美國航空 (AAL) 2004 Q4 法說會逐字稿

Ladies and gentlemen, thank you very much for standing by.

We appreciate your patience today and good morning, good afternoon or good evening.

Welcome to the AMR fourth quarter 2004 earnings conference call.

At this point all of your phone lines are muted or in a listen-only mode.

However, later during the call there will be opportunities for your questions and those instructions will be given at that time.

[OPERATOR INSTRUCTIONS]

As a reminder, today's call is being recorded for replay purposes and that information will be announced at the conclusion of our conference.

With that being said, here with our opening remarks is AMR's Director of Investor Relations, Ms. Kathy Bonanno.

Please go ahead, ma'am.

Good afternoon, everyone.

Thank you for joining us today.

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

Today, Gerard will provide an overview of our performance and outlook and then James will provide the details regarding our earnings for the fourth quarter , along with some perspective for 2005.

After that, we will be happy to take your questions.

In the interest of time please limit your questions to 1 with 1 follow up.

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

I encourage you to view 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 slides.

The slideact(ph) in conjunction with the press release, will contain reconciliation of any non-GAAP financial measurements we may discuss to what we think is the most appropriate GAAP measurement.

Finally, 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 subject to a number of factors that could cause actual results to differ materially from our expectations.

These factors include domestic and international economic conditions, commodity prices, general competitive factors including, but not limited to, government regulations, uncertainty in domestic or international operations, acts of war or terrorism, our ability to access the capital market and changes in the company's business strategy.

Any of which could affect our actual results.

With that I will turn the call over to Gerard.

Thank you, Kathy.

Good afternoon, everyone.

As expected, our fourth quarter proved to be a disappointing end to a difficult year.

We lost $387 million in the quarter, bringing our full year loss to $761 million.

We did have some special items during the quarter and for the full year which James will discuss in a few moments.

Excluding those items, our fourth quarter loss was 473 million, or $2.94 per share.

The increased price of fuel in the fourth quarter alone added $477 million to our fuel expense line compared to a year ago.

Our full year loss excluding special items was $986,000 million -- $896,000 million or $5.58 a share.

High oil prices and lower yields were the major contributors to another year of losses for the industry.

And unfortunately, barring a change in at least 1of these factors our outlook for 2005 at this point doesn't look a whole lot brighter.

Clearly, we must continue to find ways to reshape our business to drive toward better results and we have much work underway to do so.

Unfortunately, on the revenue front the environment doesn't appear to be getting any better.

Given the latest pricing move by Delta, it is in fact getting worse.

And while we disagree with many of the news reports that forecast staggering decreases in revenue, we certainly agree that the initial impact will be negative, particularly in the first quarter.

That said, I would like to take a moment and outline our view of this latest change to the pricing structure and give you some of our thoughts.

First of all, there's no denying that the new fare structure will cause revenue dilution.

However, we think it is likely that this dilution will at least partially be offset by 3 primary factors.

First, share shift, second, traffic stimulation and finally, the restructuring of our corporate contract.

Share shift will come in several ways.

First, from customers who previously chose to fly on a connecting itinerary because the price was better than flying nonstop.

We have seen this share shift recapture occur in a number of nonstop markets where we have implemented low walk-up fares some time ago.

In Dallas/ Fort Worth, Los Angeles, for example, where we implemented a new fare structure last June, we gained 6 points of local market share in the month following our implementation.

In addition, passengers who had been driving to secondary and less convenient airports will shift back to primary airports now that fares are competitive.

This has certainly been the case in Miami where we implemented a similar pricing structure back in November of last year.

Based on our preliminary results in our markets such as New York to south Florida we have seen Miami's share of bookings grow from 23 percent to just over 30 percent.

And, lastly share shift will come from customers who would prefer to fly on American because of the depth and breadth of our network and our frequent flyer program and service but had in the past had chosen another carrier based solely on price.

Regarding stimulation, as basic economics has taught us, lower prices generally mean higher demand.

In this case, business fares have been reduced the most so would would expect more business travel as a result.

As with share shift we have seen this play out in markets where a low one-way fare structure was put into place.

Returning to the example I used of this -- Dallas/Fort Worth - LA market -- in addition to our share of the market growing, the size of the market grew as well.

The size of the DFW-LA basin market is up 39 percent year-over-year.

And the DFW -LA market specifically is up 56 percent.

And finally, because business fares have been reduced, the level and extent of corporate discounting should also be reduced.

We were able to revise our agreements with corporate clients in south Florida and we are hopeful that we will be able to do the same with our remaining accounts.

We have already informed our corporate customers that we will be visiting them in the coming weeks to discuss changes to our agreements as a result of this new pricing structure and we are optimistic we will get that done.

One other benefit I should also mention is we expect a faster growth rate in AA.com as customers come directly to our website looking to book travel.

We've had a streak of record-setting days since implementing the new fare structure with bookings, visits and revenue up substantially year-over-year.

These factors all should serve to mitigate the impact of dilution from the new Delta fare structure and in the long-term we are going to do our best to try to turn what is today a negative into -- into a positive.

But the fact of the matter is the revenue environment is not improving in the near term so we've got to continue to find cost savings wherever possible.

I think we demonstrated in 2004 our commitment to the first tenet of our turn around plan -- lower cost to compete -- as a result of a lot of hard work and collaborative efforts with all of our labor groups, American's 2004 unit costs excluding fuel and excluding special items declined 10.7 percent year-over-year.

Now with the outlook for this year one of continued yield pressure, oil prices stubbornly in excess of $40 a barrel, legacy competitors negotiating for labor rates that are lower than our own, and many carriers, not just low-cost carriers, adding capacity beyond projected GDP growth rates, we've got to keep up the pressure on cost and build on the progress that we made in 2004.

And we've taken a number of steps that we believe will help improve our position in the coming year and we are aggressively working to find more.

First of all we reduced our scheduled flying in the fall when we saw this tough environment in the early part of this year coming, by pulling down 15 main line aircraft.

We also deferred delivery of 54 Boeing aircraft and cancelled delivery of 18 ERJ- 45s that would have been delivered this year.

In the first quarter, this will mean a 4 percent reduction in our mainline domestic capacity year-over-year.

It will also eliminate about 400 million in CapEx this year and about $600 million in 2006.

And while we are putting domestic aircraft on the ground, our simplification initiatives have freed up wide body aircraft which will allow us to continue capacity in international markets where opportunities still exist.

For us, the most obvious opportunity is in Asia where we are still a relatively small player.

This year we will add daily nonstop service between Chicago and Nagoya, Japan on April 3.

We will also resume service between Dallas/ Fort Worth and Osaka, Japan on November 1st.

And as all of you I think know, we have requested the authority to fly between Chicago and Shanghai this year and we are hopeful to hear from the Department of Transportation on that soon.

Despite this growth, our domestic service will still represent over 65 percent of our total flying this year.

But, we are being smarter about how we serve all of our domestic markets.

For example, since September we've taken a number of actions to prune unrewarding flying, particularly in non-core point-to-point markets and in our service to secondary airports.

As part of this effort we cancelled a number of transcon routes including Boston to Las Vegas, Boston - Seattle, and Boston - San Jose along with Kennedy to Long Beach and Kennedy to Phoenix.

We also reduced our level of service in several other markets including Boston to LA, Fort Lauderdale to Los Angeles, Kennedy -- San Jose and Los Angeles to Orlando.

These actions helped free up aircraft, allowing us to build on our strengths.

And, as I think all of you know, we're -- one of our strengths of course is Dallas -- the Dallas/ Fort Worth hub.

Today we operate 502 big jet departures and 249 Eagle departures on a peak business day.

That's an increase of 17 big jets and 27 Eagle departures since September.

And we're not finished.

By April we will be up to 515 big jets and 265 Eagle departures on our way to 540 big jets and 275 Eagle operations by summer.

We've added jet departures to Fort Lauderdale, Indianapolis, L.A., Sacramento and Tampa, to name just a few.

And on the Eagle side we've added new service to Pensacola, as well as several points in Mexico.

And then, in lots of markets we've increased frequency in several of our markets out of DFW.

And, we are busy working on the schedule as we sit here today looking for more opportunities to free up resource to continue to build DFW which we planed to do.

Another initiative we think will pay off for us this year, is the decision we made to add seats back to our aircraft.

The schedule is as follows: Our 737 fleet will be fully reconfigured with 6 additional seats by June.

Our MD- 80 and 767 fleets will each be fitted with 7 additional seats also by June, and we will add 9 additional seats to our 777 fleet by December of this year.

Once completed, we will have about 12,000 more seats for sale each day.

And in this marketplace where high load factors and low yields are becoming the norm more seats will make us a lot more competitive.

We are also becoming a lot more productive as a company.

Both our people and our planes in 2005, Americans plane miles flown per aircraft day will average a little over 4,000 which is a 10.5 percent improvement than where we were back in the year 2003.

As for our people, on our last call we announced plans to reduce our work force by another roughly 3200 employees.

These reductions come as a result of our continued efforts to reduce costs and complexity throughout our organization and this will reduce American's headcount per ASM by about 8 percent compared to 2004.

And finally, we took a number of steps last year to protect our liquidity.

We sold some assets.

We completed several new financings and then late last year we replaced our revolver in December, $850 million worth of revolver.

And at the end of 2004 our cash in short term investment balance came in at a little over $3.4 billion including $478 million in restricted cash.

In closing, before I turn things over to James, let me assure that you our goal is to turn this company into a growing and profitable entity.

This year we will continue to push for ideas that will improve productivity and efficiency and reduce costs further and as challenging as it often seems we are going to continue to look for ways to improve revenue.

We are spending a lot of time thinking about things like unbundling elements of our product and service and making them available for purchase.

We've started down this path with our fir-- food purchase program and our fee- for-res services, but there are many other distinct levels of product and service that could be detached from the base service of transportation, much like occurs in the phone business, the hotel business, the financial services industry and many others.

So we are doing a lot of thinking about that and we are going to continue working very collaboratively with all of our labor groups, recognizing that the key to success in all these endeavors is working together as a team and recognizing that all of our fortunes are linked to the success of our Company.

And with that said, I will turn things over to James Beer.

Thank you Gerard and good afternoon, everyone.

Before I get to our results for the quarter let me provide you with the details of the special items we outlined in our press release.

In total these items net us to a gain of $86 million, or $0.54 per share.

The most significant of these was a gain of $146 million, on the sale of our interest in Orbitz, which took place in November of last year.

Offsetting this somewhat was a $42 million charge for severance payments and a $21 million charge for aircraft write-downs, both associated with our continuous cost reduction and simplification initiatives.

The severance charge is related to the job reductions Gerard discussed, which began in November of last year and will continue through June of this year.

The aircraft write-downs step from the decision to place 14 MD-80 aircraft in temporary storage, as announced last quarter.

As a result, 7 former TWA MD-80s have been moved from temporary storage, and have now been permanently grounded.

Rounding out the $86 million gain was a $3 million gain resulting from an adjustment to a prior accrual for abandoned space.

Now let's move on to our results for the quarter, which as we warned last quarter were once again heavily impacted by the high cost of oil and a weak revenue environment.

As Gerard mentioned, excluding special items, we lost $473 million in the fourth quarter; bringing our annual loss to $896 million.

Our fourth quarter loss reflected the consolidated average fuel price of $1.48 per gallon, a 67 percent increase year-over-year.

This difference in price represents an increase in fuel expense of $477 million compared to the fourth quarter of 2003.

Our hedged position was a modest 4 percent during the fourth quarter, as was our hedging gain of $14 million.

For the full year of 2004, our consolidated fuel price averaged $1.22 per gallon, a 39 percent or $1.1 billion increase over 2003.

As a result, our fourth quarter mainline unit costs, excluding special items, increased 7 percent year over year to $0.1011

On a consolidated basis, unit costs in the fourth quarter averaged $0.1056, up 7.5 percent year-over-year excluding special items.

On a fuel-neutral basis, our mainline unit costs in the fourth quarter declined 3.8 percent year-over-year, excluding special items.

Reflecting our continued focus on driving down those costs within our control.

Contributing to the decline in fourth quarter fuel-neutral unit costs were improvements in commission and booking fee expenses.

The commissions, booking fees and credit card expense line declined 8.6 percent year-over-year.

The reduction reflects our new booking fee agreements with Gallileo and Worldspan and our initiatives to reduce commissions in international markets.

Food and beverage expense also declined, with fourth quarter expense down by 9.3 percent year-over-year.

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 we mentioned last quarter, we had an expense holiday in this line last year by harvesting parts from grounded aircraft, which lowered last year's base.

In addition consolidated ASMs increased 4.9 percent year-over-year which will naturally drive more expense in this line.

Fourth quarter salary and benefit increases were 4.7 percent were also in line with capacity growth.

For the full year 2004 reductions in salary and benefit expenses and increased fuel expense had the most significant impact on our P&L as compared to 2003.

Our restructured labor agreements saved us over $0.5 billion in 2004.

However. these savings were more than offset by over $1 billion in added fuel expense compared to 2003.

Despite this, thanks to our numerous cost saving initiatives, 2004 mainline unit costs, excluding special items, declined by 3.7 percent year-over-year.

Likewise, full year consolidated unit costs, excluding special items, declined by 3.2 percent percent compared to 2003.

Moving on to our revenue performance.

In the fourth quarter we reported a 3.1 percent year-over-year decline in mainline passenger unit revenue.

Mainline passenger yield for the fourth quarter was down by 6.7 percent year-over-year to $0.1132.

The decline in yield was somewhat offset by a load factor increase of 2.7 points year-over-year.

Consolidated unit revenue for the quarter declined 2.8 percent year-over-year to $0.890.

Looking at our fourth quarter results by entity, domestically unit revenue declined by 4.8 percent compared to last year on flat capacity.

Domestic load factor increased 3.8 points.

However, yield declined by 9.6 percent.

Transcon markets looked a bit better than they have in prior quarters; with a 10-point load factor increase year-over-year.

This only partially offset a yield decline of 16.5 percent resulting in a unit revenue decline of 4.3 percent versus the same quarter in 2003.

Internationally, fourth quarter unit revenue increased by 0.5 percent versus 2003 on a 12.2 percent increase in capacity.

Load factors improved by 0 .6 of a point and yields declined 0 .3 percent.

European unit revenues were up 6.5 percent year-over-year on a 7.3 percent more capacity.

Yields in Europe increased 4.2 percent for the quarter and load factors were up by 1.8 points.

In the Pacific, unit revenue in the fourth quarter increased by 3.8 percent versus the fourth quarter of 2003.

Load factors increased 2.8 points on a 22 percent increase in capacity.

Yields improved by 0.2 percent compared to last year.

Unit revenue in Latin America declined 4.4 percent year-over-year on a 14.4 percent increase in capacity.

Here load factors declined slightly down by 0.4 of a point, and yields declined by 3.7 percent.

For the full year mainline passenger unit revenue declined 0.5 percent year-over-year, while consolidated unit revenue improved by 0.2 percent.

With a nearly 25 percent increase in capacity year-over-year, our regional affiliate unit revenue declined by 2.6 percent in the fourth quarter.

That's after adjusting for a stage length increase of 10 percent to 394 miles.

Load factor increased by 2.1 points.

But stage length-adjusted yields declined by 5.7 percent.

Cargo revenue continued its record-setting pace, achieving AMR's highest quarterly cargo revenue in history.

In the fourth quarter, freight traffic grew by 10 percent and yields grew by 1.8 percent.

Year-over-year trends in mail were even higher, with a 10.8 percent increase in volume and a 27.1 percent increase in yield.

Turning to the balance sheet , our fourth quarter cash position remains strong at $3.4 billion, including $478 million in restricted cash.

Our operations consumed $86 million of cash flow during the quarter.

During the fourth quarter our CapEx totaled $233 million.

For the full year of 2004 we spent $965 million in CapEx with pre-existing financing covering all of our regional jet deliveries, or about $620 million of the $965 million total.

In the fourth quarter, we spent $244 million on principal payments.

I mentioned last quarter that we might also have to repurchase $112 million of special facility bonds that would be put to us in December.

However, we were able to remarket these bonds and thus did not have to incur that cash outlay.

For all of 2004 our principal payments including the principal portion of our capital leases, totaled about $800 million.

Our pension payments totaled $461 million this year, 2004, that is.

Total debt remains at over $20 billion.

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

For the first quarter we expect fuel prices to average $1.41 per gallon, up 39 percent from the first quarter of last year.

Our hedged position for the first quarter is about 15 percent at a price of about $40 per barrel.

With a consumption forecast of 787,000,000 gallons, fuel expense is expected to total more than $1 billion for the first quarter.

First quarter mainline unit costs are expected to average $0.10 with consolidated unit costs at $0.105 .

On a fuel-neutral basis, excluding special items, our mainline unit costs are expected to decline 1.6 percent year-over-year.

Mainline capacity for the first quarter is planned to be essentially flat with last year, up 0 .4 percent year-over-year.

Mainline domestic capacity will decline by about 4 percent year-over-year and international capacity is planned to increase by about 12 percent.

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

Because of continued record high fuel prices, a weak revenue environment and the fact that the first quarter is traditionally a seasonally weak quarter, we anticipate a loss for the first quarter.

For the full year 2005 I can also provide you with some guidance.

Our mainline unit item cost ex-fuel, is expected to average $0.739 in 2005; a 3 percent decline versus 2004, excluding special items.

On a consolidated basis our unit cost ex-fuel is planned at $0.781.

Our mainline capacity is expected to increase by 2.7 percent year-over-year; with domestic capacity down about 1 percent and international capacity up about 11 percent.

Consolidated ASMs are planned to increase about 3.5 percent year-over-year.

Our defined benefit pension contributions for the year are expected to total about $310 million.

We have already contributed $42 million to our defined benefit pension programs thus far this year.

Our principal payments, including the principal portion of our capital leases should total about $800 million in 2005.

These payments will be spread fairly evenly throughout the year.

CapEx should total about $862 million for the year with about $345 million of that to RJs with pre-existing financing.

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

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

In conclusion, we are obviously dissatisfied with our results and recognize our -- our many challenges ahead.

We will, however, continue to work collaboratively with our employees to seek out as many opportunities as possible to further reduce costs, improve productivity and enhance AMR's revenue.

That wraps up our prepared remarks.

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

Very good and thank you, Mr. Beer.

And ladies and gentlemen, then as you just heard, t this point we invite and encourage any questions or comments that you may have.

To ensure that we get to the most questions possible today, as you heard Ms. Bonanno at the opening of today's conference, we ask that you would restrict yourself to one initial question and a follow-up, and also we'll be taking questions first from the analyst community and then moving directly into any media or press questions.

[OPERATOR INSTRUCTIONS]

Representing Morgan Stanley our first question comes from the line of William Greene.

Please go ahead.

Yes.

Good afternoon.

You guys have been remarkably disciplined, In terms of your capacity outlook for 2005.

Can you just describe-- are there-- do you feel the pressure though, to keep up because clearly some of your competitors particularly on the low-cost side but also some of your network peers are starting to grow faster than you now and in fact Continental even took some extra jets for '05.

How do you stay away from that drug?

Well, Bill, I think our actions have signaled where-- where our head is in terms of what we think the solution is to some of our problems.

We have try-- we have been drawing down domestic capacity and trying to raise prices.

Unfortunately, as you point out, many of our competitors are adding capacity and 1 in particular lowered prices.

So in the-- in the face of all that, that doesn't really change our near term thinking about domestic capacity because we think in general less capacity for us short term is going to be better for us.

But, obviously we've got to be mindful of what the-- how the industry is responding to this environment and do what's best for American.

We can't control how the other guys view the industry environment.

But it is perplexing to us that the solution to this environment would be more capacity and lower prices.

Okay.

Two quick modeling questions.

The first being at the risk of asking the obvious, despite all the pluses and minuses on the revenue side, mainline revenue is likely to decline in the first quarter.

And then the second modeling question is just on the FTEs, does the 3200 roll in in the first quarter or is that throughout the year?

Bill, the answer to the second one first .

Those 3200 FTEs will roll in between now and the first half of the year.

And Bill, just to make sure we are clear on that, we are not announcing anything new today.

Those are-- that's the result of the announcements we made on the third quarter conference call.

Yes, yes.

No, just in terms of modeling.

Is it a--?

As to your first question, Bill, we will still to our long held strategy of not really providing revenue guidance.

But as Gerard talks through the various components of what Delta has set off a couple of weeks ago, clearly one of the good guys if you will, will be our ability to work with the corporate contracts as Gerard alluded to and obviously that will take some amount of time.

Whereas the fares were put in place a couple of weeks ago, now.

So I think we will just leave it at that.

Okay.

Thanks for your help.

Thanks, Bill

And thank you very much Mr. Greene.

And, next representing Bear Stearns we go to the line of David Strine.

Please go ahead.

Oh, thanks.

Couple questions.

First, just broadly when you think about what level of labor costs you need to cut in order to earn your cost of capital , are you assuming any improvement in the forward curve on oil or a stabilization in yield?

Well, obviously the forward curve on fuel is a remarkably volatile thing it seems.

And that's why in my remarks I didn't attempt to give full year guidance on fuel price as we have traditionally.

Obviously as we sat here at this time last year that guidance wasn't worth very much shortly thereafter.

So, I think we can certainly look for improvement there but certainly nothing that we can particularly bank on.

And so we are continue going to about our cost-cutting exercises with a-- I'd just say a conservative view as to where fuel will be.

I think I will leave it just at that.

David, I think the way we think about the cost side of the business is, and have for the past 2 years we think of it in the context of continuous improvement because nobody really knows where the industry is going to settle out in terms of the stable cost structure.

So, I think as I alluded to in my remarks, we were pleased at the progress that we made last year ex-fuel versus '03 and we did that through a lot of collaboration and working together and changing the way we do do our business.

But, obviously the results speak for themselves, so we got a lot more work to and every time we find a better way of doing something we've got to stop and ask ourselves, "How do we find an even better way?"

And that's what we are trying to do with everything that we do in the company.

Okay.

I read you on the fuel but at the back half of that question was whether there was any assumption in thinking about those cuts about a stabilization of yield.

Well, again, I would like to try to stay away from revenue guidance.

I would reinforce the notion that we are very pragmatic about how we think about the overall financial structure of the industry and of our Company and what we need to do to improve it.

So we are certainly very cognizant of all various crosscurrents that are impacting revenue, probably at this point in time there are even more of those crosscurrents, again as Gerard alluded to in his remarks than there usually are.

But over the long run we continue to be optimistic that the turnaround plan is the right path to be taking and that's what we are going to continue executing on.

I think, David, the fact that in this environment a number of the low-cost carriers are losing money, hopefully at some time that revenue is at a point where sensible decisions would be made going forward.

But we will see what happens.

Last question, Gerard, with respect to the 3 factors that you said you think might be able to offset the pricing changes in the industry-- being share shift, stimulation and then corporate contracts.

On the latter 2, stimulation first, how long do you think stimulation will occur if all the competitors are eventually competitive and match.

And then second, with respect to the corporate contracts, how receptive so far, have corporations been to having their contracts readjusted?

I believe the stimulation is, in some sense permanent, because you had a lot of travel departments in a lot of companies that were--that put a lot of constraints on travel because of high walk-up fares.

So I think to the extent these walk-up fares are low and remain low , I think you are going to see just continued higher levels of business traffic throughout this year and into next year.

So I think you are just going to see that keep coming.

With respect to the corporate discounts, we were successful in Florida talking to our corporations when we-- when we launched a simplified structure there in November.

And the reason you're successful is you are really not trying to claw anything back from the corporation, you are just trying to-- you're just trying to come out neutral from each other's standpoint, because they obviously don't need the same level of discount to achieve what they were achieving beforehand.

So, I'm optimistic that we will have a sensible dialogue with the corporations and they will understand that we are not trying to pick their pocket.

We want them to come out about where they were before this happened and that should lead to agreements across the board, I hope.

Thank you .

Thank you.

And thank you very much, Mr. Strine.

And Ray Neidl with Calyon Securities is our next participant in queue.

Please go ahead.

Yes, regarding the fleet, one is-- why are you cancelling RJs, when it seems like everybody else is increasing their RJ fleet because of the good economics involved with that aircraft.

And what mainline aircraft are you cancelling specifically?

And are you doing that-- I know you are doing that as cost cutting but are you also doing that maybe at a later date so you can clear the way for ordering the 77 and heaven forbid possibly even the A380.

Well, Ray, starting with the RJs, I guess I would argue with your supposition that all these RJs pouring into this domestic market are achieving a positive return on capital.

I think you just got to look at the industry's results and see that that in fact is not occurring.

And that all that is happening is more capacity is putting more pressure on price and destroying profits.

So, I think we just have a different view that we can't add capital and airplanes domestically, whether they're RJs or big airplanes, in this environment and hope to improve profitability.

Now, I guess other carriers are reaching a different conclusion and we will see-- we'll see how it works for them.

And, I wasn't clear on the second part of your question, Ray, in terms of cancellation-- the deferral.

The deferral of the mainline aircraft, of those, you didn't specify which types they were.

I was just wondering if they were the wide bodies or the smaller aircraft deliveries that had you coming in.

And, I know-- I know why you are doing it because you are cutting back on CapEx in these uncertain times.

But does this clear the way for you in the future when things do turn for you to substitute those cancelled aircraft with new 77s when they come on board, and I was joking around that may be even an A380 was in the cards.

Well, what we had on order-- I think we had 54 aircraft, Ray, on order-- firm order and the preponderance of that was 737s.

So how many 777s were in that?

It was 7 777s and 47 737s.

And you're correct Ray, that we deferred delivery of that batch of airplanes all the way out until the year 2013.

And that will give us the ability to sit down with Boeing in the coming years and decide what kind of airplanes we need and whether we can rejigger those firm commitments into perhaps 77s or into other aircraft types.

So, we have that flexibility and it's good and in fact we are very intrigued by the 77 and everything that we are studying about that airplane.

And so clearly, that's a long-term possibility for us.

And likewise on the A380, very interesting airplane.

It's not one that's necessarily fit into the way we see the world's international markets evolving, but it's certainly something we are going to study and pay attention to.

Okay.

My second question regards Delta.

It seems like they've-- their chairman has done a turnaround and is now very much supporting Song, his low -cost carrier and it looks like they're actually learning something for their mainline operations by the operation of Song.

I'm just wondering if you are reconsidering your plans about maybe starting a low-cost carrier.

Well, Ray, clearly we pay a lot of attention to what our competitors are doing.

And, certainly if they are having success with something, we pay even more attention.

I do think, though-- and I've had this view for quite some time, that we fly over 700 big jets at American and we have to make our primary focus taking those 700 and something airplanes and making them profitable.

And we are not going-- we're not going to sort that out by taking 25 airplanes over here and doing something different and solve a 700-airplane problem.

So, but having said that, I think we do need to be mindful and pay attention to the evolution of Song and Delta's results and see if they are in fact achieving something there.

Great.

Thank you very much.

Thank you, Ray.

And thank you, Mr. Neidl.

Representing Lehman Brothers, our next question comes from the line of Gary Chase.

Please go ahead, sir.

Good afternoon, guys.

Hey, Gary.

A just a quick question, and it does factor into your-- to the cabin guidance that you gave.

We roughed out the fleet changes at about a 4.5 percent increase in seat count.

Can you give us a sense of what the ASM Impact of just increased seats is say, for the full year?

And, first quarter is probably going to be negligible.

Can you just give a sense of how that phases in?

Yes, the seats will be completed for the MD-80, 737 and 767 fleets by June.

And so obviously all ready for the summer.

The 777 additional seats will be in place by the end of the year.

They will be adjusted after the peak summer season.

But--but-- I'm sorry, James, for not making that clear.

I guess I was just curious if had you a sense of how much of that alone is increasing your ASMs?

Yes, and that has a 2.1 percent impact year-over-year in ASMs.

For the full year?

Yes, that's right.

Okay.

So the cabin, ex-fuel guidance that is down 3 percent mainline, is a couple of percent of that is just increase the account, is that the right way to think about it or was that guidance be prior to?

No, the guidance includes the effect of the seats generating ASMs.

Okay.

Other than the things that are sort of phasing in from the various savings initiatives that you've got during 2005, what are some of the offsets?

I mean you've got some labor escalation built into your contracts.

Then again you have heads coming out.

How should we think about '05 just in terms of cost in, cost out, anything-- any major line items that jump out at you?

Yes, well, clearly there's a certain amount of inflation in a variety of these lines.

We, throughout 2004, talked a good amount about the maintenance material and repairs line.

And I would expect that to continue in 2005.

We have some contractual agreements with some of our suppliers there that will be pushing our expenses northward.

Similarly our experience in 2004 continued to be one in which a variety of the airport authorities looking after the airports that we serve, continue to increase rates on us.

And in-- in particular, costs the new terminal at Dallas will-- SDFW will come online in the middle part of the year.

So that will generate a certain increase in our cost of operations at our largest hub airport.

And, of course, we have taken on, as you know, more debt in this past 12 months and we have something of a rising rate environment and so interest expense will be moving northward as well.

So those are some of the-- I hesitate to use the word highlights, but some of the drivers of costs going in the wrong direction.

Okay.

And, finally James if you can give us a quick comment, what's your sense of your ability to access the capital markets going forward?

You are clearly had a lot of support in refinancing your revolver, as measured by the number of institutions that seem to be involved.

Is there a sense that you can do more nearing the end?

How should we think about that?

Well, we were certainly delighted as to the support that the entire financial community gave us in the renegotiation of the revolver.

And I think that's a very recent example of sentiment frankly, towards our company.

That was a deal that only got closed in the third week of December.

So I think that's the best illustration as to how the financial community is thinking about us.

And I would say-- just say that we have unencumbered assets, still.

Obviously, as the last 3 years have gone by, that balance has declined most appreciably, but we still have unencumbered assets and we still own various assets that other carriers do not.

Our regional operation, Eagle is still 100 percent owned just to name but 1.

So, we feel as though we have some measure of flexibility that is available to us as we continue to work with all of our unions and our employees generally, on restructuring the costs of our company.

Thanks a lot, guys.

Thanks, Gary.

And thank you very much, Mr. Chase.

Next in queue is Helane Becker with the Benchmark Company.

Please go ahead.

Thank you very much.

Hi, everybody.

Hey, Helane.

Actually, James, I think you alluded to something I wanted to ask about and that's with respect to airport costs.

I know they've been going up and you just talked about that in your last answer.

But 2 things, though-- one, is there stuff you can do to-- especially given in effect that some of your peer group has managed to get lower airport costs in some cases, to improve that line item with the airports?

And, two-- I know the city of Dallas is out there being very aggressive in trying to lure another carrier.

They are offering incentives.

Can you participate in some of those incentives and have you talked to them about that?

Well, first of all, I would say that I've been very pleased by the performance of our people right around the system, who have taken over this past year another very sharp eye to the amount of space that we utilize in a particular airport, the number of gates we operate from and so forth.

And so we have been able to offset, to a substantial degree, what would otherwise have been quite large cost increases.

So we feel as though there is some more potential there as various leases come due at different points in time.

But I think we've worked very hard along that line and there's been a good result.

So, now with respect to airport incentives generally, if I might start with a comment.

When we look at offering new service to an airport, whether it's domestically or internationally, we have been quite successful at working with airport authorities to arrive at terms of economic assistance.

I wouldn't want to go into a lot of the specifics, but we have always left no stone unturned in that regard.

The situation at Dallas is one where the airport authority is working entirely within its rights, if you will, to offer incentives to other carriers.

At the same time, though, we are, as Gerard alluded to, busy developing our own growth plan and implementing that plan at DFW, and the DFW airport board has been helpful and constructive to enable us to do that.

So that's how I would leave that one.

Okay.

Thank you.

Thanks, Helane

And thank you very much, Ms. Becker.

And next representing Citigroup we go to the line of Daniel McKenzie.

Please go ahead.

Thanks.

Good afternoon.

Just following up on the gate issue, is AMR actively campaigning one way or the other on the Wright Amendment and if so, what kind of outcome are you anticipating?

Well we're-- Dan, I guess to directly answer your question, we are opposed to the repeal of the Wright Amendment.

Okay.

Are you working that opposition on Capitol Hill at this point?

Of course.

Okay.

Okay.

And on pensions, wondering if you can give an update of where your underfunded obligation is currently, and if possible to provide a range of guidance for what you think your cash contributions might be in the '06 timeframe?

Well, we are just in the process of rewriting all the demographic data for full year-end but our provisional results are such that our defined benefits plans are now funded on an ABO. basis, up to around 80 percent.

So that's quite an improvement of where we were a couple of years ago when we were funded in the low 70s.

We had some strong returns from our assets in the plans this past year and we are obviously very pleased about that.

I wouldn't venture to estimate a funding level for 2006 at this juncture.

Clearly, this is an area where there's going to be significant legislative discussion this year.

The administration came out just at the early part of last week and put its thoughts down on paper and there are a variety of proposals being aired on Capitol Hill and we will obviously be a party to those discussions as it's an important benefit for-- for our employees, one that they hold most dear.

Sure, yes.

The-- from what I can gather, the message in Washington is loud and clear about pension overhaul.

But I haven't heard anything about pension relief.

Is there anything that gives you optimism along the lines of pension relief?

Well, if you look back at what the administration said last week, there are a couple of things that will potentially be of benefit to us.

First of all, the notion of continued interest rate relief was, in essence, addressed in their proposal.

The thought being that pension liability should be calculated using a corporate-like interest rate with the duration similar to that of the duration of a company's pension obligations.

So that would be such for us, that it would be a very different interest rate as opposed to returning to the old 30-year treasury notion.

So that would be a helpful step if that was to become part of new law.

Then the other item would be what the administration said about the timeframe under which an underfunded amount in a defined benefit plan could be paid back, could be caught up.

And whereas today's legislation, in essence, lays out a 5-year timeline, the administration has been talking about something between 7 and 10 years, perhaps.

And there are other views-- a variety of views on Capitol Hill, as I alluded to.

So, while our underfunded balance is significantly smaller than that of other airlines in this country, it would nonetheless, obviously be helpful from a cash flow perspective, if we had more time-- a sensible amount of time to catch up.

Recall again that American's plans prior to 9/11 were always fully funded and we are looking to be able to get back to that sort of a situation.

I think having said that, Dan, the other thing is obviously, the devil will be in the details of how-- what comes out in this legislation.

So we are going to have to see what direction this takes.

And, clearly it could take a direction that's adverse to our interests and put more pressure on us.

Now, we think that would be imprudent and will certainly work hard to prevent that from happening.

But there are lots of people on different sides of this issue.

And, so we've got to stay very close to it and we think it would be a very bad outcome if the legislation would in fact put more pressure on companies like ours that are in the status that we are today in.

Okay.

And if I could just add 1 last question, if you could quickly just add any color about unit revenues in Latin America, they were evidently I understand down 4.4 percent, wonder if you can comment on areas of weakness real briefly?

Well, as I mentioned a good deal of capacity was added by ourselves in that part of the world in this past year and so that has created some amount of pressure.

I'd say the long haul routes down into countries like Brazil and Argentina have performed really quite well, good premium demand coming back there.

In other parts of the region obviously spottier performance.

Some of the areas of the region have really seen a great deal of new capacity.

The Caribbean obviously has a variety of new carriers serving it, at least to some of the locations within the Caribbean region.

And a good amount of capacity also entered the Central America market.

So it's a mixed bag .

Okay and thank you very much, Mr. McKenzie.

And, ladies and gentlemen we appreciate the strong interest shown in today's conference.

However, with time now for one more analyst question, next in queue is Robert Ashcroft with UBS.

Please go ahead, sir.

Hi, guys.

It looks like maybe your regional results-- your regional program had fairly poor results for the quarter, is that fair?

Relative to some of the past quarters, I'm seeing something like a negative 36 million operating result?

I would say that the regional business was absorbing the same sorts of revenue pressures that our domestic mainline business was coming under in the back half of the year.

Obviously we added a good deal of capacity to Eagle during 2004.

We took 36 of the ERJs and some Canadairs, besides.

So when you have that level of capacity arriving, obviously there's a certain amount of digestion that needs to occur.

But I think fundamentally, the revenue story was the same 1 that the big airline was experiencing in the back half of the year.

Robert, I would also add that Independence Air's pricing initiatives throughout the third and fourth quarter of last year really impacted our RJ operation in the northeast, particularly in Raleigh-Durham.

So, undoubtedly that had a very big effect on their fourth quarter results.

I guess the-- going forward given the price caps, would you expect that to have a differential effect on your regional programs relative to the mainline, in the sense that the RJs depend on having higher fares for their-- to succeed?

Not necessarily, Robert, no, we don't necessarily look at it that way.

Fair enough.

Thank you very much.

Thank you, Robert.

And, thank you very much, Mr. Ashcroft.

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