美國航空 (AAL) 2005 Q3 法說會逐字稿

Welcome to the AMR third quarter 2005 earnings conference call. [OPERATOR INSTRUCTIONS] As a note, we will be taking questions first from members of the analyst community and then moving directly into our media Q&A session.

I'm very pleased to have with us today AMR's Chairman, President and Chief Executive Officer, Mr. Gerard Arpey.

Their Senior Vice President of Finance and Chief Financial Officer, Mr. James Beer.

And here with our opening remarks is AMR's Director of Investor Relations Ms. Kathy Bonanno.

Good afternoon, ma'am and please go ahead.

Thank you, good afternoon, everyone.

Thanks for joining us today.

Starting off, Gerard will provide us an overview of our performance and outlook.

And then James will provide the details regarding our earnings for the third quarter, along with some perspective for the rest of the year.

After that, we 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've 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 our outlook for revenue and earnings, cost estimates and forecasts of capacity, traffic, load factors, fuel costs and other matters will constitute forward-looking statements.

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

These factors include changes in economic, business and financial conditions, high fuel prices and other factors referred to in our SEC filings, including our 2004 Form 10-K.

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

Thank you, Kathy.

Good afternoon, everyone.

As I'm sure you have seen in the press release we issued this morning, we posted a third quarter loss of $153 million, including two special items, which James will discuss in more detail.

If you exclude those items, our loss for the quarter was $95 million or $0.58 a share.

And a loss in what is typically one of our strongest quarters of the year is obviously disappointing to all of us.

However, we did improve our results relative to last year by $137 million, despite an added $525 million in expense, driven by higher fuel prices year-over-year.

And we did manage a $97 million operating profit in the quarter.

Still, a loss in the third quarter is not acceptable.

And the reality is that as bad as fuel prices were in the third quarter, they're expected to be significantly worse in the fourth quarter.

In fact, we're expecting AMR jet fuel prices to increase by 24% over third quarter prices.

Given our current fourth quarter fuel consumption plan, this will translate to $353 million more fuel expense in the fourth quarter than the third.

And 672 million more for fuel on a year-over-year basis.

And I would obviously caution that fuel prices are extremely volatile right now and changing with each day.

In addition, with three major carriers operating under the protection of the bankruptcy courts and U.S.

Airways having just emerged, our competitive position remains uncertain.

Faced with the prospect of ever higher fuel prices and significant competitive restructuring through the courts.

We obviously must accelerate our efforts to improve productivity, reduce costs and increase revenues wherever possible.

And we must continue to work collaboratively with our union leaders and front line employees to do so.

Earlier this year, working with the senior union leadership and our independent employees, we decided to undertake an exhaustive analysis of our Company.

More than 300 line employees, union leaders and managers are participating in an effort we call the Performance Leadership Initiative.

And this work is focused on understanding the potential for improvement in every area of our Company.

And together, we, along with the unions, agreed to measure ourselves against the best in the industry in every important aspect of importance.

Understanding our true level of competitiveness is an important part of our turnaround effort.

And stemming from this work, we have begun to launch a number of initiatives aimed at improving performance across the Company.

First off, we are reducing our capacity plans for next year, both at American and American Eagle.

We have already made some tactical schedule reductions this quarter to consolidate traffic in high frequency markets and reduce the impact of the extraordinary crack spread for jet fuel.

As for next year, we are building a conservative capacity plan and our hopes are that with Delta, Northwest, Independence Air and others announcing reductions, we will have a better capacity environment next year than we have had this year.

And that should bode well for pricing.

We are also testing a third phase of our hub simplification efforts at St. Louis, which has the potential to help us take out another chunk of our cost structure.

As part of this test, we will implement hub turn times that are about ten minutes shorter than the turn times for the rest of our system.

In additional, we are experimenting with different ramp-manning procedures that allow for more effective turns and better gate utilization.

With an added benefit of reducing departure and arrival delays.

If our testing proves successful, we will achieve further reductions in ground time and improvements in aircraft utilization and employee productivity.

If we decide to roll this methodology out across our system.

Our distribution costs will also be coming down as we renegotiate our GDS agreements next year.

We are currently in talks with both traditional GDS channels and providers of alternative distribution technologies.

Through these discussions, it's becoming clear that the distribution environment will be significantly changed by the end of 2006.

At least that's our view.

This may mean that we are not participating in all of the traditional distribution channels that exist today.

The only way we can continue to participate in the current distribution framework is at costs that approach our direct distribution costs.

And at costs that are reasonably competitive with those of the low cost carriers who do not participate fully in the current framework.

To that end, we will soon relaunch our corporate booking portal, corporateaccess.com.

And this is a tool designed for companies that want direct access to American's corporate fares.

Un addition to these efforts, our Performance Leadership Initiative is providing us with a road map of a wide range of opportunities for improvement.

While several of the efforts I mentioned have yet to be quantified, we've already identified opportunities to remove over $500 million from our cost structure next year.

On the revenue side of the ledger, we continue to make significant progress.

In July and August, our improvement in year-over-year domestic main line unit revenue outpaced the industry by 7.3 percentage points.

And while we don't have industry results yet for September, we think American's unit revenue increase of 15.1% will handily beat the industry, as well.

Our outperformance can be attributed to the changes we have made to our network, our own capacity restraint, our reconfiguration initiatives and changes to our fare structure.

And we are, as you might imagine, continuing to push for further revenue improvement.

For example, we just launched a new product which allows our customers to purchase confirmed stand by seats a few hours prior to departure.

We expect this will generate about $30 million in incremental revenue next year.

And while this is a relatively small initiative, by adding together the more than two dozen initiatives we have identified so far, we have the opportunity to generate another $300 million in incremental revenue next year from new product features and our maintenance, publishing, credit card and investment businesses.

Our goal, as we discussed with you on many occasions, is to provide those products and services our customers truly value and eliminate everything else.

In doing so, we hope to improve our revenue efficiency and do so at the same time that we also improve our cost efficiency.

And in the end, our success or failure will obviously rest on our ability to address the simple fact that our cost structure is too high for the revenues we are producing.

We either need to lower our costs more or drive higher revenues or achieve some combination of both.

But we still firmly believe that the path to our success lies in working together to address the fundamental imbalance between our costs and our revenues.

As a team, we've made significant progress so far and we recognize that we still have much work to do.

Thank you all for being with us today.

And I will now turn the call over to James Beer.

Thank you, Gerard and good afternoon, everyone.

I'd like to start by discussing the two special items we recognized during the quarter.

The largest was an $80 million charge for termination of a contract related to a construction project.

This was offset somewhat by a one-time credit of $22 million, resulting from a favorable legal decision, which allowed us to reverse an outstanding insurance reserve.

For the remainder of the call, as I discuss our results for the third quarter, I will exclude the impact of special items.

We believe that our results, excluding special items, more accurately reflects our performance on an ongoing basis.

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

We are also expecting to record a $37 million special credit in the fourth quarter of this year related to the sale of 33 F100 aircraft in 2003.

Information area this special gain may be found in our 2004 10-K.

As Gerard mentioned, we lost $95 million in the third quarter.

While our improved revenue results helped offset the increasing fuel prices we've experienced since last year, we have not yet been able to offset two years worth of escalating fuel prices.

For the third quarter alone, the change in price since 2003 cost us $868 million.

However, we continue to make progress in reducing main line nonfuel unit costs with a decline of 2.4% year-over-year to $0.0736.

On a consolidated basis, our X-fuel unit costs declined by 1.9% to $0.0778 cents.

Our unit costs improved across a number of expense categories.

With the greatest improvement coming from salaries and benefits, which was driven by a nearly 9% increase in employee productivity.

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

The change to our depreciation methodology, which we've discussed previously, accounted for 0.8 percentage points of American's improvement.

Including fuel, our third quarter main line units costs increased 8% year-over-year to $0.105 and consolidated unit costs averaged $0.1101, up 8.4% year-over-year.

These cost figures reflect fuel prices of $1.89 per gallon, a 50% increase year-over-year.

We have continued our efforts to conserve fuel as much as possible.

And in the third quarter, we managed to keep our fuel consumption flat despite a 3.3% increase in consolidated ASN's.

Turning now to revenue.

Fare increases an the other initiatives that Gerard outlined helped drive our third quarter revenue higher by more than $720 million relative to last year.

Main line passenger unit revenue increased by 12.6% year-over-year.

We've consolidated unit revenue up 11.8%.

This was a positive surprise to the guidance we issued last month with September coming in better than we expected.

Yield improvement in the third quarter was much stronger than in the second quarter.

With a year-over-year increase in main line yield of 8% to $0.1196.

As has been the case all year, load factors hit record levels.

With our third quarter main line load factor averaging 81.2%, an increase of 3.3 points year-over-year.

In our domestic markets, unit revenue increased by 13.8% compared to last year on a flat capacity.

Domestic load factors increased 3.8 points and yield increased by 8.5%.

Unit revenue improvements were particularly strong in transcon, Miami and Chicago markets.

Internationally, third quarter unit revenue increased by 10.1% versus 2004, despite a capacity increase of 7.1%.

Load factors improved by 2.4 points and yield increased by 6.9%.

European third quarter unit revenues were up 10.8% year-over-year on 5.5% more capacity.

Yield in Europe increased by 9.7% and load factors were up by 0.8 points.

In the Pacific, unit revenue in the third quarter declined by 9% year-over-year on a capacity increase of 31.4%.

Chicago-Nagoya, which is driving much of the capacity increase, will be cancelled at the end of this month.

In this time of a very high fuel prices, building the Nagoya market has become significantly more expensive and is not something we can currently afford.

Pacific load factors declined by 2.3 points and yield declined by 6.3%.

Unit revenue in Latin America increased by 14.3% compared to last year with capacity growth of 3.8%.

Load factors increased 4.6 points year-over-year and yields improved by 7.4%.

Moving on to the revenue performance of our regional affiliates.

Third quarter capacity increased by 17% year-over-year.

After adjusting for a 9% increase in length of haul, regional affiliate revenue increased by 5.1% compared to last year.

And yields increased by just over 1%.

Average load factor increased by 2.7 points.

Looking now at our cardo operation.

Third quarter revenue grew by $3 million or 2% year-over-year.

Freight revenue increased by 1% year-over-year on higher traffic but reduced yields.

Mail revenue increased by 9% year-over-year.

With much higher yields but traffic levels still lower than last year.

Including the effect of fuel surcharges, which are included in the other revenue line, cargo revenue increased by 9% year-over-year.

And finally, our other revenue line increased by 16.7% year-over-year to $335 million.

Excluding fuel surcharges, other revenue increased by 13% year-over-year.

Turning to the balance sheet, we ended the third quarter with $3.9 billion in cash and short-term investments, including about $500 million in restricted cash.

In early July, we completed the remarketing of some DFW special facility revenue bonds, which generated $198 million in cash.

In addition, during the quarter, we completed a spare engines financing, which brought in another $133 million.

We also completed a transaction, which essentially extends the maturity of $245 million worth of secured debt from 2006 to 2012.

Thus beginning the process of addressing next year's debt maturities.

As a result of this transaction, our 2006 maturities decline from $1.5 billion to about 1.25 billion.

In the third quarter, our payments on long-term debt and capital leases, excluding the transaction related to extending the $245 million I just described, totaled $207 million.

Total 2005 principal payments are still estimated at $900 million.

Including $104 million in special facility revenue bonds that will be put to us in November and would then be available for remarketing.

Our capital expenditures totaled $102 million in the third quarter.

For the full year 2005, we now expect our spending to be reduced by more than $150 million compared to our original plan.

By deferring any spending that is not operationally critical and saving money in the implementation of approved projects, we have reduced our full-year CapEx plan to about $700 million.

Next year, capital expenditures will be reduced further to about $500 million.

As a result of canceling and deferring most of our aircraft orders, as we've previously discussed.

This amount includes, however, next year's investment in lie-flat business class seats on our longhaul aircraft.

During the third quarter, we contributed approximately $75 million to our pension plans.

In October, we completed our 2005 funding by contributing an additional $22 million, bringing our full-year total to the previously projected $310 million.

Our total debt remains at approximately $20 billion.

Moving now to fourth quarter guidance, once again, these cost figures and forecasts will exclude specialized items on a year-over-year basis.

In the fourth quarter, we expect consolidated fuel prices to average $2.34 per gallon, up 58% year-over-year.

This estimate is based on the forward curve as of October 11.

With consumption of 781 million gallons, fuel expense is expected to exceed $1.8 billion in the fourth quarter.

We have about 8% of our fourth quarter consumption hedged at approximately $48 per barrel.

Main line unit costs in the fourth quarter are expected to average $0.1151, with consolidated unit costs at $0.1203.

Excluding fuel, our fourth quarter main line costs are expected to be $0.0767.

Consolidated X-fuel unit costs are expected to average $0.0807.

Our plan currently calls for main line capacity in the fourth quarter to be flat with last year.

Consolidated capacity is expected to increase by 0.8%.

These figures include the impact of our recently announced capacity reductions in high frequency markets, which will be extended through January.

By comparison, our main line capacity growth through the third quarter averaged 1.8% year-over-year.

Our more modest fourth quarter capacity growth, relative to the rest of 2005, will have a negative impact on our year-over-year unit cost performance but a positive impact on unit revenue.

On balance, we think we will recapture most of the revenue while saving the cost of fuel and some other operating expenses.

Thus making our capacity reduction moves economically attractive.

So far, our system booked load factor in every month of the fourth quarter is well ahead of where it was at this same point last year.

Despite increased traffic, with fuel prices where they stand today, we expect a significant loss in the fourth quarter.

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

Right now, our 2006 plan calls for relatively flat capacity compared to 2005.

By entity, we're currently planning for a nearly 3% reduction in 2006 domestic capacity.

While international capacity is planned to increase by about 7%.

Departures are expected to be down but more seats and longer stage length should increase our air sends slightly.

If fuel prices remain high, however, the capacity reductions that we've taken through January could be rolled forward, reducing our system main line capacity by 1% to 2%.

At this point, we're planning for a full year 2006 fuel price of $2.17 per gallon.

This represents a $1.1 billion increase in fuel expense compared to our forecast for 2005.

If this holds up, price increases since 2003 will have cost us $4.2 billion in added fuel expense by the end of 2006. 5% of next year's consumption is currently hedged at about $45 per barrel.

In our efforts to offset fuel and other inflationary costs, we remain highly focused on continuous improvement.

As Gerard mentioned, we have already identified more than $500 million in cost-saving initiatives.

Along with $300 million in revenue initiatives for next year.

Gerard already touched on some of our cost saving initiatives, so, let me give you an idea of more of the revenue initiatives we think will bear fruit next year.

One source of incremental revenue will likely be our maintenance organization.

Which continues to have success in sourcing third party maintenance work.

Our investments business, American Beacon, is another.

They are having a great year, thus far and we expect they will continue this progress next year.

With changes we are making to our sky cap contracts, we are turning what has additionally been an operating expense into a revenue opportunity, much as we did in selling coach food on board.

We continue to evaluate the seating configuration of our aircraft and for some of our fleet types, we believe we have some modest additional opportunities to further improve our density.

We're also introducing a number of new products such as Lifetime Admirals Club memberships, which are proving to be quite popular.

With nearly 600 memberships sold in the first six weeks.

Confirmed standby is also a success.

With many of our customers choosing to spend $25 for a confirmed seat on an earlier flight rather than take their chances at the gate.

In a similar vein, we will soon be introducing a last-minute upgrade product, which will be available on flights with lower first class load factors.

And this year, in time for the holiday season, we plan to offer American Airlines gift cards, which will be broadly available at retail outlets.

Of course, all of this and more is needed if we are to transform our Company into a consistently profitable business.

Aside from fuel, we have a number of inflationary costs, that we will be faced with, including higher airport costs, particularly at JFK and DFW.

Higher medical benefit costs and higher labor rates.

We will, however, continue to address our challenges collaboratively.

Working with our unions and our employees to create lasting competitive advantage.

Together, we remain focused on repositioning AMR as a Company that will deliver sustained profitability at acceptable levels.

That concludes our prepared remarks.

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

Indeed and thank you very much Mr. Gerard Arpey and Mr. James Beer.

At this point, we invite and welcome your questions for the executive panel. [ OPERATOR INSTRUCTIONS ] As a note, we will be taking questions first from the financial community and then moving immediately into our media participants on the call today.

And representing Merrill Lynch, our first question, we go to the line of Michael Linenberg.

Please go ahead.

Yes, hi.

I guess, James, you started talking through some of the revenue opportunities and I think you've characterized it in the past as maybe unbundling the revenue.

And I guess, one of the concerns is that as you start charging for some of these various perks, et cetera, the concern is that other carriers won't follow and then you will be in a bit of a competitive disadvantage.

I'm just curious, it looks like there are some pretty significant revenue opportunities here, where - - versus other carriers you may be not competitive.

Are you seeing it - - is it having a negative impact?

And maybe you can talk about some of the unbundling of the revenue opportunities going forward.

Well, certainly, Michael, this is something that we're going to have to watch very carefully.

We do think that there is opportunity here.

We've already accomplished some nice improvements to the revenue line.

Particularly if you look at our other revenue line, which has been moving along well all year.

Things such as charging for bookings through our reservation line, for example.

Our initiatives that have been accepted by customers and indeed matched by our competitors.

So, we do feel as though there has been useful opportunity thus far.

We have been busy thinking through different ideas very much along this line of; what are people prepared to value?

What are they prepared to pay for?

Versus, what would they necessarily like but not be prepared to pay for?

And we are going to have to be very careful that the overall product balance continues to be an attractive one.

We need to be thoughtful about not only our price competitiveness, but our value competitiveness, in considering all of these different product services and features.

Again, we'll really be guided by our consumer research, our testing of these various ideas, to see what people are already prepared to pay for.

Michael, the only thing I would add to that is as we test these different paradigms for charging for things, you always have the option to retreat.

If in fact, you see that you're losing demand for your product because people are unwilling to pay it or they're moving over to the other guys.

So, I think that as James indicated, we have to be cautious.

But in this environment, I think we've got to look for every opportunity to try to generate revenue.

And I think the fee for rent services is very analogous to what a lot of other companies are doing in other industries.

When you deal with a human being, you pay more than when you deal on a Website.

And that product is - - has gone very well for us.

And we're now charging $10 through our res offices as are a number of other airlines.

And so I think that's been a success.

Okay.

And then just my second - - and I guess this is to you, Gerard, it seems like the chatter is heating up again about maybe potentially changing the foreign ownership restrictions for U.S. carriers.

And I can see while, maybe that in the near-term could reduce the cost of capital to some carriers.

That is it provides another resource of cash.

My sense is that maybe the last thing this industry needs is more capital and I'm not pointing particularly to American.

But maybe some of these weaker models out there that if it were left to the marketplace would not be in business today.

So, I'm curious about maybe your latest thinking on relaxing the foreign ownership restrictions.

And I don't know, getting a Singapore Air or a Lufthansa to invest in the U.S. carrier.

What's your thoughts on that?

Well, Michael, I think I would support the ATA position, which is the limit being increased from today's 25% to 49%, is probably something that's sensible.

But I don't think that it makes sense to go beyond that because I do think that through ownership you can obviously find a back door to cabotage.

And this is the largest market in the world, here in the United States.

And if we're going to give foreign carriers access to our markets, I think we need reciprocity.

We need access for U.S. carriers to markets around the world that are just as robust.

And if we could create that kind of paradigm, then I'm all for the free flow of capital and competition.

But I think we need to be mindful of what the United States has to offer in this type of debate vis-a-vis the rest of the world.

Okay, thank you.

Thank you very much.

The next participant in queue is Gary Chase representing Lehman Brothers.

Please go ahead.

Good.

Just a couple of quick cleanup questions first.

What is the unlying - - what's the driver of the assumption, I guess, on crack spreads in the fuel guidance?

Well, that is very much just reflecting where the curve was as of that day.

So - -.

Is that the curve for refined product then, James?

Yes, the curve for refined products.

Okay.

Yes.

I'm sorry, go ahead.

And that equated in '06 to a price of $91 per barrel of jet.

And as I recall, you said that was October 11 - -.

That was October 11 curve.

And things have moved, from our perspective, in the right direction since then.

Okay.

And the capacity guidance that you gave, particularly for next year, James, you said you would potentially be down an additional 1.5% if fuel prices stay high.

Were we with take that to mean in the 230+ range we're seeing now?

Or that you expect for the fourth quarter?

Or was that more if the 217 you envisioned for '06 comes true, you don't think you will be flying even as much as flat.

You think you will be down one or two at a system level?

That will be something that we continue to assess as the quarter goes along.

But conceivably, if fuel prices were in the region that you quoted there, within that sort of realm, we may find that it's economically sensible to continue the capacity cuts.

Of course, one of the things we're also going to have to be watching very carefully is how demand holds up.

As many in the country are worried inflationary concerns and so forth.

So, we will see how core demand develops.

As Gerard, in the remarks, our advanced bookings are strong.

Well, that was actually the next question.

Was, is there any indication of slowing in any form, be it from feedback you get from corporates?

Anything that would suggest that the demand environment is slowing in any way?

No, I think, Gary, the fact that in each of the three months of the fourth quarter we're ahead of where we were last year is a good indicator of continued economic strength.

Okay.

And I apologize, just one last cleanup one, there is no density adjustments in the '06 guidance, right, James?

No.

Okay.

Thanks a lot, guys.

Thanks, Gary.

And thank you very much, sir.

Our next participant in queue, we go to Glenn Engel with Goldman Sachs.

Please go ahead.

Good afternoon.

Hey, Glenn.

A couple of questions.

One, can I imply from your comments that flight unit costs would be a pretty challenging target in 2006 X-fuel?

Well, we haven't finalized our budgets for 2006.

You can imagine that there's a lot of hard work going on around the Company to that end right now.

And so I think I will just leave it at that for now.

But we are very focused on beating some of the figures that Gerard eluded to earlier in terms of the savings.

And we're just going to keep working at it.

As part of your ASM's number, is there a fair number of planes that are going to be returned to lessors next year?

I think MD-80's, maybe some 767's?

We have practically no lease returns next year.

So, no is the answer.

And the fleet will be roughly the same size?

Yes, correct.

We will take delivery of a couple of 777's in had the early part of the year.

Those are the only two aircraft that we had had on firm order.

That we retained when we came to our agreement with Boeing last year to defer the other 54 firm aircraft.

So, we retained the two 777 orders.

And they are earmarked for the new Shanghai service in April.

Finally, can you just give us a sense of the business mix?

How that's doing?

Well, our corporate activity continues to be strong in recent months.

We've been pleased by both the volume and price element there.

Obviously indicative of a relatively strong economy in the markets that we serve.

Thank you very much.

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

Please go ahead, sir.

Thanks, good afternoon.

Hi, David.

Hi.

James, when you were referring to CapEx, this is a small question - - you mentioned the transition to the flat beds and business first.

Were you saying that's included or excluded now from the change in CapEx?

No, that is included.

I was just trying to make the point that while our CapEx is reducing from the 700 or so that will mount up this year, down to 500 next.

We are still able to allocate money for important product development initiatives such as the flat beds.

So, that would be included in the 500.

Understood.

And, Gerard, wanted to just drill down a little bit on the $500 million in cost savings that you said you've identified for next year.

Two parts to the question - - one is how do you see that building into the business as the year progresses, quarter by quarter?

And then second, what are the major elements of that cost reduction?

Well, David, as I alluded to in my remarks, we embarked on an effort earlier this year with our unions and our front line employees to really look at our Company using some outside consultants as objectively as we possibly could, across a whole wide range of performance.

So, everything including revenue, the other revenue lines, our productivity, every important measure that we look at in running the business.

And we call that the Performance Leadership Initiative.

And out of that document and that work, which is still evolving.

And we have about 300 people involved and they have been involved for about six months, since early spring in this effort.

We have identified a wide range of opportunities for improvement across the Company.

And that's not to say closing any of these gaps is necessarily an easy thing to do.

But understanding the problem is the first step in sitting her on the table and thinking about ways to solve it.

So, the $500 million was a - - is a byproduct of that effort and many other efforts in the Company to re-engineer the way that we do business.

And in terms of the timing, some of those savings are the year-over-year effect of things we have already executed on in the latter part of this year but will get savings through next year.

And others are issue initiatives that we have identified that we have yet to actually implement.

And so, I think the best way to characterize the savings is that they will be phased throughout next year.

And my expectation is that we will continue to find opportunities to improve productivity and efficiency.

And one of the things we're trying not to lose sight of is that there are two sides to this equation.

The revenue side and the expense side.

And so, we have tried not to lose sight of the fact that we have got to stay focused on revenue at the same time we're driving productivity and efficiency in the Company.

And I'm pleased to see the results that we've achieved in the third quarter relative to the industry and we want to make sure as we move forward that we hang on to that revenue premium that we've managed to generate.

Okay.

So when you're referring to - - when you're saying productivity, I'm assuming that relates somewhat to labor.

But I'm also getting the feeling that really this - - you haven't assumed any savings from any adjustments in work rules or anything like that?

Well, I've assumed - - if you're asking have we assumed any contract changes?

The answer is no.

Okay.

But if you look at, for example, our sitting in this quarter and I'm going to round this number and Kathy can get you the actual number.

If you look at our maintenance productivity year-over-year, third quarter this year versus third quarter last year, I'm going to guess that that is up in the 20% range.

And where did that come from?

Well, it came from re-engineering a lot of processes within the Company.

Not necessarily changing the contract, but changing the way we do business.

So, when I talk about improvements going into next year, I think there will be more opportunities for re-engineering that will drive productivity.

Okay.

And last question on the revenue front, are there - - domestically, are there any markets that are standing out as being particularly strong for you right now?

Well, David, I mentioned we had very nice unit revenue improvement on the transcon markets, in particular.

We were pleased by the Chicago situation and also Miami.

Those were the places where we saw the greatest year-over-year unit revenue improvement.

That said, Dallas probably more impacted by the simplified fare structures than some on the parts of our network but still, also saw a very nice improvements year-over-year.

A couple of things, just to clarify.

Our maintenance base productivity year to date is up over 22%, to add to Gerard's point.

And then the $500 million worth of expense savings that Gerard alluded to, we believe we can attain that in 2006.

Okay, thanks for your time.

Thank you, David.

Next, we go to the line of Jamie Baker representing J.P. Morgan.

Please go ahead.

Yes, good afternoon, everybody.

Hi, Jamie.

James, I just wanted to challenge you a bit on the X fuel CASM guidance for the fourth quarter, which just strikes me on the high side.

At 767, it's higher than any quarter this past year, even though ASM production is roughly in line with the first quarter.

Is there any particular line items we should be looking for in Q4 that are explaining what seems to be a somewhat unattractive X fuel CASM number?

Well, Jamie, I think there are a few things going on here.

In the fourth quarter, we'll see the first full quarter's effect of the new buildings at both DFW and JFK that we're now operating.

As well as a variety of other airport related cost increases but those are certainly the two most significant ones.

Another item to remember is that through the third quarter of this year, we had a year-over-year benefit as a result of us operating the F-100s back through the third quarter of 2004.

And so, obviously, that benefit has been lapped come the fourth quarter.

Now, having said all of that, I would certainly want to reemphasize that we are on target and, in fact, ahead of target with regard to the $700 million in cost initiatives that we've talked about this year.

We are on-track to implement that successfully.

And we have this additional 500 number that Gerard has alluded to for next year, that we are still busily to work up.

So, we continue to be very focused on continuous improvement on the cost side.

And another thing, just to reference, is that in the fourth quarter, our guidance is indicating that X-fuel costs would be down 1.4% year-over-year.

If you look on a fuel neutral basis, actually those unit cost figures would be flat year-over-year.

And that illustrates the progress that we are making on consuming less fuel.

Then, of course, we have the issue that we don't have as much capacity in the fourth quarter as we've had in other quarters of this year.

And so, obviously, that tends to hurt CASM somewhat but help [resin].

Net-net we think it's the right direction to be going in.

So, there's a little bit more color on the cost story, if that's helpful.

Yes it was.

And a follow-up to that, excuse me, for Gerard, I suppose, what sort of probability are you putting on the government, providing some sort of pension relief without you specifically having to freeze your plans?

Well, Jamie, I think the best way to characterize the debate right now in Washington is that it's very fluid.

The reconciliation of the Help Bill and the Finance Committee Bill in the Senate ended up with language for airlines, that while it wasn't everything we wanted, it would have allowed us to treat our underfunded balance in a manner similar to the way in the guys that are freezing their plans.

So, we were happy to see how those bills reconciled and are pleased with how the bill sits today.

But as I'm sure you're aware, there's still a whole lot of pushing an pulling going on with that bill in the Senate.

And I really can't predict the outcome at this point.

We will have to see if it gets out of the Senate and then what happens over on the House side.

But we're pretty comfortable with what the current Senate bill suggests.

And - - but we're a long way from actually having legislation.

So, we will just have to play it by ear.

If a hard freeze is mandated as part of the final language, how would you describe - - would that put you at a modest disadvantage, a significant disadvantage?

What would your contingency plan be in that case?

Well, I think if that's the way the Senate bill ended up, I think we would go to work on the House bill.

And try to get in the House bill something that would reflect more of what we're looking for.

And so, ultimately we don't want to see a bill here that ends up being passed that would require us to freeze our plans.

I put a lot of time into this, so have my colleagues in the Company.

And as I sit here today, I can't predict what's going to happen, but I'm reasonably optimistic that we're going to get something done that we're satisfied with.

Okay.

All right, James and Gerard, thank you very much.

Thank you, Jamie.

Next in queue we go to the line of Ray Neidl with Calyon.

Go ahead.

Good afternoon.

Hi, Ray.

Just two quick little things here.

I was trying to look at the cash flow.

And I know you mentioned you have $500 million of restricted cash.

I'm just wondering if you could briefly summarize again what that is?

And then on top of that, is there any other items that in the future may close additional holdback, credit card receivables or anything like that?

Could - - in fact, could your restricted cash go up from that 500 million as we move into the winter?

Ray, our restricted cash is very much largely cash that backs the various worker's compensation programs run by the different states around the country.

That's what's driving that number.

So we wouldn't expect that to increase.

Obviously the worker's compensation, cash flows are driven by the number of employee injuries and the extent of those injuries.

But we don't see any trend one way or the other, necessarily.

In fact, if anything, we see fewer injuries occurring around the Company.

Albeit the cost of looking after people continues to increase in line with medical expenditures, for the country generally.

And there are no further holdbacks on your credit card receivables or anything like that that's expected?

Nope, we have a contract in place with our credit card processors and that extends through into 2007.

Okay, great.

The other thing, it's just minor, I saw that your other rentals and landing fees for the quarter are up 14%.

Where your ASM's are up 2.5%.

Does this indicate that some airports are really largely jacking up your landing fees?

Yes, I'm afraid it does, Ray.

Many of the airports that we fly into around the country and around the world have pretty much effective monopoly positions.

So, they are passing through their costs to us.

And as I indicated, we have particularly large increases on the airport side driven at both Dallas and JFK as a result of the new buildings coming online.

Okay, so we can expect to see this item probably increase in future quarters?

I think you probably would, yes.

Okay, great, thank you.

Thanks, Ray.

And thank you.

Well, ladies and gentlemen, we appreciate all of the interest that you have shown today.

However, with time now for one more analyst question before we move into our press Q&A, we go to the line of Helane Becker with the Benchmark Company.

Please go ahead.

Oh, thank you very much, operator.

Thanks for taking my question, Gerard and James.

Hi, Helane, how are you?

Well, I guess I'd be better if the numbers were better.

But this is my question, with respect to the fleet and as the fleet gets older and you're really not renewing, are you concerned that on time performance starts to suffer and that maintenance kind of offsets some of the other revenue benefits that you're going to get?

And that kind of drives a whole other revenue issue?

Helane, I'm not really concerned about that.

The average age of our fleet is about 12, 13 years as we sit here today.

And we went through a period '98, '99, 2000, 2001, where we took delivery of a lot of airplanes.

And the real key to reliability going forward is the efficacy of your maintenance and engineering program.

And as you know, we have retained our airframe maintenance with inhouse here at American.

And our hope and our expectation is that while we will have a labor cost disadvantage compared to those that are sending their planes to Central America or overseas.

We think that on - - from a standpoint of asset productivity, turn times on components, materials expense and the overall reliability of the fleet, that we hope to actually create competitive advantage there over the long-term.

And that's what we're working toward.

So, I am not at all concerned that the age of our fleet is going to impact reliability.

Okay.

And then my follow-up question is with respect to monetizing other assets, have you given any further consideration to modernizing the regionals?

Or like I think Air Canada did their aero plan in the form of a trust monetizing the frequent flyer program, as a way to raise capital if need be?

Well, Helane, I think that the best way to answer that question is to simply acknowledge that we recognize that we wholly own American Eagle.

We wholly own our AAdvantage program.

We wholly own American Beacon partnership.

And we have a number of other strategic assets in the Company and we're certainly mindful that those are valuable assets.

They contribute a lot to our Company.

And so, they remain on the forefront of our thinking.

And if we felt like it was in our Company's and shareholders' interest on to move in that direction, we certainly would.

But we have not reached that conclusion at this point.

Great, thanks so much for your help.

Thank you, Helane.

And thank you, Miss Becker.

Well ladies and gentlemen that does conclude the analyst portion of our press conference today.