美國航空 (AAL) 2005 Q4 法說會逐字稿

Good morning, good afternoon, welcome to the AMR fourth-quarter 2005 earnings conference call.

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

However, after the executive team's presentation today, we invite and welcome your questions and comments.

I will be taking questions first from the members of the analyst community and then immediately moving into any media or press questions that we may have. (OPERATOR INSTRUCTIONS)

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

Now ladies and gentlemen, with us on the call today is American Airlines' Chairman and Chief Executive Officer, Mr. Gerard Arpey; the Senior Vice President of Finance and Chief Financial Officer, Mr. James Beer; and here with our opening remarks is Director of Investor Relations, Ms. Kathy Bonanno.

Good afternoon, Ms. Bonanno, and please go ahead.

Thank you.

Good afternoon, everyone.

Thanks for joining us today.

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

Then James will provide the details regarding our earnings for the fourth quarter, along with some perspective for the rest of the year.

After that we will be happy to take your questions.

In the interests 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, you may listen to a live webcast of today's call and review our reconciliation slides.

Both Gerard and James will refer to financial results that exclude the impact of special items.

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

The slide deck, in conjunction with the press release, will contain a reconciliation of any non-GAAP financial measurement we may discuss; and we encourage you to view the press release as well as the slide deck during the course of this call.

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 factor, fuel costs, and other matters will constitute forward-looking statements.

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

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, and good afternoon, everyone.

In our press release issued this morning, we posted a fourth-quarter GAAP loss of $604 million, bringing our full year loss to $861 million.

Both of these figures include special items, which James will discuss in more detail in a moment.

Excluding those special items, our loss for the fourth quarter was $413 million or $2.39 a share.

Our full-year ex special items loss was $681 million, an improvement of $215 million compared to last year.

Although not readily apparent, these numbers do reflect a number of positive developments here at AMR.

To start with, we earned an annual operating profit excluding special items for the first time since the year 2000.

This was achieved despite a record increase in jet fuel prices that all of you are very familiar with.

But that added about $1.7 billion to our operating expenses year-over-year.

Without fuel and special items, our 2005 mainline unit cost declined by 2% year-over-year.

This is the fourth year in a row that we have been able to reduce our ex fuel unit costs, which I think reflects the dedication and determination of all of our employees to our Turnaround Plan, and that plan's first tenet -- lower cost to compete.

I would certainly acknowledge that after four straight years of reductions, it is getting harder to find ways to further reduce unit cost, given inflationary pressures and reduced capacity.

But we're making every effort to ensure that the significant cost headwinds we are facing don't drive our unit cost structure higher than it is today.

We recognize that we must continue to find ways to drive our cost structure even lower.

Another positive outcome to point to in 2005 was our revenue performance, which handily beat the ATA industry average.

Our 2005 mainline passenger unit revenue increased by 9.3% year-over-year on record high load factors in every month of the year and an average yield increase of 4.1%.

Our capacity restraint this year helped us outperform our peers, as did the changes we made to our network and fleet.

In addition, our revenue management group was able to take advantage of higher load factors to improve our revenue mix.

I think our sales folks did a great job of building our corporate client base.

Our cargo department also contributed to our improved revenue.

Including cargo fuel surcharges which are accounted for in the Other Revenue line, our cargo revenue grew by 6% in 2005 or $46 million.

We expect further growth in 2006 as we add service to China, and we will see our first full year of flying to India.

In addition to stronger passenger and cargo revenue, we introduced a number of new products and services that helped drive our Other Revenue line.

Our maintenance organization, by leveraging continuous improvement initiatives that were designed by our front-line employees, contributed an incremental $29 million to this line year-over-year.

They were able to achieve this more than 200% increase in revenue without adding capital, labor, or significant other resources.

Coupled with our new product offerings, including buying food onboard, confirming standby service on an earlier flight, purchasing upgrades at our self-service machines, buying lifetime memberships to the Admirals Clubs, and ensuring continued AAdvantage program status, we added approximately $150 million to our Other Revenue line, excluding the cargo fuel surcharges.

We also, through a variety of transactions, bolstered our liquidity by more than $1 billion in 2005, bringing our year-end cash balance to $4.3 billion, including $510 million in restricted cash.

We also contributed $310 million to our defined benefit pension plans.

So as you can see, we had a lot of reasons to feel good about our progress in 2005, yet despite all this hard and good work the fact is we still lost money.

It is unfortunate that current fuel prices are nearly double the levels of two years ago, but this is the reality we are faced with and are going to have to continue to face.

So we're going to have to do more to ensure that we can compete and thrive in this fuel environment.

Meanwhile, our low-cost carrier friends continue to expand; and many of our major competitors are cutting their costs to levels lower than our own through the use of the bankruptcy courts.

By eliminating pension plans, reducing salaries and benefits, cutting jobs, terminating contracts, and returning aircraft, these carriers will emerge from bankruptcy with lowers.

Therefore as James will discuss in a moment, we remain intently focused on collaboratively finding further cost-reduction initiatives to ensure our competitive vigor.

Now as part of our cost-reduction efforts, we continue to work with all of our employee groups in evaluating our performance relative to the airline or the industry that we consider to be best in class.

James and I have discussed that with many of you.

We have talked about our Performance Leadership Initiative in many forums, and I am pleased to report that we have finalized at least initially a lot of that work and examined all the elements of our cost and revenue structure relative to what we consider best in class.

As 2006 unfolds, we are going to be working together within our Company to capitalize on the insights flowing out of that PLI process.

I am confident that it's going to help us build on the progress that we made together in 2005.

Given our continued profitability challenge, our mainline operation will be smaller in 2006, both in terms of capacity and departures.

Our financial position means that we have got to continue to eliminate our most unrewarding flying, leading to a reduction in departures year-over-year by more than 4%.

In particular, our mainline domestic capacity is planned to shrink by about 4% in 2006 as we shift capacity to more attractive international flying.

Of course, we're able to return to sufficient levels of profitability, we will be able to reconsider our capacity and fleet plans.

Finding our way back to profitability is obviously our goal; and not just modest levels of profitability, but levels that will allow us to pay down our debt to manageable levels, replace our fleet as it ages, grow our operation, continue to fund our pension plans, and ensure an adequate return on your investment.

I think we have made enormous progress; but it is obvious that we have not done enough.

We are very determined to complete our work.

And with that said, I want to thank you for your time, and I'm going to turn things over to my colleague, James Beer.

Thank you, Gerard, and good afternoon, everyone.

Throughout the call, as I discuss our results, 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 reconciliations of any non-GAAP numbers.

Thus, I would like to start by discussing the special items we recognized during the fourth quarter, which netted to a charge of $191 million.

These items are largely accounted for in the Other Operating Expense line.

The largest item was a $155 million charge taken primarily for permanently retiring 27 MD-80s, 24 of which had previously been in temporary storage.

We also incurred a $73 million facility-related charge associated with our ongoing construction project at Miami; our decision to cease mainline service at Pittsburgh; and a change in the useful life of some of our assets.

Finally, most of you are aware by now of the $37 million special credit we took related to the sale of 33 F-100 aircraft in 2003.

Moving now to our costs.

For the mainline, fourth-quarter unit costs were 10.1% higher at $0.1113.

For our consolidated system, fourth-quarter unit costs increased by 10.6% to $0.1169.

Most of the increase was driven by higher fuel prices, which added $433 million to our cost structure in the fourth quarter.

Our fourth-quarter mainline unit costs excluding fuel increased by 2.8% compared to last year, with increases driven by higher rental and landing fees associated with new terminals at DFW and JFK; higher credit card expense, attributable to shifting passengers to the Internet; and an unexpected increase in TSA security fees.

The rise in our stock price also drove our salary line higher, as we marked-to-market our variable compensation plan.

The fourth quarter was the only quarter in 2005 in which our mainline unit costs excluding fuel were higher than during the prior year.

This is partly attributable to reduced year-over-year capacity in the fourth quarter, as compared to higher year-over-year capacity in the first three quarters of 2005.

You will recall that in the fourth quarter we canceled flights in some high-frequency markets, which allowed us to reduce our fuel expense while re-accommodating most of the revenue.

A good decision, but one that negatively impacted CASM while benefiting RASM, which I will discuss more in a moment.

We also had more difficult comps in the fourth quarter, having completed the withdrawal of the F-100s from our fleet by the end of the third quarter of 2004.

For the full year, our mainline unit costs excluding fuel declined by 2%.

In 2005, we achieved our target of $700 million in cost savings; and I want to commend our employees for their continued efforts to rein in costs wherever possible.

Some of the cost-savings initiatives we successfully implemented this past year included simplifying our operating procedures by linking together our pilots and aircraft routings; selling food onboard; reducing fuel consumption; returning unused gate space; and improving the productivity of our employees right across the Company.

Before I move on to revenue, I just want to touch on our nonoperating expenses for a moment.

I don't think the year-over-year increase in our interest expense or income should surprise anyone, as the rise in interest rates has been common knowledge.

But this year, the Miscellaneous Net line contains the impact of accounting for fuel hedge ineffectiveness as required by FAS 133.

Due to Hurricanes Katrina and Rita, the difference between jet fuel and crude oil prices rose dramatically.

This was a triggering event that caused some of the Company's hedges to be deemed ineffective.

As a result, about $15 million of expense was recognized in this line during the quarter.

It is also probably important to remind everyone that last year the $146 million gain on our sale of Orbitz was accounted for in this line.

Turning now to revenue, the fourth quarter was once again strong in terms of year-over-year performance.

Our total revenue during the fourth quarter increased by more than $600 million compared to last year.

Passenger unit revenue, both mainline and consolidated, increased by 13.8% year-over-year.

These figures were at the high end of our guidance, with a stronger than expected finish to December.

As Gerard mentioned, we saw heavy demand during the quarter, which drove our mainline load factors up by 3.6 points year-over-year.

Stronger yield performance also continued, with an 8.5% increase in mainline yield.

As I discussed earlier, relative to all of 2005, unit revenue in the fourth quarter benefited at least in part from less capacity.

Our full-year 2005 mainline unit revenue increased by 9.3% compared to 2004.

Consolidated unit revenue for the full year increased by 8.7%.

In our domestic markets, fourth-quarter unit revenue increased by 17.1% compared to last year, on a 3.6% reduction in capacity.

Domestic load factors increased by 5.1 points; and yield increased by 9.6%.

Unit revenue improvements were particularly strong in transcons, Chicago, and Puerto Rico; but DFW and Miami also performed well.

Full-year domestic unit revenue increased by 10.6%.

Internationally, fourth-quarter unit revenue increased by 7.5% versus 2004, on a capacity increase of 5.4%.

Load factors improved by 1 point; and yield increased by 6.1%.

We made a couple of significant changes to our international route structure during the quarter, with the cancellation of Chicago-Nagoya service and the addition of Dallas-Fort Worth to Osaka and Chicago to Delhi service.

So far we have been pleased with how these new markets are building.

But we have seen some very aggressive off-tariff fare actions to Osaka, which we are, as always, matching to ensure we remain fully competitive.

In the long term, we think both of these markets will be important additions to our worldwide system.

European fourth-quarter unit revenues were up by 6.9% year-over-year on a 7.5% additional capacity.

Yield, during the fourth quarter, increased by 10.4%; but load factors declined by 2.5 points.

For the year, unit revenue in our European market increased by 9% compared to 2004.

Our mainland Europe markets performed particularly well in 2005, with a unit revenue increase of 11.6%.

In the Pacific, unit revenue in the fourth quarter declined by 12.3% year-over-year, on a capacity increase of 33%.

Pacific load factors declined by 7 points, and yield declined by 4%.

For the full year, our Pacific unit revenue declined by 7.7%.

Fourth-quarter unit revenue in Latin America increased by 13.1% compared to last year, with a capacity decline of 1.5%.

Load factors increased by 4.9 points year-over-year; and yields improved by 5.3%. 2005 unit revenue was higher than the year prior by 7.9%.

We have seen significant improvements in unit revenue performance as our load factors have built in these markets.

Fourth-quarter revenue for our regional affiliate operation increased by 22% compared to last year, on a capacity increase of 13.4%.

After adjusting for a nearly 9% increase in length of haul, regional affiliate unit revenue increased by 13.4% compared to last year; and yields increased by just over 5%.

Average load factor increased by 5.3 points.

Full-year stage length adjusted unit revenue increased 2.4% compared to 2004.

Looking now at our cargo operation, our fourth-quarter revenue declined by 6.4% compared to last year.

You will recall that our strong performance last year was driven by a dock strike on the West Coast, which was not repeated this year.

Freight revenue declined by 4.6%, and mail revenue declined by nearly 13% year-over-year.

Including the effect of fuel surcharges, which are included in the Other Revenue line, fourth-quarter cargo revenue was flat with last year.

Finally, in the fourth quarter our Other Revenue line increased by 22% year-over-year to $360 million.

Excluding fuel surcharges, Other Revenue increased by 21.5% year-over-year.

Turning to the balance sheet, as Gerard mentioned, we completed a number of transactions this year to help bolster our liquidity, bringing our year-end cash balance to $4.3 billion, including $510 million in restricted cash.

During the fourth quarter, we raised over $1 billion in new financing by issuing $800 million of tax-exempt debt related to our new terminal at JFK, and issuing $223 million in new equity.

In the fourth quarter, our payments on long-term debt and capital leases totaled $215 million, bringing our full-year total to $1.1 billion.

Our capital expenditures totaled $80 million in the fourth quarter.

For the full-year 2005, our total capital expenditure was approximately $648 million, a reduction of more than $200 million compared to our original plan.

About $75 million of this reduction is spending that has been shifted from 2005 to 2006.

In the fourth quarter, we contributed $22 million to our pension plan, meeting our full-year plan of $310 million.

Our total debt remains at approximately $20 billion.

Moving now to guidance, again these costs figures and forecasts will exclude special items on a year-over-year basis.

Our mainline capacity in 2006 is planned to decline by 1.3% year-over-year, with a reduction in domestic capacity of 4.1% and an increase in international capacity of 4%.

Consolidated capacity is expected to decline by 0.7%.

For the first quarter, mainline capacity is planned to be flat with last year, with consolidated capacity up by 0.7%.

Bookings for each month of the first quarter are ahead of where they were at this same point last year.

For 2006, we are once again anticipating higher fuel prices year-over-year, with a full-year price of $1.95 per gallon built into our plan.

For the first quarter, we are expecting a price of $1.92 per gallon.

Consolidated consumption for the first quarter is estimated at 776 million gallons.

We have 30% of our consumption capped in the first quarter at an average price of $63 per barrel.

For the full-year we are 18% hedged at an average price of $60.

As Gerard mentioned, we have a number of cost headwinds we are facing in 2006, which I would like to spend a moment discussing.

Aside from the fuel, our airport and landing fees are expected to be higher, primarily due to our new facilities at JFK and DFW.

Salaries will also increase in 2006 largely due to the 1.5% pay rise our employees received in May; ongoing step increases in seniority; and a higher year-over-year stock price which impacts our variable compensation plan.

Benefit expense will also be higher in 2006 as medical costs continue to climb.

Expensing options, while not a material impact to AMR, will also negatively impact our P&L.

Finally, our pension expense will be higher next year as well.

Adding up all of our nonfuel cost headwinds, we expect more than $600 million in inflationary expense in 2006.

To offset these increases, we have continued to look for cost savings and revenue opportunities wherever possible.

Thus far, we have identified $700 million in cost-saving initiatives and $300 million in revenue initiatives that we believe we can achieve in 2006.

Our cost initiatives include items such as reduced distribution expense, lower fuel consumption, various process and productivity improvements, and reduced parts expense as a result of purchasing aircraft parts from alternative suppliers.

This is just a sampling of the hundreds of cost-saving initiatives we have included in our 2006 plan.

As a result of higher fuel prices, other cost headwinds, and reduced capacity, our mainline unit costs for 2006 are expected to be higher by 2.7% year-over-year.

Excluding fuel, 2006 unit costs are planned to be flat with 2005.

Because of our numerous fuel conservation initiatives, our 2006 fuel-neutral unit costs are expected to decline by 0.5% relative to last year.

First-quarter mainline unit costs are estimated at $0.1074.

Excluding fuel, first-quarter mainline CASM is estimated at $0.0759.

We have not yet factored into our plan any potential savings from the further hub simplification efforts, which we are continuing to evaluate and test.

As we announced previously, we began testing the third phase of our hub simplification strategy at St. Louis during November.

Effective with our spring schedule, we will be expanding that test to six additional airports.

We will also run a partial test at Chicago and DFW hubs, isolating four gates at each airport for this exercise.

You may recall that this third wave includes reduced ground times and revised gate manning procedures.

The benefits we realized in our St. Louis test include improved on-time performance, reduced taxi times, fewer gate changes, fewer baggage mishandlings, and improvements in aircraft and employee productivity.

Our capital expenditures are now estimated at near $600 million in 2006.

We had previously planned for capital expenditure of the order of $500 million; but as I mentioned earlier, about $75 million of spending moved from 2005 to 2006.

This year we're taking two triple-7 aircraft which will be utilized to fly our new Shanghai service; but we have no additional firm aircraft deliveries planned until 2013.

We expect to contribute $250 million to our defined benefit pension plans in 2006.

We have already made our first-quarter contribution of $36 million.

Our principal payments are expected to equal $1.2 billion for the full year, with $300 million paid in the first quarter.

In conclusion, despite our efforts to reduce costs, with jet fuel prices expected to remain above $80 a barrel in the first quarter and significant headwinds offsetting our cost-cutting progress, we expect another tough year in 2006.

While we are not yet satisfied with our performance, we are continuing the momentum we have developed under the Turnaround Plan, in terms of identifying both cost-reduction opportunities and new sources of nontraditional revenue.

Our capacity plan for 2006 is appropriately cautious, with resulting implications for unit revenue.

While our liquidity remains strong.

And we remain committed to working collaboratively with our unions and employees to further build on our progress.

That concludes our prepared remarks.

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

Indeed, and thank you very much, Mr. Beer, Mr. Arpey, for your time and that presentation today. (OPERATOR INSTRUCTIONS) Merrill Lynch, Mike Linenberg.

I guess just my one question on the capacity cut, the 4% domestic capacity cut, is that -- will you achieve that by just reducing the utilization of the current fleet?

Or should we anticipate that we will see more airplanes that will be permanently grounded than what was announced in the press release?

Any color on that would be great.

Mike, good afternoon.

We would expect to adjust add the capacity utilization of the remainder of the fleet to address our plan.

Mike, that 4% was domestic, so if you -- I can't remember the number, but if you look at the growth internationally, I think overall we're down about 1%, 1.5%.

What is your current utilization on your fleet?

Where are you running it?

Maybe it just makes sense to just break it out on domestic.

Well, utilization of the fleet is generally around the 9.5 hours per day mark.

Obviously, it's a larger number for the long haul international aircraft, which will be flying of the order of 12 or more a day.

So less than the narrow-bodies, but 9.5 is about the right figure for the total fleet.

Okay, thank you.

Gary Chase, Lehman Brothers.

Just a quick question, sorry for the nitpick.

I was just curious, though, James.

The debt charge, the debt [gain], was that in the Miscellaneous item as well?

Yes, that was.

That was in the Miscellaneous Net line.

Okay, that helps.

Because without it would have looked that much higher.

Could you guys give us a little bit of color?

I know the international booking window is a little bit longer, especially these days, than what we have domestic.

Last time you guys gave capacity guidance, I believe you were going to be plus-7 internationally, obviously plus-4 today.

I was just curious for your color.

Is it just that fuel prices are up, that have made that change?

Or do you see something on the revenue side that leads to what you consider to be a reduced opportunity set?

I don't recall the guidance we gave you in the past; but one of the routes that we did cancel that we had started last year was Chicago-Nagoya, which is a route that we -- I can't remember exactly when we started it.

But as we looked at the India flight, and we looked at the Shanghai flight, and we also started Dallas-Osaka in the fall, we felt like based on our startup experience in Nagoya that was going to be the weakest link in our Pacific network.

Based on the public information, we realized that United was struggling as well from San Francisco.

So we pulled the plug on that when we started the India service.

That might be the reason why the international capacity forecast came down.

I think that would be certainly part of it.

We also had previously announced that we were going to fly next summer from JFK to Newcastle.

As fuel prices continued to remain very high and we looked at our overall capacity plan, we felt that on balance it probably wasn't the right time to be starting a new long haul route into the north of England.

So there have been some decisions such as that.

Obviously, also, flying into the Yucatan, Cancun, Cozumel has been reduced as a result of the hurricanes this past season.

So those are going to be some of the factors that have been driving our international plan.

It doesn't sound like anything troubling.

Just --?

Well, as we talked about our bookings are ahead of last year for each month of the first quarter, so we are pleased by that.

Just one very quick one.

The 700 million in cost savings and the 300 million in revenue enhancements you have identified this year, that is not something you're going to be spooling up to?

You think you will realize that during 2006, correct?

Yes, that is correct.

That is realized in our '06 plan.

That is reflected in the unit cost guidance that James gave you.

Thanks a lot guys.

Glenn Engel, Goldman Sachs.

Can we go through the labor cost number?

How much of that increase on the compensation side was due to retroactive?

And how much was just due to an ongoing higher cost of the options?

We had a few different things that were impacting the wages, salaries, and benefits line.

We have, obviously, the continuing increase of our benefits expenditure.

Then Eagle, as you will recall, has entered into revised labor agreements with all of its unions over the last year or so.

So we are seeing some of the impact of that.

So those were the other two important factors in addition to the costs of the marking-to-market of our performance shares.

So overall, I would say about two-thirds of the overall change in the line was driven by the performance share marked-to-market.

How much will pension expense headwind be in 2006?

Pension expense will be increasing year-over-year by around 70, $70 million.

That is from a drop in the discount rate?

It is a few different things.

Yes, that is certainly the largest driver.

We are also moving to an updated mortality table as are many companies in U.S. industry.

Then we are also revising our assumption for asset returns.

Thank you very much.

Calyon Securities, Ray Neidl.

Gerard, you were talking about the reduction in ASMs domestically.

I am just wondering, is that -- that is mainline reduction.

Do you plan on making up some of that with increased regional RJ flying?

And if you are, are you at kind of a disadvantage because of your clause restrictions?

Would you be looking to operate some larger RJs?

Well, Ray, quite frankly we don't have any more RJ deliveries coming this year.

On the big airline side, we only have two 777s.

I think our general view, both from an American perspective and an American Eagle perspective, is that given the economic environment and the financial results that we have put up, and even look at the financial results at a lot of the low-cost carriers, we think on both fronts we should be very restrained from a domestic capacity standpoint.

So you see that reflected in the plan.

If you look at -- again the breakdown is domestically for American, we are down a little over 4% and internationally is up 4.

So in total Company for American Airlines, we are down 1.3%.

Eagle is going to be up year-over-year approaching about 6.5, 7%, but that is just the year-over-year effect of the airplanes that we took delivery of in 2005.

There's no more airplanes coming.

So overall for AMR, we are down.

If you combine Eagle and American, we are down 0.7% in terms of ASMs.

I think given the environment that is a prudent path to be on.

Also, in fact, the Eagle fleet will be smaller by five turboprops during the year as well.

Okay.

James, there has been some talk about American releasing some stockholder value by selling off -- as Air Canada did -- the frequent-flier program.

Or there is talk about spinning off part of Eagle and making a market for that.

What would be the pluses and the minuses?

At this point you don't need the cash; you have got over 4 billion in cash.

I am just wondering if that is something that the Company's considering and if you see any advantages of doing that.

I would jump in there first and ask -- James can provide some color commentary.

We recognize, of course, that we have a lot of strategic assets in this Company.

You have highlighted a couple of them, and we are very cognizant of that fact.

But of course, we don't discuss hypothetical transactions or hypothetical possibilities.

But I would just make the observation that we recognize we have a lot of core strategic assets within AMR.

I think over the very long run, we want to use those assets to the best interests of this institution, its shareholders, its employees, and everybody that has a stake in the Company.

And not necessarily -- if I look at -- continuing to be a little generic here, if I look at some of the transactions that have been done in our industry, I think they look to me to be very expensive financings.

Because while you bring some money in the door at the front end, over the long run you end up paying out, in the form of whatever kind of relationship you have created.

So we want to be real thoughtful about the long-term implications of anything we do.

Obviously, our strong liquidity position that you referred to, Ray, just means that we really are able to focus on the long-term implications of all of these strategic assets, and that is a good position to be in.

Good, thanks guys.

David Strine, Bear Stearns.

With respect to mainline CASM, it's great to see that you have guided toward it being flat, even though capacity is some now going to come down.

Is it also going to be flat consolidated?

Or do you have slightly different guidance for the consolidated number?

I think consolidated is down 0.7.

Didn't we just -- did I just say that?

On CASM or ASMs?

Oh, CASM;

I'm sorry, David.

Let us dig something out here.

Ex fuel for AMR, we would be looking at a reduction of just a sliver; so pretty much flat as well.

Great, okay.

And a follow-up on the capacity guidance.

Just domestically, I know that you shift from previous guidance at 3% to 4%.

Is there any particular market where that is going to be concentrated?

Or is it spread evenly through the network?

You are talking domestically, David?

Yes, the change on the margin, the guidance.

I think your previous guidance domestically was of ASMs down about 3% in the year.

Now it is 4%.

I'm wondering if there is any particular market where that is driving that change; or if it is spread evenly through the domestic network.

No, I wouldn't add anything other than the fact that we made some announcements a few weeks back about how we were going to be offering service at Love Field, and other services are coming out in order to fund that flying.

So you are seeing us pulling out of Long Beach and Providence, some of the Eagle cities such as Green Bay and so forth.

So I would not add to anything that has not already been released.

Okay, just one last question on CASM.

In terms of the specific line items, it looks like labor CASM has declined three years in a row now.

Is that line item also going to be flat?

Or do you feel like there will be some CASM pressure there?

There will definitely be pressure, David, because we have a 1.5% pay increase scheduled for May 1.

So there would definitely be pressure there.

But as I alluded to my remarks, I think we have, through our Performance Leadership Initiative, all this work that we have done together with our organized labor groups and our front-line employees, I think we see lots of opportunity there, and it's not just focused on labor.

It's across the board, all expenses and revenue.

I will just highlight one example.

We went through that process in a very -- we had some outsiders helping us.

And the unions and nonorganized folks were heavily involved.

Much to our surprise, what we saw in that data we had thought we had thinned the management ranks here at our Company about as thin as we possibly could.

But when we looked at the data that came through that analysis, we realized we were not best in class in terms of management productivity.

So we have built a plan this year for 2006 to take another big slug of management out of the Company.

Everyone has -- I have through all the budgets, and none of that was easy.

But that is a chunk of money that we have targeted for '06.

There is a whole range of those things that come out of that work, and now our challenge is to work together, to try to capitalize on where that analysis guides us.

Thank you.

Helane Becker, The Benchmark Company.

Gerard, I am a little confused, because James said that you have got no aircraft coming in till 2013 except the two 777s.

Right.

But you said in your remarks that you wanted to find ways you could grow the airline.

So can you reconcilement that for us?

No, I did -- what I said, Helane, is certainly our ultimate goal is to return the Company to not just modest or meager levels of profitability, but our goal, just like every other corporation, is to get to sufficient levels of return and profitability so that folks want to invest in our business and want to grow the business.

We recognize as we sit here today we're not there yet.

But that is certainly -- this is not where we want to stay.

So that is really what I was saying.

Okay, all right.

Good, thank you very much.

Then my only other question is, I guess you guys did a fare increase last night in some of the Southwest markets that do not match.

Without commenting directly on fares, because I know you can't do that, is that fare increase still in the market?

From our standpoint, I think the answer is yes.

Okay, thank you very much.

Andrew Light, Citigroup.

On the international growth of 4%, are you able to break that down into Europe, Asia, and Latin America?

No, we generally don't try to break it down geographically like that.

Although I think it is fair to say that our expansion to China, India late this past year, and the Osaka flight late this past year will be the key drivers in terms of year-over-year capacity.

And a follow-up question, regarding the ongoing Open Skies discussions with Europe, would antitrust immunity with BA or a stepped-up relationship with BA really be an automatic outcome if we had full Open Skies?

Could you give us an idea of the order of magnitude benefit of that, vis-a-vis the current situation, cooperation with BA?

Finally are there any key dates regarding negotiations on the Open Skies issue coming up?

Well, Andrew, I guess from our perspective, the British Airways partnership is very important to American Airlines.

It is seminal to our oneworld relationship.

In some respects, we and British Airways were certainly among the founding members of oneworld.

So British Airways is an extremely important partner for American.

We would like to think that if the Open Skies agreement is reached between the United States and the EU it would be a no-brainer to grant antitrust immunity to American and British Airways.

So that would certainly be our hope and our expectation.

But as you know, we don't control that process or the outcome.

But we will certainly be pushing and lobbying in that direction.

I think given the immunity that exist in the other partnerships, I would hope that that would be the outcome.

I can't quantify the benefit of that to you, but it would certainly represent some upside for both companies.

And any key dates coming up on negotiations on this issue?

I think -- but that is a different subject.

I don't know off the top of my head of any key dates.

I know that dialogue continues between the two countries, and I will have Kathy do some research for you.

We don't foresee any particular mileposts out in the near term here.

So we will stay tuned.

Okay, thank you very much.

Jamie Baker, JPMorgan.

First question is a simple one.

Gerard, you identified best in class when you were discussing your peer group during the opening remarks.

What carriers fall into that category?

Actually, Jamie, we really took -- if you think of our Company as an onion, we kind of peeled the onion in as many ways as we could; so different airlines ended up being best in class in different categories.

So in some cases, you had -- just off the top of my head -- you had Continental being best in class in this area; you had Southwest best in class in that area; you actually had American best in class in some areas.

So it really was a wide range of best in class.

We kept trying to peel the onion because we were looking for opportunities to improve.

So for example, in some cases, on the revenue side, at a macrolevel we would look at the data and we would say, gosh, American looks pretty good here.

It looks like we are best in class in this particular region of the world.

Then when we saw that we said, well, okay, let's break that region of the world down and try to break it by country.

Are we -- how do we compare in Argentina versus Brazil versus Central America etc.?

So I can't give you a simple answer to the question, other than to frame it that no one carrier was, generally speaking, best in class.

It was a wide range of pieces of each carrier that we targeted.

And in some cases I think we actually looked outside the airline industry.

For example, in our human resources area, one of the things we're looking at is the work that we do within American Airlines.

There are companies out there that can do that work.

And we looked not just to airlines; we looked to other industries and said, how much does it cost you to do your payroll?

How much does it cost you to do this or that?

In some cases it led us away from the airline industry.

I will admit to being impressed.

I asked the question because historically carriers will throw out [salflat] for example, when they discuss certain performance metrics.

So thank you for that clarity.

James, I know you have shied away typically from any revenue guidance, but you identified industry capacity declines as contributing to the RASM strength we saw in Q4.

In Q1, the year-over-year decline in your competitive capacity profile is actually going to be even larger than it was in Q4.

Care to comment on any reason you shouldn't witness similar RASM strength in Q1?

Jamie, it's a very kind invitation, but I think I will decline from taking you up on that.

We will just stick with what we said.

Okay, well, I will try one last question then.

I assume your $250 million pension number that you gave earlier was a pre-legislation figure.

Some of the advisers who are working with Northwest and its unions earlier this week projected pension funding using the language supported by the UAW.

So I suppose unlike what Continental management says, the analysis can in fact be done.

Is AMR willing to share any projected pension fundings right now, under the potentially revised terms?

The $250 million projection for this year is consistent with current law.

No; we will wait to see if anything transpires in Washington before we update anything.

Okay, well, one out of three answers, not bad.

Thanks a lot.

I appreciate it.

Good try though.

We're trying.

Gary Chase, Lehman Brothers.

This question is probably for Gerard.

Just curious if you could -- I am sure you won't give us a number -- but just kind of qualitatively give us a sense of where you think this best in class can lead?

I mean, how big is the opportunity, maybe on a scale from, I don't know, mildly significant to enormous?

Where do you think this can lead you over time?

Well, Gary, let me come at this way.

I think that the good news in the work that we have done is we have found lots of areas where we can improve the financial and operating performance of the Company.

So when you look at the institution, and you look at all of our strengths, and you look at how far we have come, this body of work tells us that there is a lot more that we can do.

And that is the good news.

The more challenging or more difficult news is that you have got to do some very heavy lifting and hard work in order to make changes within this Company in order to capitalize on a lot of those opportunities.

We are not necessarily in control of the ability to do that.

We have to work collaboratively with our organized labor groups and our nonorganized labor groups, and convince folks that it is in their interests as well as the institution's interest to continue to move this Corporation to the point of profitability at levels that will allow us to pay down our debt, fund our pensions, and replace the aging fleet.

Then ultimately if we can get the profitability up there, there is no reason why this Company shouldn't be growing at least at a pace of GDP growth in the regions of the world that we operate.

So I think the good news is there's lots of opportunity; and the stuff that the management can control, we are full speed ahead.

As you know, we have been full speed ahead on lots of fronts for many years now.

So all the stuff that are within our degrees of freedom, we are pedal to the metal.

And we are working very hard and constructively with our organized labor groups and trying to begin to educate our front-line workforce.

So we are going to keep doing that and keep continuously restructuring this Company until we get it where it needs to be.

Ladies and gentlemen, at this point then we're going to move directly into our media and press conference. (OPERATOR INSTRUCTIONS) Eric Torbenson.

I have to ask you about the performance unit situation with the unions.

I know you have had some meetings there.

I don't expect you're able to speak contemporaneously about that; but I want to ask you about it.

Well, what do you want to know about it?

In the sense that, I mean, you anticipate taking any changes to the program to, I guess, assuage the union concerns?

Well, Eric, there has been awful lot of stuff in the press, and there has been a lot of misinformation I think publicly on the subject.

I think the program that you're referring to is the Company's performance share unit plan, which provides variable compensation to a number of management employees based upon the Company's performance.

A plan of this type or sort has been in place for many, many years at our Company, going all the way back to the early, mid 1990s.

I think consistent with American's overall compensation philosophy, and like many large companies, a significant portion of management, at least senior management's total compensation is not guaranteed, but it is tied to the Company's performance.

Since 2001, those employees with a large percentage of their pay at risk have seen a substantial reduction in overall compensation as a result of the fact that these type plans have had very low variable payouts.

This same type plan paid out last year at this Company.

But this year, depending on actually what happens with our stock price between now and April, because it will payout on the basis of April's stock price.

But if the stock were to stay at the levels it is at, the payments are much higher because our stock is a lot higher.

And it's a comparative group plan, so we compare to the stock performance of other carriers.

We have outperformed our comparator group, so that is the reason why the payments are anticipated to be so much higher this year than they were a year ago.

Do you anticipate that the pilots, flight attendants, and ground workers are going to continue to participate in PLI and other working together initiatives if this plan does payout as it is outlined?

It would be my great hope that they -- it would be my great hope and expectation that [AUDIO ENDS]