would have a system that would operate

better because another clear benefit of what we have

done in Chicago is repeat the system. If you really

want to get into the technical details, our scheduling

for schedules peeks and the number of planes arriving

and certain times greatly exceeded the capacity to

the airports. You knew by definition, not all flights

could get in there exactly when they were scheduled.

By looking at the schedule, we improved the problem.

If all the hub carriers moved toward that kind of

a schedule, I think you would find the whole industry

operating better. That is a good thing both for the

airline and it is a darn good thing for customers,

as well. There is a lot of talk about hassle factor

and where there is a portion of why the revenue environment

is so bad is driven by the fact it is more of a hassle

than a problem.

That is a little overplayed today, because in fact,

American and most of our competitors are operating

more on time than we have in years. And in fact,

I would even suggest the TSA is getting better.

The number of airports where you find very, very

(inaudible) lines is going down. So, I think that is

to come back to your original question, that is why

we believe in where we are going for the schedule that

makes us productive and think we win whether or not

other people decide to follow us.

Great. Do you have any figures

for capacity in the fourth quarter or is that still

a moving target?

Uh, fourth quarter,

I will tell you. In the current environment, Jim,

I am a little reluctant to put a lot of stock in a

number. But, I guess our current estimate right

now would probably be in the 10 to 12% range versus

the prior year. But, earlier I was pointing out

it is challenging for us, perhaps more than it has

been, to forecast cost. It is challenging to forecast

what the right level of capacity is for the fourth

quarter. As we sit here today, that is where we are

heading.

Certainly the less the better.

Thanks a lot.

Our next question comes from

Gary Chase from Lehman Brothers.

Jeff, just a couple of things I want

to clarify. I think I missed what you said your

asset base was, was that 6 billion?

Yes.

(inaudible).

All that is aircraft.

In general, I don't think we have made a habit to

break out section 1110 versus 91110.

Are there any covenants you

would be subject to on either existing debt or facilities

that would prevent you from capping the 6 billion is

this

No. The number

we give you is nothing like that. That is a number

that is truly unencumbered, ready to be used if and

when we need it for liquidity. It goes back to if

you ask that question and it is an excellent question

to ask on all the calls. It goes to the point of

why we are comfortable with our relative liquidity

position and the strength of our balance sheet right

now.

Okay. You mentioned following

up on an earlier question, potential for goodwill write-off.

In your press release, you eluded to 1.4 billion.

Obviously the bulk is TWA. I am curious, the

world looks different than it did when you made that

purchase. I was wondering if there is anything in

the integration process that may give you pause about

your ability to bring costs out of the combined operations

or to generate the revenue you were hoping for?

Well, couple of

comments on TWA. Clearly, let's all remember we

bought TWA at a time when United and U.S. Air

were going to merge and be bigger than us. The TWA

transaction was tied to this complex transaction I

eluded to earlier where we would get U.S. Air assets.

I think it was a very sensible reaction to the industry

environment at that time. Now, in terms of where

we are today, on the integration of TWA, I think

it is fair to say from a marketing or consumer perspective,

it is done. In just more than a year, we converted

the data and reservation system and are selling the

product as one. The employees all have uniforms on.

We painted the TWA aircraft. They have room

in the coach. We have integrated or plans in place

for integrating the labor groups. We truly today,

are one airline. In fact, that is why you saw last

week or the week before the FAA is going to allow

us to remove the flight designator from the CRSEs,

as part of the integration. I think where we are

today is we are one integrated airline. We see ourselves

gaining market share in St. Louis, Chicago and Dallas.

We see ourselves significantly stronger in the northeast

and in particular in LaGuardia and Boston

and DCA and places where I eluded to earlier, we

are seeing market share gains today. And we picked

up a lot of assets and facilities that we picked up

pretty cheaply.

All be it at a time when we really a whole lot more

capacity looked better a few years ago than it does

now. But, the world continually changes and we react

to the changes.

One last one on the strategic

review. Wonder if you could give us - is there any

sense of timing you can give us? Is there any deadline

where you want analysis completed? Second, I wonder

if in the course of the analysis you have done, whether

you concluded anything is sacred? You mentioned

some of the things that drive premium revenue. Have

you concluded there are things you will not do?

Well, you have seen

Don talk about a few things. On the other hand,

I think the reality is we want to keep everything on the

table. We want to have a process where we are willing

to question anything and everything. Because our

view of the world is that we can't - as management

of the airline, sit around and wait for the kind of

unit revenue increases that I suspect some of our

competitors may have concluded in some of the things

they have submitted to the government when seeking

aid.

We have to find a way to make money in the current

environment. That is not something that is going

to happen next week because clearly that requires very

significant change, not just a lot of belt timing,

but fundamental change. I will suggest to you that

the kind of scheduled change in Chicago is actually

may sound technical, quite fundamental, if and when

you see us roll that out in other places. There is

quite a few things on our list that I am very excited

about, that I think you will find very interesting,

innovative and significant. There are also things

that I am not particularly comfortable talking about

until a, we do them so you can see the actual results

and b, I am not comfortable talking about until we

do them because I don't want to tell our competitors

what we are talking about. Do we have a deadline?

It is an ongoing process.

I think you will clearly, as the months roll by and

for the rest of this year, see us go forward on a lot

of big changes, many of which will have times take

much longer than through the end of the year to actually

reach fruition. I think you can feel comfortable

you will see a lot of things in motion through the

rest of this year.

Thank you.

Our next question comes from

Brian Harris from Salomon Smith Barney.

Hi, Jeff. Couple of quick

questions. Going back to Chicago. Kind of conceptual,

but my understanding was when you guys got the St.

Louis hub, the idea was to flow more the leisure traffic

over St. Louis and keep the business business traffic

in O'Hare, it would seem more logical you would want

to try the depeaking experiment in St. Louis, which

also has a lot of operational constraints. Can you

give us flavor to that, would St. Louis be a good

candidate to try that out? When would you anticipate

you would know whether the experiment is work nothing

O'Hare?

Good questions. Number one,

I have to go back a little bit to earlier comments

and say we have a network of three east-west hubs and

I think the way in which those hubs interplay is complicated

and probably tough to summarize in simple a statement

as one is business and one is leisure. It depends

on the market. Second comment I would make is that

the kind of schedule we have put in place in Chicago,

one can argue in many ways, is great from a business

aspect. We should be able to operate the thing more

dependably and I think you would find and I think

Brian, you feel you would probably much rather be on

a flight that had a two-minute long schedule connect

time. But you know what? We also hit the time.

We always got you where you wanted to go on time.

I am not sure of the kind of connect time changes

involved in moving to the hubs are going to be of that

much concern to business travelers, other than there

is a few markers at times.

Would St. Louis be a good candidate? I think

our view, based on early returns and you are correct,

Brian, I am not ready to stand here and say we are

100% done with our analysis of what is going on at

Chicago, but we are encouraged by yearly returns.

If we remain encouraged, it is fair to say St. Louis,

Dallas, and ultimately our folks are all great candidates

for this different approach to the business, which

basically says compared to where we historically have

been, we are willing to slightly make trade-offs on

time of day, on connect time in order to get our asset

abilities and people productivity moving toward where

people like hubs to go.

Okay. That is helpful. One

other question regarding all these deadlines and so

forth at TSA at the end of the year. What is your

comfort level that we are going to have convenient

air service toward end of the year versus disruptive

situation at that point?

Yeah. You know,

Brian, I think the only way I can answer that.

We are working obviously as hard as we can with TSA,

with our own airport folks and with airports in every

nook and cranny of the U.S. to try to absolutely

meet every deadline that the U.S. government puts

in place and to absolutely operate a safe and secure

airline, as we can. To do it in such a way people

will still get on an airline because it is not so much

hassle you don't want to travel anymore. It is clearly

doing all the things, it will be a challenge.

You know, I will tell you, if you think about where

we have come domestically since September 11th, I

think sometimes we underplay the incredible change

that has occurred in the airport environment in the

U.S. and how quickly it happened and yet, despite

that, how well the airports today are operating. I

guess I don't mean to bring my own personal view,

but having spent the last three years living in Europe

and traveling around Europe, Europe for a long time

has been driven by the government. Little higher

levels of airport security and the U.S. government

chose to make different trade-offs in terms of personal

freedom before September 11th. We have made massive

strides since September 11th and have run darn good

airlines since then, even with the massive (inaudible)

doing what took years for the Europeans to achieve.

That gives me optimism despite the challenges between

now and the end of the year, you have a great team

of people and a lot of companies in the government

who are working hard to try to achieve all the goals

at the same time.

Okay. Thanks very much and

good luck in your new position.

Our next question comes from

Susan Donofrio from Deutsche Banc.

Can you update Long Beach,

with respect to getting more gates?

Yes. I think as

most of you know, we are currently operating some Long

Beach service with temporary slots and due to expire

in January. We have made the case for permanent

slots to the airport and to the city. We feel good

about our ground in the case, should that type of action

be necessary. Couple of weeks ago, we met with the

DOT and FAA regarding the issue. The FAA

got involved to mediate the dispute. We are pleased

to have them involved, given the important policy and

air competition issues that are involved. With the

FAA's involvement, we are hopeful the FAA will

help us reach resolution that satisfies our concerns

and the concerns of the Long Beach community. I

don't know where we will come out. We are hopeful.

My second question. I am

just trying to - obviously, you are rethinking your

business model in what could be permanent changes in

pricing. Are you looking at possibly like a leisure

type of airline for American? That would be separate.

I know other airlines have tried and not successfully.

I wonder what your thoughts are on that?

I said earlier,

Susan, we are working very hard as we go through this

process to not start with any preconceptions and be

willing to question every sacred cow or conventional

wisdom, if you will, that we have in the company.

As a matter of fact, in a board meeting this morning,

we talked about that very issue of making sure we don't

leave anything off the table. All that said, certainly

an observer, as you just did, will point out there

hasn't been much success anywhere in the industry with

these attempts to artificially create a carrier within

a carrier. In addition, you have got an environment

right now, where clearly the last thing we or anybody

else wants to do is add capacity by taking a part of

the business and saying we will find a way to operate

and (inaudible). So, I think I feel comfortable

saying it is awfully low on the priority list to look

at that kind of structure.

But, I don't want to say anything is off the table.

I think that is not in the spirit of what we are

trying to achieve right now.

Great. Thank you very much.

Our next question comes from

Glenn Engel from Goldman Sachs.

Good afternoon. First question,

Jeff. You talked about unencumbered assets. Do

you have a credit line currently being tapped? If

it was tapped, would the assets drop in value?

Uh, well, we have

- we have a bit of financing in place, Glenn, that

we could call upon for a billion dollars, that would

then tap into those assets. Now, I didn't mention

we had that billion dollars because that makes it quicker

and easier and more secure for us to quickly get a

billion dollars. On the other hand, we could decide

not to tap into that bridge because we have other options

and use the assets elsewhere. The $6 billion number

are assets that are unencumbered on existing outstanding

debts. As you point out, we have a billion dollar

bridge in place, which should we decide to do so, would

call upon a portion of those assets.

You mentioned the U.K. was

underperforming, is that economic or market share with

a new product?

Sadly it is economic.

Think about the U.K. versus the continent, the

U.K. has been (inaudible), where we are a very

bridge business and premium market. Sadly, that is

exactly the kind of market here in the U.S., which

has been going on in the U.K., that has been hardest

hit. That is the kind that has gone away more than

anywhere else. So, the size of the shrinkage of the

premium market in the U.K. for the industry is far

in excess of what we see on our route to the continent.

Now, that said, it is a good, tough competitor.

We have our ongoing competitive battles and in one

month, we went a few customers back and we steal them

back. You know, there is certainly some of that thing

and thing going on, depending on the week you ask me.

We will have stolen their customer or they will have

gotten ours. The real driver of the U.K. versus

the continent is what is happening in the premium side

of the industry market.

Last year in your base comparison

you already acquired TWA assets, which had low unit

revenues and on top of that, you started to take seats

out of those planes. Shouldn't you be actually doing

better than the industry and yet you are doing worse?

Well, I think Glenn,

you are correct in your mathematical analysis. I

said we are clearly underperforming year over year,

the industry on revenue basis. And when you look

on at a system level, as I said, the entity mix plays

a big part of that. When you look at it just for

domestic, we are also underperforming. That is where

we come back to having more capacity than we probably

should have in the second quarter, not being as quick

as we should have been to do the kind of redeployment

we are doing today, moving stuff out of the business

oriented markets into the leisure market. The continuing

growth of RJs of all our competitors.

Last year post 9-11, there

was enough fear there was industry discipline to cut

capacity significantly. It is still obviously too

much supply out there. Is there enough fear for the

industry to act together or will this be a long-drawn-out

process?

We never act together.

We would all be in jail.

Sorry.

I think you clearly

- I hope I have been clear about our own views,

which is one of the drivers of the performance you

just articulated, we did get ahead of ourselves.

That is why you see us looking back at the fall and

later on in the (inaudible) season. And, would

I think that would be a rational conclusion for many

competitors to reach? I think the answer is yes.

Glenn, could I go back to your last question for

one second. I do want to point out to people on the

domestic revenue performance, we got capacity issue,

the business versus leisure issue and the RJ issue.

I took you through earlier a lot of detail on some

of the history and the mechanics of our scope clause

and what we are doing about it. I guess I should

point out we are about to issue or have just issued

- I am looking, or will issue this afternoon, a press

release that American Eagle is going to announce

it has reached an agreement to dispose of 14 of its

ERJ regional jets and ultimately these planes will

be acquired by Trans State, the American connection

carrier I was talking about earlier. The potential

deal requires the consent of the company's financing

and also subject to the negotiation of final documentation.

But, we are doing this to make sure we remain in compliance

with the pilot contract. But, we are at least pleased

these planes ultimately will be flown by airlines connecting

passengers to American, rather than to one of our

competitors.

Thank you.

I am getting the signal here we have time for

one more question.

Thank you. Our last question

comes from Kevin Murphy from Morgan Stanley.

Thank you. Hi, Jeff. I

guess what I am troubled by is you mentioned the restrictions

with the co-chair that you are unable to do with

United and U.S. Air are doing because of labor

limitations and ditto for the RJ issue. At the

same time, you mentioned part of your strategic

agenda on the horizon is some sort of major breakthrough.

How is that possible unless you have a major change

in concessions and moreover permanent concessions from

labor?

Well, couple of

different points. Let me start with the scope clause.

And clearly, today, American revenue performance

versus the rest of the domestic competitors is clearly

hurt by the fact that we have a more restricted scope

clause, which is preventing us from buying what customers

are after and frankly what our competitors are running

circles around us doing. And so, it is just a fact

that it is one of the challenges and problems that

we have. I will point out to you that the United

contract, as it exists today - I am not an expert

on United, but I don't think it allows them to co-chair,

either. I think the process they have embarked upon

is one where they would potentially make that concession

as part of an overall transaction, if you will, with

the government, with employees along with agreement

from the government and maybe stocks and pilots and

etcetera. The broader issue of employee concessions

is one where to date, I think, we have been pretty

open and we don't see our circumstances today being

quite as dire as UA or U.S., although in the case

of United, I might argue their situation is not dire

enough to make them qualify for government aid.

But, those carriers are going down the paths they

are going and we will have to wait and see whether

they in fact are able to put in place significant labor

concessions. Today we are not talking to any labor

about concessions. What we are trying to do is find

better ways to run the business, to run the airline

to deal with the revenue environment as it exists.

Now, the world continually changes and we will have

to see what United and U.S. Air do and what laborers

do, in a world in which those two carriers who combined

- I am not sure, I will represent 25 or 30% of

the industry capacity, a world in which they actually

put in place a co-chair agreement that the pilots group

decided to allow, combined with significant financial

concession. That is a world that is very different

from the world we operate in today. That is a world

that may require us to do different things than we

are trying to do right now.

But, I think that is how we think about concessions

there and concessions here. Just circle back to the

first point of your question. The scope clause, would

it be easier to bring all of our employees back to

resume and get closer to profitability so we could

grow the company? It would be easier to do all those

things if we could be competitive with the rest of

the industry. We don't have that option. So, we

are living up to our contractual agreement and trying

to find ways to run the business the best way we can.

Yeah. I am sorry to make

an observation that as the second half of the year

unfolds and I guess, you will be making these strategic

initiatives known, I fail to see how they are going

to be revolutionary without some cooperation from labor.

Well, time will

tell, Kevin. I think we will have an interesting

dialogue about these issues as the months roll by.

Best of luck. Thanks.

Thank you very much,

everyone. If the - I appreciate everyone participating.

I am hopeful over the coming weeks, now that I have

spent the last few weeks just frankly cramming and

studying for today and to get our books closed. But,

I hope to see many of you in person for the coming

weeks. For those listening from the media, stay on

the line for a few minutes and I will be back to answer

any questions you may have. Thanks.