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.