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Operator
Ladies and gentlemen, thank you very much for standing by.
We appreciate your patience today.
Good morning, good afternoon or good evening.
Welcome to the AMR first-quarter 2005 earnings conference call. (OPERATOR INSTRUCTIONS) As a reminder, today's call is being recorded.
With that being said, let's get right to this first-quarter agenda.
Here with our opening remarks is American Airlines' Director of Investor Relations, Ms. Kathy Bonanno.
Please go ahead, ma'am.
Kathy Bonanno - Director, IR
Good afternoon, everyone.
Thanks for joining us today.
On the call are Gerard Arpey, AMR's Chairman and Chief Executive Officer, and James Beer, Senior Vice President of Finance and Chief Financial Officer.
Starting off, Gerard will provide an overview of our performance and outlook, and then James will provide the details regarding our earnings for the first quarter, along with some prospective for the rest of the year.
After that we will be happy to take your questions.
In 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 which website, interested parties may listen to a live webcast of today's call and review our reconciliation slides.
The slide deck, in conjunction with the press release, will contain reconciliation of any non-GAAP financial measurement we may discuss to what we think is the most appropriate GAAP measurement.
Finally, let me note that many of our comments today on matters related to our outlook for revenue and earnings, cost estimates and forecasts of capacity, traffic, load factor and fuel 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 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.
Gerard Arpey - Chairman, President & CEO
Thank you, Kathy.
Good afternoon, everyone.
As you have seen in the press release we issued this morning, we lost $162 million in the first quarter, or $1 per share.
Excluding a special credit, which James will discuss in a moment, our loss for the first quarter was $230 million, or $1.43 per share.
For the quarter we generated positive operating cash flow, ending March with a cash and short-term investment balance of just over $3.5 billion, including $483 million in restricted cash.
Our loss comes despite a 3.7% improvement in mainline unit revenue year-over-year and a 3.2% reduction in fuel neutral mainline unit costs, excluding the special item the James will share with you.
Of course, adding in fuel expense, our unit costs excluding that item increased by 4.6% compared to last year.
The high price of oil added $346 million to our expenses during the first quarter.
And based on the current forward curve for oil, we expect the full-year impact of higher prices to exceed $1.3 billion.
This is on top of the over $1 billion increase we already experienced last year in comparison to 2003.
Because the price of oil is overshadowing much of the progress we are making in improving revenue and reducing costs, I want to spend just a few minutes bringing to light the many achievements I think we have made.
And I want to thank our employees for continuing to work together as a team to find innovative ways to improve revenue and reduce costs, while at the same time delivering very good service to our customers.
As I mentioned earlier, our mainline unit revenue during the quarter improved by 3.7% year-over-year.
Through February, our year-over-year unit revenue improvement was better than the rest of the ATA industry by more than 3 points.
Our out performance relative to the industry is an indication, I think, that the network changes we announced last year are beginning to bear fruit.
By grounding aircraft, we operated with 4.2% less mainline domestic capacity in the first quarter this year than we did during the same period last year.
We pulled down unrewarded flying in trans-cons and other point-to-point markets.
And we built upon our strengths by shifting capacity to stronger international markets and adding a lot of service at Dallas-Fort Worth.
Further industry capacity growth this year, however, is likely to exacerbate an already poor revenue environment.
And with fuel costs increasing by $1 billion each year we are clearly in need of further cost-cutting efforts.
Lower costs to compete, the first tenet of our turnaround plan, continues to be a primary focus for our leadership team and all of our employee groups.
As you may know, just this month we fully implemented our simplified operating initiative that we spoke with you quite a bit last year as we tested some of these concepts.
For the first time, as we built our April schedule, our pilots and aircraft routings were completely linked together.
To give you an idea of the magnitude of this change, it's helpful to look at the number of connections our pilots were making each day from one aircraft to another prior to this initiative.
During the second quarter of last year we operated with 600 daily pilot connections.
But in our schedule this month that number is down to just 25 daily connections.
With numbers as big as this, I think it is not difficult to see that our operation just became a lot less complex.
Our pilots and their union have done a great job helping us think our way through this and implement this change, and I think it is going to result in improvement in our reliability and our dependability.
Another example of our simplification efforts can be found in the modifications we're making to our MD 80 engines.
Recently we upgraded the thrust on nearly all of our MD 80 engines from 217-C power to 219 power.
Operating on more than 300 strong fleet with exactly the same engine type and thrust rating will provide us with much greater operational flexibility and simplicity.
The additional thrust capability will also allow us to better serve hot and high airports, such as Denver in the summer, and airports with shorter runways, such as New York LaGuardia.
In the past we have routinely imposed weight restrictions from these airports, making our operation more costly and forcing us to turn away revenue.
So I'm happy to say that today these routine weight restrictions will be greatly reduced.
These simplification initiatives are allowing us to become much more efficient, and we're making terrific strides at increasing both aircraft and employee productivity.
This year our miles flown per aircraft day should increase by another 1.5% year-over-year and our ASMs per employee will increase by more than 8%.
Since 2003 these metrics have increased 9% and 22%, respectively.
Looking forward, we still see opportunities for further cost-cutting.
Distribution costs, for example, will be under significant downward pressure as alternative technologies emerge and provide new competition for traditional GDS business models.
All of our existing GDS contracts expire next year, so we will be looking for the most cost-effective solution we can find.
Fortunately, it looks like we will have more reasonable options available to us than we have had in the past.
In fact, American entered into a distribution agreement with G2 SwitchWorks in March, which will provide American significant cost savings on bookings through the G2 TRUEConnect network.
We've also seen substantial growth in bookings through our least expensive distribution channel, AA.com.
In the first quarter our AA.com bookings increased by nearly 4 percentage points year-over-year to 15% of revenue, and we plan on driving that number higher.
One of our major efforts in this area is the development of partnerships with select travel search engines that will deliver customers directly to AA.com.
Our content will be available through these travel search sites in late second quarter.
In addition, we're establishing a home base reservations program which may help us to further reduce distribution costs, while at the same time offering greater flexibility to those employees who desire that sort of flexibility and lifestyle choice.
Before I turn things over to James, I want to highlight a couple of other initiatives that our employees have been instrumental in spearheading.
I'm sure everyone knows that we're now selling food onboard our aircraft.
What you may not know is that our flight attendants and their union have been instrumental in getting this program off to a good start.
So far we're doing better than planned, and our flight attendants and their union have worked with us every step of the way to determine how best to organize and position this product change.
We've also been pleased with the initiatives shown by our mechanics and the Transport Workers Union.
I'm sure most of you saw our joint press release announcing that the Tulsa maintenance base had set an objective to become a future profit center.
While all of the details have not been ironed out, we are certainly pleased with the direction in which we're headed at Tulsa.
In addition, mechanics at our alliance maintenance base are implementing procedures that provide greater flexibility, which will allow us to capture more third-party engine business there as well.
Finally, all of our employee groups have acted as our business partners in recognition of the need for sensible pension reform.
While we agree with the general direction the government is headed in with their proposed pension legislation, we take issue with the notion of penalizing companies that don't have investment-grade credit ratings, especially companies like American, which have continued to fund their pension plans even in these very difficult times.
I'm pleased to report that we contributed another $138 million to our defined benefit pension plan in the first quarter.
All of the efforts that our employees are undertaking to reduce costs and improve revenue are the key to our long-term success.
We have to keep whittling away at our cost structure, finding every opportunity to improve efficiency and productivity, while at the same time generating new revenue sources and providing a great level of service to our customers.
The environment obviously remains very difficult, but I think it is fair to say we are making steady progress.
And with that said, I'm going to turn things over to our Chief Financial Officer, James Beer.
James Beer - SVP, Finance & CFO
Thank you, Gerard, and good afternoon, everyone.
Before I get to our results for the quarter, let me provide you with some information on the tax credit we received in March.
The $69 million credit is related to certain excise tax refunds that date back to 1996.
The gain is split between the fuel line and interest income with $55 million offsetting our fuel expense and $14 million added to our interest income.
The impact to earnings per share is $0.43.
Now, let's move on to our results for the quarter, which were once again heavily impacted by the high cost of oil.
As Gerard mentioned, excluding special items, we lost $230 million in the first quarter, or $1.43 per share.
Before I go much further, let me just advise you that I will be quoting several cost figures, including fuel prices per gallon.
All of these figures will exclude our special item for the quarter, which is the tax credit I just discussed.
We believe that excluding special items provides a more realistic picture of our business on an ongoing basis.
As Kathy mentioned in her opening remarks, please refer to our press release and the slides accompanying this webcast for reconciliations of any non-GAAP numbers.
Our first-quarter loss reflected a consolidated average fuel price of $1.40 $1.45 per gallon, a 43% increase year-over-year.
This difference in price represents an increasing fuel expense of $346 million compared to the first quarter of 2004.
Our hedged position was a modest 15% at $40 per barrel during the first quarter, giving us a hedging gain of $18 million.
As a result, our first-quarter mainline unit costs increased 4.6% year-over-year to $0.0992.
On a consolidated basis, unit costs in the first quarter averaged $0.1045, up 5.3% year-over-year.
On a fuel neutral basis, our mainline unit costs in the first quarter declined 3.2% year-over-year.
Approximately 1 percentage point of the year-over-year decline in unit costs is attributable to the change we made to our depreciation methodology.
We revised our methodology to more accurately reflect the expected useful lives of our narrow-body aircraft, extending the expected life from 25 to 30 years.
Given the durability of our aircraft we feel a 30-year useful life is a realistic assumption.
As for the rest of our expenses, most line items improved year-over-year on a per-unit, or per available seat mile, basis.
Despite higher salaries and benefit costs year-over-year, our various productivity initiatives have driven down these labor-related expenses on a per-unit basis.
We've also seen improvements in our unit expenses in food and beverage spending, commissions and booking fees, and in our materials and repairs line.
Turning to revenue now, in the first quarter we reported a 3.7% year-over-year increase in mainline passenger unit revenue.
Mainline passenger yield declined by 2.1% year-over-year to $0.1188.
This decline was more than offset by record load factors in every month of the quarter.
For the first quarter our mainline load factor increased 4.3 points year-over-year to 75.4%.
On a consolidated basis, unit revenue increased 3.1% year-over-year to $0.0938.
Looking at our first quarter results by entity, domestically unit revenue increased by 3.9% compared to last year on a 4.2% reduction in capacity.
Domestic load factor increased 5.3 points, with yield decline of 3.3%.
We saw considerable year-over-year improvement in our trans-con markets with unit revenue increasing by nearly 21% year-over-year.
Miami was also strong with a unit revenue increase of 6% year-over-year.
And while our new simplified fares have reduced yields, traffic gains, at least in the first quarter, are offsetting the dilutive effect of this new structure.
And we continue to see share shift as passengers move from secondary airports back to primary airports, like Miami and Chicago O'Hare.
We also continue to make progress in restructuring our corporate agreements.
We have about 90% of our contracts back and signed, and we expect to get the final few completed shortly.
Internationally, first-quarter unit revenue increased by 3.2% versus 2004 despite a capacity increase of 11.4%.
Load factors improved by 2.3 points and yields were flat year-over-year.
European unit revenues were up 9.6% year-over-year on a 6.2% more capacity.
Yields in Europe increased 5.7% for the quarter and load factors were up by 2.8 points.
In the Pacific, unit revenue in the first quarter declined by 3.4%, after a full year of substantial year-over-year gains.
Load factors declined 2.9 points on 24.6% more capacity.
Yields improved by 0.4% compared to last year.
Unit revenue in Latin American increased slightly, up 0.4% year-over-year.
Capacity increased 12.8% year-over-year.
Despite the capacity growth, load factors increased 2.9 points year-over-year with yields falling 3.7%.
Moving on to revenue performance for our regional affiliates, with a nearly 20% increase in capacity year-over-year, our regional affiliate unit revenue declined by 6.2% in the first quarter.
That's after adjusting for a stage length increase of nearly 6.5% to 390 miles.
Load factor increased by 2 points, but stage length adjusted yield declined by 9%.
As a reminder, Eagle's last RJ on order will be delivered in July of this year.
Looking now at our cargo operation, we have resumed carrying domestic mail.
Revenue growth slowed in the first quarter with a loss of about 7% of our mail revenue, but freight revenue increased by 3.5% year-over-year, resulting in a 2% increase in total cargo revenue.
You will also see improvements in our other revenue line year-over-year.
This is in large part due to our efforts to increase revenue by unbundling certain product features.
Our success is demonstrated by the 15.4% year-over-year increase in this line.
Through testing various initiatives we have found that many of our customers continue to value our dedicated reservation services and in-flight food and entertainment options, and they are willing to pay a small fee for these product attributes.
So far, results from these fee-based tests have exceeded our expectations.
Also in this line is the revenue we generate from cargo fuel surcharges, which are an integral part of our cargo pricing structure.
Unlike the passenger side of the business, these fees increase and decrease in step with oil prices.
About 4 percentage points of our year-over-year increase in this line is attributable to cargo fuel surcharges.
While our other revenue line continues to show promise, year-over-year gains in passenger unit revenue will likely moderate.
Some of the factors that made the first quarter so strong will work against us in the second quarter.
For example, Easter shifting from April of last year to March of this year positively impacted first-quarter unit revenue by about 1 point.
In addition, industry capacity will be growing at a faster rate in the second quarter than in the first, with total industry capacity expected to increase by nearly 5% year-over-year in the second quarter.
And while the industry has finally started to pass through to customers some of the increased cost of fuel, the fare increases we've taken so far will only offset a fraction of our increased costs.
Turning to the balance sheet, we generated $465 million in operating cash flow during the first quarter, bringing our cash and short-term investment balance to $3.5 billion, including $483 million in restricted cash.
During the first quarter, our capital expenditures totaled $242 million.
Our payments on long-term debt and capital leases totaled $235 million.
And we contributed approximately $138 million to our defined benefit pension plans.
For the full year we still estimate total capital expenditures at about $860 million, with $345 million of that for RJs with pre-existing financing.
Our principal payments for the year are estimated at about $900 million, including the principal portion of our capital leases and $104 million in special facility revenue bonds that can be put to us in November.
Our pension contributions are expected to total $310 million in 2005.
At the end of the first quarter our total debt remained at approximately the $20 billion.
Moving now to guidance, let's start with the second quarter.
Once again, these cost figures and forecasts for the quarter and the year will exclude special items on a year-over-year basis.
In the second quarter we now expect consolidated fuel prices to average $1.70 a gallon, up 52% from the second quarter of last year.
We have only very limited hedges in place for the second or third quarters of this year.
In the fourth quarter our hedge position is at about 6% at a price of about $40 per barrel.
With our second-quarter consumption forecast at 813 million gallons, fuel expense is expected to total nearly $1.4 billion in the second quarter.
Including this fuel forecast, second-quarter mainline unit costs are expected to average $0.1019 with consolidated unit costs at $0.107.
Excluding fuel, our second-quarter mainline unit costs are expected to decline 3.4% year-over-year to $0.0738.
Consolidated unit costs, excluding fuel, should decline 2.6% to $0.0782.
Mainline capacity for the second quarter is planned to increase 1.7% year-over-year.
Mainline domestic capacity is estimated to decline by about 2% year-over-year.
And international capacity is planned to increase by about 11%.
So far, our domestic booked load factors in every month of the second quarter are well ahead of where they were at this same point last year.
And second-quarter bookings look good in our international network as well, despite an 11% capacity increase planned in the second quarter.
Now, moving to the full year 2005, we are forecasting full-year consolidated fuel prices at $1.64 per gallon.
Given this fuel price, our consolidated unit costs are expected to average $0.1056.
For the mainline we're anticipating unit costs of $0.1006.
Our forecasts for mainline CASM excluding fuel is $0.0736 in 2005, a 3.4% decline versus 2004.
On a consolidated basis, our plan for CASM ex-fuel is $0.0779, which is a decline of 2.8% year-over-year.
Our full-year mainline capacity is expected to increase by 2.6% year-over-year as we add seats back to our aircraft.
Domestic capacity should be down about 1% and international capacity up about 10%.
Driven by Eagle's growth consolidated ASMs are planned increase about 3.4% year-over-year.
In conclusion then, I'd just like to reemphasize that we have taken and must continue to take the necessary and often painful steps to turn around the Company.
The number of people that AMR employs continues to decline.
The job reductions of 3200 we announced on our last call include a reduction of 500 positions at our Kansas City maintenance base which will occur this June.
As a result of our network realignments, we fly fewer mainline aircraft but generate more revenue.
And we continue to eliminate costs by simplifying and redesigning the way we operate the Company day to day.
A large number of other cost reduction initiatives continue in all areas of the organization, and yet we still see opportunities to reduce costs further.
Through all of this change we remain committed to working together with our employees and unions in order to make a new AMR that is thoroughly competitive in its marketplace and is routinely delivering excellent customer service.
That concludes our prepared remarks.
Gerard and I will now be happy to take your questions.
Operator
(OPERATOR INSTRUCTIONS) Mike Linenberg, Merrill Lynch.
Mike Linenberg - Analyst
I guess just two quick questions.
I think, James, you touched on some of the Kansas City cutbacks.
Have you at all established maybe a cost-cutting target that you're looking for 2005?
Is there something out there that maybe you will formalize?
And then if you can maybe get a sense of something like the Kansas City cutbacks, what that means to the P&L on an annual basis?
James Beer - SVP, Finance & CFO
What we have talked about in the past is that our plan for this year was to be able to drive approximately $700 million worth of cost saving initiatives.
And of course, that will help us more than offset a variety of cost lines that are inflating on us -- things like airport charges, health care and so forth -- which we value at around $300 million.
So net-net that gives you a picture for what we set out this year to achieve in terms of cost reduction.
Of course, that does not cover the efforts that continue to be developed as the year goes along.
And I'm pleased to say that in the numbers we have already announced today we've been able to make good on some of our previously budgeted plans, and obviously that's a perspective that I and the rest of the finance team at American will be continuing to pursue for the rest of the year.
Our unit cost ex-fuel for the year, given that we will be growing some ASMs, will be down 3.4% year-over-year.
So we're encouraged by that continued momentum.
Gerard Arpey - Chairman, President & CEO
The only thing I would add to James's comments is that we very much think about costs in the context of that first tenant of our turnaround plan as a continuous improvement effort.
So every time we find a way of doing something more productively, more efficiently, we are trying to become a culture that immediately asks itself, "okay, now that we've figured that out, how do we do it even better than that?"
So we really are preaching to ourselves as a management team and working with our unions and front-line employees around a concept of continuous improvement with respect to costs, and at the same time not losing sight of the revenue line because we've obviously got to drive the Company through both those lines to profitability.
Mike Linenberg - Analyst
Just my second question, I believe some of airplanes that may have been leased to Jetsgo -- and you can correct me if I'm wrong on this -- but Americans may have had some financial exposure to them.
Or maybe those were planes that you have completely written down, and I'm referring to some of the Fokkers.
Is there anything that we will see as it pertains to American and its exposure or potential exposure to those airplanes?
James Beer - SVP, Finance & CFO
No, we have no exposure to Jetsgo.
We had sold them some F100s last year, and we had receive cash upon sale.
So we have no ongoing exposure to worry about.
Mike Linenberg - Analyst
Perfect.
Very good.
Thank you.
Operator
Bill Mastores (ph), Bank of New York Capital Management.
Bill Mastores - Analyst
James and Gerard, I wonder if you could give us an idea just in terms of incremental dollars that you may have received from fuel charges, and maybe what that might translate into as far as annualized increases in revenues.
Or alternatively, how many more fuel surcharges, or what system-wide increase would you have to have on a ticket basis, to cover those incremental fuel costs?
Gerard Arpey - Chairman, President & CEO
Bill, I will let James put any color on this that he'd like.
We're obviously encouraged by the fact that we've gotten some pricing traction in the early part of this year.
But in the context of a fuel bill that, as we indicated, is going to be up $1.3 billion this year, we're nowhere near offsetting that in terms of price increases.
I don't know, James, if you can add any color to that.
James Beer - SVP, Finance & CFO
Yes, I would rather not try to quote a figure associated with the various price increases.
There are going to be an awful lot of moving parts here for the remainder of the year.
Capacity, as we have mentioned in the remarks, are going to be growing in the industry faster than it has thus far this year.
And we're going to have to see how the usual competitive dynamic plays out in terms of fare sales and so forth.
Certainly, I would just echo again, it's nowhere close to fully covering the increased fuel expenditures.
And we generally haven't utilized fuel surcharges on the passenger side of the business.
We do do that, as I mentioned, on the cargo side of the business.
And in the first quarter that would have increased our revenue about $10 million for the quarter.
So the cargo situation is one where there is just a better balance between supply and demand for those products, and so routine surcharges are sticking.
Bill Mastores - Analyst
Let me ask just a much more broad-based question that has to do with how many additional fuel surcharges domestically and internationally do you think will take place in the second and third quarter, if you dare to be a forecaster.
Gerard Arpey - Chairman, President & CEO
Well, Bill, that's an awful hard thing to predict.
I will say if you've looked at what American was doing last year and what we've been doing this year, we will continue to attempt to pass along this extraordinary increase in fuel prices to our passengers.
And whether or not we can get that to stick in the industry will be a function of the supply and demand and competitive balance that James discussed.
So very difficult to predict.
Bill Mastores - Analyst
One last item, James, quickly.
I missed the CapEx number that was expected for the second quarter.
James Beer - SVP, Finance & CFO
That will be --
Kathy Bonanno - Director, IR
We gave our first-quarter number and full-year number, Bill.
James Beer - SVP, Finance & CFO
We've also said in the past that those amounts are pretty evenly spread across the quarters of the year.
So it will be very similar to the first-quarter figure.
Bill Mastores - Analyst
Thank you.
Operator
Gary Chase, Lehman Brothers.
Gary Chase - Analyst
James, just a question.
I think it was either James or Gerard, you mentioned in your remarks that you're seeing an acceleration of capacity growth.
I was just curious if you could give us a little color on specifically where.
Is that domestic or international?
And if it's domestic could you elaborate a little bit on where you're seeing that?
James Beer - SVP, Finance & CFO
I think nothing probably new to you here.
Obviously the international side is seeing significant growth at American, but other mainline carriers as well.
And then of course the regional air carriers are still growing at this stage very strongly.
Eagle's growth in the first half of this year will be strong, but come the middle of July it's RJ order stream will come to an end.
You will recall that we canceled 18 RJs that we're going to take at end of that order stream last year.
And the low-cost carrier segment is continuing its fast growth rate in line with its taking of aircraft off the production lines.
So that's a summary of the primary drivers that we're seeing here.
Gary Chase - Analyst
But no market-specific stuff that is unusual relative to everything else you're seeing?
James Beer - SVP, Finance & CFO
In the first quarter, clearly the trans-con market benefited.
That ramp in improvement was driven by various carriers, including American, pulling capacity off those markets.
And we're pleased by that result.
We feel that we've got our network lined up on the core markets that are important to us.
And obviously those are the markets we look to defend.
Gary Chase - Analyst
When we think about the restructuring that you have apparently pretty much finished with on the corporate contracts, just roughly speaking should we just assume that you've recouped?
In other words, the differential and discount is offsetting the change in fare level? (multiple speakers) pretty good recovery mechanism that you've been able to put in place (multiple speakers) reduced your fares?
James Beer - SVP, Finance & CFO
I wouldn't want to get into any great specifics, but I just think it's fair to say that we're pleased with how this process has played out swiftly.
And as ever we're very appreciative of the support that we get from our corporate partners.
So it's been a successful process.
Gary Chase - Analyst
One place I was a little surprised you didn't mention in terms of bright spot for performance was Chicago.
I would have thought with the capacity reductions there at a market level between ATA and some of the stuff announced out of both yourselves and United, I would have thought that would be a little bit of a better performer.
Is there something special there we should be aware of?
James Beer - SVP, Finance & CFO
We really just called attention to Miami being so far ahead of the domestic average, and obviously the trans-con area as well.
We're certainly continuing to be happy with how things are in Chicago, but nothing in particular to note in this first quarter.
Gary Chase - Analyst
Not much different than the domestic average there, is that fair?
James Beer - SVP, Finance & CFO
Well, you could probably back into that sort of an assessment by thinking through the trans-con and the Miami numbers.
Gary Chase - Analyst
Thanks a lot guys.
Operator
Helene Becker, The Benchmark Companies.
Helene Becker - Analyst
I have two questions.
One and one follow-up.
One is can you quantify the changes at all at DFW and how much that might have added to first-quarter numbers, or traffic, or somehow so we understand the impact that Delta's pullout had?
And my second question is with respect to taxes.
Continental every quarter tells us how much they paid in government taxes, and I was just wondering if you could kind of quantify that for us as well.
Thank you.
Gerard Arpey - Chairman, President & CEO
I will start and then let James jump in here.
I think with respect to DFW you have hot a lot of moving pieces there.
And we certainly benefited from Delta's exit, but when you actually look at where we were prior to the change in their network, we had pretty much captured a good deal of the domestic local market because of the depth and breadth of our network here.
So when Delta moved, there wasn't as much local business there to capture as you might have imagined.
And they moved those aircraft to Salt Lake City and to Atlanta to compete for connecting traffic.
That is largely what they were doing here at DFW to begin with.
So we're still competing with them over DFW for connecting traffic; we're just competing over Atlanta and Salt Lake City.
And with respect to taxes, we usually have that number broken out.
I don't know if any of our (multiple speakers)
James Beer - SVP, Finance & CFO
I don't have that one in front of me, but certainly proportionate to the size of Continental it's going to be basically the guidepost for what AMR would be paying.
Helene Becker - Analyst
That's very helpful.
Thank you.
Kathy Bonanno - Director, IR
You can just follow up with me later.
I'll get it for you.
Helene Becker - Analyst
Okay.
Thanks very much.
Operator
David Strine, Bear Stearns.
David Strine - Analyst
My question relates to revenue.
James, you made a comment perhaps you can clarify for me.
You said that SimpliFares reduced yields, but traffic has worked as an offset.
Do you mean that it's totally offset it or partially?
And if so, if it's partially, how much?
James Beer - SVP, Finance & CFO
Again, we have so many moving parts in this revenue equation it is very difficult to try to identify the specific dollars that came from increased volumes driven by lower fares from SimpliFares.
So net-net our unit revenues of for the quarter.
We're pleased by that.
So I think I will probably just leave it at that.
Certainly the high volumes were probably greater than what we would have expected, whereas the yields were pretty much down in line with what we would have expected.
Gerard Arpey - Chairman, President & CEO
David, I think the results in the quarter are pretty consistent with our expectations.
I think if you go back into January when Delta launched this initiative, you had quite a wide range of estimates as to the impact that that was going to have on various airlines, including American.
At the time, and in a couple of presentations that I made on Wall Street, we consistently made the point that we felt like the net result of the Delta initiative was going to be negative versus the status quo, but it wasn't going to be nearly as bad as was being predicted.
And I think that's what you're seeing, because you are seeing some stimulation, we are seeing share shift, and we have seen, as James indicated, a renegotiation of a lot of the corporate agreements that we have in place.
So I think it's pretty much playing out the way that we thought in January that it would.
David Strine - Analyst
And when you look at the trends, seasonally adjusted of course, the premium business versus the leisure business, are you seeing any movements in that mix?
James Beer - SVP, Finance & CFO
When we look at corporate flying, as of has been the story for sometime now, we're looking at very strong volume growth.
But obviously yields are a significantly lower than they have been.
So we're encouraged by that volume.
But we obviously still have much left to do on the revenue front.
David Strine - Analyst
Thanks a lot.
Operator
Jamie Baker, JPMorgan Chase.
Jamie Baker - Analyst
Gerard, how do you view the 787 both within the context of your existing 76 program, but also in terms of your need to ensure competitive cockpit costs?
I'm curious if growth concessions is a part of this collaborative process that you're successfully developing with labor?
Gerard Arpey - Chairman, President & CEO
Jamie, I have commented in the past that we're very intrigued and excited about the 787.
The technical people in our Company are spending time getting up to speed on the airplane, and it looks to be an airplane that may very well fit in our fleet plan down the road.
Having said that, our more immediate issue and desire is to drive the 700 plus airplanes we currently have to a position of profitability.
We're not going to solve that problem by an airplane that can be delivered out in the 2009-2010 time period.
So we're very much focused on the here and now and taking what we've got and working collaboratively with all of our constituencies to get the 700 plus airplanes that we currently fly profitable.
Jamie Baker - Analyst
That's helpful.
Thanks Gerard.
Operator
That does conclude the analyst portion of today's call.
At this point then we will move immediately into our media portion. (OPERATOR INSTRUCTIONS) Elizabeth Souder, Dow Jones News Service.
Elizabeth Souder - Media
I would like to ask your thoughts on consolidation in the industry.
There's news this morning that USAirways and America West might be in talks about a merger.
I'm curious what you think about that and about consolidation in general.
Gerard Arpey - Chairman, President & CEO
Well, Elizabeth, historically there have been a lot of barriers to consolidation in the US airline industry.
And those historic barriers have been the government, organized labor.
And given what the industry has been through the past years, I think you could add lack of balance sheet strength to the equation.
But having said that, there's obviously press reports that several carriers are talking about consolidation.
And I think from the standpoint of the industry, how that would benefit or not benefit the industry will be decided by how it affects capacity.
So depending upon what happens under some of these consolidation scenarios, if it takes capacity out of the industry, I think that would improve the revenue environment and improve industry conditions.
If, on the other hand, it preserves capacity that might otherwise go away, that would be a bad development.
Elizabeth Souder - Media
Any interest in taking part in some of the consolidation out there?
Gerard Arpey - Chairman, President & CEO
I'm not going to comment about American specifically in that regard, Elizabeth.
Elizabeth Souder - Media
Thank you.
Operator
Keith Alexander, The Washington Post.
Keith Alexander - Media
Actually, my question was just asked and answered.
Elizabeth beat me to them.
Thank you very much.
Operator
Suzanne Marta, Dallas Morning News.
Suzanne Marta - Media
I just wanted to -- I guess following on that same -- on a similar vein, if a bankruptcy judge and USAirways was to solicit bids for certain assets would American be interested in bidding in any of those?
Gerard Arpey - Chairman, President & CEO
Suzanne, we've made it a practice historically not to comment on consolidation or possible asset acquisition.
I'm afraid I'm going to have to stick with that practice.
Suzanne Marta - Media
All right.
Gerard Arpey - Chairman, President & CEO
You can ask another question, though, if you want.
Suzanne Marta - Media
I guess we're also curious about some of your airport projects.
You're going to have improved facility at JFK and also at DFW by this summer.
Those are going to add some costs.
I guess we're wondering given today's revenue environment -- obviously you made choices about those long ago.
Are you still feeling like those improvements are going to be worth it?
Gerard Arpey - Chairman, President & CEO
I think you make a good point.
Many of those projects were launched at a different time and a different era.
But those decisions were made then, and the cost implications, at least for this year, are reflected in the guidance that James gave earlier.
And we're very excited about the fact that monies that we have been spending to get these facilities up to speed over many years, we're finally going to get the fruits of our labor.
We've already opened some gates in Miami.
We will open part of the Kennedy terminal hopefully in June.
We've got some contractor issues there, but I think we're working our way through that.
And we think we will open a big chunk of that terminal in June.
And we're very excited about moving over to Terminal B at DFW and the opening and operation of the new train over there, which, as you know, because you probably ride the train that's been there for 30 years, is going to be a huge improvement.
So you're right that these facilities are costly.
On the other hand, they're going to be a tremendous lift to customer service at all three of those airports.
So we're excited about that.
Suzanne Marta - Media
Great.
Thanks again.
Operator
Mary Schlangenstein, Bloomberg News.
Mary Schlangenstein - Media
Gerard, early on your remarks you talked about the need for continued cost cutting.
I'm wondering if you can comment in terms of -- I know that you see all the time the continued speculation that you'll go back to employees and ask for more concession.
Is that a consideration or an option that is still in the mix?
Or is that anything that you have definitely ruled out that you don't want to do that?
Gerard Arpey - Chairman, President & CEO
Mary, I'm afraid I will simply be repetitive that we are heavily focused on collaboration and working together with both our unions and front-line employees to find ways to raise productivity, raise efficiency.
And I have been engaged with organized labor now almost monthly since I became CEO of the Company.
And indeed many of the ideas that we have implemented and have saved us money have actually come from front-line employees and from the folks that are running our unions.
So we're going to stay on that path and continue to work hard to find ways to continue to improve productivity and efficiency under the notion that we have to continuously improve until we get to the point where we've reached a level of acceptable profitability.
I think the fact that we continue to collaborate and find additional opportunities to save money is indicative of the fact the we're on the right track.
Mary Schlangenstein - Media
But in spite of the fact that you're working with them and finding ways to save money, you wouldn't at this point be able to rule out that that is still a possibility, or again it's still an option that's on the table?
Gerard Arpey - Chairman, President & CEO
We're going to continue to work collaboratively with the folks that represent our employees to find ways to save money, Mary.
Mary Schlangenstein - Media
Thanks very much.
Operator
Dave Konig (ph), The Associated Press.
Dave Konig - Media
Actually a couple of my questions were already asked and answered.
I did want to ask James -- is James on the call?
James Beer - SVP, Finance & CFO
I am, yes.
Dave Konig - Media
What was again the 3200 headcount -- excuse me if this is in the release -- is that an of end of quarter to end of quarter change, or is that a year-over-year?
James Beer - SVP, Finance & CFO
No, I was just referencing back to something we talked about at this time last quarter.
These were reductions that were made right across the Company from maintenance, ramp, management, pilots, and so forth.
So there's no new news in any of that.
I was just highlighting the fact that part of implementing what we had talked about last quarter was going to going on at the Kansas City based (multiple speakers) and that that would account for 500 of those mechanic heads.
But no, that was all part of what we had discussed this time last quarter.
Dave Konig - Media
If fuel prices -- and this would be for either of you gentlemen -- if fuel prices stay where they are or even would that lead to more job reductions?
Gerard Arpey - Chairman, President & CEO
Dave, really the question is will the industry be able to pass that cost on to the consumer?
And that will really drive the ultimate consequence of all this.
I can't really predict that at this point.
Dave Konig - Media
Thanks.
Operator
John Dorschner, Miami Herald.
John Dorschner - Media
Let me concentrate on Miami.
Is that 6% increase in Miami, is that both domestic and international traffic coming through the city?
James Beer - SVP, Finance & CFO
Yes, that was the combination of domestic plus international.
John Dorschner - Media
Why do you think Miami was so strong for this quarter?
James Beer - SVP, Finance & CFO
Well, I think it's a reflection of the simplified pricing structure that we put into place back in November of last year.
And when we made that move we were of the view that we would be able to attract back to the Miami Airport many customers who had moved a little way up the coast there and were flying out of either Fort Lauderdale or West Palm Beach.
And tracking the data that we do, that does appear to be happening.
And of course, the lower fares are proving to be very popular with customers generally, and so that is stimulating the overall size of the market.
So when you put together that favorable shift back from Fort Lauderdale in particular and stimulation of volume overall, then we've been able to arrive at the good result that we discussed.
John Dorschner - Media
Very good.
Thank you.
Operator
August Cole, MarketWatch.
August Cole - Media
A quick question here.
If you look at the fuel costs in the second quarter, you're at that $1.4 billion level.
It's getting pretty close to what you have in dollar terms for labor costs.
What's the significance of this from your perspective for the Company, but also for the industry too?
James Beer - SVP, Finance & CFO
I think it is just obviously the largest single cost headwind that we have been experiencing, not only this year, but last year as well.
Remember that we had a $1.1 billion increase in our fuel bill last year over that that we had in 2003.
Now we're talking again about $1 billion plus increase for '05 versus '04.
This is just further accentuating the need for us to continue the restructuring of the Company that we've been engaged in now for some time, and that that restructuring focuses both on the revenue line, as well as the cost line.
And in the results we issued this morning we were pleased to see that we had our unit revenue rising at the same time that our unit costs, excluding fuel, were declining.
Obviously that's the sort of relationship that we've got to work to continue, and just echoing some of Gerard's remarks, really with very much a focus on collaboration on unions and employees.
Gerard Arpey - Chairman, President & CEO
I think one of the things that is playing out here is the fact that obviously every airline has their own view about elasticity and the impact of higher prices and whether that will be net revenue positive or negative, depending on what you think will happen to demand if you raise prices.
And you've got 12 or 13 airlines out there all with different views about that.
But against that backdrop you also have the government continuing to impose higher and higher fees and taxes on the industry.
If you go back, I don't know, 10 years ago on a $200 ticket, fees and taxes would consume about 15% of that ticket price.
That number today is up to 26 or 27%.
And undoubtedly that makes it harder for the industry to raise prices to recover fuel costs when there are so many fees and taxes being applied that are consuming our ability to raise prices.
August Cole - Media
Thank you.
Operator
Andy Compart, Travel Weekly.
Andy Compart - Media
I want to clarify a couple of things you said earlier in the call.
Sorry;
I was interrupted a couple of times and I didn't catch it all.
But you mentioned something about something you're doing with travel search sites in the late second quarter.
I didn't catch all of that.
I have a follow-up after that.
Gerard Arpey - Chairman, President & CEO
We were making the point that we're working with several search sites to direct booking to our own website, AA.com.
And we have a number of initiatives under way with folks that are out there in that business.
And several of those will come online in the second quarter.
Andy Compart - Media
This is beyond Orbitz, you're talking about?
Gerard Arpey - Chairman, President & CEO
Yes, we're talking about companies that are out there building websites that essentially go out and search airline websites for fares on certain itineraries.
Then when they get a customer that wants to buy that, they then direct the customer to the airline website.
And so we're in the process of making some deals with a couple of those companies.
James Beer - SVP, Finance & CFO
These are the meta-search type engine companies.
Mobissimo would be an example of one of them that we've already entered into an arrangement with.
Andy Compart - Media
What was that called again?
James Beer - SVP, Finance & CFO
Mobissimo.
Andy Compart - Media
Mobissimo?
James Beer - SVP, Finance & CFO
M-O-B-I-S-S-I-M-O, if I recall correctly.
Andy Compart - Media
You also talked about some ancillary -- I don't know if you call it ancillary -- revenue, but things like the buy onboard program and some other sources.
First of all, are those showing up under passenger revenue or other revenue?
And can you say if some of them are and quantify more how they're performing?
James Beer - SVP, Finance & CFO
They show up under other revenues.
For buy onboard I think it is safe to say that we have always looked at that thus far as a cost reduction exercise as we take off the free food from the aircraft.
And it's early days as to see how the revenue develops from that, but we mentioned in the remarks that we were certainly pleased that sales volumes are running ahead of plan.
We're also testing one of these handheld in-flight entertainment devices on some of our narrow body flights.
So that test continues.
And so those are the sort of things we're referring to in that line.
Andy Compart - Media
Is that testing going well, because I know Aer Lingus just pulled hold -- decided to stop doing that?
James Beer - SVP, Finance & CFO
I think it may be Ryanair you're referring to?
Andy Compart - Media
Ryanair, sorry.
James Beer - SVP, Finance & CFO
I think their focus was their flying was really too short haul for it to work.
And the geography of the US is certainly significantly larger than some of the areas where they're flying.
So we're still under way with that test, but nothing else to say at this juncture on that one.
Andy Compart - Media
Things like selling the headsets would show up in that line too?
James Beer - SVP, Finance & CFO
Yes, that's right.
That would be in there, and also the (technical difficulty)
Thomson Editor
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