美國航空 (AAL) 2004 Q3 法說會逐字稿

Welcome to the AMR Third Quarter 2004 Earnings Release Conference Call. [Operator Instructions] Kathy Bonanno, Director of IR.

Good afternoon, everyone.

Thank you for joining us today.

On the call we have Gerard Arpey, AMR's Chairman, President, and CEO, and James Beer, SVP of Finance and CFO.

Starting off, Gerard will provide an overview of our performance and outlook, and then James will provide the details regarding our earnings for the third quarter, along with some perspective for the rest of the year.

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

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 have posted our earnings release on the investor relations section of our website, at AA.com.

At that same website, interested parties may listen to a live webcast 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 now 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 cost 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.

Before I begin my remarks about our third quarter results, let me say how saddened I am by the report late last night that Corporate Airlines Flight 5966 was involved in an accident upon landing at Kirksville, Missouri, Airport.

As you may know, Corporate Airlines is an independent airline that operates code share flights under the American Connection brand name.

We extend our deepest sympathies and prayers to the crew and passengers on that flight and to their loved ones.

Turning to our results, I wish I had better financial news to share with you today for the third quarter, which is typically our best quarter of the year.

We posted a loss of $214m, or $1.33 per share, excluding an $18m special credit that James will elaborate on, our loss for the quarter was $1.45 per share.

This quarter we paid over $500m in taxes and fees to the U.S. government, despite the fact that we had no income to tax.

In addition, oil prices have continued to skyrocket.

The year-over-year change in price per gallon of fuel drove our third quarter expenses up by $342m.

We now estimate that the full year impact of the rise in fuel prices will cost is $1.2b in added expense compared to last year.

We are doing all that we can to control the consumption side of the fuel equation and mitigate where possible the damage we are incurring from skyrocketing prices.

Our flight department, working closely with our pilots, dispatchers, and their unions, are saving millions of dollars, although that is certainly hard to see, given the year-over-year increase we're experiencing in price.

Our conservation initiatives include single-engine taxiing, relying less on gas-driven auxiliary power units and more on ground power, pushing aircraft away from the gate with tugs instead of engine thrust, and refining our methods of making sure we have an appropriate amount of fuel on each flight, without carrying any excess.

So we are doing all that we can on the consumption side of the fuel equation.

Unfortunately, as all of you can see in our numbers, the price increase year-over-year is enormous.

What is most discouraging about this run-up in fuel prices is that it masks the great progress we continue to make in lowering our non-fuel costs, but I want to be sure not to overlook American's fuel-neutral unit cost statistics, which declined by nearly 5% year-over-year.

While is the major driver of our poor results in the quarter, I have a hard time blaming our woes entirely on oil prices, because virtually every other fuel-intensive business has been able to pass along at least part of this increased cost of operating to their customers, but the reality is that in spite of record high fuel prices, our yield, and the industry's yields, are actually down, year-over-year, in the quarter.

While low-cost carrier growth is responsible for some of this decline, there are other factors at work, starting with total industry capacity growth.

This year, total industry domestic mainline capacity is planned to increase by more than 6%, significantly higher than the 3.6% growth in domestic GDP growth so far this year.

Making matters worse is the impact of distressed carriers or carriers operating in bankruptcy.

We have seen this play out before.

Carriers in financial difficulty, in an attempt to generate cash, lower their fares to entice customers to book, and these fares then spread throughout the industry's revenue base.

Recently, we've seen some modestly encouraging signs on the revenue front and have even taken some fare increases over the past couple of months.

But the fact remains that industry capacity and distressed carrier pricing has hastened the slide in fares that was already underway.

So given this reality, the obvious question is, ``What are we doing about it?'' Well, the positive news is, we are doing a lot.

In fact, the initiatives that I'll walk you through in a moment, coupled with the fare increases I just mentioned, are expected to improve our 2005 results by several hundred million dollars.

Since I've just been discussing industry capacity, the obvious starting point is our own level of flying for next year.

We've decided to pull down our domestic schedule, beginning in January.

We plan to eliminate 15 narrow body aircraft's worth of mainline flying.

This decision, coupled with the year-over-year impact of retiring our F-100 fleet, means that for the first quarter of next year, our domestic capacity will be down by about 5% compared to last year.

Rather than reducing service across the board, we're going to target certain areas of our system, similar to what we did when we restructured our mid-continent hub last year, except this time, rather than cut more hub flying, our primary focus will be on point-to-point markets.

We'll trim point-to-point service that is redundant with service to nearby cities or is not core to our strength.

In addition to sitting aircraft, we will also continue to reallocate assets to focus on our strengths.

For example, we now plan to increase our summer flying at DFW by 90 daily departures, 20 more than we originally announced last month.

DFW is our large hub and we're expanding and boosting our service to meet the needs of local DFW customers, as Delta continues to draw down their schedule.

We are also addressing our capacity at American Eagle.

As you've seen in our press release, Eagle had firm orders to take delivery of 36 new 50-seat aircraft in 2005 and another two in 2006.

However, in light of the current environment, American Eagle has reached an agreement in principle with Embraer to cancel the last 18 of its planned deliveries.

This move will save AMR $330m in capital spending.

These decisions to reduce our schedule and our fleet are some of the more visible changes we're making to reduce costs, conserve cash, and improve our results.

But this is just the start of a long list of changes we are undertaking to improve our outlook.

You have heard us talk for some time about the changes associated with our hub simplification efforts in Chicago.

I don't think it'll come as a surprise to anyone that we have decided to expand these operating principles throughout our system, and we expect the benefit of isolating aircraft to certain stations, scheduling pilots and aircraft together, and significantly reducing the day-to-day churn of aircraft move-ups will improve asset and employee productivity, reduce costs, and improve dependability.

In addition, the tally of employee-identified cost savings initiatives we've been busy implementing this year has grown from $75m to more than $100m.

As part of these efforts, we've decided to consolidate our res offices here at DFW.

So far this year, when you culminate and you add up all of these ideas, they have allowed us to eliminate approximately 400 management and support staff positions throughout our company.

Unfortunately, fewer departures and streamlined processes next year mean fewer people will be needed to do the work, so we will endure further job losses across all of our work groups, including management.

We don't have complete numbers yet, but as we finalize them and after we have announced them internally, we will make them public.

As we continue to work on the cost side of our company, we have not forgotten about revenue.

As I mentioned earlier, we have been able to increase some of our domestic fares.

Over the past month, we implemented two fare increases.

Each time we increased the lower end of the pricing spectrum by $5 one way and $10 roundtrip.

Holding all else constant, we expect these and other recent increases to improve our annual revenue by about $80m a year.

We implemented a somewhat broader increase yesterday, but it's too early to know how much of that increase is going to hold and how much it could be worth, so we'll just have to see what develops.

Another positive development was the order the DOT issued recently allowing U.S. carriers to match fuel surcharges in international markets.

Last week, we initiated increases ranging from $7.50 to $20 each way.

These increases could be worth somewhere between $80m and $100m annually.

On September 6th, we implemented $5 and $10 fees for ticketing services provided by our reservations and ticket agents.

These fees are expected to generate more than $25m per year.

We also believe we'll realize more than $30m in new revenue by bringing our International Advantage upgrade program in line with that of our competitors.

Historically we have offered the most generous reward upgrade policy for international travel, allowing passengers traveling on discounted fares to upgrade using only miles.

By instituting a $250 fee in concert with a mileage upgrade, we will continue to offer a generous option for customers traveling on discounted fares, while at the same time getting paid for the value of the service we're providing.

Another area where we see revenue opportunity is to correct the coach seating density disadvantage we face versus our competitors.

That disadvantage is primarily attributable to our more room throughout coach product, a product that has, as I'm sure all of you will recall, was implemented at a very different time in the airline industry's history, a time of relatively rich revenue and plenty of high-yielding passengers.

That time is gone, and in the current low-fare, high-volume environment, we cannot afford to operate with a density disadvantage relative to our competition.

Therefore, beginning in January, we'll begin adding back to all of our planes a portion of the seats we removed as part of the ``more room throughout coach'' initiative.

Fortunately, because our aircraft also have tend to have more room for closets, galley space, and lavatories, we can use some of that space to increase our seating density.

So on our MD-80s and 737s, we're not adding back the full two rows of seats we took off our planes; we're adding back just one row.

And the MD-80 reconfiguration will also expand the first class cabin on that fleet type by two seats.

We will begin the reconfiguration with the MD-80s, 737s, and 767s.

We'll then follow with the 777 fleet next October, and the entire process will take about a year.

We're still working through the impact of these changes on our capacity figures, but in general, our total departures in 2005 will be down and as I said earlier, our 1Q ASMs will be down by about 5%.

As was the case this year, by improving our productivity and shifting some of our assets from the domestic entity, we'll be able to increase service to international markets, where we continue to see numerous opportunities for growth, particularly in the Pacific.

In fact, you may have seen our announcement yesterday that we will resume daily non-stop service between Dallas/Ft.

Worth and Osaka, Japan, on November 1st, and we'll-- next year, and we'll launch daily non-stop service between Chicago and Nagoya, Japan, on April 3rd.

I'm sure you all know that we are also seeking authority to begin non-stop service between Chicago and Shanghai, starting on May 1st, 2005.

In conjunction with our international growth, we've been working hard to capitalize on the strength of our cargo market and our results have been quite good.

James will provide you with more details, but just to give you an idea of how well this business is performing, our third quarter cargo revenue increased 10% year-over-year but our wide body capacity, which is the more relevant capacity to consider for cargo business, only increased by 1%, and this excludes nearly $30m in revenue from fuel surcharges, which we classify as ``other revenue.'' Unlike the passenger business, cargo fuel surcharges increase automatically as fuel prices increase.

Before closing and handing things over to James, I want to spend just a second talking about the portable entertainment devices we'll begin testing next month.

The appeal of this concept is that it presents a quick-to-market solution that does not involve expensive and lengthy modifications to our aircraft.

The portable unit, which is about the same size as a personal DVD player, will contain a broad selection of entertainment on its hard drive.

Customers will be able to choose from recently released movies, TV programming, music, and games.

The tests will run for 12 weeks in select markets on a variety of our aircraft.

We'll be reviewing our operational procedures and evaluating customer acceptance rates and feedback on board the airplane and we'll share those results with you at the appropriate time.

It is a long list of changes we just talked about, and are in the midst of implementing.

I think it's fair to say that we're doing all that we can to adapt to the changing circumstances we find ourselves in, and I want to commend all of our employees for their flexibility and determination in facing our challenges.

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

Thank you, Gerard, and good afternoon, everyone.

I'll start with the special credit I'm sure you saw in our third quarter earnings release.

We took this credit of $18m as a result of adjusting prior accruals for lease commitments initially recorded as a component of special charges.

The adjustment was trigged by an exchange of space with another carrier in Nashville.

Moving on to our results, I'm going to spend a few minutes discussing our performance for the third quarter, which as Gerard mentioned, was significantly impacted by fuel and a weak revenue environment.

Then, I'll provide some guidance to use going forward.

Our third quarter loss of $232m, excluding special items, reflected fuel prices of $1.26 per gallon, a 48% increase year-over-year.

This difference in price represents an increase in fuel expense of $342m.

Our hedge position was a modest 9% during the third quarter, as was our hedging gain of $22m.

On a fuel-neutral basis, as Gerard mentioned, our unit costs decline 4.9% year over year, reflecting our continued focus on driving down those costs within our control.

Productivity increased virtually across the board, with our headcount per ASM declining 4% year over year, and our miles flown per aircraft day increasing by more than 8%.

In addition, food and beverage expense continued to decline, with third quarter expense down 9.4% year over year.

And we made progress on our other rentals and landing fees line, as a result of our continued efforts to turn back unused space and reduce fees.

This line item declined by 2.3% year-over-year.

Also, our mainline fuel consumption was flat with last year, despite a 3.5% increase in ASMs.

This reflects the numerous adjustments Gerard mentioned that we've made in an effort to conserve fuel and mitigate rising fuel prices.

Like last quarter, there were a couple of expense lines, in addition to fuel expense, that increased year-over-year, maintenance, materials, and repairs being the most apparent.

As most of you are aware, last year we were able to significantly lower our spending in this line from harvesting parts from grounded aircraft.

This expense holiday, if you will, has lapsed, and we're now back to a more reasonable run rate for this line.

Another driver of increased expense here is the fact that we're currently paying some transition costs as a result of moving to what will ultimately be a less expensive APU overhaul supplier.

This is a good example of how our purchasing and maintenance organizations are driving down costs by finding alternative suppliers.

By bringing more competition to this market, we will start seeing the benefit of lower costs when our new overhaul contract begins next month.

While some of our fleets have already been transitioned over to the new supplier, our largest fleet, the MD-80s, will be addressed in November.

Compared to what we would have been paying our former provider, we'll save about $4m next year and our savings will grow each year thereafter.

Another expense line that increase year-over-year was the commissions, booking fees, and credit card expense line.

The increases are partially attributable to flying more passengers, but commissions also increased, as we shifted more of our flying to international markets.

And credit card usage increases as we book more revenue online.

So far this year, the percentage of our revenue booked online has grown by about 3.5 points, year-over-year, to nearly 23%.

Booking fees, however, actually declined by 2% year-over-year, despite a traffic increase as a result of reduced GDS fees and of course, as I mentioned previously, a shift to booking online.

Moving on to our revenue performance, we reported a 2.5% year-over-year decline in mainline unit revenue.

Mainline yield for the quarter was down by 4.8% year-over-year, to 11.07 cents.

The decline in yield was somewhat offset by a load factor increase of 1.9 points year-over-year.

Consolidated unit revenue declined 1.8 percent year over year, to 9.13 cents.

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

Domestically, results declined relative to last year, on a 1.3% decline in capacity.

For the third quarter, unit revenue in domestic markets was down 4.6% compared to last year.

Domestic load factor was up 2.1 points.

However, yield declined 7.2%.

Transcon markets continued to dampen results in the domestic entity, with unit revenue falling by more than 16% year-over-year.

The industry-wide reduction of compared in these markets should help performance going forward.

As I'm sure most of you are aware, we have cancelled all of our JFK transcon flights to secondary LA Basin-area markets, determining instead to concentrate our Basin area transcon flying in LAX.

This is clearly the airport preferred by our customers, and as such, this winter we'll fly two additional daily JFK-LAX frequencies, year-over-year.

In this market, we offer the full spectrum of choice for our customers, with both low-fare options and a premiere, premium-class product.

Internationally, the story remains positive.

Unit revenue increased by just under 1% versus last year on a 14.5% increase in capacity.

Load factors improved by 1.1 points, while yield was down half of a percent from year-ago levels.

European unit revenues were up 9.6% year-over-year on a 8.7% more capacity.

Yields in Europe increased 3.6% for the quarter and load factors were up by 4.7 points.

In the Pacific, unit revenue in the third quarter increased by 4.7% versus last year.

Load factors declined by 1.2 points on a nearly 33% increase in capacity year-over-year.

Yields improved by 6.2% compared to last year.

Unit revenue in Latin America declined 7% year-over-year on a significant 16.8% increase in capacity.

Here, load factors were down 1.5 points and yield also declined, by 5.1%.

Our regional affiliate revenue was strong once again this quarter, with a 3% increase in stage length-adjusted unit revenue, year-over-year.

Stage length increased 14.6%, to 375 miles.

As Gerard mentioned, during the third quarter, cargo revenue improved versus last year by 10.4%, to $149m, with freight revenue up 10.6% and mail revenue up 7.6%.

Volume increases in both freight and mail drove the improvement, along with an increase in freight yield.

Freight traffic increased 9.1%, while mail volumes grew by 9.4%.

Yield on the freight side increased 1.4% year-over-year, with a doubling in revenue from our premium cargo product, Expedite FS.

Turning to the balance sheet, our third quarter cash position declined seasonally to $3.6b, including $481m in restricted cash.

Our operating cash flow during the quarter was $70m.

For the full year, our capex estimate is $1.1b.

We have pre-existing financing to cover all of our regional jet deliveries, or about $760m of this spending.

Our principle payments in 2004, including the principal portion of our capital leases, total about $800m.

We spent $204m on principal payments in the third quarter, and anticipate spending $288m in the fourth quarter.

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

Total debt remains at over $20b.

We do not have any pension payments left for the year, having contributed the full annual requirement as of the end of the second quarter.

As a reminder, we contributed $461m to our plans this year.

Regarding the sale of our Orbitz stock, I'm sure most of you know that on September the 29th of this year, Cendant Corporation announced a tender offer for all shares of Orbitz at $27.50 per share.

American owns approximately 6.7 million shares of Orbitz.

The estimated proceeds to American, if the transaction is consummated, are $185m.

However, the tender offer is still subject to regulatory and other approvals and conditions.

If and when this transaction is completed, the company expects to recognize a gain of approximately $145m.

Before moving on to guidance, I want to spend a few minutes discussing our $834m bank credit facility.

As most of you know, on September the 22nd, we obtained an amendment to the EBITDA covenant to lower the required EBITDA to fixed charges ratio to one to one for the nine-month period ending September the 30th, and 0.9 to one for the 12-month period ending December the 31st.

Previously, the EBITDA-to-fixed charges requirement was 1.3 to one through the third quarter and 1.4 to one for the full year.

The original, unadjusted ratio requirement of 1.5 to one remains in effect next year, starting with the 12-month period ending March 31st, 2005.

As of September the 30th, we met both the original and the adjusted ratio test, and we complied with the other requirement of the facility, which is to maintain an unrestricted cash balance of $1b.

We anticipate that we will be able to meet both the unrestricted cash and the adjusted end-of-year EBITDA covenants.

However, while we expect to be able to continue to meet the unrestricted cash covenant, we do not believe we will be able to comply with the EBITDA covenant next year, starting with the March 31st test.

Thus, we are in active discussions with our banks to refinance this facility and we are targeting to obtain a replacement facility before the end of this year.

In doing so, we will likely pledge additional assets beyond the aircraft that secure the facility today.

Moving now to cost guidance, let's start with fuel.

For the fourth quarter, we expect fuel prices to average $1.54 per gallon, up a staggering 74% from the fourth quarter of last year.

Our hedged position for the fourth quarter is about 4%, at a price of about $30 per barrel.

With a consumption forecast of 807 million gallons, fuel expense is expected to total more than $1.2b for the fourth quarter.

The cost-saving initiatives Gerard mentioned will largely impact expenses next year, so we're not including the benefit of any of the new initiatives he mentioned in our fourth quarter unit cost guidance.

As a result, we expect mainline unit costs of 10.3 cents.

On a consolidated basis, we're forecasting fourth quarter unit costs at 10.8 cents.

Mainline capacity for the fourth quarter is planned to increase by about 3.5% year-over-year.

By entity, domestic capacity is planned to decline slightly year-over-year, and international capacity is planned to increase by about 12%.

So far, our book-to-load factor for the fourth quarter is stronger than it was at this same point last year.

The initiatives we've outlined may result in special charges in the fourth quarter.

The amount and nature of such charges are currently being determined.

Because of continued record high fuel prices, a weak revenue environment, and the fact that the fourth quarter is traditionally a seasonally weak quarter, we anticipate a loss for the fourth quarter, one significantly larger than our third quarter loss.

Looking forward to next year, we're still finalizing our budget, so we'll have more information to share on our next call.

However, we have already determined our pension contributions, which will be about $421m next year.

And our principal payments, excluding the revolver I discussed earlier, are expected to total about $750m.

These payments will be spread fairly evenly throughout the year.

We will also have $104m in special facility revenue bonds put to us in November of next year.

We have the right to remarket these bonds, but there is no guarantee that we will be able to do.

Regarding fuel, the current forward curve suggests the full-year fuel price of $49 per barrel.

However, just one month ago, the curve indicated a price under $40 per barrel.

Our hedged position in 2005 is diminutive.

And finally, as Gerard mentioned, we will withdraw capacity equivalent to 15 narrow body aircraft in 2005.

In addition, we will begin adding back seats to planes in January of next year.

Because only a few aircraft will be reconfigured during the first quarter, our first quarter 2005 domestic mainline capacity is planned to decline by about 5%.

We're still working through our plan for the full year, and we'll have more information to share with you shortly.

In conclusion, we are clearly dissatisfied with our quarterly results, and recognize that the future looks very challenging, with fuel remaining at these lofty levels.

However, as Gerard mentioned earlier, we continue to believe that our best course of action remains constructive collaboration with all of our employee groups.

With the help of our employees, we will continue to rethink and change all the facets of the business within our control in pursuit of improved performance.

More change clearly lies before us, but the long list of initiatives we've set in motion since implementing our restructured agreements speaks to our clear intent.

In fact, since May of last year, when our restructured agreements became effective, we have added seats back to our aircraft, restructured our hubs, materially simplified our operating procedures, cancelled aircraft deliveries, scaled back our domestic departures, and increased our employee and aircraft productivity to record levels.

Our goals remains sustained profitability, and we will continue to transform our airline until that goal is achieved.

That wraps up my prepared remarks.

Gerard and I will now be happy to take your questions.

[Operator Instructions] Jamie Baker, JP Morgan.

Gerard, the industry labor bar is quickly moving away from you.

It's leading you in an increasingly uncompetitive position.

I recognize that you're trying to do what you can elsewhere within your cost structure, but wouldn't it be prudent to start the labor process now?

We all know how it's going to play out.

Labor must know how it's going to play out.

My question is, why wait?

Well, Jamie, I guess the way I'd respond to that is that we're certainly not immune to what is happening in this industry.

And like any other business, over the long run, our company is going to have to be competitive.

But as you see in our year-over-year third quarter results, we're continuing to make changes, working collaboratively with organized labor, to improve our efficiency and our unit costs and we're going to continue to do that as we move forward.

And as I say, over the long run, we're going to have to be competitive, but I think the way to achieve that is to work collaboratively with people to confront the reality that's before us.

And are you confident that you can renegotiate the credit facility without showing any, you know, incremental effort on the labor front?

I would just reiterate--

I mean, above and beyond, I'm sorry, Gerard, what you just indicated.

I'm sorry, Jamie, what was your question?

Are you confident you can renegotiate the facility without showing any further effort at chipping away on your labor costs, above and beyond what you just identified?

Well, I would just say, Jamie, that we're-- we're certainly pleased as to the progress that we're making in those talks with the revolver banks.

Obviously, more work yet to be done, but no, we are-- we're pleased with the progress.

OK.

And just a question follow-up on a more pleasant topic -- any plans to improve the business class offering, in light of some of the improvements taking place at your international competitors?

Yes, Jamie, we're very close to an announcement there for a seat that's going to be fully competitive with everybody else in the industry.

David Stein, Bear Stearns.

First, a quick revenue question -- Continental said yesterday that they thought fourth quarter yields would be down 5%.

What's your perception of the yield environment for you guys in the fourth quarter?

Well, David, you know, we don't really try to project out yields for you, but yeah, I indicated in my remarks that the other side of the unit revenue equation, loads, are looking better than last year, so we're pleased about that, and we'll obviously continue to do all we can to move the dial on fares.

You've seen us doing a lot recently and we're encouraged by some of the recent progress, being able to put the international fuel surcharges into place, I think, is particularly helpful, so we'll obviously look to try to be able to maximize our efforts here in the fourth.

OK.

And I noticed that you're making a little bit of movement on the capacity reductions.

I was wondering, you know, if you assume sort of the status quo on oil, do you have a number in mind for how much you would have to reduce capacity in order to actually be profitable?

Well, again, you've seen what we've said about the 15 narrow bodies' worth of the aircraft and the RJs.

We're very much of the view that that is the right thing to do, given this current environment of a real imbalance between supply and demand, particularly as we head into a tough winter environment here.

So, no, I think I would just leave it at the fact that we're pleased that we've got to that decision on the narrow body aircraft, and obviously this is something that we'll continue to watch very closely, as events unfold around the industry.

Just to follow-up on what Jamie asked Gerard, it's really amazing we're having this discussion after all the work and progress you guys have made, but you indicated that you were going to work collaboratively with labor.

Just what's your perception now as to how receptive labor is to be flexible on not just wages and work rules, but also pension, given the big changes that appear to be taking place with defined benefit plans in other parts of the industry?

Well, David, I think that question is probably best directed by your to organized labor, but you know, what I can tell you is we're- we have, for the past 18 months, been continuing to change our business in a collaborative fashion with our organized labor stakeholders, and that's how we got to the point where our asset and our employee productivity is at an all-time high, as we sit here today, and based on the things I described today, we're going to be pushing the dial harder moving into next year.

And the only that we can be successful in doing that and still run a reliable, safe airline and have- provide very good customer service is to have everybody pulling in the same direction.

So, I feel strongly that, you know, it's clear that what's going on at these other airlines, even though much of what you have described has not necessarily been achieved yet, but we can certainly see what people are talking about achieving, and we're not immune from that.

And over the long run, we're going to have to be competitive, but the way to get from here to there is to work together to confront those issues.

And so as we see events unfold here and we see these other carriers actually achieve these things, then we'll work collaboratively to confront them.

OK, thanks a lot.

Appreciate it.

Robert Ashcroft, UBS.

American's mainline aircraft are significantly more fuel-efficient in terms of capacity production than, say, 50-seat regional jets, so as fuel increases in price, it shifts the relative economics in favor the mainline.

Is that at all consideration in deciding to curtail the American Eagle RJ program, or was it mostly a capacity reduction issue, or does Eagle have other cost issues relative to other regionals?

Well, Robert, I think I would answer that, that it's a little bit of both of the first two phenomenon you described, that certainly with fuel where it is and what's happening domestically, you heard in my remarks and James' remarks, there's too much capacity in this industry, and we can't solve that ourselves, but we can certainly do our part, and we can do that both on the American Airlines front and at American Eagle, so that-- the capacity issue was the biggest driver in our thought process, and we wanted to pull down both the big airline and the small airline, and we'll see what the other airlines conclude, as they look at the fall and winter period here and they look at next year.

I can only do what makes sense for my company and keep my fingers crossed about the other guys.

So you're basically done, then, on regional jet growth, you think, once that happens, or if fuel prices came down, would you consider more?

Well, who knows what the future holds, but certainly having canceled these 18 airplanes, we have no more firm RJ deliveries--

So it's not on your wish list?

Correct.

William Greene, Morgan Stanley.

I know that you want to be a little bit vague in terms of the capacity additions for '05, but is it safe to say that based on the changes that you've announced, we will see overall capacity rise by a few percentage points for the mainline?

Well, William, I think that's certainly not what we're trying to achieve domestically.

I think you really gotta look at the world and you've got to separate the domestic market from the international market, and putting the 15-- pulling the 15 narrow bodies out of the plan, beginning in January, our domestic ASMs will be down about 5% in the first quarter, and you know, quite frankly, we'll see how the world develops next year.

We can-- we're adding the seats to improve the production capability of every aircraft that we fly next year, but we can manage our capacity by utilization and departures.

And so I would expect as we move through the year we'll be very cautious domestic capacity and we're going to have fewer departures domestically than we have last year.

Now internationally, we've got a little bit different story, because we're doing better internationally.

So that's the way I see the world and we'll see how it evolves.

But clearly, it doesn't look sensible to us, in the first quarter of next year, to be building a bigger domestic schedule than we had last year.

And I gather some of our competitors are reaching a different conclusion and you'd have to ask them why.

And Gerard, do you worry at all about all the international capacity additions that we're hearing about, that that may get affected, or is that market just so much larger and the opportunity so much bigger that it's not a concern?

Go ahead, James?

Well, I don't think you'd ever say it's not a concern, because clearly the underlying strength of the economies of these various countries are enormously important to the success of the routes.

We'll be putting these two additional flights into Japan next year, and if we're successful, one into China.

Now, as you know, we're a relatively small player in the Pacific.

We're very serious about changing that.

And so I think there's less risk for us as a result of our relatively small size, from, you know, a significant change in the economic performance of China or Japan.

Looking over to Europe, we'll be expanding quite a bit less aggressively than it would appear some of our other competitors are electing to do, so you know, it's something that we feel comfortable with, given the current plan that we have.

So you intend to balance your international network, is what you're saying?

Yeah, we'd certainly like to see the Pacific grow and come more into balance the size of our European operation.

Obviously Latin America remains by far the largest part of the international picture for us, and we've been investing there this year, and that's been important, I think, in terms of developing the the strength of the network in that part of the world, and we'll continue to look for opportunities there next year, but probably not at as aggressive a clip as this year.

James Higgins, Credit Suisse First Boston.

The decision to increase the coach seating density and the balance of your fleet, you know, obviously follows having done that in your leisure-oriented markets, with the A300s and 757s.

Do you have revenue data to share?

I mean, I realize it's not an ``all else equals'' situation, but is there anything you can share with us about the success of adding those seats back on those aircraft that are informing your decision to go ahead with the rest of this week?

Yeah, Jim, on the A300s and 757s, through about this point this year, we generated about $60m in additional revenue versus a year ago, and the occupancy rate, you know, this summer on the A300s is, as I recall- if you just take the incremental seats, the occupancy rate was about 40% load factor on those incremental seats, and on the 757s, was in the 30%, mid 30s.

Very good.

And then the 15 narrow bodies' worth of capacity reductions next year, those are all incremental to your prior schedule, is that-- or prior plans, is that correct?

I think the way to think about it is, we-- while we've had multiple this year for next year, as we-- if you look at where we were about a month ago, we're taking 12 airplanes that we're physically flying right now and grounding them and three airplanes that are planned to come out of storage and fly, and we're not going to put them in service.

Those are the 15 airplanes.

And were those 12-- had they previously been planned to be removed from the schedule, or--

No, no, they're flying right now and they were planned to fly all next year.

Great.

And are these actually accelerated retirements or are they're just putting them into storage for now, to wait and see what happens?

No, we're just-- we're essentially pulling them out of the schedule and we haven't really decided whether we're going to fly them to desert or park them here or what we're going to do with them.

But we're just going to withdraw 15 airplanes of flying from where we were a month ago; 12 of those airplanes are flying right now, and physically what we do with the, we haven't figured that out yet, but we just won't fly 'em.

Michael Linenberg, Merrill Lynch.

Gerard, the 15 narrow body planes, are these MD-80s?

If you look at the 15, it's 14 MD-80s and one 757, as we-- one 757, as we sit here today.

That's the mix.

And then just my second question -- I believe one of the unique aspects of your Embraer agreement was that you actually had the right to put back, I think, some of the airplanes to the manufacturer.

You know, beyond the 18 that you're going to cancel, is there-- do you still have privilege, such that down the road, if we run into the, you know, let's call it a 50-seat saturation situation, which, you know, maybe we're there already, that you would be able to possibly shrink that fleet further?

Well, as part of the agreement with Embraer for giving up these 18 firm orders, we gave up 18 put rights that we had on other aircraft, and we have other put rights besides, so I think I'd just leave it at that.

Ray Neidl, Calyon Securities.

Yes, I just wanted to try and verify here -- I though most of your assets were collateralized already, but you mentioned that in renegotiating the facility, that you did come up with some aircraft that you can put into the pool.

I'm just wondering, how much flexibility do you have left in this area?

Ray, we have 67 unencumbered aircraft today.

Oh, OK, that many?

Yep.

OK, great, so that gives you still further flexibility, going out.

The other thing, for Gerard, is I think we had talked about this before, about adding point to point capacity.

It appears you're pulling out of- or not appears, you've announced you're pulling out of Long Beach-New York, and I guess Phoenix-New York, up against jetBlue.

I'm just wondering, in some of the other markets where you're trying to jetBlue or other low-cost carriers on, head-to-head, like Boston to Florida, without giving away your future schedule plans, do you find that it's more productive, not trying to compete with them head to head, and maybe continuing to do what you're doing now, putting your assets into your hubs?

Yeah, Ray, I think the way I would describe is certainly in this environment, what we have concluded is we've gotta take a hard, long-term look at our network and decide where we have a long-term future, and James mentioned earlier, clearly in the transcon markets, that means Kennedy-LA, Kennedy-San Francisco, and we concluded not Kennedy-Long Beach, so we just decided that we're going to stop trying to compete in secondary markets like that, draw back to our strengths, and basically draw a line in the sand around our strengths, and then from there, not retreat.

So that's why we've decided to beef up our schedule at DFW, even more than the 70 departures we had previously announced, because I think we are having some success against low-cost carriers in Dallas/Ft.

Worth.

I think we're having some success in some of the transcon markets.

So, we're looking at the whole network and we're saying, ``where do we draw the lines, where do we have long-term strength,'' and that's what we're going to retreat to, and then, you know, come what may.

Do you see any advantage with United Airlines pulling back capacity in Chicago?

Well, I see in my view a very sensible decision, in light of what is going on in the industry.

I think as we-- as I said in my remarks, and as James indicated, there's a real capacity disconnect in this industry relative to GDP, and it's not just the low-cost carriers.

If you look at mainline carriers this fall and look at their schedule year-over-year, there's a big disconnect between GDP and the size of their schedule, so I don't so much see opportunity that we want to capitalize on, but I see- I just see them doing what we're doing.

OK, great, thanks guys.

Gary Chase, Lehman Brothers.

I just wanted to go back for one second, Gerard, to Jim Higgins' question, when you said you had captured $60m in additional revenue on the seating reconfiguration.

Yeah.

Is there any way you could give us the percent that that is?

You know, in other words, what was the percentage increase in revenue?

I probably can, Gary, but I can't do it off the top of my head here.

We can go back and-- you want to know what's the absolute amount of revenue we're carrying on those airplanes, compared to the $60m?

Well, or just the percent.

I mean, I'm just trying, you know, to see what kind of impact that might have across the fleet, you know, as you expand the initiative.

Well, I tell you what, Gary, let Kathy and I've got some of my colleagues here, we'll try to pull that together and get back to you with something sensible, but I did throw out that load factor number, to give you some indication of occupancy on the seats.

Yeah, although I doubt those are at the same revenue as the rest of seats of the airplane, but--

I think you're correct.

Just one other technical question, which was-- and I apologize if I missed this in the prepared remarks, could, you just kind of walk, even if it's loosely, through what the schedule for that reconfiguration is?

Yeah, what we're going to be doing in the spring of this year is reconfiguring our MD-80s and 737s, adding, in the case of the MD-80s, one of the two rows in coach we took off, and two first-class seats.

And in the case of the 737s, one row of coach where we had taken off two.

And all of those will be accomplished by the summer, so all the MD-80s and the 737s is our current plan, if we can execute on that plan.

The other fleet is the 767-300s, which we will be adding-- and we've got those in multiple configurations today, so depending on which airplane, it's either, as I recall, nine seats or 13 on another set of airplanes, those 58 airplanes will be accomplished by this summer.

So those three fleet types will be done by the summer, and then 777s will begin in October of next year, so they won't be done by the summer.

OK.

And the additional row in the 73s is in addition to what you'd already done, which was taken some first-class out?

That's correct.

OK.

Can I just ask you, Gerard, just kind of a more philosophical question.

I mean, it kind of touches on what Bill Green was asking you.

It seems to be a big push, you know, to move internationally and I know, you know, particularly in Latin America, you've had great success there over time.

But I want to say, you know, the international entities have been pretty volatile in terms of performance over time.

I mean, do you feel like sort of the business is shifting towards more risky entities, or you know, I mean, I guess the data, the only data I really have to go on is what's in form 41, which, you know, we all know is imperfect.

But it seems like the historical performance there has been pretty volatile.

Yeah, well, Gary, I think that's a fair point.

Certainly you're subject to political and economic factors in all these countries that you operate around the world.

But if you look at our entire network, our international as a percent of our total system, and I'm guessing at this number, but it's 33%, 34%, and you know, some of our competitors have a much larger percentage of their business, at least our legacy competitors, international.

And when you think about risk, I think I'll take that trade right now versus the domestic market, in terms of the risk-reward tradeoff, as I look to the future.

And recognize that we're not talking about-- we're not taking a bunch of airplanes next year in order to do a lot of these international adds we're talking about.

In fact, the way we're getting at these Pacific adds is by putting our 777s into one configuration, where historically we've had that fleet split.

By putting it into one configuration, we actually drive two airplanes' worth of added utilization because of the inefficiency we had by having a split fleet -- a European configuration and a Pacific configuration.

So, when you think about it, we're not getting any airplanes next year, but we're going to be adding three Pacific routes, and we're doing that first, because of what I just described.

And then second, pulling some of that capacity out of the domestic market.

So I think it's all a good tradeoff.

Remarkably efficient aircraft utilization can come out of some of these international routings as well.

It's interesting to note that higher than expected Chicago-Nagoya service will only require us to utilize one 777 because we'll, in effect, have a Heathrow-Chicago flight turn right on to the Nagoya trip, and so it's just an example of how aircraft productivity can be quite high under these circumstances.

Well, I guess it helps to fly across a dozen time zones, or whatever it is.

That's right.

Daniel McKinsey, Citigroup Smith Barney.

I guess just dovetailing on some previous questions, regarding the pulldown of non-hub capacity, I'm wondering if you can add even more color, such as, you know, will the pull down be even across all of AMR's non-hub flying, or you know, will the point-to-point pulldown be, say, more targeted to, you know, transcon specifically?

Well, Daniel, I'm not terribly interested in giving my competitors a heads up on what we're thinking there, so I think you're just going to have to stay tuned to the OAG tapes, but you know, we're looking at-- we're certainly looking at more transcon markets and looking at some of the Northeast-Florida stuff that is-- that really nobody is doing well with.

OK, I appreciate that, thanks.

And I guess just secondly, Aer Lingus, I guess about three weeks ago, simplified, you know, fares on the trans-Atlantic routes, and you know, we're seeing some fare simplification in Mexico and Caribbean markets, and I'm just wondering how AMR is thinking about the impact from these actions and you know, does it suggest that, you know international revenues will come under some pressure, you know, as we look ahead, or are the routes impacted diminimus?

Well, early days to really give any particular definitive comment to Aer Lingus initiative.

Yeah, it's obviously a logical extension of how they have reorganized their business in the intra-Europe market, and it's certainly not a surprise to anyone here to see that sort of a pricing structure coming on to long haul routes, and so it just further underscores the need for us to continue working the cost side of the equation and changing the business in the way in which we have articulated in our various remarks -- simplification being one of the key themes, because I think it's-- it's fairly clear where the domestic revenue environment is heading, I wouldn't say that the international environment is immune, either.

And I guess, James, maybe just dovetailing on one previous question regarding the 67 unencumbered aircraft.

I'm wondering if you could please provide, you know, what you think a value for these aircraft might be, and perhaps a quick update on other financial firewalls remaining for AMR, and I guess just with respect to section 1110 versus non-1110, you know, unencumbered spare parts remaining, or unencumbered real estate, or you know, other assets that might be able to be pledged?

Well, obviously, we're working through-- with regard to those 67 unencumbered aircraft that I reported to, we're working through with banks right now, how much those banks think that they're worth, so I won't go into any more detail than that right now.

As to our position, you know financially in terms of further flexibility, I just point out that we have not encumbered either our Japanese route system or our Heathrow route system, as other airlines have done, that we still own 100% of our regional airline, Eagle.

Very different course to others have taken.

We still have AMR Investments, our successful investment company, fully owned, so there are a variety of assets in addition to the Orbitz stake that we've already referred to, that are continuing to be available to us, and so we're pleased by that relative situation.

Helane Becker, Benchmark.

I'm just going to ask you this question -- are you concerned at all about the slipper slope of going-- cutting back domestic flights, increasing international [inaudible] and over time looking more and more like Pan-Am and TWA used to look?

No, Helane, I'm not really concerned about that because we're not really tearing at the fabric of our domestic network by the steps that we've taken.

We have such a large domestic network, with hubs in Chicago, Dallas, Miami, and strong presence on the East and West Coast.

I think we can take the steps that we have taken and still be a very formidable domestic competitor, so I think we're nowhere near doing anything like you just characterized.

OK, that's good to hear.

And then my other question is, just on a follow-up for James, would be adjustments in the ERJ, could you just tell us now what capital spending plans for '05 will be?

We're still working through all of that, so we'll probably have more information for you on the next call, I would presume.

Glenn Engel, Goldman Sachs.

Question on the Caribbean.

That's a market where, I guess by your Latin results, is doing very poorly.

You've added tons of capacity there, it seems like everybody else is also talking about adding lots of capacity there.

Why won't that be a market where that seems to make more sense to cut back than others?

You know, we've been in the Caribbean forever and we- we, you know, historically have done very well in the Caribbean, and those aren't markets like Kennedy-Long Beach or Kennedy-Phoenix, where that's not a place where we have a long-term future, so we'll have to see how those other carriers do, Glenn.

I don't think they're going to do very well.

And on the business mix end, is there any indication yet you're seeing corporate activity picking up, even though corporate pricing may still be coming down?

I wouldn't say there's anything in particular to point to there, Glenn, one way or the other, frankly.

Although traffic is, you know, traffic is strong.

When you look at your corporate accounts, you're seeing higher volume and just lower prices?

Well we're certainly seeing more and more business travelers taking advantage of the increasingly available low fares; no surprise there.

And you know, we're certainly pleased by how volumes have come back this year, but you've also seen the revenue results, so no particular obvious signs of volumes rising significantly further at the corporate end.

OK, thank you, Glenn.

Thank you, everybody.

This concludes today's conference call for all analysts. [end of recorded presentation]