美國航空 (AAL) 2004 Q2 法說會逐字稿

Good afternoon, welcome to the AMR 2nd quarter 2004earnings 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 the 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 Miss Kathy Bonanno, Director of Investor Relations.

Miss Bonanno you may begin.

Good afternoon everyone, thank you for joining us today.

On the call today are Gerard Arpey, AMR's President, Chief Executive Officer and Chairman.

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 2nd quarter, along with some prospective 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 posted our earnings release on the investor relations section on our website at AA.com.

At that same website, interested parties may listen to a live web cast of today's call and review our reconciliation slides.

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 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 cometive 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 our actual results.

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

Thank you, Kathy.

Good afternoon, everyone.

As I'm sure you've seen by now in our press release issued this morning, we reported net income of $6 million or 3 per share diluted which included special items worth $31 million.

Excluding those special items about which James will elaborate in a moment, we reported a net loss of $25 million or 15 cents per share.

Needless to say, it was a much more difficult quarter than we had expected when we built our original plan for this year.

Obviously, our results were dramatically impacted by the price of fuel with our second quarter fuel bill costing us over $230 million more than it would have, with last year's prices.

And of course, we thought last year we were in a high-price fuel environment.

Nonetheless the progress we have made and continue to make is significant.

And we do have some encouraging news to report.

Despite the high costs of fuel.

We earned an operating profit, excluding special items of $165 million.

And we generated positive cashflow from operations in the amount of $362 million.

Excluding special items our Main Line unit costs for the quarter were down 6% year-over-year.

And on a fuel neutral basis our Main Line unit costs fell 10.8%.

Clearly our ongoing cost restructuring is at the core of our improved performance.

Record high fuel prices and an intensely competitive domestic revenue environment have made the need for further cost-cutting all the more clear.

Because of this reality, we are continuing to focus all of our energies on our turnaround plan, and in particular on the first tenant of that plan, lower costs to compete.

I'm sure many of you saw our announcement Friday, of a pilot furlough that will take place this fall.

While that is regrettable, It marks the final step in fully implementing our restructured pilot - labor agreement.

As a reminder, the pilot group agreed to certain productivity savings that we knew would take time to phase in.

To offset this fact our pilots took larger pay cuts during the first year of those restructured agreements.

Now that all of the retraining has been accomplished.

This furlough marks the end of that process.

As we've been implementing our restructured agreements, we've also been keeping up the pressure for continuous cost improvement.

For example, some time ago we started down the path of simplifying our operation.

A big part of that effort has been the simplification of our fleet, taking it from 14 unique aircraft types in the year 2000 to 7 by last year.

And this year with the are removal of the F-100 we'll be down to 6.

From there we set about simplifying our schedule, and we peaked our operations beginning with Chicago, then Dallas and finally just this past May in Miami, and now we're looking to simplify our day-to-day operation, which is something we're currently testing in Chicago.

During this test, we're evaluating the benefits of keeping our pilots and aircraft together, limiting the number of aircraft moveups or last-minute aircraft changes that we make and performing more maintenance work at the gate.

By making it these changes, we think we'll achieve savings in crew costs, maintenance costs and material costs.

The further that we dig into this whole notion of simplification, the more opportunity we believe we're going to find.

We're also doing a lot of work thinking about simplifying our aircraft routings, we know that reducing the number of fleet types has brought us significant savings in costs and improved dependability.

But we also know that if 6 fleet types are better than 14, then 1 purely from a cost standpoint is better than 6.

Of course it's not realistic to expect a global airline of our size to operate a single fleet type.

But the question we're considering is whether we need to operate all six types of aircrafts that we now operate at each of our hub airports.

If we were to operate our hubs more independently and reduce the number of aircraft types that flow in and out of any given hub, we may be able to realize many of the same savings we achieve when a fleet type is eliminated, allowing us to operate more like some of our low cost competitors.

In addition to these ideas, employees throughout our company have identified close to $75 million in new cost-savings initiatives which will help us lower our cost this is year.

We're keeping a running tally of these ideas, and I think it's fair to say the list grows longer every week, and the ideas are all over the map ranging from using electric power tugs rather than engine power to push back aircrafts here at DFW, they're returning unnecessary space at airports all over the world.

With the domestic revenue environment somewhat stuck in neutral, it's clear that cost-cutting must continue to drive our focus.

Pricing remains limited and domestic unit revenue remains at historically low levels.

Of course, that's why we have been focusing our capacity growth on international markets, launching new service-like L.A.-Tokyo, Kennedy-Brussels and Boston-Manchester.

I think all of you know that Asia in particular is really building up a lot of steam.

Our new L.A.-Tokyo service, which is performing better than we had anticipated, I think is a good indication of the strength of that region.

I'll let James fill you in on some of the details, but in general, I think we're very pleases with what we've been seeing internationally.

In total our international capacity is going to be up about 15 to 16% this year and we're keenly focused on international opprtunities for next year.

Before I turn things over to James I want to congratulate our employees for their efforts under the third tenant of our turn around plan -- Pull together, win together.

We've been getting terrific feedback from our employees and we've got a number of people signed up to participate in teams as part of our efforts to create a more collaborative decision making environment here in our company.

Recently we announced some of the ideas from one of the largest of these teams, our Customer Strategy team.

This was a group of 100 front line employees who undertook review of a lot of our customer strategies and tactics and the result has been I think a real success, and we've been busy implementing a number of their ideas.

So in summary, I think all in all, I think it's fair to say we are pleased with our progress, that we have made under our turn around plan this past year, but we recognize the many challenges still ahead.

In the end, I think the final tenant of our plan - Build a financial foundation for our Future, acts as a support card for our performance.

Our financial position is much stronger today than it was a year ago, as I said earlier, we earned an operating profit this quarter of $165 million.

We have a second quarter cash and short term investment balance of $3.9 billion.

Including 489 million in restricted cash.

We have met all of our pension funding obligations for this year.

And for the 5th consecutive quarter we generated cashflow in our operations.

So considering where we have been in the past, I think it's fair to say we feel modestly good about the momentum we've built.

We recognize with fuel over 40 dollars a barrel, we continue to have our work cut out for us.

And with that said, I'll turn things over to James.

Thank you, Gerard, and good afternoon everyone.

Before I get started, let me briefly discuss the special charges we outlined in our press release today.

Both the aircraft credit and the employee credit represent adjustments to prior restructuring accruals.

Together they offset expenses by a total of $31 million.

The aircraft credit of $20 million adjusts accruals made in 2002 and 2003.

And reflects lower than anticipated lease return costs.

Our lease return costs were reduced for two reasons.

First, the maintenance preparation work required on returned aircraft was less than expected.

And second, we decided to retain three of the aircraft we had originally planned to return.

I'll touch upon the latter a bit later in my remarks.

The employee-related credit of $11 million true's up our accrul for severance charges made in the 2nd quarter of last year.

With that out of the way, let's move on to our performance for the quarter.

As Gerard mentioned, fuel prices were the real story in the 2nd quarter.

Net results include the fuel costs that were 28 cents per gallon higher than they were in the 2nd quarter of last year.

Representing an increase in fuel expense of $232 million.

This added expense was the difference between profit and losses for the quarter.

Still, despite record high fuel prices, we did earn an operating profit for a 4th consecutive quarter, and we generated $362 million in cashflow from operations.

In addition, our unit costs continued to improve for the quarter, excluding special items, our Main Line unit costs improved by 6% compared to last year.

On a fuel neutral basis, unit costs excluding special items improved 10.8%.

Of course, comparisons to last year benefit from the fact that last April we hadn't yet implemented our restructured agreements.

Even so, looking at May and June combined, Unit costs excluding the impact of fuel, were down 7.9% compared to a year ago.

As expected, however, we did, in fact experience head winds in our benefits, maintenance materials and repairs and other -- landing fee lines.

In addition, you'll see increases in our commissions and credit card fees line year-over-year.

This increase is partially attributable to flying more passengers, it's also due to flying a greater percentage of international operations, shifting more traffic to online booking channels.

Of course, these are examples of higher expenses that drive higher revenues or offset other cost categories.

The price of fuel per gallon averaged $1.11 during the 2nd quarter, an increase of 34% year over year.

As most of you know, our hedged position was modest at 16% during the 2nd quarter.

Our hedging gains were similarly modest at $19 million.

The only positive note with regard to fuel is that growth in Main Line fuel consumption continues to lag our growth in capacity.

For the quarter, consumption increased 4.8% year over year, while capacity increased 8.5%.

The gap between the two reflects the success of our fuel conservation initiative which are proving crucial given the high fuel prices we're experiencing.

Before I move on, I'd like to spend a few moments discussing our fuel hedging program, which I know is a topic of great interest to many of you.

First, I'd like to remind everyone where we were just one short year ago.

Although we had implemented our restructured labor agreement, our cash balance had dipped to just over $1 billion.

In addition.

The war in Iraq and SARS had a devastating impact on revenue, lending uncertainty as to the expected rate of revenue recovery.

In an effort to preserve cash, we halted our hedging program and unwound most of our 2004 hedges, raising cash in the process.

In March of this year, with our cash balance much improved.

We reinstituted our systematic program.

Since then, however, prices have risen dramatically, limiting the amount of hedging that we could accomplish.

Going-forward, one of the decisions we are faced with is whether we should act to replace the unwound hedges outside of the structure of our systematic hedging program.

Today the price of doing so is relatively high and needs to be balanced with the view held by the preponderance of oil industry analysts and specialists that 2005 will seek fuel prices below $75.

Albeit based on an analysis of pure supply and demand.

Of course, external shocks anywhere along the supply chain could alter this picture.

Given all of this, and with the spot market up $41, we're thinking long and hard before either spending a lot of money on option premiums or assuming a significant amount of swapped exposure.

Moving on to our revenue performance, we reported a 1.3% year-over-year improvement in Main Line unit revenues this quarter, Main Line yield for the quarter was down slightly.

Not quite 4% year-over-year to 11.7 cents.

The declining yield was more than offset by a load factor increase of 1.3 points year-over-year.

Consolidated unit revenue increased 2.4% to 9.4 cents.

Looking at our 2nd quarter results by entity, we continued to see it year-over-year improvement in our international business, despite significant capacity growth.

Domestically, results were in-line with last year on a 3.3% increase in capacity.

For the 2nd quarter, unit revenue in domestic markets was essentially flat compared to last year, domestic load factor was up 1.4 points, however, yield declined 2.2%.

Transcon markets continued to dampen results in the domestic entity, with yields falling by nearly 19% year-over-year.

However, the restructuring of our mid-continent hubs is helping to offset the impact of intense transcon competition.

For the quarter, we believe the impact of our St. Louis restructure positively impacted unit revenue by 1.2 points.

Internationally, the story remains positive, with the unit revenue increase versus last year of 5.2% on a substantial 21.4% increasing capacity.

During the 2nd quarter, international load factors improved by 1.4 points.

While yields were up 3.2% from year-ago levels.

For a second consecutive quarter we saw large increases in full fare traffic on some of our core international business routes.

Nowhere more so than in Tokyo, where full fare traffic increased 129%.

European unit revenues were up 8.7% year-over-year.

On 14.5% more capacity.

Yields in Europe increased 5.6% for the quarter and load factors were up by 2.4 points.

Our cochair relationship with British airways is enhancing our european results.

In fact for the 2nd quarter, revenue from itineraries connecting with British airways grew nicely ahead of the rate at which we added capacity in the London market.

In the Pacific, unit revenue in the 2nd quarter increased by 35.5% versus last year.

Load factors improved by 13.5 points, on a more than 56% increase in capacity year-over-year.

Yields improved by 13% compared to last year.

But in America, was the only international entity with a year-over-year decline in unit revenue.

Albeit on a significant 22% increase in capacity.

Here, load factors were down 1.3 points, but yield increased 0.7%, driving a unit revenue decline of 1.3%.

Although unit revenue declined year over year in terms of profitability.

This entity is still one of our strongest.

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

Most of you know that with our restructured agreements, we are no longer limited in terms of RJ growth capability.

This has allowed us to increase our regional jet fleet and expand the substitution of RJ's for Main Line jets on routes that weren't making the cut when flown by the bigger planes.

As we do so, our profitability on these routes has improved significantly.

And the fact that we have some catching up to do with the rest of our network peers in terms of regional jet deployment should give us some upside in terms of relative performance.

For the second quarter, unit revenue for our regional affiliates increased 3.3% year-over-year.

We adjust for more than a 14% stage length increase, unit revenue is actually better than last year by nearly 13%.

On a stage length adjusted basis, yields were up by 6.6% with load factors up 3.9 points on a 26% capacity increase.

Cargo revenue improved versus last year by 10.7% to $155 million.

Driving the improvement was an 18% increase in freight traffic.

In fact, traffic was so strong that 2 nt quarter results represent our highest quarterly freight figure on record.

This translated to an increasing freight revenue of 16% with a 2% decline in yield.

Gains in freight traffic came primarily from Hawaii, Europe, and Japan.

May was the largest freight traffic month ever and June the largest June on record.

Somewhat offsetting these gains was a nearly 11% decline in mail revenue, with more than 5% declines in both traffic and yield.

You'll also note a fairly sizable year-over-year increase in other revenue this quarter.

This increase was primarily due to rising air freight service fees which have increased in step with fuel prices.

Unlike the passenger business, fuel surcharges in the cargo business, automatically increase and decrease as fuel prices rise and fold.

For the quarter, revenue from these fees grew by 30% year-over-year.

Turning to the balance sheet, our cash position increased from the first quarter to $3.9 billion.

Including 489 million in restricted cash.

We generated $362 million in operating cashflow during the quarter, and made early pension payments in the amount of $142 million.

For the full year, our Cap Ex estimate has declined slightly to about $1.1 billion.

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

For the 2nd quarter, our net capital expenditures were $279 million.

In the 3rd quarter, net Cap Ex is estimated at $314 million.

Our principal payments in 2004 including the principal portion of our capital leases total about $800 million and are evenly divided by quarter.

In addition, $112 million in tax exempt special facility bonds will require repurchase in December. total debt remains at over $20 billion.

Moving to cost guidance.

Let me remind everyone that May marked the one-year anniversary of our restructured agreements, so the very large year-over-year cost reductions from our concentual cost restructuring have come to an end.

In addition, for the rest of the year, we expect fuel prices to average $1.21 per gallon.

An increase of 39% relative to the back half of last year.

This combination does not bode well for year-over-year cost comparisons, as we saw this quarter, we will continue to face some cost head winds, primarily for medical benefit costs, airport fees and the maintenance materials and repairs line.

Yet, despite these negative factors, we expect unit costs to increase just 1.5% year-over-year in the 3rd quarter to 9.6 cents.

With fuel estimated at $1.20 a gallon.

On a fuel neutral basis, we expect a decline in 3rd quarter unit costs of 4.8% year-over-year.

Our ability to further reduce nonfuel-related expense reflects our commitment to continuous cost reduction as we discussed previously, this year we will phase in $400 million in strategic initiative savings that were identified in 2002.

On top of that, as Gerard mentioned, we've identified nearly $75 million in incremental 2004 savings, through a host of ideas generated by our employees.

These savings along with substantial increases in aircraft and employee productivity, will help us meet our budgetary stretch goals, and, of course, we're targeting even larger savings from the simplification efforts Gerard talked about earlier.

For the full year, Main Line unit costs are expected to average 9.6 cents.

On a consolidated basis 3rd quarter and full-year unit costs are forecast at 10.1 cents.

For the 3rd quarter, we currently have fuel hedges covering approximately 9% of our expected consumption, as a WTI crude equivalent price of about $32 per barrel.

For the 4th quarter, our hedged position is about 4% as an average price of about $30 per barrel.

Our hedged position in 2005 is diminutive.

Our Main Line capacity in the 3rd quarter is expected to be up 4.5% year-over-year with a 16% increase in international markets and flat capacity domestically.

This capacity increase is it lower than our original plan for growth of 5% in the 3rd quarter.

In recognition of the normal seasonal decline in traffic that occurs in September and October, we have decided to tactically reduce capacity below our original plans.

We'll fly fewer ASM's on offpeek days like Tuesdays, Wednesdays and Saturdays.

For the full year, Main Line capacity is planned to increase by 5.8%.

Down from the full-year guidance of 6% that we have given previously.

With respect to our capacity growth, I think it's important to point out that we are flying more ASM's this year, despite the fact that summer-over-summer we'll be down 57 aircraft.

In fact our aircraft utilization is at an all-time high, and this summer, the average American aircraft will fly nearly 4,000 miles per day, which exceeds Southwest's current level of aircraft utilization.

In addition, our growth has been and continues to be focused on the international arena.

With only 1.5% growth forecast for our domestic markets.

If you consider that we've added seats back to our 757, 8-300 and 737 aircraft, our capacity adjusted for seating density, is actually down year-over-year.

Our bookings for the next three months are mixed.

With tough year-over-year comparisons resulting in somewhat lower booked load factors for August.

But September and October are looking better than they did at this same point a year ago.

Before closing, I'd like to point out a few changes to our fleet plan that you'll see when we release our 10-Q for the 2nd quarter.

In that document you will notice a reduction of 4 MD-80 aircraft listed in temporary storage.

You'll also see our 757 operating aircraft counts increase by 3.

I'd like to provide some context for these changes.

First off, it's important to know that we have decided to return 8 MD-80 aircraft to leasores, having been unable to negotiate satisfactory lease renewal terms for these planes. 7 will be removed from our fleet beginning in December of this year, through March of next year.

The 8th is already in storage and will be returned by lease expiration in May 2005.

To offset the loss of these planes, we are reactivating 3 MD-80 aircrafts and one 767-200 from temporary storage.

We'll also retain three 757 aircraft that have been previously retired.

The decision to retain these special aircraft contributed to the special credit we took this quarter.

The 757s have now been marked to market which as you might expect have given us attractive lease terms, the 767 won't be returned for service until later this year.

The 4th MD-80 now planned to leave temporary storage status, is being returned to the leasor.

In separate talks we have also been able to negotiation very favorable terms on another 7 of our MD-80 aircraft that were also scheduled to come off lease in early 2005.

All of these changes combined are expected to result in aircraft rent savings of approximately $12 million per year, beginning next year.

This leads us with 24 MD-80 aircraft in temporary storage, which may are returned to service as conditions warrant.

In conclusion, while we are dissatisfied with our quarter's results, we are encouraged by the progress of our turnaround.

Our resulting strategic position, and our opportunities for further improvement.

Our costs are among the lowest of the global carriers and the organization is focused on capturing further improvements.

We have the world's largest network and our international expansion is working out well.

Bolstered in part by the significant expansion of our alliances.

We continue to leverage the benefits of our Advantaged Frequent Flyer program, particularly in the increasingly competitive domestic arena.

And importantly, our employees are more and more engaged in our turnaround as evidenced by the involvement of front line staff in the task forces that Gerard mentioned earlier.

We recognize the continued losses are not an acceptable result.

But we believe that the four tenants of the turnaround plan are the right strategic framework to lead us to our objective of sustained profitability at acceptable levels.

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

Thank you, sir.

At this time we will begin the analysts' question-and-answer session.

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

You will be prompted to record your first and last name as you will be announced prior to asking your question.

For the sake of the time, please limit yourself to one question and one follow-up question.

If you have additional questions, you will be placed back into cue where you can then press star one again.

To withdraw your question please press star 2.

Once again, if you would like to ask a question please press star and one.

The first question comes from Mr. Michael Linenberg with Merrill Lynch.

Wir, you may ask your question.

The first one is more of a conceptual one, your cash is up at a very high level.

I think you're north of 20%, relative to what your revenues are this year, this is an industry where it seems like you can never have enough cash.

Are there things that you can do with that cash that can maybe help you clean up the balance sheet?

You know, any thoughts on that would be helpful.

Well, Michael, I'll start and let James jump in here, I think you answered your own question by saying that in this environment, you can never really have too much cash, and I guess that's a bit of an overstatement.

But we're certainly -- with fuel where it is and given some of the turmoil in the industry, I think we're being very cautious about our cash and how we use it, we do have some tactical things that James is working on to elimination -- eliminate some debt that's a hold over from some other projects that we've had.

I don't know if we can be public about that.

But I'll turn it over to you on that.

As we think about the cash balance it is that very important blend between excess and not sufficient.

And a year or so ago we were very light on cash, only six months ago we had less cash as a percent of revenue than almost all of our competitors.

I'm pleased to say that that is no longer the case.

In fact I'd say we're right there around the same level as continental's cash balance when you adjust.

So pretty comfortable with where things sit at the moment.

Off yusly, you will expect seasonal fluctuations in the cash balance, which is particularly a strong time in the year.

So yes, some different ideas around the edges, but I think it's ever important to maintain strong liquidity in this volatile fuel environment.

Okay.

And then just my second question.

You know, I know that some of the security changes that have been put into place over the past 5, 6 months, and I guess what I'm trying to refer to are some of the regulations with respect to transitting without a visa.

And I -- I'm specifically referring to your Miami hub, where I think you do carry a decent amount of international connect-to-connect traffic.

Some of those regulations that have gone into place, are they having an impact on your operation?

I know, for example, Liberia has scaled back that operation.

They claim that they were losing millions of dollars of revenue because of some of that.

Are you saying something similar?

Well, Michael, I think that early on those security changes did have implications for us, and definitely negatively impacted our revenue, because we were carrying a lot of folks through Miami that never entered the country and didn't need a visa to do so, and could do that freely.

And, of course, today they're prevented from doing that, so early on, we did lose a lot of business, and that situation hasn't changed, but what we've done is gotten busy to resell those vacated seats, so I think -- and I think we've done a pretty good job of making up for a lot of that transit without visa traffic that we loflt.

I don't know that I have precise enough set of figures in my head that can say we've made it all up.

I know we've come a good way.

Do you have anything to add.

One of the ways that I look at that issue is by looking at the performance of the Madrid to Miami service, that is flowing a lot of customers through traditionally, and that's the sort of business in Liberia, traditionally utilizing as well.

The short story there is, we are still filling up that flight very nicely.

And the economics of that and many of our other local flights are really more driven by the volume of business customers at the end of the day, but we're filling up the plane.

So we are finding substitute passengers.

Okay.

Thank you very much.

Thank you, Michael.

The next question comes from Mr. David Strang with Bear Stearns, sir, you may ask your question.

Thanks.

I want to reference your comment the earlier about simplifying the business more.

And specifically, with respect to the fleet.

How much more do you think the fleet can be simplified.

How many aircraft types do you think it can be whittled down too, and over what period of time.

And what sort of savings do you think you could derive from it?

Well, David I think, unfortunately, having retired the F-100, I think our last airplane retired either this month or last month, we're down to 6 types, and the next logical type of aircraft to eliminate from our fleet is the A-300.

Not that the A-300 is not a good airplane, but we only have 34 of them.

Those missions can be satisfied with 757s or 767s or some combination of those two equipment types.

But the problem is, most of those airplanes as I recall, are leased.

I think 24 or 25 of them are leased.

We've -- I think own 10.

And the first of those leases come off in 2008 as I recall, and -- so we've looked at transactions or structures to try to move that date up, not because we're not pleased with the airplane, but just from a pure sim plif indication -- simplification standpoint.

But because these are leverage leases.

I think I'm giving you a long-winded answer to your question, but I think the punch line is, it's very difficult to get further simply fiction before 2008 and beyond.

Although, having said that, I think the -- that it's something we'll continue to wrestle with and see if we can find a way.

Now, one of the things we can do, and are doing within the 6 remaining fleet types is thinking about more standardize configurations, we still -- within those six fleet types we don't have just 6 configurations, I don't know what the number is.

But we have a multitude of configurations among those 6 airplanes and we're busy working on further sim plif -- simply my if I indication in that respect.

What you may have picked up on.

The notion of do we have to fly every aircraft type to every hub ?

There are going to be opportunities in our view for further savings?

Have you had the opportunity to experiment with measuring those yet?

We're doing that right now in Chicago, with this test I mentioned in my remarks, and we're using June as our base, and we're focused on our MD-80 fleet in Chicago.

We've changed some of the ways we operate the ways we put our pilots with the airplanes, we're measuring it every day.

I'm encouraged by what we're seeing.

But until we've completed the month and had the opportunity to sit back and reflect on the entire test, I don't think we'll be in a position to make any decision.

Thanks very much.

Thank you, David.

Your next question comes from Mr. Sam Bushrick with UBS.

You may ask your question.

Good afternoon, everybody.

Your unit labor costs have been essentially pretty flat sequentially for the last three quarters or so.

Labor, of course, is 50% of your ex-fuel cost base.

How should we be looking at this, is it you've got your savings and that's pretty much it, or we've got kind of a pause here that refreshes and we're going to move down over the next 2 or 3 years.

Well, as James and I both commented on, we're continuing to focus on our overall cost structure and you correctly point out that labor is -- represents about 40% of our total cost structure, and that's where obviously a lot of the money is.

So we're going to continue to be focused on productivity and efficiency, and I'm pleased to report that where we are today are aircrafts and employee productivities at an all-time high.

So when you look at the things that we are studying and working on, including this test we're running in Chicago, they are all intended to drive higher levels of productivity of both our assets and our people.

But I would acknowledge to you that it gets more and more difficult to find low-hanging fruit as we move forward.

Secondly, and on a smaller -- I thought interesting point.

I guess some will always disagree.

I guess you've been running tests or a test for on-board Mobil phone use, I think it's a Qualcomm system.

Could you talk briefly about that, as a potential customer service initiative down the road, when might a system be ready for prime time?

What might some of the cost parameters be?

We did run a test last week with Qualcomm here at DFW, we outfitted one of our airplanes with a -- with their system, and we flew that airplane over west Texas with a bunch of people on board and they used their own cell phones to make calls all over the United States and internationally, and part of that effort was to work not just with Qualcomm, but to work with the FAA and also with the FCC to continue to move the balls down the field here in terms of getting approvals to be able to eventually do this, because I think it's increasingly obvious to us that the obstacles are not going to be technical in nature.

That cell phones don't interfere with the systems on board the airplanes and with this Qualcomm system that they have, it works.

However, we have got to get the FCC there, and we've got to get the FAA there, and that will take many months into the future.

That's sort of one issue.

The other is, we Americans are working very hard to try to conceptualize a business model for us so that everybody -- if there's money to be made because of this connectivity on board the airplane, it's unusual as it may be, maybe we would end up with some of that money.

And we haven't found that model yet.

Right.

Thanks very much.

Thank you, Sam.

Your next question comes from Mr. William green with Morgan Stanley.

Sir, you may ask your question.

Just as a follow-up to Sam's question, are you going to have a quiet zone on the aircraft?

Just for you, bill.

It's going to be the bill zone.

So the question I have for you is, I know we're talking about fleet efficiencies, and maybe simplifying it further, how do you feel about the age and reliability of the fleet?

Do you need to think about increasing jet orders or is that just so far enough into the future you don't have to worry about it.

I think compared to the network carriers, we're in very good position.

The average age of our fleet is 11 or 12 years old, I think if you go look that stacks up very well versus most of the network carriers, so, no, that is the -- that's very, very low on the priority list in terms of our concerns.

so Cap Ex should -- this is pretty much about as high as it would need to go, or does it need to jump up from here.

As it relates to the -- how modern our fleet is, and from a cost engineering maintenance standpoint, I don't think we're thinking at all that we would need to invest in our fleet for that reason.

and in the 10K, we laid out the firm commitments that we have with Boeing that are really a hold over from those in place at 9/11 three years ago now.

So those aircraft begin to deliver in January of '606.

So starting with 12 737s in 2006 and one 777.

So that's obvious ly we'll --

pension contributions remaining in the year are about how much?

We have finished making pension contributions for this year.

So it's about 400 next?

Next year, we're looking at $450 million next year.

That's the current demographic projection.

Thank you for your help.

Thanks, bill.

Your next question comes from Mr. Jim Higgins from credit Suisse first Boston.

Sir you may ask your first question.

Kpou give some color on the the -- upward pressure of your expectations or upward pressure period.

Jim, we've seen higher engine volumes than we had anticipated when we built the plan this year.

And that is not something that you can always predict as accurately as you like.

The other thing that we've done is we're transitioning our APU work from honey well to another vendor and we're doing that because it offers in our opinion very substantial long-term savings, but in the first year as we transition work from honey well -- you have end up with the transition spending a little bit more money, those are the two things that come to my mind.

I'd ask James if he'd want to add anything else.

We would defer unnecessary maintenance work -- we're very much seeing the year-over-year catchup fact there.

You effectively start to lap that catchup by first quarter of next year.

The most intensive activity in terms of cashflow savings going on in the March/April time frame of last year.

In this regard.

And you would you also.

You had mentioned I think on at least one previous call, the possibility of doing the same thing with your international fleet that you did with your 75s and that is an increase to A-300, that is reversing more room throughout coach.

Is that something you've given more thought too?

The pacing item on that decision is a new business class seat.

And because were we to cross that bridge, you would do it at the same time you were installing those new seats, and we are full speed ahead on that project, and I don't have anything to announce today.

But when -- if you think about the -- our configurations, our top priority are our wide bodies right now, and with business class seats at the top of the list, and when we finalize that seat, then we will finalize our thinking on the coach cabin.

Great.

Thank you very much.

Thank you, Jim.

The next question comes from Mr. ray needle with Blaylock & partners, sir, you may ask your question.

Good afternoon.

Hi, Ray, how are you doing?

Good.

Two things, I noted the accounts share going up, which I expected.

Probably due to stock, promised to employees for give backs, I'm wondering going-forward, will we see that number continuing to increase, and do you have an estimate on that?

Yes, ray, that is correct.

The options that we granted to employees last year were struck at market at the time at 15 $5, so even though our stock has had a hard couple of weeks or so here, all of those options are in the money, and, therefore counted in the fully diluted share count.

So as the stock price rises, then there are other shares that will become in the money, but the vast majority are already there, those that were granted last year to employees.

That sounds good.

Just a very general question, if you care to address it.

You're picking on Jeff Bloom now and Boston and Florida markets, Airtran's expanding and DFW.

You're experiencing MoreDirect competition from low cost carriers, would you want to offer us your opinion on how it is continuing with them, and, you know, how you shape up against them, I know you're reducing your costs, but what other things are you doing to take on this MoreDirect challenge they have now.

Well, obviously, we've seen the impact as I said in my remarks, the domestic side of our business was under greater unit revenue pressure than the international side, and that's very much a function of the growth of the low cost carriers, we are really driving to all of the tenants of the turnaround plan in order to successfully address the situation.

First and foremost reducing costs and that's -- an important part of that is rethinking how we can continue to operate relatively complex network structures, would do so in a much more efficient traction.

Looking for simpler ways, being very happy to steal an idea or two out of the books of our competitors, and one of the themes that I've been encouraged by as a result of these changes is the improvement in our employee productivity.

If you look at where we are year over year, our productivity is measured by AFM production is up 18% at American airlines, and that's very much the sort of direction that we'll see continuing to be more and more competitive against the LCC's.

Now, of course, one of the other things we've seen going on is the -- some of these companies will be coming under some of their own cost pressures, you'll have seen the flight attendant agreement that Southwest airline as degreed to the other day.

So as they grow and their businesses become a little more complicated.

They'll be potential cost pressures for them to deal with as well.

Do you want to venture a guess on what kind of revenue premium you could get at your hubs?

Well, you would -- I think as we discussed in previous calls, we've really tried to avoid predicting specific revenue premium figures.

If you look at the LCC population these days, it's very different to the situation say five years ago, when Southwest was clearly the leading low cost carrier.

It's still the largest, clearly, but there's several other business models out there now, jet blue takes a higher cost strategy and designs to achieve a higher revenue than Southwest.

So I think it's important for us to recognize that there's a relatively wide range of strategies being deployed by these newer carriers, and so, frankly, the revenue premiums we will be able to generate is going to vary across the different airlines.

great, thanks, guys.

Thank you.

Our next question comes from Mr. Gary chase with Lehman Brothers, sir, you may ask your question.

Good afternoon.

I apologize if I missed this.

I caught the yield number, could you remind us what your transcon RASM was for the quarter.

It was down, we noted the transcon yields were down 19%.

So that's all I mentioned in my remarks.

Okay.

Could you just refresh our memory as well on the contribution, the nonlabor contribution from the savings that you had outlined back in the '01, '2 time frame.

Was that an incremental $5 million in that time frame?

That's right.

We have that extra $400 million coming this year, that I referred to in the text, and then $200 million next year, and that gets us to the total $2 billion target that we have given ourselves.

With the other $2 million coming from labor and negotiating supplys.

That would come from an expanded rollout of what you're doing in Chicago, right?

Yes.

Do you have any productivity metrics of how your hubs are doing?

Whether it be revenue generated per dollar of assets in place?

Do you have anything you can tell us?

More importantly, I'm more curious how things are going in the spoke cities as you depeek the schedule.

The macro numbers are some indication --

yeah, that's right.

We tend not to talk about that sort of measure exactly as you're portraying it there.

Clearly, I think the spokes offer another opportunity because the original focus when this work got under way was on the Chicago hub itself.

Now we feel as though we have that schedule the way it should be.

We have more opportunities now to focus our efforts on some of our larger folks and look to achieve the same sorts of benefits at places like Los Angeles, New York, Boston and San Francisco and so forth.

I would agree with where you're going, there's more opportunity out of the spokes.

one final question, understanding that you're nowhere near -- you're not growing as quickly as many of your network airline competitors, not to mention LCC's but are there any circumstances under which you would consider reducing the capacity base?

We have extremely high fuel prices, are there any circumstances, or should we assume that's something that's off the table other than, I mean, you noted a 50 basis point change in your full-year forecast.

But something more significant than that?

I think because of the environment that you're describing there, Gary, we are going to be tactically more aggressive about making weekend cancellation this fall and Tuesday/Wednesday-type cancellations, more so than we have done historically, beyond that, we're not looking at any dramatic draw down in our schedule.

But as you point out, our capacity increase is quite a bit different to many others in the industry, and our focus has been, as I eluded to, really internationally focused and we've been pleased with the performance.

We feel good about that, and you also see that we've been cautious about the aircrafts that are sitting in the desert today.

So when you adjust for that reality that we've taken seats off of the 757s and -- put them on the 757s.

Then our domestic capacity is actually down as I alluded to earlier.

Thank you very much.

Thank you.

The next question comes from Mr. Dan Mackenzie from Smith Barney.

Sir, you may ask your question.

Thank you.

Perhaps the question for James, following up on ray's question, given the price between DFW and Los Angeles, I'm hoping you can better help me understand the impact of low cost carrier degradation.

Does most of the degradation occur when the LCC enters the market or does it depend on the extent of low cost carrier saturation, and I guess as differently as AMR finding the revenue impact from low cost carriers essentially the same.

I think you lay out a extreme continuum there.

If it's a de men mouse amount of share, then the impact is going to be much less.

It's early days in the DFW to the Los Angeles market to see the results of our structure.

I say one of the themes that we've seen over and over again as we've introduced these simple structures, very much matching up on low cost comparisons put into place, is the dynamic that the proportion of local customers that were able to carry goes up very significantly, because what is usually been happening prior to us putting in place a structure, is some customers have been going from A to B, but via C. Via a competing carrier's hub, and so we've been able to divert back those customers on to our local flight.

Making them nonstop customers again.

Of course, that reduces our dependence upon slow traffic and it's connecting customers where we've seen the most significant reductions in terms of their revenue value, being able to -- is key to the overall strategy.

Just to serve as an example to my point on DFW Los Angeles takes a lot of traffic, has done historically over Phoenix.

And we're pleased by our early results how we're able to move traffic back on our nonstop service.

Delta thought they could only achieve a 5 or 10% yield premium on domestic routes with international flows, perhaps getting them to a 10 to 15% premium relative to the low cost carriers, you folks are kind of backing off on estimating that.

But assuming that Delta's estimates are correct, how much does AMR feel it needs to cut its costs?

Well, we're really shying away from throwing out those target numbers, you know, the focus as weess spoused in the last several months indeed it's useful to throw out those continuous efforts, how they're bearing fruit, which is why we noted the number that we've generated just this year .

I think I'll just leave it at that.

Sure.

Okay.

I understand, and then one last question here.

The European commission is attacking buy laterals between member countries in the United States.

How is AMR viewing the development at this point?

Well, we'll see how things play out over the coming weeks and months here.

We've always been in favor of the U.S. being able to arrive at an agreement with the EU.

I Nomad a.m.

Pelacio is disappointed we haven't seen an early agreement.

She's eager to take this additional -- this is obviously a matter for public government, and we'll retain our policy of being in favor of open arrangements, I think what will be important for America as we open an agreement in the U.S. -- next year after the elections, it's very tough to say on timing.

The fact that the alliance that we have with British airways which is not immunized unlike those of united luf stanza and Delta, that we be given that tonight to compete equally with those other alliances, and that will really be the focus for us as we monitor these developments.

Okay.

Great, thanks very much.

The last question comes from miss had a lane Becker from benchmark --

there's not a lot to ask.

Gerard, I ask this question of northwest this morning and I'll ask it of you.

Continental divulged how much they're paying in taxes yesterday.

And northwest said this morning that they would start doing that beginning in the 3rd quarter.

Any thoughts on that one way or the other?

Good idea, bad idea?

Well, maybe it is a good idea, Helene.

I hadn't thought about that.

Clearly the industry is under an extraordinary tax burden today.

The way I like to think about it, instead of slowing out the big billion dollar numbers and that sort of thing, I tend to think about it from the standpoint of revenue we used to keep years ago, versus how much we keep today.

For example, if you go back to 1997 if we sold an airline ticket for $200.

We would end up keeping 166 would come back to American. $18 would go to an excise tax, and we'd have a PFC of $12.

I'm assuming this ticket involves one transfer and a hub.

In 1997, $200 ticket $34 goes to various government agencies, we keep $166.

So 17% was lost to taxes.

Jump to today's environment and you have an excise tax that in percentage terms went down, so it's 15 dollars, the segment tax has gone up.

That's now $12.

Now we have a security tax on our customers of $10, so $55 is now going to various government agencies, and we're left with $145.

So 28% is going to the government.

That excludes the annual security fee that all the airlines pay a lump sum to the government every year prior to '01.

It excludes the moneys that we are spending today to perform cargo security when, in fact if you read all the legislation, the government should be paying for all that.

It excludes the cost of revenue displacement for all of the fans riding around on our airplanes.

I guess the point is, we're the only industry in which our customers are being asked -- or being taxed directly to fund the war on terror, even though there are certainly a number of other entities in the industry, that certainly bear a threat of terrorism.

And I don't know what Gordon said or what Richard said earlier this morning, but this is a huge public policy issue for our country.

And it's a huge burden on the airlines and part of the reason we're all having trouble getting our head above water.

I don't know if that answers your question, but --

no, no, it does.

That's my reaction.

And I appreciate your details.

Thank you very much.

thank you .

That concludes the calls for the analysts, you're listening in from the media.

If you'll stay on the line, we'll be happy to answer any question you may have.

Thank you.