美國航空 (AAL) 2003 Q4 法說會逐字稿

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  • Operator

  • Good afternoon and welcome to the AMR fourth-quarter earnings release conference call.

  • All participants will be able to listen only until the designated question-and-answer session.

  • All analysts will be the first to have the opportunity to ask questions.

  • Once the question-and-answer session has ended we will ask all analysts to disconnect and we will continue with questions for media.

  • This conference is being recorded.

  • If you have any objections you may disconnect at this time.

  • I would now like to introduce Ms. Kathy Bonanno, Director of Investor Relations.

  • Ms. Bonanno, you may begin.

  • Kathy Bonanno - Director of IR

  • Good afternoon, everyone, thank you for joining us today.

  • This afternoon I'm joined by Mr. Gerard Arpey, AMR's President and Chief Executive Officer, and Mr. James Beer, Senior Vice President of Finance and Chief Financial Officer.

  • Starting off Gerard will provide an update on our turnaround plan and then James will provide the details regarding our earnings for the fourth quarter along with some perspective for the rest of the year.

  • After that we'll be happy to take your questions.

  • In the interest of time please limit your questions to one with one follow-up.

  • Our earnings release contains highlights of our financial results for the quarter.

  • I encourage you to review that document for more specific information.

  • We've posted our earnings release on the investor relations section of our web site at www.AMRcorp.com.

  • At that same web site 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 in conjunction with the press release will contain reconciliations of any non-GAAP financial measurement we may discuss to what we think is the most appropriate GAAP measurement.

  • Once again, the web site is www.AMRcorp.com.

  • And the webcast can be found on the investor relations page.

  • A replay of today's call will be available for at least one week.

  • Finally, let me note that many of our comments today on matters related to our outlook for revenue and earnings, cost estimates, and forecasts of capacity, traffic, 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, government regulations, uncertainty in domestic or international operations, acts of war or terrorism, our ability to access the capital market, and changes in the Company's business strategy, any of which could affect or actual results.

  • With that I'll turn the call over to Gerard.

  • Gerard Arpey - President & CEO

  • Thank you, Kathy.

  • Good afternoon, everyone.

  • First off, let me take a moment and welcome James Beer to his first AMR earnings call as Chief Financial Officer.

  • Of course, I think most of you know James is no stranger to our financial organizations having spent most of his career in our finance department in various roles prior to his most recent assignment as Vice President of Europe and Asia.

  • I think it's fair to say the fact that we were able to look internally and tap someone of such caliber to fill our CFO position really says a lot about the depth of AMR's management team.

  • So welcome, James.

  • Now, onto the business at hand, I'm sure all of you have seen our press release reaffirming the progress that we have made since implementing our labor agreements and our four point Turnaround Plan.

  • The most compelling evidence of our ongoing restructuring effort can be seen in our pretax earnings line, excluding special items, which provides the most meaningful year-over-year comparison.

  • On a pretax earnings basis, our fourth-quarter results improved $733 million compared to last year.

  • That's obviously an enormous year-over-year improvement, and one that we're proud of.

  • On a GAAP basis, we reported a fourth-quarter net loss of $111 million or 70 cents per share, excluding special items which James will elaborate on in just a moment.

  • Our fourth-quarter net loss was $95 million or 59 cents per share.

  • And while we're certainly not satisfied with the loss, we are nonetheless very pleased with our progress.

  • The fourth quarter is historically a difficult quarter, and the fact that we made an operating profit and generated cash is very encouraging.

  • We're continuing to build momentum under our Turnaround Plan, and I'd like to briefly touch on our progress before I turn things over to James and let him take you through some of the details.

  • As a reminder, I think most of you know the four tenets of our Turnaround Plan but just very quickly, they are first Lower Cost To Compete; second Fly Smart, Give Customers What They Value; third, Pull Together, Win Together; and fourth, build a financial foundation for our future.

  • Under the first tenet, Lower Cost To Compete, I think our progress is very clear in the fourth quarter, an 11.9 percent decline in unit cost overall.

  • If you take out the negative impact of rising fuel prices, our progress would've been even more dramatic with a year-over-year decline in unit costs of 12.8 percent if we hold fuel constant.

  • Now, even though we've made a lot of progress there, we are continuing to keep our focus on the cost side.

  • We worked very hard on our budget that we built for this year.

  • And, as you can see in our press release, we announced this morning that we are depeaking our Miami hub this spring.

  • It'll go into effect with the May 1st schedule change.

  • It's another step in our effort to drive down costs and improve productivity.

  • If you include the Miami schedule change, our aircraft productivity systemwide, if you measure it in miles flown per aircraft day, will improve nearly 10 percent year-over-year and it's going to be back to levels that we haven't seen since -- going all the way back to 1998 which, of course, was the best year in our history.

  • As with the depeaking of the Dallas-Fort Worth and Chicago hubs, we're going to fly the same level of service with fewer aircraft and we're just going to make the whole operation a whole lot more efficient.

  • And that's important to us as well in Miami because we're trying to work our way through the construction project down there and this is going to help relieve some of the pressure on the terminal as we continue down the path of getting that project finished.

  • Fly Smart, Give Customers What They Value is the second tenet of our Turnaround Plan and it's our way of focusing the Company on revenue production.

  • Within this framework we are making and we have made a number of adjustments that are improving our relative revenue performance.

  • All of you know that last November we implemented one of the largest schedule changes in our history, restructuring our mid continent hub.

  • We saw some good results from that in the fourth quarter.

  • We think about a point of our 6 percent fourth-quarter unit revenue improvement is attributable to that change.

  • Also, the added seats on the 757 A300, the results for that over the holiday period in particular looked good.

  • Still, under this tenet is the revenue benefit we'll receive from expanding our alliance network.

  • Over the past several months we've grown our European network with the codesharing with British Airways.

  • We added SWISS International to the oneworld alliance.

  • Last month you'll recall we announced an extensive expansion of our domestic codeshare alliance with Alaska Airlines.

  • And then today, extending our reach into Latin America, I'm very excited to announce -- you saw in our release earlier today that we've signed a partnership with Mexicana to codeshare in a reciprocal frequent-flier partnership.

  • We and Mexicana have the two longest traditions of serving the United States and Mexico.

  • I think we're going to make terrific partners and we're very excited to announce that today.

  • Moving on to our third tenet, Pull Together, Win Together.

  • We're, I think, here making some progress as well.

  • Last quarter we hid the good result of working with the TWU to find a way to keep our maintenance bases open, but at the same time saving a lot of money.

  • We are continuing our active involvement process in the company with organized labor and our employees.

  • In fact, next week we're bringing about 100 employees from all walks of life at American; pilots, flight attendants, every employee group is coming in to meet with us, including union members, to talk about some customer strategy issues that we're working on so we make sure as we make decisions going forward we reflect the input and the views of our front-line workforce.

  • We're also rolling out today the details of an annual incentive plan that we developed in concert with our unions and other employee groups.

  • The plan will include a customer service component that is going to reward employees for high competitive rankings in either on-time performance or for survey results indicating high overall customer satisfaction levels.

  • We're very excited about this.

  • It's going to roll out today and be in effect for this month, and I think it will be a way for all of our employees to tangibly be rewarded for their efforts in pulling together and helping to run a great airline.

  • And finally, we're making significant headway on our fourth tenet, Build A Financial Foundation For The Future.

  • I can't remember whether we had this in our release or not, but we ended the quarter with 3.1 billion in cash.

  • That's almost double the amount cash we had on hand at the end of the first quarter.

  • The most encouraging achievement here is once again we're generating operating cash flow.

  • In the fourth quarter, if you don't count our bond repurchase, which James will talk about in a minute, our cash flow from operations totaled more than $300 million.

  • All of the momentum that we have built in recent months and our improved financial performance has resulted in greater access to the capital markets, and I think as we sit here today we have a wide range of financing alternatives to meet whatever needs arise this year.

  • So, obviously, we feel very good about that.

  • So, all in all I think we're building great momentum under our Turnaround Plan.

  • We're very encouraged by our progress, but we all certainly recognize we've still got a lot of work to do and we're going to continue working very hard.

  • And with that as an introduction, I'm going to turn things over to our Chief Financial Officer, James Beer.

  • James Beer - Senior V.P. Finance & CFO

  • Thank you, Gerard, and good afternoon, everyone.

  • We have a lot to feel good about this quarter.

  • Clearly the domestic cost restructuring we began to implement in the second quarter is at the core of our improved performance.

  • Our unit costs are now among the lowest of the network carriers.

  • We're well positioned to compete against all carriers including limited choice carriers or, as they're more commonly defined, low-cost carriers.

  • Our revenues, while still not where we'd like them to be, are nonetheless improving and, as Gerard stated, we believe our revenue performance should remain strong relative to our peers.

  • As our results have improved, we have greater access to the capital markets, and have made real progress on the liquidity front.

  • All of our employees are focused on driving further improvements in both costs and revenues.

  • To top it all off, there's every indication that 2004 will offer some cyclical upside with domestic GDP growth estimated at about 4 percent.

  • While we're pleased with the tremendous progress we've made, we're certainly not breathing easy.

  • There's still a lot of work ahead of us to enable AMR to achieve sustained profitability at acceptable levels.

  • Our results this quarter, a loss of $111 million, include some charges associated with our restructuring.

  • We continue to believe it helpful to cull out these special items which do not reflect the ongoing nature of our business.

  • I'll talk more about these items in a minute.

  • In addition, our results for the fourth quarter do not reflect a provision for federal and state income taxes.

  • Though the pretax earnings measure is really more meaningful in terms of comparing to prior year performance.

  • On a pretax earnings basis, excluding onetime items, our loss for the fourth quarter of $95 million improved by more than 88 percent year-over-year.

  • For the full year our pretax earnings improved by more than 52 percent compared to 2002.

  • Let me take a minute to the elaborate on the special items associated with our restructuring and impacting the P&L this quarter.

  • I'll start with the largest item, the $302 million charge for aircraft.

  • The bulk of this is attributable to aircraft impairment charges resulting from a recent reassessment of the future value of our 767 200 and A300 fleets.

  • Also included in this category are charges for the continued early grounding of our remaining TWA 757 aircraft, which began last quarter.

  • In the fourth quarter, we grounded six TWA 757 aircraft for a charge of about $37 million.

  • These aircraft come off lease in 2004 and the early grounding saves on costly maintenance work coming due prior to their normal retirement schedule.

  • We also took a $12 million facility charge and a $16 million employee charge associated with the St. Louis hub restructuring.

  • In addition to our restructuring charges, but working in the opposite direction, were three rather large nonrecurring gains.

  • The first was a favorable tax audit result which resulted in a gain of $164 million to the Company.

  • Of that, 80 million will show up as an income tax benefit which might rightly lead to some confusion.

  • Let me just make it clear, we did not tax effect our earnings.

  • The number you see there is this onetime gain.

  • The remaining $84 million shows up as an offset to interest expense.

  • The second gain was the sale of our stake in Hotwire for a gain of about $80 million.

  • The third was the Orbits IPO and secondary offering which resulted in a gain of approximately $70 million.

  • These show up in the miscellaneous line of other income.

  • All told, special charges for the quarter total about $330 million, and onetime gains in the other income and tax lines total approximately $314 million.

  • I'll turn now to cost performance which continues to be the real story of the quarter.

  • In the fourth quarter, the real progress we're making is clear with mainline unit costs excluding special items improved by 11.9 percent to 9.45 cents.

  • On a full year basis, unit costs excluding special items were 10.10 cents compared to 10.78 cents in 2002.

  • As we've seen for some time now, the improvement in unit costs comes not just from the labor and nonlabor restructuring we implemented, but also in almost every line of our P&L.

  • This widespread improvement is a testament to the ongoing efforts of everyone at AMR to adhere to the first tenet of the Turnaround Plan, Lower Costs To Compete, while continuing to deliver great customer service.

  • It also demonstrates our focus on the need to go beyond the $4 billion in savings we initially identified.

  • Disappointing news in terms of our cost-cutting efforts is that fuel prices remain persistently high averaging 88 cents during the fourth quarter.

  • This represents an increase of 6.5 percent year-over-year.

  • Without the increase in fuel prices, our mainline unit costs for the quarter would have improved by 12.8 percent.

  • Increase in fuel costs for the fourth quarter came despite hedging gains of $31 million or 4.2 cents a gallon.

  • I should also note that our fuel consumption declined 5 percent year-over-year during the fourth quarter, 3 points more than our 2 percent decline in capacity.

  • This improvement reflects the success of our fuel conservation initiatives, which are proving crucial given the high fuel prices we're experiencing.

  • As we look at revenue performance, we do see signs of improvement, but certainly not to the degree that we would like.

  • Still, there is some cause for optimism with an increase in mainline yield for the fourth quarter of 3.5 percent compared to last year.

  • This is a continuation of a relatively recent trend of improving year-over-year performance.

  • Compared to a full year yield improvement of only 9.4 percent, the fourth quarter result is encouraging.

  • Aggressive yield management strategies in markets with limited fair rule restrictions have contributed to the increases in yield.

  • Higher load factors also provide greater opportunity for yield management strategies.

  • Mainline load factor for the quarter was up 1.8 points year-over-year to 71.6 percent.

  • For the year, loads were up 2.1 points to 72.8 percent.

  • The combination of stronger load factors and improvements in yield produced strong gains year-over-year unit revenue performance.

  • Mainline unit revenue for the fourth quarter of 8.68 percent, an increase of 6.1 percent compared to last year.

  • As Gerard mentioned, we're very pleased with results so far from our St. Louis restructure that contribute about a point of our RASM increase to the change.

  • For the full year 2003, unit revenue was 8.67 cents, up 3.3 percent compared to 2002.

  • Total AMR revenue for the quarter was $4.4 billion, an increase versus last year of nearly 4 percent on less capacity.

  • As encouraging as our yield and RASM performance seems, both measures remain weak by any historical standard.

  • Unfortunately, business traffic for the fourth quarter remains soft and those business travelers that did fly had a number of lower yielding flexible products from which to choose.

  • By entity, our fourth quarter revenue results were strong domestically, with improvements in both load factors and yields.

  • As a result, unit revenue in domestic markets was up 7.2 percent compared to last year.

  • Relative to last year, our domestic load factor was up 2.1 points and yield was up 4.1 percent.

  • Domestic capacity was down 5.7 percent.

  • Internationally, unit revenue increased versus last year by 3.6 percent on a more than 7 percent increase in capacity.

  • During the fourth quarter international load factors improved by 1 point while yields were up 2.2 percent from year ago levels.

  • Let me remind everyone that this year's statistics will include the impact of our 767-300, three class to two class reconfiguration which added 23 states to each plane.

  • So the year-over-year change in international RASM will look worse by about 3 points than it would have had without the change.

  • But of course, if we talked about CASM, on an entity level it would look better.

  • This change impacts both Europe and Latin America.

  • European unit revenues were up 4.4 percent year-over-year on a 3.6 percent increase in capacity.

  • Yields in Europe increased 1.2 percent for the quarter and load factors were up by 2.4 points.

  • Moving on to the Pacific where traffic has rebounded, unit revenue in the fourth quarter increased by an impressive 16.2 percent versus last year.

  • Load factors improved by 6.5 points on a slight increase in capacity year-over-year.

  • Yields improved by 6.6 percent compared to last year.

  • Finally, unit revenue for our Latin American operations was up slightly, less than 1 percent year-over-year, but on a significant 11.7 percent increase in capacity.

  • Here, load factors were down nearly a point year-over-year but the yield increased 2 percent.

  • For the full year, domestic unit revenue improved 4.8 percent while international unit revenue remained unchanged from 2002.

  • Before we move on to the balance sheet, let me touch briefly on results for our regional affiliates, which continues to be a good news story.

  • This is another area that could provide upside to AMR.

  • In the past, we were severely limited in terms of RJ (ph) growth capability.

  • But with our latest round of labor agreements we now have much greater flexibility in the use of regional jets.

  • This is important because our margin results have been impressive as we substituted RJs for jets on routes that weren't making the cut when flown by bigger planes.

  • And as we catch up to the rest of our network peers, we should have some upside in terms of relative performance.

  • For the fourth quarter, eliminating the year-over-year differences in accounting, unit revenue for our regional affiliates was up 3.5 percent year-over-year.

  • If we adjust for a more than 14 percent stage length increase, unit revenue was actually better than last year by 12.8 percent.

  • On a stage length adjusted basis, yields were up by 7.6 percent with load factors up 3.2 points on a nearly 19 percent increase in capacity.

  • Cargo revenue improved 2 percent despite a decline in cargo capacity of 6.6 percent.

  • The gains were due to an improvement in product mix including growth in our Foley launched, guaranteed express product.

  • Expeditefs.

  • Now, moving on to the balance sheet.

  • I have to say I'm pleased with the liquidity position I've inherited, and I'm certainly encouraged by the fact that we have greater access to the capital markets.

  • The net result of our strong cost restructuring combined with modest revenue improvements is that we've been able to rebuild market confidence and in turn rebuild our liquidity.

  • We ended the year with $3.1 billion in total cash and short-term investments of which about $530 million is restricted.

  • This is in line with where we were last quarter.

  • However, this quarter, we repurchased about $200 million in off balance sheet debt in the form of special facility revenue bonds, and we redeemed others for about $100 million.

  • Approximately $530 million of our special facility revenue bonds contain mandatory tender provisions that require American to repurchase the bonds at curious times.

  • Although we have the right to remarket the bonds, there can be no assurance of a ready market.

  • This year, in December, approximately $112 million in bonds will require repurchase.

  • What continues to be the most important news on the liquidity front is that we generated positive operating cash flow during the quarter in the amount of about $300 million.

  • Excluding the bond repurchase I just discussed.

  • Additionally, we generated cash during the quarter from the special items I covered earlier; the sale of Hotwire generated about $80 million and the Orbits IPO brought in about $65 million.

  • It's probably important to remind everyone that we ended the first quarter with a dangerously low unrestricted cash balance of about $1 billion.

  • And once again, as a result of our restructuring, we have turned the tide and now find ourselves with record high cash balances and the ability to pay down some debt.

  • And net debt at the end of the year totaled $17.9 billion.

  • While we're on the subject of liquidity, let me just outline our CAPEX, debt repayment, and pension funding for 2003 along with our plans for 2004.

  • In 2003 we spent $1.4 billion on CAPEX.

  • Most of this, in fact 1 billion, was for aircraft with prearranged financing.

  • For 2004, CAPEX was estimated at a little more than $1.2 billion.

  • We have pre-existing financing to cover all of our aircraft deliveries or about $740 million of this spending.

  • In the first quarter, CAPEX is expected to be about $320 million.

  • We paid about $800 million in '03 in principal payments, including the principal portion of our capital leases.

  • Our total principal payments in 2004 are also expected to be about $800 million and will be evenly divided by quarter.

  • We met our defined benefit pension funding requirements for 2003 of about $200 million.

  • In 2004, funding requirements will be about $600 million.

  • Given our improved results, driven by our restructuring, and with the greater access we now have to the capital markets, we have a range of financing alternatives we can use to meet our 2004 obligations.

  • These include secured financings, asset sales, and the sale of equity or equity linked security.

  • As things stand today, I believe there is strong demand in the market for all of these financing alternatives.

  • Moving to cost guidance, for the year, our mainline unit costs should improve by about 9 percent compared to last year to 9.2 cents.

  • Improvement comes primarily from having a full year worth of labor savings rather than just a partial year.

  • Additionally, our strategic initiatives will be more fully realized in 2004 providing approximately $400 million in incremental savings.

  • We will face some cost headwinds in 2004, primarily from medical benefit costs, airport fees and the maintenance materials and repairs lines which will create a drag on results.

  • At the AMR level, unit costs for 2004 are expected to come in at about 9.6 cents, nearly 9 percent better than last year's level.

  • Our first-quarter mainline unit costs are projected at 9.4 cents an astounding 17 percent improvement over last year.

  • Our full year cost forecast assumes the fuel price of about 87 cents per gallon, essentially flat compared to 2003.

  • We're more pessimistic for the first part of the year with the fuel forecast of 91 cents for the first quarter, up 3 cents from the fourth quarter.

  • For the first quarter we currently have fuel hedges covering approximately 21 percent of our expected consumption at the WTI crude equivalent price of about $23 per barrel.

  • As we unwound virtually all of our hedges for the second quarter 2004 and beyond, our hedge position for the remainder of the year is much lower.

  • However, now that we're on firmer ground, we've begun replacing these hedges albeit at less attractive prices.

  • We expect our ASMs for the full year to increase by about 6 percent next year, despite removing 57 aircraft summer-over-summer in 2004 and reducing mainline departures.

  • This is possible because we increased efficiencies driven by three characters.

  • First, we operated with a low base in 2003 as a result of the war in Iraq and SARS.

  • Second, we're adding seats backs to two of our fleet types, 757s and A300s.

  • And third, as we realign our mid-continent hubs into peak the Miami schedule we'll substantially improved aircraft productivity levels.

  • For the first quarter, capacity is expected to be up about 6 percent year-over-year.

  • As we look at our systemwide booked load factor for the rest of this year, loads are down about a point compared with last year.

  • However, this isn't too surprising given our capacity increases.

  • If we compare year-to-year changes in RPMs rather than booked load factor we see strong increases, particularly in international markets where capacity is up 16 percent in the first quarter.

  • I understand that for the past two quarters, we told you that they take away message should be one of cautious optimism.

  • I think this remains appropriate.

  • We've made tremendous strides in reducing costs, improving performance, regaining access to capital markets, and rebuilding our liquidity.

  • Clearly, however, continued losses are not an acceptable result.

  • That said, we're making a number of changes to improve our competitive revenue and cost outlook going into 2004, and our entire company is focused on and committed to executing all four tenets of the Turnaround Plan and returning AMR to sustained profitability at acceptable levels.

  • With all that as background, Gerard and I will now be happy to take your questions.

  • Operator

  • (OPERATOR INSTRUCTIONS) Michael Linenberg from Merrill Lynch.

  • Michael Linenberg - Analyst

  • Hi, good afternoon, gentlemen.

  • I guess two questions here.

  • I know recently there was some news out about the Department of Transportation changing or reallocating flights in Chicago.

  • I haven't seen all the details, I just saw the headline and I was just curious -- I'm not sure how much of that you have seen, but does that have any sort of impact on your ability to continue to run Chicago as a deep (indiscernible) hub?

  • Gerard Arpey - President & CEO

  • I think at this point, I think it would be best for us to simply refer you to the DOT.

  • We have been working cooperatively with the DOT and the FAA on their effort to improve reliability in Chicago, and we're quite comfortable with the direction this thing is headed and what I believe they're going to be announcing this afternoon.

  • But, I don't want to get out ahead of them.

  • So go ahead and just -- I think they're going to have a press conference this afternoon and we have been fully supportive of this effort.

  • Michael Linenberg - Analyst

  • Okay, fair enough.

  • Gerard Arpey - President & CEO

  • I don't think it hinders us in any seminal way in terms of what we're trying to do in Chicago.

  • Michael Linenberg - Analyst

  • Perfect.

  • My second question to Gerard.

  • Recently you've now really been given the green light on your agreement with British Airways; and I realize it's not antitrust, you don't have antitrust immunity with them but you can now put in place at least a pretty meaningful codeshare.

  • Have you at all put out any estimates -- potential revenue that we should see over the next couple of years?

  • As we ramp up Intuit and maybe a mature annual revenue number that you will benefit as a result of this agreement?

  • Gerard Arpey - President & CEO

  • I don't think we've ever associated specific revenue numbers with any partnership.

  • I'm looking at my colleagues here and they're confirming that.

  • So, no, we have never associated any numbers with the BA beyond codesharing, but I will tell you this.

  • We obviously waited a long time to get that piece of this partnership done and we're very excited about it.

  • I don't know when the next phase of codesharing goes into place, but it's not in the terribly distant future.

  • The traffic results I've seen so far have been very encouraging.

  • We're very excited about developments there and, of course, about our announcement today with respect to Mexicana.

  • Michael Linenberg - Analyst

  • Very good.

  • Nice progress on the turnaround.

  • Gerard Arpey - President & CEO

  • Thank you, Michael.

  • Operator

  • Jim Higgins from Credit Suisse First Boston.

  • Jim Higgins - Analyst

  • Your 6 percent capacity growth this year, is that AA mainline only, does that include regional jets?

  • Gerard Arpey - President & CEO

  • Jim, that doesn't include the commuter carrier.

  • Of course, as you know, they're taking delivery of a lot of RJs this year.

  • So their capacity is up more than that.

  • That 6 percent at American is mostly international.

  • Do you have the breakdown, James?

  • I know I had that on a board slide earlier today, I think it's something like --.

  • James Beer - Senior V.P. Finance & CFO

  • -- 16 percent for the international part of the business and around 3 percent for the domestic.

  • Gerard Arpey - President & CEO

  • And most of the domestic, Jim, because we're retiring the F100s this year, are driven by the added seats on the A300s and the 757s, and higher utilization as I think I may have mentioned or James mentioned where in terms of plane miles flown per day, we've got the highest utilization on our fleet that we've seen in at least as long as I've worked here.

  • Jim Higgins - Analyst

  • And do you have a figure on the RJ capacity growth?

  • Gerard Arpey - President & CEO

  • Eagle overall, ASMs are up about 25 percent this year.

  • Jim Higgins - Analyst

  • And that's Eagle wholly-owned plus partner carriers?

  • Gerard Arpey - President & CEO

  • That's correct.

  • Jim Higgins - Analyst

  • And any -- the realignment at Miami, is it similar in kind to what you've done at other hubs?

  • Gerard Arpey - President & CEO

  • Yes, it is, although Miami, we started with -- it's a smaller hub than either Dallas or Chicago.

  • But in concept it's the same thing.

  • It's taking all of the peaks and spreading them out throughout the day so you improve the utilization of your airplanes, your facility, and your labor across the day.

  • The added benefit in Miami is as we move through that terminal construction project, flattening out the schedule allows us to work in and around the construction hopefully a little bit better.

  • And I know lots of people I'm sure on the call go through Miami.

  • We've worked real hard to make the experience there as best we can in light of the fact we have got a $1 billion construction project underway.

  • Jim Higgins - Analyst

  • Absolutely.

  • I would encourage you also to work on JFK.

  • Gerard Arpey - President & CEO

  • We've got another big project there, too, as you know.

  • Jim Higgins - Analyst

  • Thank you very much.

  • Operator

  • David Strine with Bear Stearns.

  • David Strine - Analyst

  • A question regarding aircraft utilization.

  • Where do you think you peaked out in terms of the utilization of the fleet in terms of either miles per aircraft or hours per day?

  • And the second question is, do you have a number in mind for where you'd like to end the year in terms of FTE headcount?

  • Gerard Arpey - President & CEO

  • David, in terms of -- I could the best I could give you is in our '04 plan, I'm just digging out a slide that I showed our board today, our aircraft miles per day it looks to me, looking at my slide, about 3800 miles per day.

  • And as I said, in terms of where we end up that's the highest that we've had as long as I can remember.

  • So, you're obviously always trying to push that number up.

  • But, I don't know how much further we can push it.

  • The good news is, that higher utilization is what's in part driving our ASM increase of 6.3 percent and our total departures for '04 are actually down 4.5 percent.

  • So, that's what you obviously want to see in this business because ASMs drive your ability to sell and departures drive cost.

  • So we've got ASMs going up, that's more product to sell, and we've got departures going down, that is going to drive less cost, less departure driven cost.

  • Second part -- remind me the second part of your question?

  • David Strine - Analyst

  • That related to head count for '04?

  • Gerard Arpey - President & CEO

  • I would say plus or minus, David, around 80,000 FTEs.

  • David Strine - Analyst

  • Plus or minus.

  • Gerard Arpey - President & CEO

  • That's your job to figure that out.

  • David Strine - Analyst

  • Great.

  • Thanks a bunch.

  • Operator

  • Ray Neidl with Blaylock.

  • Ray Neidl - Analyst

  • You've done a great job both in getting your unit cost structure down and describing that today.

  • Gerard Arpey - President & CEO

  • Thanks, Ray.

  • Ray Neidl - Analyst

  • But the second part now is how much further can you go?

  • Are you going to have a target two beyond the 4 billion?

  • I guess the first question is when will you finally achieve that 4 billion I guess will be this year sometime?

  • And then going beyond that, the 9.2 cents that you talked about, is there any way -- you know, fuel neutral -- is there any way you can get that down lower or is that about the lowest that a hub-and-spoke carrier, full-service carrier can do?

  • Gerard Arpey - President & CEO

  • Ray, I'll let James Beer jump in here, but in terms of the way I think about cost, and certainly in all the employee meetings that I have, I don't talked about a new target, I talk about continuous improvement under that first tenet of our Turnaround Plan, Lower Cost To Compete.

  • And what I have said to all of our employees is I know everybody sacrificed a lot and everybody is working harder, and goodness sakes we appreciate that.

  • But the revenue environment remains very tough in this industry, and therefore we have to change the whole paradigm in this company which has historically been revenue focused to cost focused.

  • And that's what we've been doing this past year, and I think people are beginning to understand that cost reduction is going to be a forever continuous improvement process in this company.

  • So, we haven't set an explicit target other than to talk about it in that way.

  • James Beer - Senior V.P. Finance & CFO

  • Going back to the $4 billion target originally, you'll recall that that was made up of $2 billion of strategic initiatives.

  • And in my remarks I mentioned that we thought that we would obtain another $400 million of that 2 billion this year.

  • That just leaves $200 million next year before we hit that $2 billion target.

  • The other 2 billion of the $4 billion target was already accomplished by the labor restructuring back in April as well as the assistance that are various buyers and creditors gave us at that time.

  • Ray Neidl - Analyst

  • Great.

  • And the second question is with all the scares that we've had or warnings, terrorist warnings, have you seen any affect at all in the first quarter on bookings?

  • Have people been shying away or is traffic normal?

  • Are people getting used to those warnings?

  • Gerard Arpey - President & CEO

  • I think definitely getting used to it, Ray.

  • I don't think we saw any impact that we could measure over the holiday period and I don't want to -- people shouldn't be immune to those warnings, but they certainly should be vigilant, but I don't think it had any impact on our traffic that we can see.

  • Ray Neidl - Analyst

  • Great.

  • Thanks a lot.

  • James Beer - Senior V.P. Finance & CFO

  • And the bookings volume is almost keeping up with the quite significant capacity increase.

  • Ray Neidl - Analyst

  • Thank you very much.

  • Operator

  • Jamie Baker with J.P.

  • Morgan Chase.

  • Jamie Baker - Analyst

  • A fleet question.

  • I think you've still got two configurations on the triple sevens, perhaps three types of seven sixes, a handful of seven fives, I see you're going all coach transatlantically, a rather brutal concept this summer, and still multiple MD-80s.

  • Is fleet commonality still a goal?

  • And if so, is there any guidance on the timing and/or the cost improvement that we might associate with that process?

  • Gerard Arpey - President & CEO

  • Jamie, it is still a priority.

  • And let me -- just a couple things here.

  • All coach on the transatlantic, we're not changing the configuration on the airplane, we're just going to sell it as all coach.

  • The people that pay the most will get the privilege of sitting upfront, but their expectation will be that they bought a coach product so they should feel good if they end up in the front of the airplane.

  • You're right about the triple sevens and the different configurations on some of the other airplanes stem from the TWA asset acquisition.

  • I think what happened, Jamie, is because of the financial difficulty that we got into the past couple years, we had to slow down and be a little more thoughtful about the timing of commonality on these fleets.

  • But I'm a huge believer in simplifying the number of fleet types and the number of configurations.

  • So, you're going to see us back on track now that the liquidity of the Company has improved, but we've still got to be very prudent in how we spend capital around here.

  • We're going to get all these fleet over time aligned.

  • Jamie Baker - Analyst

  • That's very helpful, Gerard.

  • And in terms of the other working groups, I know the pilots get an 8 percent pay raise in May offset by furlough activity and increased capacity and what have you.

  • What are the other across the board increases for your working groups?

  • Gerard Arpey - President & CEO

  • Jamie, I know you understand this, but I do want to correct at least the way you described that, because the way we think about it is not a raise.

  • It was part of the original restructuring deal.

  • The way the pilot savings were negotiated, because it took us a year to get the benefit of some of the productivity provisions in the contract, the pilots stepped up to a much bigger pay cut than I believe any other work group.

  • For the first year while we were implementing the productivity, and then at the end of this year period we returned some of that pay cut as we have gotten the offset in productivity.

  • So, I know we're quibbling over words but it's important in terms of how the other employees understand it.

  • In terms of other changes to salaries, we have a 1.5 percent across the board increase that goes into effect on May 1 of this year, and then beyond that, certainly within all of our labor contracts, as people move up in seniority they continue to move up the steps on their pay scales, and if anybody gets a promotion they certainly get that as well.

  • But structurally, I think only the 1.5 percent is the only thing that's out there.

  • Jamie Baker - Analyst

  • Okay.

  • That's excellent.

  • Thanks for the clarification on that and great job this quarter.

  • Operator

  • Glenn Engle with Goldman Sachs.

  • Glenn Engel - Analyst

  • Good afternoon, congratulations.

  • I missed it on the first quarter, the capacity growth and can you break out some other quarters as well for me?

  • Gerard Arpey - President & CEO

  • Hang on, let us dig that out, Glenn.

  • James Beer - Senior V.P. Finance & CFO

  • For the first quarter, AA capacity growth will be 5.9 percent, for the second quarter, it will be 8.5 percent, for the third 5.3, and for the fourth 5.6.

  • Glenn Engel - Analyst

  • Can you help us out with any numbers on business mix to show what trends are doing?

  • James Beer - Senior V.P. Finance & CFO

  • I think it's fair to say that the business volumes are not at the level that we have seen historically.

  • That we'd like to see increasing those volumes.

  • It's becoming more difficult to really understand what is a business traveler in that they are using different types of fares these days to a much greater degree than has ever been the case.

  • And as the LCC type fare structures have become more prevalent as those carriers expand, then that's a trend that is only increasing.

  • I think it's also fair to say though that our own survey results say that about 50 percent of our passengers are actually traveling on business.

  • Clearly the yields that they are generating continue to decline.

  • Glenn Engel - Analyst

  • And can you talk about the current fare activity?

  • How does that compare to last year?

  • Gerard Arpey - President & CEO

  • James, jump in here, but, Glenn, one of the things obviously that we're struggling with is higher fuel prices.

  • And you've seen us over the past month or so try to increase the fuel surcharge and we've been unsuccessful doing so.

  • So, it continues to be a very competitive environment out there.

  • Kathy, I don't know if you or James would add anything to that?

  • James Beer - Senior V.P. Finance & CFO

  • The length of these sales is somewhat similar to years past, so nothing terribly dramatic changing from that regard.

  • Clearly volume of (inaudible) sales is approximately the same as well.

  • So, nothing terribly dramatic I would say this year thus far.

  • Glenn Engel - Analyst

  • Thank you.

  • Operator

  • Gary Chase with Lehman Brothers.

  • Gary Chase - Analyst

  • Good afternoon, guys, welcome, James.

  • Just -- you guys noted that the business environment is still soft, yet you were able to get some pretty decent yield growth during the quarter off what I think were pretty good -- pretty tough comparisons last year if I'm not mistaken.

  • Is there any way to sort of characterize the yield growth that you saw?

  • Gerard Arpey - President & CEO

  • I think, Gary -- again, James, you elaborate -- we did see pretty good year-over-year increases, but by historical standards we're still in a very depressed revenue environment.

  • I don't know that we'll ever get out of this state of depression, but if you look over a long period of time, we're coming off of a very low absolute base.

  • James Beer - Senior V.P. Finance & CFO

  • In part, our yield improvement was driven by an increase in leisure fares and an increase in the volume of discounted business traffic.

  • I think internationally on some of the key markets we're starting to see a return of the higher yielding business travelers.

  • If you look across the Pacific, across the Atlantic, we were starting to see more of that in the back end of November and December.

  • Gerard Arpey - President & CEO

  • Gary, one of the things, at least historically has been the case, is the airline industry revenues have been highly correlated to GDP as you know, and all of the consensus GDP forecasts that we look at for this part of the world and indeed around the world look very strong for this year.

  • So we are optimistic that at least the economic environment in which we operate is cooperating.

  • Now offsetting that somewhat is all the capacity that's coming into the industry this year.

  • Gary Chase - Analyst

  • Okay.

  • Actually, good segue into my next question, Gerard, which is -- I'm just curious if there's a way to quantify what the impact on your cost structure -- this is certainly not unique to American -- has been just on increased system efficiency.

  • There's less capacity in the system, or there has been, and that's allowed you to be more efficient.

  • How should we think about that going forward?

  • And I wonder if I could take it a step further and just say if your capacity growth is going to be 6 percent can you tell us what your block hour growth is going to be?

  • Gerard Arpey - President & CEO

  • The thought that comes to mind is whatever efficiency we have enjoyed it's over because by the end of '04, capacity levels are back to pre 9-11 levels.

  • So, whatever efficiency was embedded there, and I'll be candid with you, I couldn't give you a number or anything that I think would help you there.

  • Whatever was there will be gone because if you look at overall ASMs in the industry we'll be back to pre 9-11 levels by the end of this year.

  • And in terms of our costs, our marginal costs are extremely low.

  • You can measure in this business, and I've seen it done a thousand different ways, marginal cost, but a lot of our cost or our ASMs are being driven by added seats, added utilization, and the fact that we're down departures 4.5 percent but up ASM 6 percent.

  • That's got to tell you right there that it's extremely cost-effective capacity.

  • Gary Chase - Analyst

  • Is there a stage length increase embedded in next year of any significance in the domestic entity?

  • Obviously for mix reasons you're going to --.

  • Gerard Arpey - President & CEO

  • My instinct is to say yes but I don't have the number sitting in front of me.

  • James Beer - Senior V.P. Finance & CFO

  • Driven by the fact that the international part of the business is driving the capacity growth.

  • Gerard Arpey - President & CEO

  • Gary, I don't have that in front of me, but that's certainly something we can get you.

  • Gary Chase - Analyst

  • And I apologize, just one last quick one.

  • Is there anything you can say about impact on the Transcon markets from the recent entry of America West and just sort of the competitive environment there?

  • Gerard Arpey - President & CEO

  • Obviously more capacity increases supply and it's a hypercompetitive market.

  • Those are markets we've been in for many, many years and we will be in them for many years to come and we will be price competitive.

  • So, it's obviously a tough environment, but our cost structure now allows us to be very competitive.

  • Gary Chase - Analyst

  • Thanks a lot, guys.

  • Operator

  • Sam Buttrick with UBS Warburg.

  • Sam Buttrick - Analyst

  • Good afternoon, everybody.

  • Girard, with respect to your second tenet I guess, which is in part give customers what they value, it strikes me that perhaps don't give customers what they don't value might be more descriptive of your behavior.

  • But how have customer values importantly changed in the last three, four, five years?

  • What the key changes there that you see?

  • Gerard Arpey - President & CEO

  • Sam, I don't know that I can highlight any changes, but I will tell you this.

  • I'll ask James to chime in here.

  • I have for most of my career believed that this business is really consumers fundamentally buy the product on the basis of price, schedule and service.

  • Obviously, in this kind of environment, in order -- if price is either the first criteria or the second, you've got to really keep a handle on your cost if you're going to give customers what they value which is low price.

  • So, I think those three factors have been pretty consistent.

  • Not only in the past three or four years, but throughout my entire career, and price, of course, as you know has become more and more transparent with the advent of the Internet and everybody selling airline tickets.

  • So, I don't know if that's responsive to your question but that's how I think about it.

  • Sam Buttrick - Analyst

  • I guess sort of directionally where I was going with it, you've been decontenting your product.

  • You talked about the limited choice carriers and I'm thinking with respect more to in-flight aspects.

  • Are you looking at recontenting or changing the content or continuing to decontent?

  • James Beer - Senior V.P. Finance & CFO

  • I think it will be a mixture of different things.

  • Let me give you one example though from what we did in Europe this past year in terms of sneaking away some content, and that was when we started charging for alcoholic drinks in the economy.

  • The experience there was that I think I received two complete letters on that subject from people who went out westbound and had a free drink and came back eastbound with a new policy and had to pay, which was obviously very unfortunate.

  • But since that point in time, there was no complaint letters on that subject at all.

  • And whilst this is a relatively small item, our costs for purchasing alcohol went down.

  • I think it's clearly consumption declined when a price was attached and revenues rose.

  • Incidentally, the flight attendants who are very happy about the whole outcome, given the fact that they had less unruly passengers to have to deal with on a long flight.

  • So, it was a good example of where we took away something that really hadn't been of value.

  • We don't believe we have lost a single customer as a result of that particular move.

  • Now, a counter example perhaps would be that in the in-flight entertainment area where some of the new carriers are putting forward some quite innovative ideas and products.

  • And clearly this is an area where we need to take careful stock.

  • We have an enormous fleet and making decisions here lead to very sizable capital investments.

  • We're certainly very focused on that sort of thing.

  • Perhaps evidenced by the fact that America is the airline with the largest number of (indiscernible) ports already installed on the plane, allowing customers to bring the entertainment option that they choose rather than that somebody else chooses for them.

  • So, we're clearly focused on this sort of area, we just want to think it through and make the right choices for the customer in terms of what they are really prepared to pay for or change their behavior for.

  • Sam Buttrick - Analyst

  • I don't know who wrote that second letter, but let me move on.

  • Other carriers having done so, are you willing to make perhaps a broad statement as to how challenging it will be for you to show a full year profit in 2004?

  • James Beer - Senior V.P. Finance & CFO

  • Really not looking to try to provide that sort of guidance at the moment.

  • Sam Buttrick - Analyst

  • So that I understand that.

  • James Beer - Senior V.P. Finance & CFO

  • We're encouraged by the direction both on the revenue and the cost lines.

  • Obviously you see the fourth-quarter numbers.

  • We are really developing the momentum, now we're seeing the results of a lot of the things that we've been talking about as a company for two or three quarters.

  • Gerard Arpey - President & CEO

  • That's obviously our goal, Sam, and if you'll just get out and fly instead of writing us nasty letters we might have a shot at it.

  • Sam Buttrick - Analyst

  • I fly you plenty.

  • Thanks very much.

  • Operator

  • (OPERATOR INSTRUCTIONS) Helane Becker.

  • Helane Becker - Analyst

  • Thank you very much, operator.

  • Hi, guys.

  • In terms of -- two questions actually.

  • One, could you, James, clarify just on interest expense.

  • I know it's a deduct for the fourth quarter so that would explain the 198 and a third going to 123.

  • But then on a go-forward what are we thinking about for interest expense for '04?

  • And then my other question is can you just talk about the success you're having with the Internet and what percent of your seats you're selling now via either AA.com or all other channels?

  • Thank you.

  • James Beer - Senior V.P. Finance & CFO

  • Okay.

  • We're looking at interest expense in the order of 800 million or so for the full year '04, and with regard to the volume of seats that we're selling across the Internet, the total is around the 20 percent mark.

  • Nicely up from where we were this time last year.

  • Gerard Arpey - President & CEO

  • James, I think that includes not just AA.com but other Internet intermediaries.

  • James Beer - Senior V.P. Finance & CFO

  • That's absolutely right.

  • Helane Becker - Analyst

  • Great.

  • Thanks very much.

  • Operator

  • William Greene with Morgan Stanley.

  • William Greene - Analyst

  • Good afternoon.

  • I was wondering if you have any sense for the absolute dollar cost or the impact on yields of the promotion that you're running from the Northeast to sun destinations in the US?

  • James Beer - Senior V.P. Finance & CFO

  • We're certainly very pleased by the reaction to this program.

  • We're not going to try to provide any guidance as to the specific revenue result of it.

  • But it is quite remarkable.

  • The impact that it has had in terms of getting our message out about the fact that we are a company that really offers something different to that of the LCCs in terms of the scope of the network that we're able to provide to our customers.

  • Combining that leverage with the scale of membership in our frequent flyer program is clearly a powerful way in which we plan to compete and we'll continue doing so.

  • William Greene - Analyst

  • Okay.

  • And then as a follow-up, you mentioned several times throughout the conference call the capital markets are open to you.

  • Should we assume that that implies that you would very much like to issue equity in an order to repay debt?

  • James Beer - Senior V.P. Finance & CFO

  • I think all I would say is that you saw us last year file a registration statement, that was a helpful step that provides us with broad flexibility, and we have a variety of different options available to us.

  • We'll obviously have to go very thoughtfully here in selecting which are the best options.

  • We have some big commitments ahead of us this year as I outlined in my remarks.

  • So, I think it's fair to say that that will be active.

  • William Greene - Analyst

  • Great.

  • Thanks for your help.

  • Operator

  • Jeff Kauffman with Fulcrum Global partners.

  • Jeff Kauffman - Analyst

  • Thank you very much.

  • Just a follow-up on Glenn's question about capacity for AA mainline by quarter.

  • Could you give us a sense of what you think the regional or the non mainline capacity additions would be on a similar quarterly basis?

  • Gerard Arpey - President & CEO

  • Yes, hang on a second.

  • James Beer - Senior V.P. Finance & CFO

  • Yes, looking at the first quarter, the regional ASMs should be up just shy of 26 percent.

  • A similar figure in the second around 27 percent.

  • That builds to 30 in the third quarter.

  • Down to around 26 in the fourth.

  • Jeff Kauffman - Analyst

  • And a follow-up on the pension.

  • You mentioned 600 million, is that the amount of the pension expense you expect in '04 or the cash contribution in excess of your pension expense?

  • James Beer - Senior V.P. Finance & CFO

  • That is the amount of cash that we expect to contribute this year.

  • Jeff Kauffman - Analyst

  • Okay.

  • Thank you very much.

  • Kathy Bonanno - Director of IR

  • We have time for one more.

  • Operator

  • Ed Shapiro with PAR Capital.

  • Ed Shapiro - Analyst

  • Two questions.

  • One factor which I assume is fairly material you didn't mention was currency.

  • The depreciation of the dollar, particularly in Europe, how much of an impact that might have been in the fourth quarter RASM, and given where the dollar is today what impact it might have on the full year?

  • And maybe some more color on St. Louis.

  • You said it contributed about a point I think to RASM and that's despite the fact it wasn't until November 1st that it was implemented, and I assume there was some ramp or there will be some ramp as you enter -- spool up in the new markets, how material that might be for 2004?

  • Thanks.

  • Gerard Arpey - President & CEO

  • Let's start with St. Louis, Ed.

  • I think you're right, we did implement that in November.

  • And the results that we have seen thus far I think are encouraging on a number of fronts.

  • One, the reallocation of the AA Jets out of their other markets has done what we intended it do to which was buttress our flying in Chicago and Dallas and elsewhere.

  • But I think more encouraging, the remaining flying that we've got left in St. Louis, particularly a lot of the RJ flying is doing very well.

  • A lot of it profitable on an onboard basis.

  • So, I don't remember the actual dates but we actually went back in with some big Jets into the DCA market, into L.A. and into Oklahoma.

  • So, I feel very good about where we are there, and of course we'll get the year-over-year affect of that throughout the year.

  • As for currency, James, have you got anything on that?

  • James Beer - Senior V.P. Finance & CFO

  • Yes, we haven't seen too much of an impact from the currency in the fourth quarter.

  • Looking ahead, whilst obviously the value of the dollar has changed quite dramatically, what we're finding is that our European point-of-sale, Pacific point-of-sale, so forth are obviously having a balancing effect.

  • It's going to be a wonderful year for Europeans to come on holiday in the United States.

  • Ed Shapiro - Analyst

  • (multiple speakers) you've got an immediate benefit as you sell those foreign currency tickets and translate them back into dollars?

  • James Beer - Senior V.P. Finance & CFO

  • Obviously, the cash comes ahead of the travel.

  • And I think perhaps the other interesting issue really for us is more indirect when it comes to the value of the dollar.

  • Much has been talked of as to how that has influenced the Saudis (ph) and other oil producers as to the direction of oil prices.

  • But perhaps if there's any one issue that's probably the one that would be the most important for us financially.

  • Ed Shapiro - Analyst

  • One other follow-up.

  • Any comment on the US Airways assets for sale?

  • Any potential interest in any of the entities that they've supposedly put on for sale?

  • Gerard Arpey - President & CEO

  • You know better than that, Ed.

  • Ed Shapiro - Analyst

  • I thought it was worth a shot as a last question.

  • Gerard Arpey - President & CEO

  • Thank you, Ed.

  • Thank you, everyone, for being with us today.

  • Operator

  • This concludes today's conference call for the analysts.

  • Media, please stand by, your question-and-answer session will begin shortly.

  • Thank you.