美國航空 (AAL) 2002 Q4 法說會逐字稿

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  • Operator

  • Good afternoon. Welcome to the American Airlines fourth 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 now like to introduce today's speaker, Mr. Jeff Campbell, Senior Vice President of Finance and Chief Financial Officer of AMR. Mr. Campbell, you you may begin.

  • - Chief Financial Officer and Senior Vice President of Finance

  • Well, thanks, Lynn. And good afternoon, everyone. I appreciate your joining us on the call today.

  • Before I review the results from what was clearly another tough year here at American, let me first run through the required legal preamble. Many of my comments today on matters related to our outlook for revenue and earnings, cost estimates and forecasts of traffic, capacity, load factor and fuel costs will constitute forward-looking statements. These matters are, of course, subject to a number of factors that could cause actual results to differ materially from our expectations. These factors include domestic and international economic conditions, commodity prices, general competitive factors including but not limited to the recent bankruptcies of U.S. Airways and United Airlines, government regulations, uncertainty in domestic or international operations, acts of war or terrorism, our ability to access the capital markets, changes in the Company's business strategy, any of which could affect our actual results.

  • With that out of the way, let me move on now to the numbers we reported this morning. As you can clearly see, both the fourth quarter and the full year 2002 were dismal for our Company. With losses for the full year exceeding those we recorded during 2001.

  • For the fourth quarter AMR reported a net loss of $529 million, which was $205 million better than last year's fourth quarter loss, excluding special items. On an earnings per share basis, that equates to a loss of $3.39 per share for the quarter. For the full year 2002, AMR reported a net loss excluding special items of $2,018,000,000. This loss exceeded our 2001 loss before special items by $611 million. On an EPS basis, that represents a full year loss of $12.97 per share in 2002 versus a $9.13 sent per loss share last year. Including special items AMR's loss for 2002 totals $3,511,000,000 dollars or $1.75 billion worse than in 2001. On a per-share basis, that's a loss of $22.57 in 2002 compared to $11.43 in 2001.

  • Before I get to some specifics on revenue, let me talk about a couple of accounting items. First, while we recorded no special items in the fourth quarter of this year, there have been a number of special items from previous quarters that I impacted our full year earnings both in 2002 and in 2001, the details of which we outlined in the press release. Collectively, the impact of these items represented a charge of $9.60 in 2002 compared to charges of $2.30 in 2001.

  • Second, let me talk briefly through one noncash charge that will impact our year-end balance sheet, though not on the income statements we released today. As we indicated in our third quarter 10-Q, given the low interest rate environment and the generally weak market conditions, we were required to record a significant minimum pension liability charge as of December 31. This minimum pension liability reflects the amount that our pension plans accumulated benefit obligation exceeds the plan assets in excess of amounts previously accrued for pension costs. As a result of this liability, we have recorded a charge to stockholders' equity of $1.1 billion. This leaves our year end stockholders' equity balance at approximately $840 million.

  • Finally, as I mentioned during the third quarter conference call, we anticipated that sometime during the later part of the fourth quarter or early in 2003, we would not be in a position to realize some portion of our deferred tax assets. As a result, we would be required to take a deferred tax asset valuation allowance.

  • Now, our fourth quarter operating results do include a full tax provision. The year end noncash charge for minimum pension liability, however, a charge that is normally tax-affected, was booked to equity with just an immaterial tax provision. This immaterial tax provision represented the last of our ability to take a tax benefit for accounting purposes. So as we move into 2003, we will no longer be recording a provision for taxes. As such, our pre-tax income beginning in the first quarter of 2003 will equal our net income.

  • Let me now briefly touch on the revenue environment. As we mentioned in the press release, the industry revenue environment remains very weak. Last week on a macro level the ATA released final industry revenue figures for 2002. In total, industry revenues for 2002 came in at about $60 billion. In contrast, full year 2000 revenues were over $80 billion. That's a decline of about $20 billion in industry revenues in a two-year period. Clearly, we are struggling to reduce the costs of the industry by a comparable $20 billion amount.

  • American's results have been hard hit, as well. Our fourth quarter system unit revenue was up just 2.6 percent from last year's depressed fourth quarter base. While our system load factor was 69.8 percent for the fourth quarter, up 5.8 points from last year, yields continued to decline, falling 6 percent from last year's levels. When compared to the fourth quarter of 2000, this represents a decline in unit revenues of over 20 percent.

  • As we discussed at our analysts meeting back in November, our geographic mix of flying relative to our domestic competitors has continued to have a negative impact on our relative revenue performance over the past year and a half. In particular, the weakness in US business demand as well as weak overall demand in the Latin America market has resulted in a drag on our revenue performance during this cycle. When combined with our small Asian network, our relative performance is further exacerbated versus our competitors as the Pacific region has held up relatively well through the cycle.

  • During the fourth quarter, we estimate that this geographic mix resulted in our revenues being almost $90 million below what they would have been under an industry average mix of regional flying. Had our network earned that extra revenue, our unit revenue improvement at the system level would have been 5.3 percent versus the 2.6 percent we reported. However, we have begun and continued to adjust our network where possible to address this mix issue. We have taken steps to further trim our domestic capacity for 2003, which I'll talk about in a few minutes. We have also trimmed our Latin-American flying and have announced plans to boost our Tokyo operations with new service from Los Angeles in April. And our competitors have been responding as well, particularly with reductions in Latin America that should provide us some modest benefits as we move into 2003.

  • Now, before I move on from revenue, let me briefly recap our revenue results by entity. Our domestic unit revenues for the fourth quarter were flat with last year on a load factor increase of 4 points and a yield decline of about 6 percent. We continue to see an increase in the level of low cost carrier competition we face domestically. As of the fourth quarter, low-cost carriers impacted 82 percent of our domestic traffic by extension, pricing. That represents a 7-point increase from the 75 percent impact we experienced during the fourth quarter of last year. In addition, we continue to see very little pricing power domestically. No systemwide fare increases were successful during 2002. However, fare sales remained robust.

  • In contrast to our domestic results, international unit revenues were up 10.4 percent in the fourth quarter, solely based on strong load factor improvement. Yields continued to decline falling 5.4 percent from last year's fourth quarter, but load factors rose 10.2 points. Similar to previous quarters, the relative strength internationally was primarily driven by Europe and the Pacific, with Latin America, including the Caribbean, showing relative weakness. European unit revenues increased by 19.6 percent off of a very low base in the fourth quarter of 2001. As was the case domestically, all of this strength was driven by higher load factors which were up 15 points while yields continued to decline -- falling just over 4 percent from last year's level. Continental Europe continues to outperform the UK on a year-over-year basis as we have seen in previous quarters. However, both entities posted positive unit revenue results relative to last year's fourth quarter. While a small portion of our network, the Pacific entity, did continue to post unit revenue improvements, in the fourth quarter unit revenues rose 16.5 percent from last year's level. But as we've seen elsewhere, this was all load factor-driven, with yield falling 6.6 percent while load factors rose 14.2 points.

  • Overall, our Latin-American entity did see unit revenues increase 4.2 percent from last year as load factors rose 5.2 points. But yields declined almost 4 percent. However, the results were somewhat mixed. The Caribbean recorded a unit revenue decline due to increased service by competitors. Central America was also weak. And unrest in Venezuela certainly did not help unit revenues in that country. However, a Mexico and a number of key deep South American markets did record above average unit revenue improvements, though Argentina still remains depressed.

  • Now, before I move on to our unit cost performance, let me briefly touch on our results for our Eagle and cargo operations. At Eagle, unit revenues rose by 7.2 percent year-over-year during the fourth quarter while yields fell 1 percent, in part due to a 6 percent longer average stage length. Load factor rose by 4.7 points during the quarter, offsetting the modest yield declines. Our cargo division recorded an increase in revenues of 5.8 percent, while overall cargo operations continue to be negatively impacted by a general drop in demand and significant restriction on cargo shipments for security reasons, we did see stronger traffic on our Pacific routes during the fourth quarter as a result of the West Coast dock workers strike.

  • Now let me briefly run through the one bright spot for the fourth quarter, and that was our unit cost performance. Our main line unit costs came in about 2 percentage points better than we originally expected, down 5.3 percent from last year's fourth quarter. Holding fuel prices constant, that equates to a unit cost decline of 7 percent year over year. Now, our ability to drive down costs during the fourth quarter was driven by a couple of key factors. First, employees from all around the company contributed to our cost control efforts during the quarter by keeping a tight lid on discretionary spending and developing new ideas for saving money. Secondly, we continue to see benefits from the $2 billion in cost saving initiatives that we have identified and are implementing over time. While we're not yet steady state on these savings and won't be for another couple of years, the effects are clearly visible and in our relative cost performance.

  • While some of these benefits have come from productivity enhancements, both at headquarters and in the field, others have been driven by targeted reductions to specific expense lines. For example, our elimination of domestic-based commissions, which took effect in the first quarter of 2002, contributed to a 24 percent drop in commission expense this quarter from last year's levels. Also benefiting the commission line was the continued migration of bookings to Internet-based booking vehicles. During the fourth quarter, approximately 17 percent of our flown revenue came from online sources versus 12 percent last year.

  • Other expense lines which produce savings during the quarter included food and beverage, where we have continued to make adjustments to our service offering; facility and other rents where some year end rent credits and improved utilization reduced expenses relative to last year's fourth quarter; finally, aircraft rents, which are lower year-over-year as we returned early a number of leased aircraft as part of our fleet simplification program. Working against us during the fourth quarter, unfortunately, were higher fuel prices. Despite gains in excess of $22 million from our hedging programs, our main line fuel cost per gallon relative to last year rose almost 15 percent to 83 cents per gallon.

  • So while I'm encouraged to see that our cost reduction efforts are paying off in terms of our unit cost performance, it's clear from the magnitude of the losses we incurred again this quarter that our current situation is not sustainable. Our cost basis simply remains too high relative to the revenue environment we face. As we have talked about before, AMR needs to find about $4 million in annual structural cost savings. To date, we have identified $2 billion of that total and are implementing it over time. But most of the low hanging fruit has already been identified, and, that being said, while we're still looking for additional initiatives, they will be harder to find and smaller in magnitude than what we have identified to date.

  • In light of this reality, we have engaged our union leaders in an active dialogue about our Company's financial position with formal discussions that began in October. We have also offered to open our books to the unions and their financial advisors so that we can have a common understanding of our Company's financial situation. And I'm pleased to say that all of our unions have accepted this offer. But beyond our union leaders, we have also been actively communicating with all of our employees around the globe since this crisis began about 18 months ago. We have kept them updated on the financial state of the Company and our industry, as well as all the steps we have been taking to trim costs, as we restructure our business.

  • However, over the course of the past year and a half, our situation has not improved. As a result, the need to bridge the gap between the required $4 billion in savings we need and the $2 billion we have already identified remains an absolute necessity and one that we must address quickly.

  • Clearly, our industry is in a state of tremendous flux. The financial crisis facing AMR and the other legacy carriers is very real, very serious. This is evident by the fact that one-fifth of the domestic industry is already operating under the protection of the bankruptcy courts, the remaining legacy carriers continue to post significant losses as we have seen over the past week.

  • Our industry's position and our Company's position are not historically unique, however. Over time, all companies must adjust their ways of doing business to meet the changing times. Our approach so far has been to address our challenges in a logical and structured way in an effort to avoid more draconian tactics that some companies have used. To be successful in this effort, we certainly need the support, cooperation of all parties that have a stake in our success.

  • Now, while clearly the financial numbers we reported for the quarter aren't good, I should point out that our front line employees continue to do a fantastic job in keeping the airline running smoothly. While we faced a few weather challenges here and there this quarter, our overall dependability performance was quite good. Our on time arrival performance exceeded 85 percent in the fourth quarter, up over 3 points year-over-year. And while the final results aren't out yet, it looks like we'll finish the fourth quarter in second or third place amongst the majors in on-time performance.

  • Now, before I get into our outlook for the first quarter, let me run through some balance sheet and liquidity items. First, we ended the year with $2.7 billion in cash. This was down slightly from the $2.8 billion that we had at the end of the third quarter. Included in our year end cash balance is about $775 million in restricted cash. $350 million of this amount is to cover workers' compensation claims. $75 million is to cover various other operating needs. And the remaining $350 million secures Letters of Credit backing certain of our floating rate tax-exempt bonds. We're currently in the process of sending out redemption notices on these facility bonds and in fact we anticipate paying them off this quarter. Now, while this action may seem counter intuitive given the critical importance of cash reserves right now, these bonds are currently requiring us to post more cash collateral than the face value of the bonds they represent. So by redeeming the bonds, we will actually increase our restricted cash balance by about $45 million even though our total cash balance will be reduced by close to $350 million during the first quarter.

  • Given the continued focus on liquidity, I know a number of you have inquired about access to the capital markets. At this point, think it's fair to say that our continued access to the capital markets remains somewhat uncertain. Now, that being said, we did just complete a $675 million aircraft financing in late December. With this latest financing, our pool of unencumbered aircraft now stands at about $2.9 billion, down from the $4.2 billion we had at the end of the third quarter. Given collateral requirements for the recent financings that we have completed, only about $700 million of our $2.9 billion in unencumbered aircraft is Section 1110 eligible. Including our most recent aircraft financing, we ended 2002 with approximately $19.3 billion of net debt. When combined with the charge to shareholders' equity this puts our net debt-to-capital ratio at 95.8 percent. Not surprisingly, this represents the highest leverage ratio we have ever reached.

  • Looking forward, we are still expecting capital expenditures for the full year 2003 of about $1.4 billion, of which we have $1.1 billion covered by prearranged financings for regional jets and Boeing aircraft. We also anticipate getting our last available tax refund which should be about $550 million sometime in the first quarter. Lastly, on balance sheet and liquidity items for the full year 2003, our principal and capital lease payments should total about $800 million excluding the early redemption of the floating rate tax-exempt bonds that I talked about a minute ago.

  • Let me now turn to our outlook for the first quarter. As I mentioned earlier, we continue to adjust our capacity plans for 2003 and that includes our capacity levels for the first quarter. Based on our latest estimates, I would expect to see system capacity in the first quarter up a little less than 2 percent from the relatively depressed levels we saw in 2002. However, we have continued to adjust our mix of domestic and international flying. As a result of as a result, domestic capacity will actually be flat with last year while international capacity should be up about 7 percent.

  • Our systemwide booked load factor for the first quarter is currently down about two points from where it was at this time last year. Part of this shortfall is due to March bookings, which are impacted by a shift in Easter holiday travel from March to April. Offsetting this somewhat is the continued trend towards closer end bookings. I expect we'll make up some of that shortfall and load factors will only be off about half a point from last year's levels.

  • In reviewing our advanced bookings by entity, results are fairly mixed. We continue to see weakness domestically with bookings down about three points from last year's level. Internationally, the results vary by entity. Europe bookings are running slightly ahead of last year's levels as are those for central and South America. However, the Pacific and Caribbean are weaker than they were this time last year.

  • For the first quarter, we expect to see continued pressure on our fuel costs. Based on our current forecast, which does not any include possible effects from a Gulf war, our costs for fuel will be 91 cents per gallon up about 36 percent from last year. Even with this significant increase in expected fuel costs, we still anticipate seeing total main line unit costs down about one percent versus last year at 11.2 cents. On a fuel adjusted basis, this would represent a unit cost improvement of about 5 percent from last year.

  • At the AMR level unit costs for the first quarter are expected to come in at 11.5 cents, also about one percent better than last year's level. While these unit cost numbers reflect continued benefits from our cost reduction initiatives, some of these benefits will be offset by underlying cost head winds from higher fuel prices, pension benefits, medical benefits, insurance costs, and contractual increases. As we move through the first quarter, we'll continue to update you on fuel and overall unit costs through our 8-K filings.

  • We do have fuel hedges in place for both the first quarter of 2003 as well as for the full year. Our first quarter hedges cover about 40 percent of our planned consumption at $23 per barrel based on WTI crude. For the full year 2003, our hedge position covers about 32 percent of expected consumption, also a at $23 per barrel crude.

  • While the number of uncertainties we face has never been so great, be it concerns over fuel costs, the Iraqi situation, the revenue environment, amongst others, based on our projections for traffic and unit costs, I expect that we will report another loss in the seasonally weak first quarter that will be comparable to our fourth quarter results.

  • While I provided some full year guidance on our last quarterly call, I wanted to take a last-minute and update you on our current projections for the full year 2003. If in terms of unit costs, we are currently forecasting a main line unit cost of 10.9 cents which would be up less than one percent from our full year 2002 unit cost. This forecast is based on a fuel price assumption of 80 cents a gallon, that is 6 percent higher than 2002's actual. We have now reduced our forecast for full year 2003 main line capacity from being flat to down about 2 percent from 2002 levels. Our current traffic projections, while certainly very cloudy, would have traffic about flat with last year producing a slight increase in load factors. However, these forecasts are clearly just that, forecasts.

  • While we certainly have contingency plans for an Iraqi war, we have not included a Gulf war scenario in the base numbers I have been giving you. So certainly there is incremental risk to all of these projections, including our unit cost and fuel costs forecasts, should a war occur.

  • As I have indicated before, while we will make some progress in reducing our structural costs, there will be upward pressures on operating costs, primarily from pension, medical and retiree medical benefits, scheduled and step salary increases, fuel prices, to a lesser degree increases in landing fees. We should continue to make some modest progress on reducing further commissions, booking fees, and food and beverage expenses. Additionally, there should be some modest savings in materials and repairs as our fleet simplification efforts build steam. In terms of nonoperating costs, it's safe to assume some fairly significant increases in both net interest expense and capitalized interest. Our net interest expense will likely increase by well over $100 million during the 2003 with first and second quarter increases in excess of $30 million. Additionally, capitalized interest expense and other nonoperating expenses should rise by another $50 million to the levels seen in 2002.

  • So with all that as background, I would be happy to take whatever questions you may have. I will add, because I am afraid my time will be a little bit more limited today than it has been, if you could limit your questions to one a piece, please. Thanks.

  • Operator

  • Thank you. If you would like to ask a question, press Star 1. You will be announced prior to asking the question. To withdraw the question, press Star 2. Once again, to ask a question, press Star 1 now. (Pause) Our first question comes from Brian Harris from Salomon Smith Barney.

  • Jeff, kind of a higher level question here. Despite the weakening financial environment your financial firewall still looks to be pretty strong through most scenarios. You guys are bleeding more cash than any other solvent airline right now. Given that dynamic, how can you put pressure -- how can you set up some kind of a -- a time frame for where you can anticipate to get labor savings to prevent the labor unions for just kind of dragging their feet, given you're still at least demonstrated access to the capital markets in December and you're still rather thick financial fire walls?

  • - Chief Financial Officer and Senior Vice President of Finance

  • Well, Brian, I -- you know, to state the obvious, no company can continue to lose a half a billion dollars every three months forever. And, ... if you look at what we said in our press release this morning, I think it kind of speaks for itself. When, to quote from it, AMR acknowledged that the future of the Company cannot be assured until ways are found to lower significantly labor and other costs. Now, clearly, we have and have had for some time now a good dialogue with our employees and with our labor groups. That dialogue is ongoing. We are having completely open and blunt discussions with our labor unions and their financial advisors about the financial situation of the Company. And I think we have great faith in that effort.

  • You know, if you look at the employees of American Airlines, Brian, and think about what our Company and our employees have been through since September 11th, it's been rather remarkable. And yet through all the challenges we faced, our employees continue to run a great airline. And I think the industry and our Company continue to face unprecedented challenges that are going to take unprecedented actions. And I think when I think about the track record that we have over the last 18 months, I think our employees will work with us and with their labor leaders to do what we have to do to make sure that American Airlines remains an industry leader.

  • Would you anticipate that sometime before the end of this quarter, new proposals will be coming forth either from management or through this dialogue to readjust the labor contracts?

  • - Chief Financial Officer and Senior Vice President of Finance

  • Well, Brian, I don't want to negotiate --

  • I'm just talking time frame.

  • - Chief Financial Officer and Senior Vice President of Finance

  • I don't think I even want to talk time frame. We have an ongoing dialogue every week with our labor leaders about all kind of issues, Brian. And I certainly would never want to say anything outside of those sessions before I have said it in those sessions.

  • Okay. Thank you.

  • Operator

  • Our next question comes from William Greene from Morgan Stanley.

  • Yeah, hi, Jeff. Just a quick question on pension. What do you think the cash contribution will be for 2003 to the pension fund?

  • - Chief Financial Officer and Senior Vice President of Finance

  • Bill, you faded out right at the end. You said --

  • Oh, sorry. I said what do you think the pension cast contribution will be in 2003?

  • - Chief Financial Officer and Senior Vice President of Finance

  • Our -- pensions as you know, I was taking our board through this last night and pensions are so confusing because there are three different ways to account for them. There is one set of accounting you do for your income statements. There is another set you do to determine what goes on your balance sheet, which is what drove the $1.1 billion minimum pension liability adjustment we took and, of course, there is a third calculation that you do that determines your cash contributions. We have been and expect to remain 100 percent compliant with all of the minimum cash funding requirements, Bill. For 2003 that will only require a pretty modest contribution in the $200 million or so range.

  • Okay. And then the second question is just related to your unit revenues. You discussed at the analysts meeting a unit revenue premium that you thought was a fair number going forward and obviously you're not getting there. Are there any actions you have in place to try to get that back in place, and is it even realistic to think you can hit 30 percent?

  • - Chief Financial Officer and Senior Vice President of Finance

  • Well, first answer is yes, we continue -- the number you are referring to is the number we think about as a long-term premium that we can achieve over the low-cost carriers. Not necessarily over the other hub and spoke legacy carriers like us. And we base that number on 30 years of experience of competing against Southwest in particular who has their largest hub in Dallas right where our largest hub is, has had for a decade, rather than real short-term trends. Now, when you look at American's revenue performance today, clearly in the aftermath of September 11, American perhaps more than any other of the legacy airlines had a network product schedule pricing system all optimized to meet the needs of the business traveler. And that is the section or portion of the market that has clearly fallen the furthest and recovered the least. And so there are all kinds of adjustments that we have been and continue to make and that we must continue to make, Bill, to reposition our network in line with the fact that it's not clear to us that that segment of the business travel market is ever going back to where it was.

  • But as we look at all the numbers and as we look at our performance against the low cost carriers in particular markets, we don't -- we continue to believe that with that 30 percent number versus the low cost carriers is an achievable and sustainable revenue premium.

  • Okay. Fair enough. Thanks for your help.

  • - Chief Financial Officer and Senior Vice President of Finance

  • Yup. Thanks, Bill.

  • Operator

  • Our next question comes from Glenn Engle from Goldman Sachs.

  • Good afternoon, Jeff.

  • - Chief Financial Officer and Senior Vice President of Finance

  • Hi, Glenn.

  • Can you go through the pension and health benefits? One, what changes of assumptions you've made; and two, how much head wind that provides in 2003 versus 2002?

  • - Chief Financial Officer and Senior Vice President of Finance

  • Yeah. I think, , when you look at the discount rate as you would know, Glenn, last year we had a discount rate of 7.5 percent. I would expect that for 2003 we will use a 6.75 number which I think is very much in line with the other airlines in industrial America.

  • On the asset return side, last year we used 9.25. This year we will be using 9 percent, which again we think is pretty mainstream. In terms of what's happening year over year to expense, because of those two changes, our pension expense year-over-year will be up almost $250 million. And the two -- just those two assumption changes I just talked about drive 80 percent of that increase with the remainder being just driven by the fact that we've got another year of service from employees, et cetera.

  • Now, as you know, and as I talked about a second ago, that doesn't immediately necessarily translate in a a $$250 million increase in cash. On the other hand, it does over time because over time our pension plans need to be fully funded. But the cash impact for '03, as I mentioned to Bill, will only be about 200. Did you also ask, Glenn, about retiree health?

  • Yes, in general health benefits, as well.

  • - Chief Financial Officer and Senior Vice President of Finance

  • Certainly, in general in health benefits, it continues to be one of the real frustrating parts of our cost structure because while we are making lots of progress on other parts of our cost structure, besides pension, probably the other biggest head wind, if you will, working against us is on the medical side. And so for our active employees, we see medical costs that are up in the 10 to 15 percent range and in particular, with our retired employees, because the way that program works, that mainly works out to being a prescription drug program, that of course is a part of the medical market that has seen the most extreme kind of inflation. And so our costs there are up about 25 percent year-over-year.

  • So the total impact in terms of the year-over-year, the dollar increase?

  • - Chief Financial Officer and Senior Vice President of Finance

  • So the total impact of all of the retiree -- well, the retiree health is probably about $60 million, and I have somebody handing me a piece of paper here... on the health side, that's about another 80 to $90 million.

  • And, of course, this year you have some scheduled wage increases that haven't been --

  • - Chief Financial Officer and Senior Vice President of Finance

  • Yes. We have a -- our flight attendants union has a -- had a 3 percent wage increase that went into effect on January 1. That will cost us about $30 million this year. And the TWU, which represents our fleet service clerks and mechanics, has a 3 percent raise going into effect March 1. That will cost us about $52 million this year.

  • Even with the head count cuts, the wages actually will end up rising this year?

  • - Chief Financial Officer and Senior Vice President of Finance

  • Yeah. Now, the way we look at it, wages will be flat. They may be down a tad, but despite the fact that we are on the productivity side going to be about 5 percent -- almost 5 percent better, Glenn, it gets pretty -- almost completely washed out on the pure wage side by those increases and then of course benefits between pensions and the medical issues are just going through the roof.

  • Thank you very much.

  • Operator

  • Our next question comes from Gary Chase from Lehman Brothers.

  • Hey, Jeff. Just two quick clean-up things. On the covenant issue that you raise in the press release, I'm just curious, I guess that is a secured facility. I mean, I guess I'm just wondering if there is any reason at all to believe that you wouldn't be able to obtain a waiver. I mean, it's....

  • - Chief Financial Officer and Senior Vice President of Finance

  • Well,.

  • Not a great environment to be taking aircraft back.

  • - Chief Financial Officer and Senior Vice President of Finance

  • Yeah. What that is, Gary, is -- that's actually our revolver. It's an $834 million revolver. It's already secured. And, of course, we have a consortium of banks through which we have that revolver. Now, in a world where every day when I drive to work I hear the latest speculation on what's going to happen in the Middle East and I guess this morning's speculation was that Russia is now announcing when we are going to go to war, it would be kind of crazy for me to tell you that I'm sure of -- I can guarantee or be 100 percent sure of anything.

  • Now, that said, we don't anticipate that we would have difficulty going and negotiating a waiver if we need to do that by just posting a little bit more collateral or paying a little bit higher fee. But... as you say, the world's kind of crazy place right now so there are no guarantees of anything.

  • And I noticed that, you know, you noted a flat RASM improvement, or no RASM improvement, I should say, domestically. That looks like it's a little bit worse than the industry again. Any color there on what's contributing to that?

  • - Chief Financial Officer and Senior Vice President of Finance

  • You know --

  • Just within, you know, aside from regional mix, just within the domestic entity.

  • - Chief Financial Officer and Senior Vice President of Finance

  • Yeah. And I think I come back to my comment there that when you look at just the domestic entity, we had a network optimized for the business traveler. We had a product optimized for the business traveler. And we haven't been as quick as we might have liked at adjusting our network to move away from that sort of focus. We're in the process of doing it. I'll also point out to you, too, that one of the things I have pointed out in my call is that the year-over-year growth in terms of the percentage of our domestic network where pricing is essentially set by the low cost carriers, that grew from 75 to 82 percent year-over-year fourth quarter to fourth quarter. And that's a not insignificant change. And that is clearly one of our challenges in the domestic environment.

  • Just one quick clarity question for clarity on -- when you said the first quarter loss would be comparable to the fourth, you also said that there wouldn't be tax provisions. So you know, in other words, will the bottom line loss --

  • - Chief Financial Officer and Senior Vice President of Finance

  • Yeah, that is an excellent point. Let me state that more precisely. I would expect that our first quarter pre-tax loss would be comparable to our fourth quarter pre-tax loss.

  • Okay. So it's quite a bit of degradation sequentially when we take account of the fact there is no tax accrual?

  • - Chief Financial Officer and Senior Vice President of Finance

  • No. No. What I'm saying is the pre-tax numbers will be comparable.

  • Right. So the net numbers should be --

  • - Chief Financial Officer and Senior Vice President of Finance

  • Yes. The net number will clearly degrade. You are correct.

  • Thanks, Jeff.

  • Operator

  • Our next question comes from Michael Linenberg from Merrill Lynch.

  • Yeah. Hey, Jeff, good afternoon.

  • - Chief Financial Officer and Senior Vice President of Finance

  • Hi, Michael.

  • I guess a question here related to United in Chicago, you know, as a result of the filing for bankruptcy. Have you seen any shift in traffic and maybe anything that you can say as a result of the fare initiative that they put in place? You know, anything that you have seen on your revenue as a result of that?

  • - Chief Financial Officer and Senior Vice President of Finance

  • Michael, clearly, we always keep a close eye on our market shares everywhere although I think it's fair to say to say our biggest focus right now of the Company is addressing the financial crisis facing us. But you know, there is a lot of moving pieces when you try to address the question you are asking. I think one of the pieces is that the media has done a remarkably good job of telling customers, don't worry about United or USAir being in bankruptcy, just keep flying them, no big deal. That now, from our perspective probably hasn't been helpful for us to try to shift some of those customers. Clearly United's pricing actions of late have been very aggressive. We have all seen some of the things they are doing in the published arena including their reduction in full fares which clearly in the near term is going to be dilutive to us but they have also been very active in the opaque channels, and there was a -- you know, in recent weeks, they have been doing as much as half of all the sales that go on some of those opaque channels which is putting a lot of pricing pressure on all of us.

  • So when you kind of bake all that up, I look at all of our share numbers and we're comfortable with all of our share numbers. But, boy, I certainly don't see anything that suggests to us there is anything positive happening to us net on the revenue side from United's situation. In fact, it may well be in that negative because of the pricing actions they are taking.

  • Jeff, do you have any sense on the amount of dilution, you know, maybe what the impact is on a monthly or quarterly basis to you guys?

  • - Chief Financial Officer and Senior Vice President of Finance

  • You know, Michael, I really prefer not to give a number. Again, because there are so many moving pieces to this and so many different things, all moving at once.

  • Operator

  • Our next question comes from Sam Buttrick from UBS Warburg.

  • Yes, hi, Jeff.

  • - Chief Financial Officer and Senior Vice President of Finance

  • Hi, Sam.

  • First of all, to -- to you know, restate the obvious, when you're saving billions of dollars a year, your costs are supposed to be going down, not up. Now for the question part. You said that your cash funding requirement for pension would be I think you said about $200 million.

  • - Chief Financial Officer and Senior Vice President of Finance

  • Yes.

  • You said your noncash pension expense would be up 200 to $250 million. What's the total -- what total does that build to in terms of the noncash expense? Or the pension expense for GAAP purposes?

  • - Chief Financial Officer and Senior Vice President of Finance

  • Our pension expense for GAAP purposes for 2003, Sam, I would expect to be in the 700 to $750 million range.

  • Therefore, for -- to the extent we are making this adjustment in assessing cash from operations, you have a noncash expense of $700 to $750 million offset by 200 to $250 million funding requirement?

  • - Chief Financial Officer and Senior Vice President of Finance

  • Correct.

  • For a net operating addback of about $500 million?

  • - Chief Financial Officer and Senior Vice President of Finance

  • Correct.

  • In roundish numbers.

  • - Chief Financial Officer and Senior Vice President of Finance

  • Correct.

  • Okay.

  • - Chief Financial Officer and Senior Vice President of Finance

  • By the way, Sam, I am puzzled since our unit costs came down over five percent from last year's --

  • I'm talking about -- I'm not talking about history.

  • - Chief Financial Officer and Senior Vice President of Finance

  • Ah, okay.

  • I'm talking about the future. And, ... remember, with respect to labor, that the truth is not a threat.... Secondly , with respect to United, if -- if you are able to achieve their current wage levels but not work rules -- and I'm talking about relative to your current accrued rates, not your book rates, what would that mean to you roughly on an annual basis since those terms are in the public domain?

  • - Chief Financial Officer and Senior Vice President of Finance

  • Well, yes, they are in the public domain, Sam. But I think I'd prefer not to get into the business of talking publicly about the impact of our competitors' labor contracts on our cost structure exactly, I guess that's a discussion I think more appropriately belongs in a room between us and our employees and between us and their elected labor leaders. Suffice it to say, that particularly in the current industry environment, no airline is going to be able to survive without competitive labor costs and the definition of competitive labor costs has been changing at blinding speed and is clearly going to continue to evolve. And we are extremely mindful of that.

  • You talk about changes in your -- in both your discount rate and I think your asset return assumption. But you didn't mention any -- as relates to pension. You didn't mention any changes in wage rate or wage rate escalation. Did you make any changes in assumptions there?

  • - Chief Financial Officer and Senior Vice President of Finance

  • Well, of course, I haven't -- in the numbers we just gave you, no. But I think one could argue that's awfully conservative accounting right now when you think about where the industry is going.

  • Well, that's my point.

  • - Chief Financial Officer and Senior Vice President of Finance

  • And the Company is -- I haven't done any actual accounting for 2003 yet, and I actually won't until I talk to you about first quarter earnings in a couple months. The world will continue to move between now and then.

  • Right.

  • - Chief Financial Officer and Senior Vice President of Finance

  • And, from a the -- perspective of trying to keep the kind of conservative, reliable books that we have always kept at AMR, I think it's more appropriate to adjust those kinds of assumptions when we actually have concrete evidence of changes as opposed to adjusting them speculatively

  • Right. Okay. Thank you, Jeff.

  • - Chief Financial Officer and Senior Vice President of Finance

  • Yes. Thank you, Sam.

  • Operator

  • Our next question comes from Susan Donofrio of Deutsche Banc.

  • Yes. I just had a question with respect to your RASM performance again domestically. Which obviously has not been outperforming the group. I know you are talking regionally with respect to the reason why. I'm just wondering, Jeff, if you could also factor in kind of what impact your hub de-peaking has had with respect to any negative impact. I think specifically, if you could just address really the sub-optimization of you schedule with respect to being displayed in the CRS systems.

  • - Chief Financial Officer and Senior Vice President of Finance

  • That's a good question, Susan. That's an issue we have spent a lot of time focusing on. As you know, we very cautiously and sequentially went about the de-peaking of first Chicago, and then Dallas, which always gave us a real strong ability to kind of have a control, if you will, to measure against. And so we remain very confident that the de-peaking itself has had no impact on our connecting shares, which is what that would have impacted, and in fact has caused, although it's hard to sort through cause and effect sometimes, but we have seen some improvement in our local shares. So the de-peaking itself we remain extremely pleased with. And when you -- you know, there is no sugar coating the fact that our domestic revenue performance has been disappointing. And I think I would just come back to the overall focus that we have had on the business traveler and adjustments we are -- we have been and need to continue to make for that.

  • I would point to the increased penetration of the low-cost carriers and then I would also remind you, Susan, that for us, domestic includes the San Juan and the Caribbean. And when that is a very big market for us, it's a significant chunk of our domestic network. And, of course, pricing in that market has been particularly challenged, shall we say, by the entry of JetBlue. And so that is also clearly a factor that pulls us down domestically vis-a-vis the other legacy carriers who aren't as big in that part of the world.

  • Great. Well, thank you.

  • - Chief Financial Officer and Senior Vice President of Finance

  • Sure. Thank you, Susan.

  • Operator

  • Our next question comes from Jamie Baker from J.P. Morgan.

  • Good afternoon, Jeff.

  • - Chief Financial Officer and Senior Vice President of Finance

  • Hey, Jamie.

  • You stated in your prepared remarks that you had already developed certain contingencies for a second Gulf war. Could you elaborate somewhat on what those might be?

  • - Chief Financial Officer and Senior Vice President of Finance

  • Well, you know, Jamie, I don't really want to elaborate other than to say that in some ways what we have is a continuum of Iraqi contingency plans because of course the challenge is nobody knows exactly what will happen there, how it will play out, is it a day-long, is it a week-long? What happens -- is it enough to drive fuel prices up or not? Does it scare anyone from getting on airplanes to the Trans-Atlantic? And so we have lots of contingency planning we've done.

  • I think it's fair to say, though, that, you know, when and if an Iraqi action begins, we are going to have to wait and see a little bit what happens. We don't have a plan that says two seconds after the Bush goes on TV and says we are going in, bam, we know exactly what to do because at that point, no one will know. So really the approach we have taken is to prepare for an array of scenarios depending on how the world evolves from that point.

  • Now, the one other point I would make is we certainly have been very actively engaged in Washington to make sure that those in Congress and the White House fully understand the potential impact on American and the whole US airline industry from a war in the Middle East right now. And you know, while certainly we can't predict exactly what Washington will do in that scenario, I think it's fair to say that there is a pretty good understanding of this issue, I think.

  • All right. Well, that was the follow-up point I was going to ask, ... so you would envision assistance coming largely in the form of Government aid as opposed to financial reorganization or simply "other" for lack of a better term?

  • - Chief Financial Officer and Senior Vice President of Finance

  • Well, I didn't say that. I think I said I feel that there is a great understanding of the issue in Washington and empathy. Whether that translates into any action is, of course, another question which I would not even begin to try to predict. I well make the point, Jamie that we have been very vocal in saying the last thing the industry needs is more debt. And so what should be talked about here are things like tax relief, things like potentially relaxation of some of the antitrust rules to allow the airlines to rationally say, how do we reduce service and still not, you know, all pull out of the same small city while -- other small cities, et cetera. So we would certainly hope if there was action, it would take that kind of form. But, boy, I wouldn't even try to begin to tell you I'm confident that will happen.

  • Okay. I appreciate it, Jeff. Thanks.

  • - Chief Financial Officer and Senior Vice President of Finance

  • Thanks, Jamie.

  • Operator

  • Our next question comes from Helane Becker from Buckingham Research group.

  • Thank you very much, operator. Hi, Jeff.

  • - Chief Financial Officer and Senior Vice President of Finance

  • Hi, Helene.

  • Let's see. If I understand you correctly, you are spending $1 billion this year on aircraft and yet in the first quarter alone you are looking at an $820 million loss which is an actual cash loss, I didn't hear you talk about non-recurring charges this quarter. So we are looking at your equity line I guess going to zero at the end of the current quarter so your leverage ratio goes back to 100 percent. I don't understand how you can't be trying to figure out ways to get out of these aircraft.

  • - Chief Financial Officer and Senior Vice President of Finance

  • Well... I think all of your math is quite good, Helane.

  • Well, thanks. (Laughter) Jeff, I got an A, this quarter anyway! (Laughter).

  • - Chief Financial Officer and Senior Vice President of Finance

  • There are two types of aircraft we are taking. We have about $500 million in Boeing aircraft that are scheduled to be delivered this year. We worked as hard as we knew how to work last year to defer those deliveries. We were successful in deferring all of our other Boeing deliveries in the years '03, '04 and '05. But we were unsuccessful in negotiating our way out of the 11 Boeing planes that are coming this year. So, you know, we'll make no bones about it, internally or externally, or to Boeing. We don't really want on need these 11 planes but we have a contract so we are going to take the airplanes. Now, Boeing is providing full financing for all of those airplanes. So we won't write any checks.

  • Okay.

  • - Chief Financial Officer and Senior Vice President of Finance

  • When those airplanes deliver.

  • Are you talking to you other lesser source about renegotiating leases? To cut some costs?

  • - Chief Financial Officer and Senior Vice President of Finance

  • We certainly have not talked about that as of today. The other kind of deliveries we have, of course, this year are the regional jets. And even in the current environment, one of the only bright spots -- which gets buried in the overall economics of AMR, is that in the kind of market we're in now, we continue to have places where we can put in regional jets and achieve much better overall economics for AMR than we would otherwise have. So since those regional jets which are about $600 million come fully financed at extremely attractive rates by a combination of the Brazilian, Canadian and Canadian governments and (indiscernible), we absolutely think it makes sense to continue to take those deliveries.

  • And then would you look at as a pension contribution doing what Northwest did with, you know, your Eagle stock counter bidding from Eagle as opposed to actual cash?

  • - Chief Financial Officer and Senior Vice President of Finance

  • I would never rule out anything. All I can tell you is today, all of our contributions to our pension plans have been cash.

  • Right. I've kept up with that. Okay. Well, thanks very much. Good luck.

  • - Chief Financial Officer and Senior Vice President of Finance

  • Thanks, Helene.

  • Operator

  • Our next question comes from James Higgins from Credit Suisse First Boston.

  • Yes, hi. Can you elaborate a bit on the covenants on this debt, the $800 million in debt that you mentioned in the press release?

  • - Chief Financial Officer and Senior Vice President of Finance

  • Well, I think, Jim, I would just come back to, as I said earlier, you know, this is our $834 million revolver. The covenant -- and this is -- maybe I should add, this is probably the only piece of debt we have that is any kind -- has a covenant that is even remotely significant under almost any scenario of the Company. But this is a covenant that is basically a ratio test, so it is earnings-based and sort of fixed charges coverage-based, and unless we see a significant uptick in the revenue environment, I think we are going to have trouble meeting the covenant as it exists right now.

  • Okay. Secondly, I mean, this is following on some of the other questions, but... is your capacity really where it needs to be given what you see in the environment?

  • - Chief Financial Officer and Senior Vice President of Finance

  • Oh, that's a tough question to answer, Jim. You know, I -- I -- I think a -- if someone were to just have dropped into this conference call knowing nothing about the airline business and heard the comment in my prepared remarks where I pointed out that the ATA reported that the year 2000 revenue for the industry was $80 billion, year 2002 revenue was $60 billion... well, I think the simple math that someone who knew nothing about our business might do is they would say, oh, so okay, so the business should be 25 percent smaller and everybody should still be kind of achieving the same margins and employees making the same amount of money.

  • Right.

  • - Chief Financial Officer and Senior Vice President of Finance

  • Well, that's not the way our business works.

  • Sure. Sure.

  • - Chief Financial Officer and Senior Vice President of Finance

  • And -- because the industry is clearly not 25 percent smaller. So we are all just bleeding red ink. Now, I'd love for the industry to be 25 percent smaller. And you might guess my preferred way that the industry would get there quickly. But I think American on its own making small incremental reductions in capacity don't really help solve the overall industry imbalance between capacity and demand and just put us at a further competitive disadvantage or network disadvantage to our competitors.

  • Sure. Sure.

  • - Chief Financial Officer and Senior Vice President of Finance

  • Also, as you know, in our industry, there are lots of challenges to getting rid of the costs as you try to shrink. And so I look at all those things and I say, I don't think American on its own shrinking in the current environment today given our position today makes much sense.

  • Very good. Thanks very much.

  • - Chief Financial Officer and Senior Vice President of Finance

  • Okay. I'm afraid I'm going to be able to take one more question here.

  • Operator

  • Thank you. Our last question comes from Ray Nightle from Blaylock Partners

  • Good afternoon, Jeff.

  • - Chief Financial Officer and Senior Vice President of Finance

  • Hey, Ray.

  • To get back to the aircraft leases, in bankruptcy, U.S. Airways, and from what I hear United, is being very, very aggressive in going to their aircraft lessors at rejecting aircraft and getting rates down. And in bankruptcy they can also go to their ETC and double ETC holders and make changes. Now, American, even if you get all the cuts you want from labor and other areas, is still probably going to be at a big competitive disadvantage if United does manage to emerge from bankruptcy with much lower costs and operating -- capital costs on their aircraft. What, if anything, can American do outside of bankruptcy to modify that -- what would be that differential?

  • - Chief Financial Officer and Senior Vice President of Finance

  • Well, that's a very good question. Let me make a couple of points -- maybe. I think it's fair to say, number one, it's a little too early to say exactly what United and USAir are going to look like long term because neither of them are out of bankruptcy yet. United has announced a wildly aggressive target in terms of what it is seeking from lessors. But we'll see how successful they are in getting towards that target.

  • But, you know, that caveat aside, the reality, when I look at the economics of what's happened at US Air and what appears to be happening at United Airlines, is that the lions' share of their reductions in costs are coming from changes in their labor agreements. And while they are also getting some fleet savings, certainly some of those fleet savings can be gotten potentially even outside of a bankruptcy process and in fact you saw United negotiate some when they were still trying to get the ATSB loan. Secondly, the bankruptcy process itself imposes a lot of cost on a company, on its customers, on its employees, and so as we think about this at AMR, we have got to have competitive labor costs, and we have got to lower significantly our labor and other costs to sustain our Company. And that's just repeating what we said in our press release today. But I -- I absolutely think we can be a tremendously successful airline with competitive labor costs without having to use the bankruptcy process to do what United and US Air have done on the fleet side. Because over time, I think we can close some of that fleet.

  • And I'll also point out to you that the biggest chunk and, Ray, you may be more of an expert on this than me, but as I look at what appears to have happened at US Air and where I think United is going, the biggest chunk of their savings on the lease side are coming from aircraft that they are just getting rid of. Now, I can't do that outside of the bankruptcy process, but you know what I just said to Jim Higgins is outside of the bankruptcy process, I don't want to shrink. And so if you United and US Air use the bankruptcy process to shrink a little bit, well, you know, from a network perspective, that's not a bad thing for me. And I'm not so sure that I'm that anxious to lose 10, 15, 20 percent of my capacity in order to get a bunch of labor -- excuse me, fleet savings in the bankruptcy process.

  • So I very strongly resist the chain of thought that says it is inevitable now that US Air and United have gone into bankruptcy that American must. You know, we are blunt in our press release saying, to sustain our Company, we have got to lower our labor and other costs. But I honestly believe, Ray, we can find a way to do that, working together with our employees after what they've been through and working together with our labor leaders to keep this as one of the world's great airlines.

  • On the flip side, the positive side with United, if they don't successfully reorganize, if they liquidate, that's going to take a lot of capacity up to 20 percent capacity out of the market. And they are going to have assets available. Would that take pressure off of American for trying to lower their costs with all that capacity on the market and would American be in a position to maybe bid for some of those assets.

  • - Chief Financial Officer and Senior Vice President of Finance

  • Well, that's an awfully hypothetical question, Ray. I guess all I would say, the whole world changes if you saw a liquidation at United Airlines. But I'm not sure I want to speculate on that. I will leave that to experts like you and to the folks at United.

  • So thank you to everyone for participating today. And for those of you listening in for the media ,if you will stay on the line, I'll be back with you in just a few minutes. And I'll be happy to answer your questions.

  • Operator

  • This concludes today's conference call.