美國航空 (AAL) 2004 Q1 法說會逐字稿

Good afternoon and welcome to the AMR first quarter earnings release conference call.

All participants are 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 for all analysts to disconnect, and we will continue with questions from 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.

Ms. Bonanno, you may begin.

Good afternoon, everyone.

Thank you for joining us today.

On the call we have Gerard Arpey, AMR's President and Chief Executive Officer; and James Beer, Senior Vice President of Finance and Chief Financial Officer.

Starting off, Gerard will provide an update on our Turn-Around Plan and then James will provide the details regarding our earnings for the first quarter along with some perspective for the rest of the year.

After that, we will 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 to you 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 web cast of today's call and review our reconciliation slide.

The slide deck in conjunction 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.

Finally, let me note that many of our comments today on matters related to our outlook for revenue and earnings, cost estimates, and forecasted 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 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.

Thank you, Kathy.

Good afternoon, everyone.

As indicated in the press release we issued today, our progress under our Turn-Around Plan continued into the first quarter of this year, resulting in our third consecutive quarter of positive operating income, excluding special items.

On this measure, over the course of the past 12 months, our results have exceeded the prior year by a total of nearly $3 billion.

This improved performance has contributed to our cash balance, which ended the quarter at $3.7 billion, including restricted cash of $501 million, and has given us the flexibility to make an early payment to our pension plan.

For the first quarter, we reported a net loss of $166 million, or $1.03 per share.

Our operating income for the quarter was $42 million.

While we are never satisfied to report a loss, we are nonetheless pleased with how far we have come.

And I think it's important we not forget that the first quarter is seasonally a difficult quarter, and that difficulty has been compounded by this year's very high fuel prices.

The fact that in the face of high oil prices we made an operating profit and generated cash in the quarter is very encouraging.

I'm also pleased to report that we earned a net profit in the month of March of $30 million.

This net result is about at the level of net income we reported in March, 2001, which was the last time we made money in this particular month.

We're not back to the profitability levels achieved in 1999 and 2000.

But still, we are gratified to be earning net profits in March, rather than incurring the large losses that we have seen the past two years, and I think it is fair to say we're particularly pleased by a net profit in March given the fuel price environment.

This progress is a tribute, of course, to our employees, and a testament to the power of the changes we're making under our Turn-Around Plan.

It has become our tradition, I'd like to spend a few minutes updating you on the headway we're making under this plan, and then I'll turn the call over to James and he'll give you some more details behind our quarterly results.

I hope all of you have our four tenets of our Turn-Around Plan memorized by now, but in case you don't, they are first, is lower cost to compete; second, fly smart, give customers what they value; third, pull together, win together; and then fourth and finally, build a financial foundation for our future.

As was the case in the third and fourth quarters of last year, the first tenet, lower cost to compete, continues to provide great evidence of the success of our efforts.

This quarter's more than 16% decline in main line unit costs, follows two previous quarters of equally impressive reduction.

Our success in removing costs from the operation has paved the way for improved results, and has given us the ability to stand and fight in many markets, here domestically and around the world.

When you consider that this year-over-year improvement comes during a quarter of record high fuel prices, I think the result is even more impressive.

Without the negative impact of rising fuel prices, our progress would have been more dramatic on the cost front.

Our year-over-year decline in main line unit costs would have been more than 17%.

The magnitude of recent cost reductions may lead one to believe that we've squeezed all the savings we can out of the operation.

However, I can assure that you every day, we continue to find large and small ways to reduce costs further.

Sometimes these savings come from unusual and unexpected sources.

Take for example the cleaning of our 757 lavatories.

It used to be that during a heavy sea check, the tanks would get removed and sent to an outside firm for cleaning.

Our maintenance folks took a look at that process and figured out a way to do the work in-house faster and cheaper.

As a result, we are going to save about $600,000 a year in lav cleaning.

I point to this unusual example to illustrate the fact that we're looking for every penny we can find and if it means cleaning the toilets ourselves, we will do it.

At other times, the savings we find are a continuation of a familiar theme, as is the case with our decision to de-peak our Miami schedule.

This change will occur on May 1 and should provide us with further cost savings as we smooth out the peaks of that operation.

It'll also help us operationally as we work around the major terminal project that we have under way in Miami.

With the domestic revenue environment as it is, we're going to need every bit of cost savings we can find, which leads me to the second tenet of our Turn-Around Plan: fly smart, give customers what they value.

This is our way of turning our focus through revenue production.

Within this framework, we've made a number of adjustments that we believe will help improve our relative revenue performance.

Recent change under this tenet, the restructuring of our mid-continent hubs was implemented in November, and we estimate that a full point of our 2.5% first quarter unit revenue improvement is attributable to this change.

Additionally, shifting some of our capacity to our international network is proving to have been a good move.

In the the first quarter, that capacity shift to higher yielding operations contributed considerably to our year-over-year improvement in revenue.

Domestically, however, the revenue environment remains difficult.

Despite projected GDP growth of more than 4.5%, industry capacity is growing at a higher rate.

In most domestic marks, yields are essentially flat, year over year.

However, in some markets like the transcons, yields have declined significantly.

And as a result, we've take an close look at our transcon schedule and we've recently reallocated some of our capacity in the New York to California base and markets.

In doing so, we added three additional Kennedy to L.A. flights and canceled three of our New York to Orange County flights.

Because it became apparent to us that for our transcon customers, L.A. is the preferred basin area airport.

These -- I think these transcon markets are a perfect example of where we've made the decision to stand and fight.

However, we want to ensure we're fighting for the right cause, one valued by our customers, and therefore, we're putting our focus in the markets that we believe are preferred by our New York and L.A. passengers.

By mid June, we'll be flying 12 daily flights from New York to L.A. all in three class 767-200 aircraft.

Moving on to the third tenet of our plan, pull together, win together, we're making real progress here as well.

Last quarter, I mentioned our customer service initiative, which brought together about 100 employees from across the Company to find ways to enhance customer service.

That effort is well under way with every labor group represented, and focused on improving our service levels.

Additionally, our employees just recently experienced firsthand the benefit of working for a company with improving performance in the financial markets.

The first of our broad-based stock options issued to all U.S. employees, in conjunction with our restructured agreements, vested earlier this week, with a strike price of $5 per share, these options were worth millions to our employees.

With this broad-based plan, and our other performance-based incentives, we have created a set of compensation vehicles that we believe underscore the fact that if the Company does better, we'll all do better.

Finally, we're making significant headway on our fourth tenet, build a financial foundation for our future.

We ended the first quarter with $3.7 billion in cash and short-term investments.

Including 501 million in restricted cash.

After a rough few years, I continue to be pleased by our positive cash flow from operations, which totaled approximately $370 million in the quarter.

Our strong cash position allowed us to make an early payment of $147 million to our defined benefit pension plan.

On a year to date basis, we have contributed $319 million to all of our pension plans.

While we're on the subject of pensions, I'm sure you're all aware that we received some good news from Washington a couple weeks ago with the passage of the Pension Funding Equity Act.

That legislation provides relief from deficit reduction contribution payments, which will reduce our cash funding obligation, particularly next year, and I'll let James fill you in on the details.

We're also able to benefit from improved access to the capital markets, completing two financings during the quarter.

The first, a secured spare parts financing, generated $180 million for the Company.

And second, a convertible debt deal raised $324 million.

We've also arranged for RJ financing to the tune of about $735 million this year.

So all in all, we're maintaining great momentum under our Turn-Around Plan, and we're very encouraged by our progress, but we obviously recognize we still have a lot of work to do, and we're all looking forward to continuing to work hard, and we're also looking forward to a very busy summer.

And with, that I will turn the call over to James.

Thank you, Gerard.

And good afternoon to all of you.

Our results for the first quarter once again highlight the impact of the dramatic cost restructuring we began to implement last year.

Our unit costs are now among the lowest of the network carriers, and we are now much better positioned to compete against all carriers.

In fact, our first quarter results are stacking up nicely, compared to other global carriers.

Particularly on a pretax basis.

It is important to remember that many of our competitors with net losses include tax benefits, which improves their bottom line results.

As we look across the global carriers, our pretax margin compares quite favorably.

Unfortunately, this quarter's results also reflect record high fuel prices.

Fuel, as most of you know, is our second largest expense line, behind salaries and benefits.

The year-over-year increase in fuel prices cost the Company $55 million for the quarter.

And it's worth noting that last year's prices were already high in anticipation of the war with Iraq.

Despite this fact, our main line unit costs for the first quarter improved by more than 16%, compared to last year to equal 9.49 cents.

We realized improvements in many expense categories.

Which demonstrates the Company's commitment to continuous cost reduction.

It also demonstrates our focus on reducing costs beyond the $4 billion in annual savings we initially identified.

The price of fuel per gallon averaged $1.01 during the first quarter.

An increase of 7.4% year-over-year.

Without the increase in fuel prices, our main line unit costs for the quarter would have improved by more than 17%.

The increase in fuel costs for the first quarter came despite hedging gains, of $37.4 million, or 5.1 cents per gallon.

Aside from hedging gains, the only positive note here is that our main line fuel consumption increase of 2.2% year-over-year was 3.5 points lower than our 5.8% increase in capacity.

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

Moving on to our revenue performance, we reported a 2.5% year-over-year improvement in main line unit revenue this quarter.

Main line yield for the quarter was down slightly, year-over-year, to 12.14 cents.

This decline in yield was more than offset by a load factor increase of 2 points, year-over-year.

Leisure traffic, in particular, remains strong.

And our books load factors for the next several months are higher than they were at this same point in time last year.

Of course, we haven't forgotten that there weren't a lot of people booking airline travel at this point last year, so we're not overly optimistic.

Just the same, we anticipate strong summer traffic, as was experienced last year.

Looking at our performance by entity, we saw a good deal of strength in our international business, while our domestic results were a little better year over year.

For the first quarter, unit revenue in domestic markets was up 1.3% compared to last year.

Domestic load factor was up 2.2 points; however, yield declined 1.8%.

Domestic capacity increased 2.5%.

Transcon markets continued to dampen results in the domestic entity, with yields falling by more than 22% year over year.

Increased traffic is offsetting some of this loss, with load factors up 6.5 points.

Still, if we exclude transcon's from our domestic performance, unit revenue would have increased 3% compared to last year.

Internationally, the story is much more positive.

With a unit revenue increase versus last year of 5.2%, on a significant 14% increase in capacity.

During the first quarter, international load factors improved by 1.5 points.

While yields were up 3% from year-ago levels.

Now, what's really encouraging is that we're seeing substantial increases in full fare traffic on some of our core international business routes.

In our London markets, for example, full fare traffic increased 23.4% year-over-year.

And to and from Tokyo, full fare traffic increased 30.1%.

European unit revenues were up 8% year-over-year on a nearly 6% increase in capacity.

Yields in Europe increased 2.5% for the quarter.

And load factors were up by 3.8 points.

Moving on to the Pacific, unit revenue in the first quarter increased by an impressive 25.1%, versus last year.

Load factors improved by nearly 9 points, on a 6% increase in capacity year-over-year.

Yields improved by 11% compared to last year.

Finally, unit revenue for our Latin American operations was essentially flat year-over-year, but on a significant 22% increase in capacity.

Here, load factors were down nearly 1.2 points, year-over-year, but yield increased 1.6%.

Before we move on to the balance sheet, let me touch briefly on the results for our regional affiliates and cargo.

Our regional affiliate results continue to impress.

In the past, we had been severely limited in terms of RJ growth capability.

But with our restructuring, 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 RJ's for jets on routes that weren't making the cut when flown by the 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 first quarter, unit revenue for our regional affiliates was up 4.3% year-over-year.

If we adjust for more than a 16% [inaudible] increase, unit revenue was actually better than last year by 15.1%.

On a stage land suggested basis, yields were up by 7.6%, with load factors up 4.1 points, on a nearly 24% increase in capacity.

Cargo revenue was up 10.4% on a 9.6% increase in capacity.

Freight revenue grew 13.4%, with a 6% increase in traffic and a nearly 7% increase in yield.

The improvement in freight traffic was largely driven by growth internationally.

Particularly to and from South America, Europe and Japan.

The yield improvement was driven by better mix, including a 92% growth in our high yielding guaranteed product expedite FF.

Moving on to the balance sheet, I continue to be pleased with our cash position, which increased from the fourth quarter, by $600 million, to $3.7 billion, including $501 million in restricted cash.

Most rewarding is the fact that we generated $371 million in operating cash flow, during the quarter.

We accessed the capital markets twice during the month of February.

First, we issued $180 million in fixed rate notes, secured by a portion of American's spare parts pool.

The notes are due in 2009 and bear interest at 7.25%.

In addition, AMR issued $324 million of 4.5% senior convertible notes.

The conversion premium was 40%, equivalent to a stock price of $22.05.

Our total debt at the end of the first quarter was $20.5 billion.

This improved access to the capital markets, and our ability to produce cash from the operation, enabled us to make an early payment to our defined benefit pension plan of $147 million.

As Gerard mentioned this early payment will serve to lower our cash obligation in 2005.

While we're on the subject of pensions, I'd like to spend a couple of minutes discussing the impact to AMR of the Pension Funding Equity Act.

In a nutshell, the legislation expands by two years, the time line for making our remaining deficit reduction contribution payments.

While we had planned to make our remaining DRC payments over the period 2004 through 2007, we now plan to make them during the years 2006 through 2009.

At the same time, the act's adoption of a discount rate based on more realistic long-term corporate bond rates will serve to reduce present value of our pension obligations, and in turn reduce funding requirements.

If on top of these positive legislative changes, our asset values increase over the next couple of years, our DRC payments would be lowered even further.

I want to make it very clear that our obligation to make these payments is in no way altered by this legislation.

It just moves the obligations two years out into the future.

With the bill's passage, our defined benefit funds requirements for 2004 have been reduced from our initial full cost of $600 million to less than $450 million.

In 2005, our funding requirements are expected to be slightly less than those in 2004, at the just over $400 million.

Before moving on, let me just outline our Cap Ex and debt repayment schedule for the remainder of the year.

For 2004, Cap Ex is estimated at about $1.2 billion.

We have pre-existing financing to cover all of our regional jet deliveries, or about $755 million of this spending.

For the first quarter, our net capital expenditures were $213 million.

In the second quarter, net Cap Ex is estimated at $360 million.

Our total principal payments in 2004 including the principal portion of our capital leases are expected to be about $800 million.

And will be evenly divided by quarter.

In addition, $112 million in tax exempt special facility bonds will require repurchase in December.

Given our improved results, and the changes to our acquired pension contributions, we have a good deal of flexibility in meeting our cash obligations in 2004 and 2005.

In addition to our cash flow from operations, we believe we have a range of financing alternatives available to us.

Including secured and unsecured financings, asset sales, and the sale of equity or equity-linked securities.

Moving to cost guidance, for the year, we still expect our main line unit costs to improve by about 8% compared to last year, equivalent to 9.3 cents.

The improvement comes primarily from from having a full year's 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.

Our second quarter main line unit costs are projected at 9.2 cents.

A word of caution, however.

These numbers assume a full year fuel price of about 97 cents per gallon.

Which is what the forward curve suggested at the time we closed our books for the quarter.

However, as you all know, fuel prices have been rather volatile of late.

And if we were to rerun our forecast with the more recent fuel price, of for example, $1.03 per gallon, our unit costs would be 9.4 cents for the full year, and 9.3 cents for the second quarter.

As we stated last quarter, we will face some cost head winds in 2004, primarily from medical benefit costs, airport fees, and the maintenance materials and repairs line, which will create a drag on results.

For the second quarter, we currently have fuel hedges covering approximately 16% of our expected consumption, that's a WTI crude equivalent price of about $32 a barrel.

For the second half of the year, our hedged position is about 6%, also at an average price of about $32 a barrel.

Our main line capacity in the second quarter is expected to be up 8.4% year-over-year.

For the full year, we still expect our main line capacity to increase by around 6%, despite removing 57 aircraft, summer-over-summer and reducing main line departures.

This is possible because of increased efficiencies driven by three factors.

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

Second, we have added seats back to our 757s and A300s; and third, as we realign our mid-continent hubs and de-peak the Miami schedule, we'll substantially improve aircraft productivity levels.

We now expect traffic to be up a little more than 6% for the year.

In conclusion, I continue to believe there is every reason for cautious optimism.

Our costs are among the lowest of the global carriers.

We have the world's largest network.

The world's largest frequent flyer program and a vibrant alliance partnership that spans the globe.

We've made tremendous strides in generating operating cash flow, regaining access to the capital markets, and rebuilding our liquidity.

And we have dedicated proud employees who are working to further improve our business while providing our customers with first-rate service.

We recognize that continued losses are not an acceptable result, but we believe that the for tenets of the Turn-Around Plan are the right strategic framework to lead us to our objective of sustained profitability at acceptable levels.

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

Thank you, sir.

At this time, we will now like to begin the analysis question-and-answer session.

If you would like to ask a question, please press star one.

You will be announced prior to asking your question.

To withdraw your question, you may press star two.

Once again, to ask a question, please press star one.

One moment, please .

Our first question comes from David Strine of Bear Stearns.

You may ask your question.

Good morning, thanks.

Or good afternoon.

I'm wondering what changed from the time at which you put out the 8-K, in I think the third week of March or so, looked like RASM was up for the quarter, and at that time it seemed that your thoughts were RASM would be flat to down.

Was it volume?

Was it yield?

And are those trends continuing this month and as far as you can see in bookings right now?

David, I think the short answer to your question is that the back half of March came in much stronger than we had anticipated at the time that we put the 8-K out.

And in fact, we ended the month of March with a record load factor and I think it was 74, 75%, and we did not anticipate that.

And usually, we're a little bit better at forecasting but I think in light of the base last year, with some of the things we talked about, the war and SARS and what not, we have not been as accurate in forecasting our domestic traffic.

And so that's the short answer and I guess the good news is, it's -- instead of coming in lower, it came in much higher than we had anticipated.

If you want to add --

Just to add to that, we are seeing a real shift in the booking patterns towards closer-in booking.

We really are seeing a marked increase in the last 14 days or so prior to departure than has historically been the norm, and that is continuing on into the second quarter thus far.

And so with respect to the business mix, I think you mentioned earlier that it's looking a lot better on the international front, particularly the trans-Atlantic and the trans-Pacific, and domestically, what's that picture look like?

Well, domestically, I think it is fair to say that we still have about half of our customers who are traveling for business purposes.

But obviously, part of what is going on in the domestic marketplace is that customers now have a much wider variety of fares available to them, and cheaper fares are being selected.

And so there's a little good news in terms of business volumes, but we're obviously seeing the negative effects on the yield side of the equation.

And just to follow-up on one of your other themes, the improvement that we saw in the back part of March was largely traffic-driven and not yield driven.

Great.

That's helpful.

Appreciate it.

Thank you, David.

Our next question comes from Michael Linenberg of Merrill Lynch.

You may ask your question.

Yeah, I guess two questions.

I guess one, Gerard, can you talk about the -- your recent announcement about the JV that you're doing with Rolls Royce, and you know, maybe other opportunities where you can utilize your asset base more intensely to generate additional revenue?

Michael, that -- you're picking up a release from earlier this week, that we've been working -- we've had a long-standing partnership with Rolls Royce, at our Alliance Maintenance Base, to do overhaul work on Rolls engines, and we have Rolls engines on our 757s and on our triple seven.

And as we restructured our labor contracts last year, and as we've worked really hard on driving lean manufacturing processes into our operation, that joint venture with Rolls has really turned around to the point wherefore the first time, we're actually -- we've actually turned the thing into a profitable little company.

And because we are more efficient, Rolls has made a commitment to us that if we continue down that path and we continue to do well, they're going to put more of their volumes into Alliance rather than taking it to some of their other overhaul facilities.

So I think that's a very positive development.

And it's really a great recognition of the work that we've been doing with the TWU, to work together in making our operation more efficient, and having it drive a great bottom line result.

So I'm very encouraged by it.

But we do need to continue to produce engines more efficiently and on the times that we've committed to, or else Rolls won't give us the business.

So the good news is, they stand ready to give us the business, but we got to keep doing a good job.

Great.

And then just my second question, as we get up to the end of April here, we're going to be anniversaring the first year of the labor agreement, can you just run through or give us some sense of what we should expect on the labor line?

I think there's some step increases for some of the various groups.

If you could just, you know, update on that, that would be great.

Okay.

The increase will apply to all U.S.-based employees, will be 1.5% and that will be coming along in May, and we will be looking at that level of increase each year for the duration of these five-year agreements that we arrived at this time last year.

Okay.

Thank you very much.

The other thing that's going on, Michael, is part of the pilot restructuring, it has taken us all this time to implement a lot of the productivity savings that were embedded in that contract, because we've had to train pilots to their new seats, in order to get the productivity, and as a result, the deal that we constructed with the pilots had them taking a bigger pay cut for the first 12 months, and then a reduced pay cut after that.

And I'm looking for somebody to help me with the timing of that adjustment.

Is that -- I think that is May 1 as well.

Okay.

And those are the only two really seminal events coming on the labor front.

And Gerard, just the pilot piece is more like a 7% -- I guess it's give back, or however you want to call it, and then it -- after that, it's the 1.5% like every other group?

Yeah, that's correct.

That is all part of the original deal.

Okay.

Very good.

Thank you.

You're welcome.

Our next question comes from Glenn Engel of Goldman Sachs.

You may ask your question.

A couple of questions.

One is, is that you had an arbitration that you lost with the pilots.

Does that charge show up in the miscellaneous income?

And what happened there?

Yeah, Glenn, we did lose an arbitration that dated back to the year 2001, and it's -- the economic consequence was a $23 million hit and I believe we booked that below the line.

Yup.

That's in the miscellaneous net line in the press release.

Okay.

So that was to the tune of $23 million.

Now, Glenn, that obviously got booked in March, and as I reported in my comments, we made a net profit of $30 million in March, and that's net of that $23 million bad guy.

But we also had some one-time good guys in the month of March as well, that were one-time.

So I think the 30 million is a good reflection of how the Company did in the month.

On on a net basis.

Can you give us some flavor of how much currency lifted Europe and Asia?

Well, if we had had last year's currency rates this year, then our European and Pacific RASMs would actually will have been five and four points lower, respectively.

If that gives you a sense for it.

Thank you.

That's all.

Thanks, Glenn.

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

Good afternoon.

As you've returned to a less room throughout coach product on certain aircraft types, have you been able to determine any yield effect outside of what's otherwise, you know, occurring in some of those leisure markets?

I'm asking because I'm curious as it relates to remaining potential ultra low cost growth that could occur across the rest of your fleet.

Well, Jamie, I think the only thing I can tell you there is the occupancy rate on those added seats has been consistent with what we expected.

So we feel very good about the decision to add the seats back on the 75's and the A300's and in fact, you'll recall that not only did we add the seats, when we went through our network restructuring last November, we reoriented a lot of the airplanes to put those airplanes in our higher load factor market, so we feel very good about the results we've gotten there, but I think for the time being, we feel very comfortable with where the rest of our narrow body fleet is in terms of seating density.

I think the next thing that we are working most actively on is actually our wide body fleet, where I think we do remain concerned about our seating density.

If you look at our 777 for example, we have a total of I think it is 234, 238 seats.

234.

234 seats.

Which I think in the long run, we're going to have to have a higher seating density on that airplane to improve our international results.

So that's something that we're currently studying, and we're also looking at the -- our business class fee and a couple of other things as well, so we hope all of those decisions will come together and be made at one time.

One other thing just to note in terms of seating density is that obviously, I think you know about the 757 and the A300s, going to a more dense configuration in economy.

But once we retained the more room product on the Boeing 737, we've actually increased the seat count on that aircraft now, by 6%, as a result of taking a row out of first class, and turning it into two rows of economy.

Still retaining a relatively large first class cabin for our best domestic routes.

So with that aircraft.

So still 16 seats in the front on that plane.

But a denser unit now.

I wasn't aware of that.

Thank you, both, appreciate it.

Thank you, Jamie.

Our next question comes from Jim Higgins of CSFB.

Yes, hi, thanks very much.

Trying to, if memory serves me, your profits in March tend to be greater than they are in April, or probably May, but maybe considerably less than June.

Is that a reasonable characterization of sort of seasonal trends?

I think in part, that's going to depend on where it used to fall, for example.

But directionally, March can be a reasonable month for us.

Right.

So it tends to be probably stronger than some of the months then?

Yeah, I think that is fair to say.

Okay.

And secondly, as you've -- as you've changed the seat configuration in the 75's and A300s and it becomes more critical that those find their way into the right routes, are you seeing -- is there any push-back from customers who aren't getting what they think they used to get, even though they probably weren't willing to pay for it?

Or does it seem to be going pretty smoothly?

I think, Jim, based on the survey data we're seeing and the customer comments, I think it's gone very smoothly, and of course we're very proactive on our Web site to make it clear which airplane you're getting on which flight.

So I think for the most part, it's gone very smoothly.

And is there -- is there any scheduling difficulty related to needing to segregate those aircraft into certain markets, or have you got that all worked out?

No, I think it's all worked out.

Great.

Thanks very much.

Thank you, Jim.

Our next question comes from Gary Chase of Lehman Brothers.

Good morning, guys.

Or good afternoon.

Sorry.

Hey, Gary.

Gerard, just a quick cleanup question.

When you mentioned the good guys in March that had offset the expense you booked in miscellaneous, did that show up in depreciation?

Because that line seemed down sequentially very significantly, and you know, unexpectedly.

No, Gary I don't think it did.

It was in the -- the couple good guys we had were in the wages line.

So the depreciation line to my knowledge pretty clean quarter.

Is there any reason then, James, for the major shift between, you know, where you were in the fourth quarter and where were you in the first?

A change in useful life assumptions or anything like that?

No--

Well, we did have the write -- we took some -- we took the write-off on the A300 at year-end.

We took -- what else did we take at year-end?

Well, there was no change in accounting policy on depreciation.

Certainly year over year, the depreciation line improves, in part as a result of the restructuring agreements that we arrived at with some of our lessors and such, this time last year,.

Yeah, I think, Gary, that's something we can go chase down for you and give you more definitive answer, but the things that occur to me are the retirement of the F-100 fleet, fewer of those in the operation in the first quarter, in the earlier write-off, and the -- I don't have it in front of me, but last year at the end of the year, we wrote down our A-300s and our 767-200s and that's certainly showing up in --

Yeah, Gary, we had an aircraft charge in the fourth quarter of $302 million last year.

So that's probably what you're staring at there.

Okay.

Just I also wondered Gerard if you could elaborate on the transcon.

From the numbers that you gave, or from the numbers that James gave, it seems like RASM there was down about 15%.

Was there any sort of -- was there any way that that progressed during the quarter?

Was it horrible in January, got much better in March?

And also, could you just give us a little color on how first class, how your front cabins performed versus the coach cabin.

Well, Gary, unless somebody can dig it out, I don't have the first class/coach cabin split in front of me, but it is obviously a very difficult yield environment.

I guess the only encouraging news in those markets is our load factor was up considerably, about 6.5 points, and through some of the promotions we ran, we signed up an additional 25,000 I think new Advantage members.

So while it is a difficult competitive environment, those are markets we've been in forever.

We have a strong customer and Advantage base on both coasts, and we're going to continue to work hard to deliver good service and emphasize our company's strengths.

You know, I think it is fair to say that February was a particularly tough month on the transcon.

Our RASM decline was the greatest of the quarter, and that was offset by a relatively better result in March.

The bookings look more like March than February, if we look into April and so on?

Yes, booking, as I said, are continuing to be sensitive to the last 14 days or so, prior to the departure.

But we're cautiously optimistic about where bookings are.

We're certainly expecting it to be a busy spring and summer.

And you know, I will just leave it at that.

Thanks a lot, guys.

Thanks, Gary.

Our next question comes from William Greene of Morgan Stanley.

Good afternoon.

I was wondering if you have a sense for what the cost of the two-for-one promotion was, or how you might measure the effect of it on your statement?

Sorry, could you repeat the last part of the question?

Sorry, how the -- what the two-for-one promotion, how it affected your financials.

Well, we took $8 million into deferred revenue for that promotion.

And as Gerard indicated, we, through the promotion, created around 25,000 new Advantage members.

And of course, those are people who we're now able to cross-sell both our airline product to, as well as our nonairline products, such as the Citibank Advantage card.

So all in all, we're quite content with how that promotion evolved.

Do you think you need to repeat it?

Or are you comfortable with where the trends are now?

Oh, I think as we are coming into a stronger season, that we don't necessarily need to repeat it.

Part of what was accomplished with this promotion is that we filled and awful lot of what would otherwise have been empty seats on these aircraft.

Okay.

And then do you have a sense for how much the chasm is coming down because of the extra seats on the 757s and the Airbus?

The effect there is going to be of the -- of the order of 2% of AFMs [ph], so that gives you a sense for it.

When you think about our 6% for the year capacity increase, think of it as 2% coming from 75s and the A300s, 2% coming from enhanced utilization, and 2% coming from the year-over-year effects of the war and SARS.

Okay.

And just lastly, just head count went up from fourth quarter from about 90,600 to 92, does that mean we've pretty much troughed in terms of the head count?

Well, the head count growth was actually at Eagle, and -- are you referring quarter-over-quarter?

Or year-over-year, sorry, Bill?

Quarter over quarter.

First quarter versus fourth quarter.

There was some increase in Eagle but main line went up 1,000.

Yeah, the volume related aspect of that is going to be driving the vast majority of that.

Our AXMs for the quarter were up 5.8%.

So I think if you adjust for that, you'll see that we're pretty close to flat on head count.

Okay.

So since you're growing your capacity from here on out, these numbers probably don't get smaller then.

No particular plan for that at the moment, no.

Okay.

Thank you.

Our next question comes from Ray Neidl of Blaylock & Partners.

Yes, Gerard, just a very general question.

We both would like to look forward to the future about the industry and your crystal ball is probably better than mine, and you guys at American have done a superb job in reducing your cost structure, I'm sure you could do a little bit more, but it would probably easy for you to just pit there.

So going forward you're still trying to be an airline to all people, and that's understandable.

You're a big airline and you want to please your frequent flyers and you want to go to all place, but going forward at many point-to-point leisure markets, you're probably never be cost competitive with the LCCs, which are gaining strength and gaining market share in these areas.

And I was thinking, for the future long-term might it not be better that you concentrate your limited resources in areas where you have an advantage, like your hub and spokes and your international, and then maybe turn over some of the point-to-point markets, at least the leisure markets, to the LCCs and kind of compromise with them and do co-chairing.

Is that a possibility down the road where everybody can start making a little money?

Well, Ray, I think that part of what we have going for us is the depth and breadth of our network, and so one of our strong selling attributes, particularly in the corporate environment is the fact that we can take our customers to virtually anywhere in the world that they want to go.

Particularly when you think about what our One World partners bring to the table.

And you got to remember that your business customer during the week is also your leisure -- is the same customer, is also your leisure customer at spring break and over the holiday periods.

So, I think that we're going to continue to develop and leverage our network as part of our second tenet of our Turn-Around Plan, flying smart and giving customers what they value.

Now, that doesn't mean that you can fly, you know, to tons of places and not make money flying there.

And that's why we've continued to refine our network to drawback our flying, to points where we think we can have long-term success.

So I think the -- going forward, our strategy has to be to continue to drive improvement across all fronts in the company, and what we are preaching in every forum that we have, is continuous improvement and we have not let up one bit on the cost front.

And we are continuing to work as hard as we can on refining our network, and our fleet plan, and our partnerships, in a manner that will both drive revenues up and drive costs down, and I think, and expect that as we move through this year, you'll continue to see the results of our efforts, and if we're making the right decisions, you'll continue to see our revenue relative to our competitors improve.

Okay.

And I don't think you addressed this in the conference call.

I just saw something come across about Chicago.

It looks like let's go up, let's go down at the government's request.

Could you just update us on what's going on there and how that might affect you going forward?

Yeah, Ray, we have been in a dialogue with the FAA regarding our operation at O'Hare, and I'm sure you saw in the dependability numbers that we had a pretty rough January and February, and when you cull through the data, you can see that a good piece of that was a combination of weather and our operation in Chicago.

And in particular, weather in Chicago, and its effect there.

So the FAA is rightly concerned about capacity in Chicago.

And the ability to run that airport reliably.

So we have agreed to take down our flying by another 2.5%, and I don't know if I'll have the hours exactly right here, but I think it's 1300 to 2000 in the evening, and United I believe has agreed to do the same thing.

Now, obviously we can't talk to United about capacity, but we can talk to the FAA, and so I believe Secretary Mineta made that announcement earlier today.

So that goes into effect, I believe, -- instead of throwing out a date, let me get it to you, Ray.

But it goes into effect May 1 or plus or minus shortly around that date.

So I think it is a good development.

It will run more reliably in Chicago and do a better job for our customers.

Great.

Thanks a lot.

Thank you, Ray.

Our next question comes from Helene [ph] Becker of Benchmark.

Thanks, operator.

My questions have been asked and answered.

Thank you, Helene.

Our next question comes from Dan Hemme of Presidential Equity Group.

Hi, it is Prudential.

Good afternoon.

Gerard, a question for you, I want to get your thoughts really on how the Turn-Around Plan may evolve down the road.

Let's roll the clock forward maybe a year or two.

Can investors expect to see a new set of goals at some point, particularly on the first tenet of lower costs?

Well, Dan, I think rather than set a specific target or goal, I have emphasized continuous improvement.

Because I think in this environment, as you look forward, I think we're going to continue to see yields under pressure, as they have been for the past 10 years, in this business.

So I think you're naive if you don't think about efficiency and cost reduction as something that you have to continually work on.

And so rather that set a target, where we're emphasizing across every operating group in the Company, is finding ways to do the job more effectively and more efficiently.

And we're finding success all over the Company, and sometimes in very small ways, but one of the examples I think that was reported because of an interview I did this week, is that we, on our cutlery on our airplanes, we bought that domestically and were spending about $2 million a year on it, and our purchasing folks went on the internet in a reverse auction, and dropped that expenditure by $600,000 a year, and essentially bought the same product in Asia.

So I could cite many, many examples like that, that are going on all over the Company, and we're just going to keep pressing on every front.

And I think that's the right place to be.

Thanks very much.

Time for one more.

Our next question comes from Dan McKenzie of Smith Barney.

Okay, thanks, operator.

James, one other minor question on the income statement.

AMR had good cost performance across nearly all line items with one exception.

That was commissions, booking fees and credit card expense.

Which I guess on a unit base were up about 6%.

What's driving the increase there?

Is that a one-time bump-up in the quarter?

Or is that something we should expect more of going forward?

Well, I think the increase there is very much really driven by the volume of business.

That, you know, you see our revenues at AA up about 8.5% or so.

And you know, I think one of the other sub-plots here is that as you see more and more bookings being driven to the web, obviously commission costs can be coming down, but credit card fees are a bigger part of how travel is purchased via the web.

So there is a variety of different things going on there.

The fact that we're particularly focused on growing the international part of the business, this year, that's a part of our system that has higher costs of distribution.

The AFMs are going up around 16% this year internationally, where as domestically the figure is 2.5% or so.

So I think those are the primary things driving that line.

Okay, good.

And secondly, as of February, Alaska did away with the Friday and Saturday night stays and simplified its fare structure.

How has AMR responded to these initiatives on those routes where it competes, and secondly, how would you characterize the net effect?

Well, where we've got competitors who are entering into those more simplified fare structures where we're very much matching up on them.

We need to be absolutely competitive for -- going after every customer.

You know, we're continuing to think through this equation for other parts of our system.

But thus far, our view is that it's been -- a simplified structure would be potentially revenue negative, we're certainly not giving up on that, because obviously it's something that is of great interest to customers, but that's where we are at the moment.

Okay.

That's great.

Thanks very much.

Thanks, Dan.

And if Ray is still on, I think -- did Ray ask about Chicago?

Ray, I don't know if you're still on that but that schedule change in Chicago goes into effect June 10.

Thank you all very much for being with us.

And I think now we will go talk to the press.

Thank you all.

This concludes today's conference call for all analysts.

Media, please stand by.

Your question-and-answer session will begin shortly.

Thank you.