美國航空 (AAL) 2005 Q2 法說會逐字稿

Welcome to AMR's second-quarter 2005 earnings conference call.

At this point, we do have all phone lines in a listen-only mode.

However, after the executive team's presentation today, there will be opportunities for questions.

And as a note, we will be taking questions first from the analysts or financial community.

And for all of you joining us from the world press today, we ask that you say on line, and instructions will be given for your separate Q&A session after that. (OPERATOR INSTRUCTIONS).

As a reminder, today's call is being recorded for replay purposes.

So, with that being said, let's get right to this second-quarter agenda.

And here with our opening remarks is Ms. Kathy Bonanno, Director of Investor Relations.

Please go ahead, ma'am.

Good afternoon, everyone.

Thank you for joining us today.

On the call today are Gerard Arpey, AMR's President and Chief Executive Officer, and James Beer, our 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 second quarter, along with some perspective for the rest of the year.

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

In the interest of time, please limit your questions to one with one follow-up.

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

I encourage you to review that document for more specific information.

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

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

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

Finally, let me note that many of our comments today on matters related to our outlook for revenue and earnings, cost estimates and forecasts of capacity, traffic, load factor and fuel costs will constitute forward-looking statements.

These matters are subject to a number of factors that could cause actual results to differ materially from our expectations.

These factors include domestic and international economic conditions, commodity prices, general competitive factors, including but not limited to government regulations, uncertainty in domestic or international operations, acts of war or terrorism, our ability to access the capital markets and changes in the Company's business strategy, any of which could affect our actual results.

With that, I will turn the call over to Gerard.

Thank you, Kathy.

Good afternoon, everyone.

I am pleased to report that despite the unwelcome addition of $434 million to our expenses year over year, thanks to higher fuel prices, we earned a net profit in the second quarter of $58 million.

This represents our first quarterly profit without the benefit of special items since the fourth quarter of 2000, nearly five years ago.

Our ability to turn a profit in these very difficult times is a tribute to the hard work of all of our employees and is evidence, I think, of the headway we're making under our turnaround plan.

We can point to significant progress on all four fronts of our turnaround plan, but I think it is safe to say that the most important tenet, the one that has allowed us to achieve profitability this quarter, is the third tenet of our plan -- Pull Together, Win Together.

By working together, we have been able to move our company forward despite very difficult industry conditions.

Instead of battling one another, we have remained focused on battling our competitors.

And instead of denying the realities of change in our business, we have met change head-on.

And we will continue to do so until we have achieved our goal of sustained profitability at acceptable levels.

Before I turn the call over to James, let me take you through some of the highlights of the second quarter.

I will start with revenue, which, compared to where we have been, was strong in both absolute terms and relative to our competitors.

As has been the case for some time, traffic was robust in the second quarter, with our load factors hitting monthly record highs for each month of the quarter.

But what was different about the second quarter is that we finally put an end to a string of five quarters of year-over-year declining yield performance.

In the second quarter of this year, our mainlines yield increased by 1.9% year over year, with improvements in both domestic and international markets.

The combination of improved yield and record load factors drove unit revenue 7% higher compared to a year ago.

The fare increases that we have taken this year in response to record high oil prices have certainly helped improve yield and unit revenue, but equally encouraging to us at AMR is the fact that our revenue premium versus the industry is also improving.

This confirms to us that the numerous steps we have taken under the second tenet of our turnaround plan -- Fly Smart, Give Customers What They Value -- are paying off.

In fact, based on the industry data in ATA's June revenue report, which was just released yesterday, our second-quarter revenue premium results are the best we have seen since the year 2000.

Along with increases in passenger revenue, we saw strong growth in our other revenue line during the second quarter.

This is a continuation of the improvement we saw in the first quarter, and is attributable to third-party work in our maintenance organization, fuel surcharges related to our cargo business and small fees that we have implemented to reflect the extra cost of providing certain services.

On the cost side of the equation, we were able to reduce our mainline unit costs, excluding fuel and special items, by 4.3% year over year.

At the start of the year, I think we shared with you that we had identified $700 million in annual cost savings initiatives, and we incorporated those anticipated savings into our 2005 budget.

Since then, we have pinpointed another $65 million in expected annual savings, and we are, of course, still working to find more.

Our improved operating results, as well as strong advance bookings, drove our cash balance nearly $350 million higher in the second quarter to $3.9 billion, including $492 million in restricted cash.

Needless to say, I am proud of the American Airlines team, our union leaders and what they have been able to achieve together thus far.

And I look forward to working together with them to meet our future challenges.

Unfortunately, despite the return to profitability this quarter, we have got to acknowledge that our challenges remain great.

While I am pleased with our performance this quarter, I recognize that second-quarter profitability must be much higher if we are to return our company to a position of financial strength.

Oil prices look as though they will be higher in the second half of the year than they were in the first half.

Fares continue to be low by historical standards.

And of course, our competitors are busy working on their cost structure, as are we.

We have met all of our past challenges as a team, and we have done so with determined collaborative resolve.

We will need to do the same going forward.

And with that, I thank you, and I will turn the call over to our CFO, James Beer.

Thank you, Gerard.

Good afternoon, everyone.

Our results this quarter, while still not at the level of profitability we need to achieve on an ongoing basis, do reflect some positive trends in our business.

As we will discuss more in a moment, our passenger unit revenue advanced significantly.

We are also finding ways to increase our other revenue line, and our cargo business, although not posting the year-over-year gains we saw last year, continues to generate much-needed revenue for the Company.

In addition, our focus on reducing costs wherever possible continues to bear fruit, as evidenced by our lower ex-fuel unit costs.

Before I go any further, let me point out that I will be quoting several cost figures which will not include the impact of the special credit recognized last year.

We believe that, excluding this special credit provides a more realistic picture of our business on an ongoing basis.

As Kathy mentioned in her opening remarks, please refer to the our press release and the slide deck accompanying this webcast for reconciliations of any non-GAAP numbers.

Our second-quarter profit reflected a consolidated average fuel price of $1.64 per gallon, up more than 47% year over year.

If there is any silver lining to high oil prices, it's that we have developed a variety of ways to reduce our fuel consumption.

With AMR capacity up 3.4% and record load factors adding weight to our planes, one would expect greater fuel consumption, yet our second-quarter consumption actually declined slightly year over year.

Excluding fuel, our mainline unit costs in the second quarter declined 4.3% year over year, and our consolidated unit costs declined by 3.7%.

Including fuel, our second-quarter mainline unit costs increased 4.8% year over year to $0.1003, and consolidated unit costs averaged $0.1053, up 5.4% year over year.

The change in our depreciation methodology, as we discussed last quarter, drove about 1 point of the year-over-year decline in our ex-fuel unit costs.

Our hedged position in the second quarter was diminutive.

As for our nonfuel expenses, we saw improvement in a number of various.

Despite a 1.5% wage rate increase in May, greater employee productivity, which rose 7.2% year over year, helped to drive down our salary and benefit costs.

We also continued to see improvements in our food and beverage, commissions and aircraft rent expenses, amongst other lines.

Turning now to revenue, fare increases have helped improve unit revenue somewhat relative to last year, but there are a number of other factors driving our relatively strong performance, including our own capacity restraint, changes we have made to our network, effectively yield managing discount fares during this period of very high load factors and adding seats back to our aircraft.

In addition, it appears as though we are benefiting disproportionately from the positive impacts associated with this simplified pricing structure.

Specifically, we are benefiting from robust business demand stimulated by lower walk-up fares.

In general, we tend to capture more than our fair share of business passengers, which means that we should have greater opportunity to improve our mix as more and more business passengers fly.

We have also made good progress in restructuring our corporate agreements.

And, like other traditional carriers, we are benefiting from share and airport shift as passengers return to preferred airports and nonstop services.

For the system, despite adding seats back to our planes, we reported a 7% year-over-year increase in mainline passenger unit revenue during the second quarter.

Our yield, for the first time in many quarters, increased by 1.9% year over year to $0.1191, and our load factor increased by 3.8 points to 79.5%, our highest second-quarter load factor on record.

On a consolidated basis, unit revenue increased 6.1% year over year to $0.1001.

Looking at our second-quarter results by entity, domestic unit revenue increased by 8% compared to last year on 1.6% less capacity.

Domestic load factors increased 4.6 points, and yield increased by 1.9%.

The Transcon and Miami markets continued to perform well.

Chicago was also strong, with a 5% capacity reduction there.

Initially, second-quarter unit revenue increased by 5.1% versus 2004, despite a capacity increase of 10.7%.

Load factors improved by 2.5 points, and yield increased by 1.7%.

European second-quarter unit revenues were up 8.3% year over year on 7.6% more capacity.

Yield in Europe increased by 6.7%, and load factors were up by 1.3 points.

Unit revenue in the second quarter declined by 4.9% year over year on a capacity increase of nearly 31%.

Our new Chicago-Nagoya service is driving much of the capacity increase, along with adding seats back to our planes.

Even with the added capacity, our average load factor in the Pacific increased by 0.3 points, while yield declined 5.2%.

Unit revenue in Latin America increased by 4.7% compared to last year with capacity growth of 9.4%.

Load factors increased 3.8 points year over year, offsetting a yield decline of 1.2%.

Moving on to the revenue performance for our regional affiliates, second-quarter capacity increased by more than 20% year over year.

After adjusting for a 7% increase in stage length, regional affiliates' unit revenues declined by 3% compared to last year.

Average load factor increased by 2.5 points, but stage length adjusted yields declined by 6.4%.

After this month, Eagle has no more planned RJ deliveries.

Looking now at our cargo operation, second-quarter revenue grew by $2 million, or 1.3% year over year, slightly more than wide-body capacity growth of 1% during the quarter.

Freight revenue increased by 2.5% year over year, with higher yields and flat traffic.

Mail revenue declined 2.2% year over year on lower volumes.

And finally, our other revenue line increased nearly 19% year over year to $327 million. 3 percentage points of this increase, or about $14 million, is due to higher cargo fuel surcharge revenue.

Turning to the balance sheet, we ended the second quarter with $3.9 billion in cash and short-term investments, including $492 million in restricted cash.

To bring you up to date, in early July, we completed the remarketing of some DFW special facility revenue bonds, generating $198 million.

These bonds were originally issued in 2000, with a 2003 mandatory put provision.

We have always been able to remarket the bonds, but given earlier market conditions, we chose not to do so until now.

Our capital expenditures totaled $242 million in the second quarter.

Our second-quarter payments on long-term debt and capital leases totaled $178 million, and we contributed approximately $75 million to our defined benefit pension plans.

For the full year, we still estimate total capital expenditures at about $860 million.

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 will be put to us in November.

And our pension contributions are expected to total $310 million in 2005.

Our total debt remains at approximately $20 billion.

Moving now to guidance, let's start with the third 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 third quarter, we expect consolidated fuel prices to average $1.85 per gallon, up 47% year over year.

With our third-quarter consumption forecast at 827 million gallons, fuel expense is expected to total $1.5 billion in the third quarter.

We have very limited hedges in place for the third quarter, and in the fourth quarter we have about 8% of our consumption hedged at about $48 per barrel.

Third-quarter mainline unit costs are expected to average $0.1037, with consolidated unit costs at $0.1084.

Excluding fuel, our third-quarter mainline unit costs are expected to decline 2.8% year over year to $0.0733.

Consolidated unit costs excluding fuel should decline 2.6% to $0.0772.

Mainline capacity in the third quarter is planned to increase 2.7% year over year.

Mainline domestic capacity should increase by about 1% year over year, and international capacity is planned to increased by about 8%.

So far, our book-to-load factors in every month of the third quarter are well ahead of where they were at this same point last year.

Moving to the full year 2005, we are now forecasting full-year consolidated fuel prices at $1.72 per gallon.

Given this fuel price, our consolidated unit costs are expected to average $0.1069.

For the mainline, we're anticipating unit costs of $0.102.

Our forecast 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 $0.0778, which is a decline of 2.9% year over year.

Our full-year mainline capacity is expected to increase by 2.4% year over year, as we add seats back to our aircraft.

Consolidated ASMs are planned to increase about 3.4% year over year.

In summary, let me say that we are very much aware that we have plenty of hard work ahead of us.

Our profitability this quarter, while encouraging, is clearly not sufficient.

Oil prices continue to increase, and while we have made progress in improving our revenues, we have only just begun to offset the added expense associated with two years of rapidly increasing fuel prices.

Meanwhile, our competitors either already have low costs or are working to lower their cost structures.

We will continue to address these challenges head-on and in a way that we believe will provide our company with lasting competitive advantage.

In cooperation with our employees, we are completely focused on repositioning AMR as a company that will deliver sustained profitability at acceptable levels.

That concludes our prepared remarks.

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

(OPERATOR INSTRUCTIONS).

Helane Becker, Benchmark.

So these are my questions.

First of all -- I have two questions -- with respect to TFCs, Northwest, I guess, pulled it last night or the night before, said they have gone away.

But I'm kind of curious because, number one, I am curious as to what your attitude towards making customers pay for that and separating out taxes so the customer actually sees where the taxes are as a percentage of the ticker total.

And the second question is with respect to the fact that during the quarter fares went up and load factors remained very strong and in fact went up during the quarter.

So maybe you could express that going forward into July and August, as well.

Do you see continued fare increases at the same time as -- and load factors remaining strong?

I will start, and then I will let James chime in here.

Maybe we'll start with the second part of your question, related to overall fare levels.

I think that, as you point out, demand is very strong.

We set record load factors throughout the second quarter.

And, as James indicated in his prepared remarks, our advance book for the third quarter is very strong.

And, of course, supply and demand does affect pricing power in our industry just like every other industry.

So we have been pretty systematically trying to recover in our prices this fuel burden that we have been talking about and of course have led many fare increases in the past year.

We have had more traction in the past couple of months than we have had in some time.

And I think that equation arguably -- all that you describe may bode well for continued pricing power as we move through the year, but I think that remains to be seen.

We're obviously heading into the fall, and traditionally the fall is a period where you see sales for that period of time.

And we will just have to wait to see how that unfolds.

With respect to TFCs, there has been a lot moving around there.

And obviously, we have to be very careful what we say with respect to pricing.

But I think we matched the initiative launched by one of our competitors, and we did that by stopping the absorption of the TFCs, which we have been doing historically.

But I believe that unwound for competitive reasons.

So I hope that is responsive to your question.

James, do you want to add anything to that?

Yes, obviously, we did match the initiative just prior to the weekend.

And now, clearly, by matching, you are going to create a pricing incentive for passengers to move through a hub that does not have a TFC charge applied to it.

So have always had to bear that in mind as we have thought through our various actions in this regard.

The other thing that I would point out is that, obviously, Delta decided to do away with their $499 cap just recently.

And that certainly is an increase that thus far several others have gone along with.

And that would be a relatively significant revenue driver for us suddenly, versus other increases that we have seen in the last few months.

We will just have to see whether or not it all holds together as we move into the slower demand seasons that are before us.

Mike Linenberg, Merrill Lynch.

You have demonstrated good improvement over the past couple of years.

Your margins are now among the -- leading among the major carriers.

You're sitting on, I think, one of your highest cash levels ever, and you're still dealing with, I guess, about 0.5 billion of restricted cash.

And I guess some of that reflects a holdback.

Your partners, your credit card processors -- what needs to happen?

I know it's probably something that you are probably addressing.

Anytime soon do we see some of that released into cash?

Well, the restricted cash balance that we have, Mike, is largely associated with our various workers' compensation programs that we have with different states around the country.

So our cash arrangements with our credit card company processers are not a part of that restricted cash balance.

Okay.

They have that money.

Yes.

There is an additional amount of money that they already have on account at those companies.

That goes back to the late '02/early '03 period.

That's a sizable amount of cash, though.

It is a sizable amount of cash.

Yes, you're right.

Any sort of headway on potentially seeing that freed up, or they just work in mysterious ways, when and if it happens?

Well, this is certainly a subject that we are always working to improve, much as we work with all of our various vendors to improve our terms and so forth.

Thus far, there has been a very limited change -- I will just put it that way -- in terms of our relationship with the credit card processor.

Fair enough.

And then, just my second question, sort of switching gears here.

I know a couple of years back, you did provide some limited service from Love Field.

I think you had access maybe to one or two gates.

Are those gates still sort of at your disposal, or are you presently locked out of Love Field?

Any sort of insight on that?

Mike, you are right.

We did operate for a period of time from Love Field.

And we still have very modest access to a couple of gates over there at Love Field.

But I think you know that Southwest pretty much dominates all of the facilities at Love Field.

And while it would be very difficult for us to achieve some scale over there in terms of gates, were the right amendment to be repealed, I think federal law would indicate that the master plan would no longer stand any court challenge.

And as a federal airport, they would be required to provide gates to us.

So I don't mean to imply that it would be easy for the gates.

I think it would be difficult, because Southwest has done a pretty good job of scooping up all the real estate at Love Field.

But nevertheless, if the right amendment were there, then under the federal law they would have to provide carriers with the facilities we'd need to operate.

I do think, in the short term, it would be very difficult -- which, obviously, is part of Southwest's strategy here.

They understand that there are really no limits on their ability to fly from DFW to anywhere they would like and charge whatever they would like.

But they would like to do it from a monopoly downtown airport rather than from DFW airport.

Jamie Baker, JPMorgan Chase.

Gerard, on revenue, your growth rate in Q3 is not significantly different than what it was in Q2.

Can you give us any reason that your RASM improvement in Q3, therefore, would not exceed that of Q2?

Give me that again, Jamie.

What?

You're talking about the Q3 --

Well, in the current quarter, the third quarter, you're going to grow ASMs about the same amount that you did in the second quarter.

Should RASM -- any reason why RASM gains in Q3 would not be as good if not better than they were in Q2?

Well, Jamie, I think James gave you the revenue guidance we are prepared to give you at this point.

And obviously, as we indicated, demand is strong.

Our advanced book for all three months is ahead of where it was last year.

We will have to see if this Delta $100 ends up standing for the entire quarter and where will raw fare levels end up for the quarter.

I guess I would remind folks that it was around this time last year that one of our competitors launched a fare sale that was 14 or 15% lower than the year before, despite the fact that oil prices were running through the roof.

So we'll have to wait to see what happens this year.

Hopefully we are smarter this year.

Shifting to pensions, given where AMR is positioned right now, it seems that the status quo would probably be best.

But some form of pension legislation appears inevitable.

Can you comment as to what sort of impact Northwest-endorsed pension legislation might have, something requiring a hard freeze and maybe a 15-year amortization period?

What would impact on AMR be if Delta and Northwest are successful in that regard?

Well, Jamie, let me start and I will let James jump in here.

We are obviously concerned about some of the aspects of the administration's proposal for pension reform, because there are a number of ideas that are in what was their original thought process that would actually increase our funding burden in the next couple of years, at a time when we really would not like to see that happen.

So we have been working together with our unions to lobby in Washington for pension reform that would allow us to actually keep our defined benefit plans and get them fully funded again.

I think things have centered up on this Boehner Bill has gotten a little bit of momentum in Washington.

And while it is not everything that we would like, it certainly is a framework to work around.

And our objective here is to simply have the framework and time to get our plans back to fully-funded status.

And we are not nearly as underfunded as any of our competitors, I think it's fair to say.

And so we are focused on something different than Delta and Northwest; we are not trying to defeat or oppose what they are doing.

If they can get a bill that helps them, terrific.

But we would rather not see a bill that forces us to freeze our plans in order to get some funding relief.

So we are on a different agenda than both those companies, although we are not trying to defeat any of their efforts.

We're simply working on a different path, and I think, if we do get some cooperation from the Congress and, of course, if we continue on the path of driving our company back to profitability, I think we have a realistic chance of getting these plans back to fully-funded status, which I think should be the goal of pension reform in Washington.

With that said, I will ask James if he wants to add anything.

I would just add to that that, at least from what we have seen in the Boehner Bill and indeed from the administration's proposal and from some discussions that the Senate Finance Committee has had thus far on the topic, that the amount of time that companies may be afforded to catch up their underfunded balance looks as though it is coming through more in the seven-year time horizon than the 15 or even greater than that time horizon that some others have been interested in.

Finally, just a real quick follow-up on that point, James.

If the Boehner Bill as written becomes reality, can you afford it, or does it imply that you simply have to ask labor for a freeze?

Well, I think, as with trying to project the cash needs of defined benefit pension plans at any point in time, it is extremely difficult.

As you know, we really are only giving guidance under our current plans and the current legislation for our cash requirements for this year 2005, and that is $310 million.

We are cautious about going out further than that at this juncture, because of the sensitivity to these figures of changes in interest rates, asset returns, demographic behavior, when are employees retiring, that sort of thing.

So I would be very cautious about trying to give you a direct answer to your question.

The Boehner bill does have more in it that is in line with our goals than what the administration put forward initially.

I think we could certainly say that.

(OPERATOR INSTRUCTIONS).

David Strine, Bear Stearns.

Two quick questions.

First, on RASM, if you look at the contributors to the RASM growth in the second quarter with a little more coming from the load side, do you expect that same pattern to continue into 3Q, or do you see a reversal, more coming from yield as opposed to load?

Just from what you can see so far.

Well, I think directionally, the third quarter obviously includes September.

And September is not as strong; you don't have the summer season in September that you do -- you know, you have got pretty much a summer season throughout in the second quarter.

So demand was very strong for all three months in the second quarter.

Having said that, a lot of the price increases that have come into effect have -- some of them have been recently.

So if they hold, we may very well see a strengthening of yield in the third quarter.

But that, as we have commented on earlier, will be highly dependent on what happens to sales in the third quarter.

So I hear where you are going with that question, David.

And I think directionally you may be right; we will just have to wait to see how the quarter plays out.

And if I might, a follow-up question on the cash issue, but from a slightly different angle.

You obviously have a really decent cash balance at this point.

Are you at the point yet where the negative carry is giving you pause and you might address that?

Or are you still comfortable keeping a lot of dry powder?

I will let James take that one, David.

We are having a little debate here about how to answer that question.

Well, obviously, we have not seen all of the industry's results yet.

When we looked at the end-of-first-quarter balances across the industry on a size-adjusted basis, we were near the top of the airline group but certainly not at the top.

So that is one way in which we will keep a careful eye on this situation.

Now, that said, obviously we have very substantial debts, as you know.

So we have got significant debt repayment obligations ahead of us.

We have reduced capital spending greatly down through the last four years or so, but still there will be capital that needs to be spent in order to continue to be competitive as an entity.

And of course, we have the unknown of pensions, as we were just discussing.

So you roll all of those things together, you obviously end up with something of a complex equation as to how much cash is enough.

But I think it's fair to say that we're pleased with our liquidity situation as it stands today.

James, I am more confused than when I asked that question, but thank you for the help.

I would add, David, a little more liquidity in these times never hurts.

Raymond Neidl, Calyon Securities.

Yes, that was a real lawyer's answer there.

We've been training.

In the regional sector, I am just wondering what your thoughts are there.

It seems like you have reached a point now where you don't need anymore RJs, and you are not interested in going to any larger RJs -- the 70-seaters or the 100-seaters.

I am just wondering, is this a temporary lull, or like other airlines, do you see domestic markets being more and more substituted for RJs, particularly the larger ones?

Well, Ray, from a macro perspective, our problem financially is not a lack of airplanes or a lack of some model of airplane.

Between American and American Eagle, we have 1,000-plus airplanes in this company.

So as we think about it, we certainly have adjusted our network considerably in the past couple of years.

We have done a lot of swapping around of regional aircraft for the bigger airplanes at American.

And our challenge now is not to add aircraft in order to try to drive results; it is to take 1,000-plus airplanes we already have and make them profitable.

And so that is what we are focused on right now, and so when you think about more 70-seaters, are you thinking about the 787 or other airplanes that are out there?

Those may very well play into our long-term future, but for now we have got 1,000-plus airplanes that we need to get consistently into the black.

And, James, for growth next year, did you say it was going to be -- or for this year, it's going to be 2.4 or 3.4?

It will the 2.4 on the mainline, and then consolidated you can add about another point for the RJs.

Gary Chase, Lehman Brothers.

Sorry, James.

Just a quick nit.

The consolidated ASM growth for the third quarter -- could you just repeat that?

I missed it, if you said it.

For the third quarter -- let's see.

I have mainline, but I just didn't get the consolidated ASM.

It will be 3.7%.

Is there any way to give us a sense -- you sort of mentioned it in the press release; you talk about the public's appetite for air travel.

Either in response to a question in your prepared remarks you mentioned the stimulative impact of SimpliFares on business travel.

Do you have any way to sort of explain the demand strength we seem to be seeing on the revenue side?

It certainly feels better than it has for a while.

Well, Gary, I guess I would start with the fact that we reported a record load factor for the Company in each month of the second quarter.

So obviously, those are higher load factors than we have ever experienced in our history, and that is indicative of the kind of demand that is out there.

And hopefully, that bodes well for pricing going forward, but we will have to see.

Is your sense that business travelers are coming back?

Yes.

Gary, I think that, certainly, you remember when we came into this year in January, and we talked about the Delta pricing initiative and a lot of folks thought that that was going to be a considerable negative impact.

And I think we immediately cautioned folks that, while it would be negative, we did not think it would be nearly as negative as some of the numbers that were reported.

And one of the reasons for that is we did feel like then -- and I think we are seeing it today -- that with this new fare structure, we are stimulating a lot of business traffic and certainly some leisure traffic.

But I think business traffic in particular -- folks are traveling more at the last minute because the structure is simpler and it is cheaper.

So I do think it is having a positive impact.

And just as a quick follow-up to that, Gerard, I was one of the people that thought it would have a much bigger impact.

I think in retrospect, you were probably more than right in the sense that it just doesn't seem like it was a big deal at all.

I am just curious, with the reversal of SimpliFares -- or, I shouldn't say that -- the change in the fare cap from 499 to 599, your prepared remarks seem to suggest that was a real important revenue event for the third quarter.

Just curious why, you know, if it didn't -- if the whole thing didn't end up having that much impact in the first place, how much will --?

I think raising the cap by $100 does not go anywhere near the type of structure that we had in place prior to Delta's initiative in January.

But back before then, we and all of the network carriers had many fares, one-way fares, that were considerably higher than 599.

So the spread between 499 and 599 is just -- in our view, that is just a reflection of the reality of fuel prices.

And that is why in January we did not put in place a formal cap, because we recognized that we don't have control over large pieces of our cost structure.

So I don't think that it really brings us in any way back to the structure that existed prior to that.

So any positive impact that we have had on the demand side because of that structure -- I think that will continue into the third quarter, despite the $100 increase.

Ladies and gentlemen, that does conclude the Q&A session for the analyst portion of today's conference.