使用警語:中文譯文來源為 Google 翻譯,僅供參考,實際內容請以英文原文為主
Operator
Good afternoon and welcome to the AMR third quarter earnings release conference call. [operator instructions] I would now like to introduce Ms. Kathy Bonanno, Director of Investor Relations.
Ms. Bonanno, you may begin.
Kathy Bonanno - Director of Investor Relations
Good afternoon everyone.
Thank you for joining us today.
This afternoon, I'm joined by Mr. Gerard Arpey, AMR's President and CEO and Mr. Jeffrey Campbell, Senior Vice President of Finance and Chief Financial Officer.
Starting off, Gerard will provide an update on our turnaround plan, and then as always Jeff will provide the details regarding our earnings for the third quarter along with some perspective for the rest of the year.
After that, we'll be happy to take your questions.
Our earnings release contains highlights of our financial results for the quarter.
I encourage you to review that document for more specific information.
We posted our earnings release on the investor relations section of our website at www.amrcorp.com.
At that same website, interested parties may listen to a live webcast of today's call and review a slide deck provided in conjunction with the webcast.
The slide deck along with the press release will contain reconciliation of any non-GAAP financial measurement we may discuss to what we think is the most appropriate GAAP measurement.
Once again, the website is www.amrcorp.com, and the webcast can be accessed from the investor relations page.
Replay of the call will be available for at least one week.
Finally, let me note that our comments today on matters related to our outlook for revenue and earnings, cost estimates and forecast of capacity [Gap In Audio] will constitute forward-looking statements.
These matters are of course subject to a number of factors that could cause actual results to differ materially our expectations.
These factors include domestic and international economic conditions, commodity prices, general competitive factors including but not limited to government regulations, uncertainty in domestic or international operations, terrorism, our ability to access the capital markets, and changes in the company's business strategy, any of which could affect our actual results.
With that, I'll turn the call over to Gerard.
Gerard Arpey - CEO
Thank you Kathy, good afternoon everyone.
As Kathy mentioned, I'm going to spend just a few minutes talking about our third quarter and the progress we're making under our four-point turnaround plan, and then I'll give things over to our Chief Financial Officer Jeff Campbell, who will go through our results in more detail.
As you see in our press release, we've got a lot to feel good about this quarter, and we obviously have many remaining challenges ahead of us.
On a GAAP basis, we essentially broke even in the quarter, reporting a net income result of $1 million.
Given the favorable tax treatment we enjoyed last year and a handful of special one-time items in both years it's perhaps more useful to look at how our pre-tax earnings stack up year-over-year excluding tax affects and one-time items.
And on that basis, we show dramatic year-over-year improvements in our financial results.
Last year on a pre-tax basis, we lost $741 million in the third quarter.
This year on that same basis, we lost a very modest $23 million including 9% more per gallon of fuel this year than we paid last year.
And while a small loss on a pre-tax basis, excluding one-time items doesn't feel as good as the profit, the fact remains that our results represent nearly a three quarters of $1 billion improvement year-over-year.
Looking at the quarter overall, I think it is fair to say we are generating momentum under all four tenants of our turnaround plan.
On the cost side, we are very pleased with the [Gap In Audio] made and we are on track for ultimately realizing the $4 billion goal we set for ourselves in capacity independent cost savings.
The closing of our St. Louis reservations office in September and the maintenance-based decision we announced today will further buttress our efforts.
In the third quarter as you see in our release, our unit cost fell by 8.6% without the impact of higher fuel prices or unit cost improvement would have been close to 10%.
On the revenue front, we also saw some momentum with our year-over-year unit revenues improving over 8%; that was driven by a lot of tactical schedule changes we've made, higher summer load factors and a modest strengthening in our yield year-over-year.
Our yields on an absolute basis, however, remain low from a historical perspective.
I would expect that we will continue to build momentum on the revenue front based on some recent successes and decisions that we’ve made, we are in the process of implementing our co-sharing agreement with British Airways and the early results of that are encouraging.
We were successful in our battle with the alliance in securing with Swiss International, into their One World Alliance.
Strategically, this solidifies the One World and Americana presence in Central Europe, which historically has been a key star strong hold.
And we see Zurich as a complementary hub in Europe and London and our British Airways partnership.
We began the process of reconfiguring our A300 and 757 fleets, to add more seats in the coach cabin.
In fact, we've got about half of the A300s complete at this point.
They will all be available by Thanksgiving.
We will finish the 757s early next year, [Gap In Audio] in the fourth quarter and throughout next year.
And then finally the realignment of our domestic hubs and the substantial reduction in St. Louis flying will go into effect early next month.
So as I said, I would expect those changes to continue to build relative momentum for us on the revenue front.
Turning to the operating side of our company, I think it is fair to say that our folks have continued to run a good airline despite all of the challenges we faced this summer including the implementation of the restructured contract.
Like most every airline our dependability slipped this summer with the heavy load factors that we experienced, but our September A14 improved 10 points versus August, and in October we are really running very well on a month-to-date basis [Gap In Audio] yesterday our arrivals within 14 minutes of schedule were close to 90%.
If we continue on that track and have good weather for the rest of the month, I think we are going to have the best October operation that we've had in our history.
Our progress on all these fronts has allowed us to regain access to the capital markets, most recently with the completion of a $300m convertible debt issue.
I will let Jeff fill you in on the details, but our cash balance has been building steadily and now stands at $3.3 billion, increase of $800m compared to last quarter.
We've also been able to fund $300 million on a year-to-date basis into our pension plan which is obviously very good news for all of our employees.
So, to summarize, I think all in all, we can't help but be encouraged by the progress we are making on many fronts, but we are mindful of the fact that [Gap In Audio] into the more difficult fall and winter seasons and we realize [Gap In Audio] number of challenges ahead of us and we are going to continue to work hard to meet all those challenges.
So, that said, I am going to turn things over to our Chief Financial Officer, Jeff Campbell.
Jeff Campbell - SVP Finance and CFO
Great, thanks Gerard and good afternoon everyone.
As Gerard said, we've got a lot to feel good about this quarter.
Clearly our dramatic cost restructuring is having a significant impact on our performance, our revenues were not where we would like them to be, and nonetheless better than they have been in recent history.
As our results have improved, we regained access to the capital markets and are making real progress on our liquidity front, and all of our employees are focused on driving further improvements in both costs and revenues.
We realize that while we should feel good about the progress we've made, we've only just begun in terms of the work we have ahead of us to return this company to achieve [Gap In Audio] at acceptable levels.
As I turn to our results, in our press release and in Gerard's opening comments, we've tried to focus people on the fact that this quarter excluding special items, we had a pre-tax net loss of $23m or $0.15 a share.
This compares to a pre-tax loss last year of $741 million or $4.76 per share.
We continue to believe it helpful to call out our special items, which are driven by our ongoing restructuring efforts and which I will talk about more in a minute.
In addition, since our results this year do not reflect the provision for federal and state income taxes, the pre-tax comparison is really more meaningful in terms of future performance.
Let me take a minute to elaborate on the special items.
I will start with the largest one, the $68m gain on restructuring.
This transaction was alluded to in my comments last quarter.
It was agreed to as part of our restructuring last April, but not actually executed from an accounting perspective until the third quarter.
We essentially sold some Fokker 100s and terminated some related interest rate swabs and exchanging for the restructuring of about a $130 million of debt.
In addition to the $68 million gain, this quarter we expect to recognize another $37 million gain in 2005 when certain contingencies expire.
The $40 million charge for Aircraft and Facility cost consist primarily of the early grounding of five TWA 757 aircraft, which would otherwise come off lease in 2004.
The early grounding saved us some costly maintenance work that we would have had to do before the normal retirement schedule of the airplanes next year.
Lastly, the $4 million employee charges for the one-time cost of severance associated with the closure of the St. Louis reservations office.
All told, our special items for the quarter add up to a net credit of $24 million.
Let me now turn to cost, which once again is really the strong story of the quarter.
As Gerard said, we are well on our way towards achieving our entire $4 billion savings goal and in fact, with regard to the $2 billion in strategic initiatives, I told you last quarter on the call that we had realized about $1.3 billion of the $2 billion in 2003.
And it now looks like that number will be close to $1.4 billion.
We will get an incremental $400 million in 2004 and another $200 million in 2005 to bring us to the $2 billion.
We reached our labor savings run rate of 1.8 billion per year in savings in the fourth quarter of this year and we have already realized the full effect of the concession air [Gap In Audio] this quarter adding another $200 million per year.
With these savings in place our main line [Gap In Audio] items as Gerard said improved 8.6% to 9.49 cents.
And I think very importantly as we saw last quarter, this improvement comes not just from the labor and restructuring - the labor restructuring and the non-labor concessions, but also in almost every line of the P&L.
This widespread improvement is a testament to the ongoing efforts of everyone at AMR to adhere to first term in the turnaround plan, lower cost to compete, while continuing to deliver great customer service.
It also demonstrates our continued focus on the need to not only achieve, but to go beyond the $4 billion in savings, we initially identified.
The disappointing news in terms of our cost cutting efforts is that fuel prices remain persistently high averaging $0.85 during the third quarter.
This represents an increase [Gap In Audio] prior to last year.
This increase came despite hedging gains of $25 million or $0.32 a gallon.
While fuel prices have moved down a bit after peak levels that they reached in March, they are still well above historic levels and obviously if they remain high will be a drag on earnings going forward.
Turning to revenue, we're seeing signs of improvement, but certainly not to the degree we would like, particularly [Gap In Audio] remain largely traffic driven with some cause for optimism, with an increase in main line yield for the quarter of 2.5% compared to last year.
This is the first year-over-year increase in quarterly yields we've seen since since first quarter of 2001.
In July and August we attributed yield increases to record high load factors, 81% in July, 80% in August.
Load factors [Gap In Audio] us to sell up and to generate a higher yielding mix of passages.
Moreover, in September, a month with a seasonally weak load factor of just 67%, we once again [Gap In Audio] was relative to last September.
Aggressive yield management strategies and markets with limited fair rule (ph) restrictions have contributed to the increases in yield, and we continue to make tactical schedule adjustments in order to capitalize on revenue opportunities.
Additional yields in the third quarter benefited from the security tax holiday granted by the federal government beginning in June and lasting to the end of September.
The combination of record high load factors and small improvements in yield produced strong gains in year-over-year unit revenue performance.
Main line unit revenue for the third quarter was 8.84 cents, an increase of 8.1% compared to last year and AMR total revenue for the quarter was $4.6 billion, an increase of nearly 2% compared to last year on 5.3% less capacity.
As encouraging as our yield and RASM performance seems, both measures still remain weak by any historical standard.
Unfortunately, business start up for the third quarter remained soft and those business travelers that did fly had a number of low yielding flexible products from which to choose.
The only bright spot here is that we've recently seen some positive trends in our [Inaudible] traffic data.
For our level of business traffic remains lower than last year.
The gap between the two years is narrowing.
Now, our revenue results were particularly strong domestically with improvements in both loads and yields.
Unit revenue was up 11.6% vs. last year.
Domestic load was up 5.1 points and yield was up 4.1%.
Domestic Capacity was down 9%.
Internationally, unit revenue last year by roughly 0.5% on a slight increase in capacity.
During the third quarter, international load factors improved by 1.2 points while yields were down 1.2% from year ago levels.
And let me remind everyone that this year's statistics include the impact of our 767-300 three-class to two-class reconfiguration, which added 23 seats to each plane.
So on a year-over-year basis, our international RASM number will look worse by about 4 points than it would have without the change, but of course if we talked about CAZM (ph) on an entity level, it would look better.
This change impacts Europe in particular and Latin America to a lesser extent.
With that caveat, European unit revenues were essentially flat year-over-year on a 2.5% increase in capacity.
Yields in Europe increased 2.3% for the quarter while loads were down by 2 points.
The impact – [Gap in Audio] where total revenue for Europe up about 2.5% on a reduction in frequencies.
In the Pacific where traffic is starting to come back unit revenue in the third quarter increased by just less than 1% versus last year.
Load factors dropped by about 4 points on a more than 7% reduction in capacity, but unfortunately yields went the other direction, and were off by about 4% compared to last year.
Finally, unit revenue for Latin America operations was also up just about 1% year-over-year on flat capacity, here once again loads increased, but were offset by corresponding decline in yield.
Now, before we move on to the balance sheet let me touch briefly on the results for our regional affiliates, which continues to be a pretty good new story.
That we have been behind other network carriers in terms of regional net growth, the fact that is clearly hurt our relative performance.
But with our latest round of labor agreements, we now have much greater flexibility in the use of regional debt.
This is [Gap In Audio] and the results have been impressive as we substituted RJs for bigger jets on routes that weren't making the cut when flown by the bigger airplanes.
As we catch up with our peers, we should have some upside in terms of our relative performance.
And for the third quarter, eliminating the year-over-year differences in accounting that I explained last quarter, unit revenue for our regional affiliates was up 1.6% year-over-year, and if we adjust for more than 10% stage-length increase, unit revenue was actually better than last year by 8.7%.
On a stage-length adjusted basis, yields were up 2.1 points on a 20.5% increase in the capacities.
Now, moving on to the balance sheet, I continue to be very pleased with our progress in terms of liquidity, and I'm certainly encouraged by our continued access to the capital market.
The net result of our strong cost restructuring combined with modest revenue improvements is that we have been able to rebuild market confidence, and in turn rebuild our liquidity.
We ended the quarter with $3.3 billion in total cash and short-term investments, a substantial increase from last quarter's balance of $2.4 billion.
And let me walk you through the primary contributors to that income.
First, and obviously most importantly we generated positive operating cash flow during the quarter in the amount of $425 million.
This was achieved strictly because of the restructuring we did, and is the foundation for why the financial markets have regained confidence in AMR.
Because of this confidence as we began the third quarter we closed on aircraft financing secured by most of our remaining 1110 eligible aircraft generating $255 million of cash.
In September, we once again accessed the capital markets; this time with a convertible debt offering, which boosted our cash balance by another $300 million.
Now as you recall in early August [Gap In Audio] offering as we felt it made no sense to proceed with the transaction in market conditions as they evolved that day.
And which were clearly at odds with the growing improvement at AMR.
In contrast to that August offering, the September convertible offering was a much larger deal, with a much lower coupon and a much higher conversion price.
All of which we felt were more in line with the financial position of the company.
Lastly a smaller transaction [Gap In Audio] generated about a $100 million.
So these strong operating cash flow results aided by strong access to the capital markets allowed us to build the highest cash balance in AMR's history, $3.3 billion.
And over on the subject of liquidity let me just quickly rattle off our plans for CAPEX, debt repayment and pension funding for the remainder of this year and next year.
For the remainder of this year, our capital spending [Gap In Audio] for which we have preexisting financing.
For next year our CAPEX will be about $1.2 billion and again we have preexisting financing to cover all of the aircraft deliveries, which are about two-thirds of the dollars we are spending.
Principal payments in the principal portion of our capital lease obligations for the fourth quarter of this year should be about a $179 million.
In addition to that we have $200 million in mini-bonds, which have a mandatory put provision effective in November.
And for 2004, our total principal payments are expected to be just under $800 million.
On the pension side, our funding requirements for 'O3 evolved and met.
For the year we contributed about $200 million to our defined benefit pension plans, plus another $100 million as far to our defined contribution plans.
Next year funding requirements for the defined benefit plan should be about $600 million.
Given our improved results driven by the restructuring and with the access we now have to the capital markets we have a range of financing alternatives we can use to meet these 2004 obligations.
These include secured financing, using our $1.7 billion in remaining unencumbered aircraft or other assets.
The sale of additional non-core assets and possible sales of equity or equity-linked securities.
As things stand today, I believe there is strong demand in the market for all of these financing alternatives.
Moving to cost guidance.
Our labor agreements will produce incremental savings of about $50 million in the fourth quarter this year, reaching the steady state of $450 million a quarter.
The saving when factored in with our strategic initiatives and non-labor savings should result in our mainline unit cost for the fourth quarter being about 9.6 cents, down about 10% from last year's fourth quarter level.
At the AMR level unit cost for the fourth quarter are expected to come in at about 10 cents, more than 9.5% better than last year.
Our cost forecast for the fourth quarter had a fuel price in it of nearly $0.88 a gallon up more than 6% from last year's $0.83 and up from the $0.85 we experienced in the third quarter.
For the fourth quarter, we have fuel hedges in place covering about 29% of our expected consumption at a WTI crude equivalent price of about 22.5 a barrel.
In the fourth quarter, we continue to plan for reduced capacity on year-over-year basis, but to a much lesser degree than we've seen in prior quarters.
Our main line capacity is planned to be down close to 2% last year's fourth quarter.
Now going forward to next year we reach a key milestone on fleet simplification with the retirement of the last F100 in September 2004.
In fact, we are removing 57 aircraft summer-over-summer 2004 versus 2003 in terms of our total fleet and reducing mainline departures year-over-year.
Because of increased efficiencies however, on the remaining fleet, on a ASM basis our capacity next year will increase by about 5% to 6% really driven by three factors.
First, we operated with a low base early on this year as a result of the war in Iraq and SARS.
Second, we are adding seats back to two of our fleet types our 757s and A300s.
These planes will be strategically deployed to high load factor heavy region markets where we are probably spilling traffic today and third, as we realign our mid-continent hubs, we are going to improve our aircraft productivity levels by 9%.
As we look at our system wide booked load factor for the rest of this year, loads are essentially flat with last year.
Bookings are a little stronger for the domestic system than they are for international.
We continue to see year-over-year shortfalls in international bookings, albeit on capacity increases rather than decreases.
Now last quarter in closing I told you that the take away message should be one of cautious optimism.
I think that remains appropriate.
We have made tremendous strides in reducing cost, improving performance, regaining access to capital markets and rebuilding our liquidity.
Clearly however, a nearly breakeven result in the seasonally strong third quarter is not where we need to be.
We are making a number of changes to improve our competitive revenue and cost outlook going into 2004 which Gerard enumerated and our entire company has focused on and committed to executing all four tenants of the turn around plan and returning AMR to sustained profitability at acceptable levels.
And with all that as background, Jordan and I will now be happy to take your questions.
Operator
Thank you.
At this time we will begin the analyst question and answer session. [operator instructions] Our first question comes from Glenn Engel of Goldman Sacs.
You may ask your question.
Glenn Engel - Analyst
Hi folks.
Jeff Campbell - SVP Finance and CFO
Hi Glenn.
Gerard Arpey - CEO
Hi Glenn, how are you doing?
Glenn Engel - Analyst
When you're looking at the 5% or 6% expense capacity growth next year, when can you give us a flavor of how it shapes out; during the year, by quarter.
And two, just what is the incremental cost of adding these seats, shouldn't I be seeing even further unit cost declines in the second half of next year versus this year?
Gerard Arpey - CEO
Yeah, Glenn, I think we are in the process of finalizing our operating plans for next year or so, you know we can't give you specific breakdown right now, but most of that increase is, or a good percentage of it is on the International front, because of all of the cancellations come in through the SARS events earlier this year.
And I think your point is, and as soon as we got that broken out by quarter in internationally, domestically we'll share it with you.
But, I think your point is right on in terms of the efficiency of that capacity.
I think that is going to be -- that 5% or 6% is going to be among the most efficient capacity we've ever put out there and I am pretty excited about the operating plan we are building generally for next year, because we've -- as Jeff pointed out we really kept the pressure on the cost front and we're seeing that throughout the company and as we finalize the plans for next year, we're really pushing hard to build one of the most productive operating plans we've had in our history.
So, the marginal capacity is going to be very efficient.
Glenn Engel - Analyst
A follow-up on that, two things.
One is, is your headcount reductions behind you and two, what will be the head wins on the cost side in 2004?
Gerard Arpey - CEO
Well, on the headcount Glenn, yes and no, if you go back to summer of '01, we're down something like 35,000 equivalent employees from where we were that summer, and the vast, vast majority of all of that is behind us, but because of the terms under which we restructured our pilot agreement, it takes time to phase in the productivity changes that we are accomplishing, because you've got to train pilots to different seats and we are still on the process of doing that.
And so, we will be seeing more -- we'll continue to see pilots come of payroll between now and the spring, but for the most part that's the only group we're going to see more reductions with the exception of attrition, just normal attrition.
And your second question, I am sorry Glenn was...
Glenn Engel - Analyst
What would be the expense head wins if things that are going to make it tougher to bring cost down in 2004?
Gerard Arpey - CEO
Well, the first thing that comes to mind is healthcare cost, despite the fact that we do our restructuring, our employees are contributing more, you're going to see a substantial increase in our healthcare cost year-over-year.
We're also facing a lot of pressure, Glenn, at all the airports around the country as more and more projects come to fruition and find their way into our landing fees and airports rents.
And then, finally like any airline as our fleet ages, you're going to see pressure on the maintenance front.
Those are the first three that come to my mind.
Glenn Engel - Analyst
Thank you very much.
Gerard Arpey - CEO
Your welcome.
Operator
Our next question comes from Jim Higgins of Credit Suisse First Boston.
You may ask your question.
Jim Higgins - Analyst
Yes, hi.
You probably said this, the five to six percent capacity growth next year, is that mainline capacity growth?
Gerard Arpey - CEO
Yes.
That's right Jim, that's for American Airlines.
Jim Higgins - Analyst
And if you included your total regional partners including Eagle, do you have a sense of what the growth rate would be?
Gerard Arpey - CEO
It bump it about another percentage point.
Keep in mind, during that part of that increase for us is going to the year-over-year effect of adding seats to the A300s and 757s, because our fleet as Jeff pointed out-- the fleet itself is still shrinking and that leads to Glenn's point about the efficiency with which we're putting those ASMs up, because we're putting them up with fewer departures.
Jim Higgins - Analyst
And that increase in seats, that's about 2% from start to finish, is that correct?
Gerard Arpey - CEO
On a full year basis, yes.
Jim Higgins - Analyst
Okay.
Where are you in terms of - you've gained a lot of flexibility to add regional jets with the labor restructurings, but there have been no major announcements or anything else.
What can we look for in terms of your adding RJs, is it just adding within your current order book and your current ability of your partners to provide service or what should we think about that?
Gerard Arpey - CEO
Well, actually Jim, in terms of the order book, we're actually in pretty good shape.
As Jeff pointed out, that compared to several of our principle competitors, our RJ Flying as a percentage of mainline flying is much less.
And that's for the historic reasons that you're familiar with.
But if you look at the order book for the next 24 months, we've got more Bombardier 70-seater planes coming and we have; off the top of my head I don't know the number, but probably close to 75, 50 seats regional jets.
We'll get you the number, so for the next 24 months we're going to be playing catch up but I think we're going to make very good progress.
Jim Higgins - Analyst
And have you set pilot rates for the 70-seaters, is that done?
Gerard Arpey - CEO
Yes, and in fact we're flying about half a dozen 70-seaters today and we have firm orders up to 25.
Jim Higgins - Analyst
Great, thank you very much.
Gerard Arpey - CEO
Thank you, Jim.
Operator
Our next question comes from David Strine (ph) of Bear Sterns.
You may ask your question.
David Strine - Analyst
Hi, thank you.
Jeff I believe you mentioned that business traffic store remains soft but you are seeing some positive trends in corporate traffic.
I was wondering if you could elaborate on that or touch and then indicate whether or not you are seeing any difference between business traffic domestically versus internationally.
If so, how much different is that?
Jeff Campbell - SVP Finance and CFO
Well, David I am not sure we, frankly did it a lot of times we can elaborate on before my earlier comments, clearly identifying business traffic has increasingly for all of us become more of an art as the fare structure has evolved to offering more and more fares without restrictions that can be purchased late in the purchase cycle.
What we can of course look at is overall levels of corporate traffic and that's where as I said at least the year-over-year declines have started to get better.
We don't particularly see any particular difference in the mix between domestic and international In many ways I think the more important thing that I look at to try to see a little bit of an optimistic sign in the third quarter is the fact that this is the first time we've seen a year-over-year yield increase for the quarter, and in fact we saw that across all three individual months since the first quarter of 2001.
And in particular, seeing that yield increase in September, when we didn't have seasonally high load factors to help us go up.
It is hard to what we bake into my comments that I am not, certainly not signaling here any huge increase in business traffic.
And there are a few signs that they at least is going in the right direction.
David Strine - Analyst
Okay, that's helpful, thanks.
Operator
Our next question comes from Ray Neidl of Blaylock & Partners.
You may ask your question.
Ray Neidl - Analyst
Yes, two questions.
One technical, one more broad.
I think I saw some speeches last week where the company was saying that further cost cutting is needed in light of the light yield comeback we are seeing.
If you said that, was this on top of the $4 billion plan already in place that you are looking for additional cost cuts or was this just emphasizing that you have to continue being a very careful with the costs?
Jeff Campbell - SVP Finance and CFO
Yes, Ray, the point at that we were making is under our turnaround plan that first tenet lower cost to compete just because we are on track for achieving the $4 billion doesn't mean that we can all relax and quit worrying about cost control.
We had all of our management team together here in Dallas a week or two ago, and one of the points we really underscored to them was the fact that in this environment lowering cost to compete has to become a continuous improvement process in our company.
And so as we build a budget for next year, we are going to be looking at every line of expense, trying to find ways to do the job more efficiently, more effectively, and we are going to be working hard to try to involve our unions and the people who do the work in helping us to figure out if there are ways to do it better.
So, I think if it as a continuous improvement from here on now.
Jim Higgins - Analyst
And the technical question is – let’s look at the next year on the bright side that American returns to profitability.
I take it that the company will not be a cash taxpayer for quite a time, is that correct, a correct assumption?
Gerard Arpey - CEO
Yeah.
I think that's a really safe assumption.
Jim Higgins - Analyst
Okay.
Good, thank you.
Gerard Arpey - CEO
Okay.
Operator
Our next question comes from Michael Linenberg of Merrill Lynch.
You may ask your question.
Michael Linenberg - Analyst
Yeah.
Hi and good afternoon.
I guess two questions.
One, I'm sure you watched both Continental and North West, you know, extract a value in using their regional partners or that ploy on regional carriers as a source of funding and particularly with their pensions.
And I know that historically, American has kind of, been on the fence with this with respect to Eagle, and I'm just curious if you can maybe update us on the latest fields on that topic?
Gerard Arpey - CEO
Well, Michael I think- yeah, we are well aware of the industry trends in commuter feed and there are all kinds of paradigms that are out there now and different paradigms emerging in and yes obviously Continental and both North West Used stock in their commuter carriers to fund their pension plan.
So, I think where that leads us, is we are mindful that we have a very important strategic asset in AMR Eagle and as we move forward, we are going to be very thoughtful about the best way to capitalize on that strategic asset for our shareholders.
As we said here today, we haven't reached any conclusions, but you can be assured, it's one of the things that on the top of our list of things to be thinking about.
There are pros and cons to different capital structures for these entities and we are going to have to think our way through them.
Michael Linenberg - Analyst
Okay and then, just my second question Jeff, when you -- through you comments you talked about some of the improvement in unit revenue when you referred to some tactical schedule adjustments.
If you can just-you know maybe elaborate on that, maybe give us an example of some of the differences that you've done with respect to scheduling?
Gerard Arpey - CEO
Yeah, Michael, I'll steal that question from Jeff.
If you look our year-over-year, third quarter last year compared to the third quarter this year, I think our schedule folks-- and have really worked hard to try to improve the efficiency of our network, and you know, some of the things that are different from last year's third quarter is the de-peaking of the DFW hub that occurred late last year.
We also had DFW earlier this year, in the spring we consolidated our main line jets into two terminals at DFW, instead of spreading them over three, and we put American Eagle over into terminal B, making that an exclusive Eagle RJ operation, which saved us a lot of the money.
We also eliminated a split operation that we had at Los Angeles surrendering a lot of gate to LA that we weren't using very efficiently and then if you crawl through just market-by-market and you look at all of our markets we've increased frequency in about 57 markets system wide, and we've reduced frequency in about 144 markets, and I won't torture you with all the markets, but we've -- and in process of doing that, we've done a lot of RJ for big jet substitution.
Put the big jets in more effective markets, we've also introduced new non-stop service in about a dozen markets and we canceled service in about 13 markets.
We're also moving to eliminate sub-fleets, fleet types and one of the projects we continue to work hard on is isolating aircraft to certain cities so that the -- we're down there -- you know, we've cut in half the number of fleet types in the company, but now what we're working on is trying to isolate those [Gap in Audio] to certain cities so we get complexity out of a lot of locations so, that's what I think I referred to as tactical schedule changes when I -- in my opening remarks.
Michael Linenberg - Analyst
Thank you very much.
Gerard Arpey - CEO
You are welcome.
Operator
Our next question comes from Gary Chase of Lehman Brothers.
You may ask your question.
Gary Chase - Analyst
Good afternoon.
Gerard Arpey - CEO
Good afternoon.
Gary Chase - Analyst
Just a quick question, I'm sure this is nothing but, you know, the release kind of point to some caution, I think, Gerard, you're discussing on uncertain revenue environment.
Was there anything behind that or is it just, you know, it's kind of hard to figure out exactly what's going on?
Gerard Arpey - CEO
Well, I think the -- I think what we're really referring to there is, if you look at -- there's good improvement year-over-year, but on a historical basis in real terms we're still selling tickets for less than we did ten years ago.
So, we continue to be troubled by absolute revenue level and candidly it's never been more difficult in all my years at American to forecast where revenue is going.
So, it's a lot harder now than it was many years ago.
So, I think that's what we're talking about.
Gary Chase - Analyst
Okay, so there is nothing necessarily that's ominous that you see in the near term anyway?
Gerard Arpey - CEO
No.
Gary Chase - Analyst
Okay.
You know I feel like I have to ask you this Gerard.
One of the parts of the turn around plan is to give customers what they value, I think, it seems pretty clear anyway that customers do value, you know, low unrestricted fares and you know to some extent I think, I just wonder sometimes if you're creating more competition than you need by sticking and this is not a situation that's unique to American, but these very high unrestricted fares, seem to be [Inaudible] a lot of people, and I'm just curious what your take is there?
I mean, is this something that you think you need to address and I guess if not why not?
Gerard Arpey - CEO
Well, Gary, I think the challenge that we face and a lot of our competitors face is overall or absolute revenue challenge, because I don't think -- and I can only speak for American and then I think we don't like the gaps that we see in many of the markets between our advance purchase fares and our walkup fares, but the challenge is trying to find a paradigm in which you change that formula and it is actually revenue positive to the company in this environment.
So, which you see us doing and I think it's fair to say you see a lot of other airlines doing is experimenting with different formulas in different markets mindful of the fact that we don't have the degrees of freedom or the balance sheet strength that we might have had many years ago to make bold kinds of experiments to try to see if we can figure it out.
So, what's happening out there is the pricing paradigm I think is evolving based on extraordinarily competitive industry with a bunch of different carriers, who all have a different view as to what the pricing structure ought to look like, and all have different views about what elasticity is in this industry.
So, you take all that and you throw all this hyper competition out there and you end up with what we have today.
But we are mindful of obviously the issue that you raised, and we'd like to solve it, but we'd like to solve it in a way that makes our company financially more successful than it is today.
Gary Chase - Analyst
Okay.
Thanks guys.
Gerard Arpey - CEO
Thank you.
Operator
Our next question comes from Sam Buttrick of UBS.
You may ask your question.
Sam Buttrick - Analyst
Yeah, hi everybody.
I guess sort of following on that last point, but these kind of carriers continue to expand aggressively everywhere, including in many of your historic markets.
American has always been a vigorous competitor in the marketplace, but you know, you've also sort of been flat on your back for a while.
Do you remain resigned that there is nothing that you can do to either deflect the onslaught or compete more effectively?
Gerard Arpey - CEO
No, I don't think so at all Sam, because I think as we continue to build momentum on our turnaround plan and we continue to build some modest balance sheet strength, we are through shrinking.
So, we are going have an operating plan next year that will as Jeff pointed lead to 5% to 6% growth in capacity, and as we realign our network, November 1, you're going to see us adding service in a number of markets at Dallas and Chicago, and I hope back to the original question either from Glenn or Jim, as we build momentum and move through next year, I think our marginal capacity is going to be very competitive.
So, I hope if we continue to make progress, we are not going to be looking at shrinking in 2005, we will be continuing to grow and so we're not running from these carriers any more.
Sam Buttrick - Analyst
And two other things real quickly.
On the subject of efficient marginal capacity, could you express that perhaps in your, I don't know, your summer '04 aircraft utilization versus '03.
So, we could look at it that way or something along those lines, and lastly, just a brief update from a provisional perspective, I guess on where you are with your JFK construction project, because I can't wait till that's done?
Gerard Arpey - CEO
Yes, I hear you Sam.
I can't either.
Sam on the point on utilization, I don't have that number yet for next summer, but I can tell you this.
I'm very excited about what I'm seeing as the operating plans come in together in terms of all of our resource utilization next year.
So, can't give it you today, but I think when we get around to giving you those numbers, we're going to be very excited about them.
As far as Kennedy is concerned, we're on track on that project, we changed the phasing of Kennedy, and we're working with the Port Authority on the phasing of the project, and as you know, we did that to phase some of our capital spending, but the project remains on track, and like you, I'll be glad to have that one behind us.
Sam Buttrick - Analyst
Okay, thanks very much.
Gerard Arpey - CEO
Sam, on that point, the first portion of the new facility is going to open in early 2005.
Sam Buttrick - Analyst
Right.
Okay, thank you.
Gerard Arpey - CEO
Thank you.
Operator
Our next question comes from Helane Becker of Benchmark Capital.
You may ask your question.
Helane Becker - Analyst
Thanks very much operator.
Hi, guys.
With respect to the balance sheet, I guess, you are talking about a lot of the opportunities that are available;
I want to start to address that relative to liquidity.
You've got just about $200 million of interest expense on a quarterly basis, plus all the [Inaudible] I guess at the level about $800 million a year plus the $800 million in principal repayments next year is about $1.6 billion right there in actual cash outlays.
Could you just talk about how you go about maybe in the next year or so getting that interest expense down to a level where you're covering it from an operating income standpoint so you can really see the meaningful improvements in net income?
Jeff Campbell - SVP Finance and CFO
Well, Helane, I guess I'd point to the range of financing alternatives.
Number one that I talked about in my prepared remarks is a variety, I think, of secured financing, equity, equity linked financing or further sales of non-core assets that we can use to fund ourselves.
I pointed out that very importantly in the third quarter of this year, we generated $425 million of cash on an operating basis.
That obviously has to be the corner stone of what happens with our company going forward.
And clearly we don't want to be a company that breaks even in the third quarter every year.
On the other hand, we think that's pretty darn good progress, considering where we were just 6 months to 12 months ago.
So, I feel very comfortable with our liquidity issues as I think about the year 2004, I think the real challenges for us are to get to the further revenue and cost improvements that we need to get to so that instead of breaking even, we're back being a profitable company and obviously it's only when we're back being achieving real profits that we're going to be able to start to chip away after reducing that interest expense level.
That's clearly not something that we are going to be able to do in the short-term, until we improve our results.
Helane Becker - Analyst
Okay.
And then, my other follow up question is with respect to on your revenues, you know you've shown all year long really good sequential quarter improvement in the revenue line.
I mean historically, the fourth quarter dips from the third and I guess you are not really seeing anything now that would cause the fourth quarter to be different this year, are you?
Jeff Campbell - SVP Finance and CFO
Well, let me make two comments Helane.
Number one, I appreciate the first part of your comment because I think you are picking on something we feel, is very important to the story here at AMR, which is the reality is that because our company more than any of the other traditional carriers was optimized in every way for the business traveler in the year 2000.
Frankly, our relative revenue performance with the economic slowdown and the events of September 11, our relative revenue performance has fallen further than the other traditional carriers, and I think it might be fair to say we're a little slow to react, but Gerard listed a whole bunch of things we are doing, and all tactical schedule stuff as we reorient this company towards the revenue reality that we find ourselves in today, and I think that is what has led to our sequential revenue improvement picture talking about, and I think, that when you look at the hub realignment, November 1, and more seats on some of the 757s and A300s and some of the other things we're doing, we feel pretty good about maintaining that sequential improvement well into next year.
Now, all that said, let me just point out that none of that is going to allow us to avoid basic seasonality of our business, and obviously, the fourth quarter is a seasonally very weak quarter and I don't find that troubling, it's not a trend that's going in a wrong direction, but we are not going to be able to escape basic seasonality.
Helane Becker - Analyst
Right, right.
Okay great, thank you so much for your help there.
Jeff Campbell - SVP Finance and CFO
Yes.
Operator
Our next question comes from Jeff Kauffman (sp) of Fulcrum.
You may ask your question.
Jeffrey Kauffman - Analyst
Okay.
Thank you very much.
I'd like to ask a question on pension and then follow up on Helane's.
Briefly, I think Continental surprised a lot of people when they mentioned that their plan was looking to be funded about 90% of current liabilities toward year-end.
Given the run in the equity markets, given some of the contributions you've made, have you taking a peek at the pension plan and gotten a rough idea of what the funding might be as we head toward the end of the year?
Jeff Campbell - SVP Finance and CFO
Well Jeff, let me make a couple of comments here.
I have a sheet in front of me, where I asked my controller to lay out for me all the different ways that for various regulatory bodies and accounting pronouncements, we measure our pension funding percentage, and I can give you a number that ranges from a 100% to a number a heck of a lot less than that, depending on which number you are talking about.
So, it's always tough for me to comment on other people now.
Jeffrey Kauffman - Analyst
Having said that, I think it's the current liability level that you judged against for the catch up contributions on [Inaudible] ?
Jeff Campbell - SVP Finance and CFO
which is generally not a number we talk about publicly.
What I would say is that if you go back to 12/31/02, which is the debt last day we have comparable information across all carriers, as of that date on a percentage basis we were actually better funded than the other traditional carriers.
Thus far this year we made a little less than $200 million in required contribution started to fund benefit pension plans that keeps us 100% compliant with all our funding needs.
We have about $600 million under the-- that we need to next year under the current set of rules.
I feel very comfortable about us meeting all of those things.
Clearly what Continental has done relates to the earlier question about Eagle.
Continental through contributions of various express jet securities was able to bolster it's pension plans funding level and certainly we could something like that.
We tend to think ultimately cash contribution are better than stock contributions but as Gerard said we are constantly evaluating all of our alternatives and we feel comfortable that as we continue to make progress on turn around plan we will continue to consistently fund our pension plan.
Jeffrey Kauffman - Analyst
Okay.
Thank you and just briefly follow up to Helane's question maybe a different way.
Just based on the numbers I am running tentatively for next year.
It looks like you are going to be free cash positive.
That those are my numbers not yours I realize.
Having said that is there a cash level at which point you say okay we've got enough cash given what we see operations now we start to pay down debt or is it going to be more an operating profit based decision?
Jeff Campbell - SVP Finance and CFO
That's a great question Jeff, which I don't think there is a clear answer to.
As I said our $3.3 billion of cash is the highest cash balance AMR has ever had; we feel great about that, and that got a part of what makes me feel real good about saying to people that we are in a strong liquidity position and can withstand a few shocks here.
On the other hand, it is remarkable when you look at around the industry at how much cash everybody is carrying and on a side-adjusted basis if you just do the math, we are probably even at the lower end, despite that size cash balance.
So a continual debate, we have and are going have to continue to have as what is the right level.
Clearly we want to have enough cash so that the financial community feels comfortable that there is not an overly high level of risk in the company.
On the other hand it is not very efficient debt $3.3 billion of cash sitting in the bank earning the kind of interest rates that it earns these days.
So, certainly sitting here today I am not anxious to lower that number a lot other than normal seasonal changes.
Clearly the medium to long-term goal has to be to get to the point where we feel company comfortable as a company running at lower levels.
Jeffrey Kauffman - Analyst
Okay.
Thank you very much.
Jeff Campbell - SVP Finance and CFO
We have time probably for one more question.
Operator
Thank you.
Our last question comes from Dan McKenzie of Smith Barney.
You may ask your question.
Dan McKenzie - Analyst
Thanks operator.
Good afternoon.
Couple of questions.
Going back to the capacity, the estimate of capacity being up 5% or 6% in 2004.
Would that assume competitive responses to low cost competitors or would that capacity estimate potentially get levered up if you were, you know, if it was necessary respond to the competitors coming into your markets?
Gerard Arpey - CEO
Early indications of the plan for next year and I think, if I could summarize your question, you are asking do you have any flexibility around that and I think the answer is yes, because we've got a lot of airplanes that we have parked since 9/11.
So, yeah, we have some flexibility surrounding that number.
On the other hand, you know, you don't just snap your fingers and get those airplanes out of the desert.
So, I wouldn't expect sitting here today that the number is going to vary a whole heck of the lot from that.
Dan McKenzie - Analyst
Okay.
Thanks.
And then just, one other quick follow-up question regarding business travel and which you have talked a little about already, but there has been a number of business travel surveys for business travel in 2004, which have concluded that travel spending should be up around 2% to 5% on average and just wondering, how that compares with what American is hearing from it's corporate accounts so far and are there some factors that will either help or hinder American relative to this average?
Gerard Arpey - CEO
Well, you know, I think, a lot of our feedback tends to be anecdotal, but Jeff I think said it right earlier that when you look at all the smattering of things that we look at we are beginning to see modest encouraging signs on lots of fronts whether it be our own trends in traffic, the surveys that you reference, our own dialog with corporate customers, but trying to judge the size of that with the momentum of that I think is very difficult to do and in terms of how we are going to do.
Relatively speaking, I think we have kind of, covered that earlier when we said we think the changes that we have been making to our network and to our configurations.
If we are making the right decisions, I think our relative momentum ought to continue to build.
Dan McKenzie - Analyst
Okay.
Great.
Thanks very much.
Gerard Arpey - CEO
Thank you very much.
We thank everyone very much and we are going to move on now to the media.
Jeff Campbell - SVP Finance and CFO
Right.
So, the media will hang on.
We will be back in just a minute.
Gerard Arpey - CEO
Thank you everyone.
Operator
Thank you.
This concludes today's conference call for all analysts.
Media please stand by.
Your question and answer session will begin shortly.
Thank you.