美國航空 (AAL) 2006 Q1 法說會逐字稿

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

We do appreciate your patience today while the conference assembled and good morning, good afternoon, good evening.

We are streaming around the world today.

Welcome to the AMR first-quarter 2006 earnings conference call.

At this point, for all of our AT&T Executive Teleconference participants, we have your lines muted or in a listen-only mode.

However, after the AMR executive team presentation, there will be opportunities for your questions.

As a note, ladies and gentlemen, we will be taking questions first from members of the financial analyst community and then immediately moving into our members of the press, who we welcome both groups to the call today.

We certainly encourage your participation at that time. (OPERATOR INSTRUCTIONS).

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

So with that being said, we have a full agenda on tap for you today.

Here with our opening remarks is American Airlines Director of Investor Relations, Ms. Kathy Bonanno.

Good afternoon and please go ahead, ma'am.

Thank you.

Good afternoon everyone.

Thanks for joining us today.

Starting off, Gerard will provide an overview of our performance and outlook, and then Tom will provide the details regarding our earnings for the first 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 Web site at AA.com.

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

Both Gerard and Tom will refer to our 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 (indiscernible), 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 expectations.

These factors include changes in economic, business and financial condition, high fuel prices, and other factors referred to in our SEC filings, including our 2005 Form 10-K.

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

Thank you, Kathy.

Good afternoon, everyone.

Before I discuss our results for the first quarter, I'd like to welcome Tom Horton back to AMR.

As I'm sure all of you know by now, Tom is our new Executive Vice President of Finance and Planning and our Chief Financial Officer.

We are obviously very pleased to have hired someone of Tom's caliber, and I think the fact that we were able to attract him back to our company speaks volumes about this company and the direction we are headed.

That said, I don't think Tom has any illusions about the challenges in front of us.

Our first-quarter loss of $92 million illustrates the fact that we still have a lot of work to do to be able to achieve our goal of meaningful and sustained profitability.

High fuel prices, our cost-competitiveness within the industry, low-cost carrier growth and our heavy debt burden are some of the more significant challenges ahead.

But before I'm accused of looking at the glass have empty, let me point out some of the more positive trends that we are seeing.

The first and most the visible -- (technical difficulty) -- revenue environment.

Strong demand and reduced capacity have allowed us to raise fares several times over the past year to help offset record high jet fuel prices.

These fare increases, along with our revenue management initiatives, helped us push our first-quarter mainline passenger revenue (indiscernible) revenue higher by 10.8% year-over-year.

What's more, our unit revenue performance has remained strong, relative to the industry, despite the fact that the industry has reduced capacity more than we have.

Adding to this good news story is the fact that at least so far the fare increases we've taken have not driven away passengers.

Last year, we set record high load factors in every month of the year in the first quarter, and this year, we set about breaking those records.

We've also significantly improved our other revenue sources, growing that line of our income statement by more than 25% year-over-year.

The new products and services we've launched, including our confirmed flight change product, purchased upgrades, lifetime Admiral Club memberships and our buy on-board foodservice allowed our customers to choose the products they value, tailoring their travel experience to fit their individual needs.

These services of course benefit our customers and provide us with an additional streaming of revenue.

When you add it all up, our total revenue from all sources -- passenger, cargo and other -- grew by $594 million year-over-year or up 12.5%.

Strong revenue performance allowed us to post a $115 million operating profit, despite an added $349 million in expense driven by higher fuel prices.

Our improved results also allowed us to further bolster our liquidity, and we ended the quarter with $4.8 billion in cash and short-term investments, including about 500 million in restricted cash.

We also favorably amended the terms of our bank credit facility.

Tom will tell you more about that in a moment.

Our challenge, going forward, is to continue to make strides on all fronts of our turnaround plan.

We have already made, I think, significant progress but we obviously can't stop until we get to our goal of sustained profitability at acceptable levels.

Achieving that goal has become more challenging as our competitors achieve cost savings beyond own through the use of the bankruptcy courts.

So to that end, we have budgeted about $700 million in cost savings this year.

Central to all of our cost-cutting goals is improved productivity and efficiency, and we've taken another important step in that regard with our schedule reductions this year.

The greatest reductions in our capacity are planned for the summer months.

By flattening our scheduled summer peak, we've been able to reduce the (indiscernible) sources that we carry year-round in order to fund that seasonal peak.

As a result, we are placing another 27 MD80 aircraft into temporary storage.

Reducing our distribution costs is another important initiative this year, and I'm pleased to report that, at the end of March, we successfully renegotiated our agreement with Worldspan.

While we're not going to get into specifics, this new deal provides us with substantially lower costs and greater flexibility.

In the months ahead, we will be continuing a dialogue with some of the other GDS providers as well.

These savings and many more planned for this year we will help to offset expected nonfuel-related inflationary costs of about 5, $600 million.

Unfortunately, these headwinds, coupled with what now looks like more than $1 billion in added expense related to fuel, will leave us with higher unit costs year-over-year.

Clearly, this is not a direction we like our unit costs to be headed, and so we continue to look for opportunities to reduce our costs in the future.

Our hub simplification efforts represent one such opportunity.

You'll recall that we began testing this third wave of simplification late last year in St. Louis, which reduced ground times and new gate manning procedures.

The results were in line with our expectations and this month, we expanded the test to six additional cities and to a limited number of our gates at Dallas and Chicago, and think we have every confidence that the changes we tested in St. Louis will be scalable but I think it's fair to say only time will tell and we should know more about that the next time that we are with you after the second quarter.

We also continue our performance leadership initiative, which we talked with you about in the past, working with our unions and our nonorganized groups to become best-in-class in all aspects of our performance.

This effort has been a collaborative assessment of our competitive position and it has shed light on opportunities for further cost improvement.

So I think, in summary, we recognize that we have a lot of work ahead of us and we will continue our aggressive pursuit of continuous improvement.

I think it's fair to say, with the vast network that we have, the world's largest frequent-flier program, a premier set of alliances and an experienced and engaged workforce, we have an awful lot to work with.

With that said, I will turn the call over to my colleague, Tom Horton.

Thanks, Gerard.

Good afternoon, everyone.

It's great to be back.

Before we get started, let me remind you that, in the first quarter of last year, we received a one-time excise tax refund of $69 million, so through the call, as I discuss our results, I will exclude the earlier impact of this credit to more accurately reflect our performance on an ongoing basis.

Most of this credit was accounted for in the fuel expense line.

As Kathy mentioned in her opening remarks, please refer to our press release and slide (indiscernible) accompanying this Web site for reconciliations of any non-GAAP numbers.

Let's move now to our first-quarter revenue performance, which as Gerard mentioned was once again strong year-over-year.

In fact, the latter half of March turned out to be stronger than we expected, allowing us to beat our recent unit revenue guidance.

Over the quarter, mainline unit revenue increased by 10.8% year-over-year and unit revenue for our consolidated system was up by 11.5%.

In our domestic markets, first-quarter unit revenue increased by 13.8% compared to last year on a 2.2% reduction in capacity.

Domestic load factors increased by 2.9 points, and yield increased by 9.6%.

Unit revenue improvements were particularly strong in Chicago and Dallas.

Internationally, first-quarter unit revenue increased by 5.2% versus 2005 on a capacity increase of 3.7%.

The load factors declined slightly, but yield improved by 5.5%.

In Europe, first-quarter unit revenues were up by 0.7% year-over-year on 7.1% more capacity.

Yield during the first quarter increased by 6.2%, but load factors declined by 4 points.

In the Pacific, unit revenue for the first quarter declined by 3.6% year-over-year on a capacity increase of 26.3%. (technical difficulty) -- load factors declined by 0.4 points, and yield declined by 3.1%.

For Latin America, unit revenue increased by 10.9% -- (technical difficulty) -- year with a capacity decline of 2.8%.

Load factors were up 2.2 points and yields improved by 7.5%.

First-quarter (indiscernible) for our regional affiliate operation increased by 26% compared to last year on a capacity increase of 11.7%.

After adjusting for a more than 10.5% increase in (indiscernible) haul, regional affiliate unit revenue increased by 20% compared to last year, and yields increased by just over 11%.

Average load factor was up 5.2 points.

Turning to our cargo operation, I should first point out that, effective 2006, we will report our fuel surcharge revenue as part of cargo revenue rather than other revenue.

We've reclassified last year's data as well so that year-over-year comparisons can be made on a like basis.

For the first quarter, total cargo revenue increased by 1.6% year-over-year.

Compared to last year, fuel surcharge revenues increased by $9.8 million or nearly 43%.

Freight revenue declined by 6.1% while mail revenue increased by 5.4%.

Finally, in the first quarter, our Other Revenue line increased by 25.5% year-over-year to $345 million.

Moving now to our operating costs for the mainline, first-quarter unit costs were 8.9% higher at $[0.1081] For our consolidated system, first quarter's unit costs increased by 8.8% to $[0.1137].

Most of the increase was driven by higher fuel prices, which added $349 million to our costs in the first quarter.

As expected, we also saw an increase in salaries and benefits, landing fees and rental and TSA security fees.

FAS 123 also drove an additional $11 million in expense this year.

As a result of these increases, our unit costs, excluding fuel, rose by about 3% for both mainline and consolidated.

Thanks to our fuel consolidation efforts, however, our first-quarter mainline fuel neutral unit cost increased by only 1.5% compared to last year.

Nonoperating costs were also somewhat higher year-over-year, primarily due to lower capitalized interest related to our new facility at JFK.

Interest expense was also higher with very low interest rates rising year-over-year.

Turning to the balance sheet, as Gerard mentioned, we ended the quarter with $4.8 billion in cash, including $510 million of restricted cash.

Our improved performance allowed us to refinance our bank credit facility during the quarter.

We were able to lower the interest rate on both term loans and the revolver, and used the EBITDAR to fix charge covenants.

This will save us about $12 million annually compared to what we would have paid in interest under the prior terms.

The first quarter, our personal payments on long-term debt and capital leases totaled $364 million.

Our capital expenditures, net of proceeds, totaled $98 million in the quarter.

Also in the first quarter, we contributed $36 million to our defined benefit pension plan.

Since the close of the quarter, we contributed another $84 million to those plans.

Our total debt, including capitalized value of the leases, remains at approximately $20 billion.

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

Our mainline capacity in the second quarter is planned to decline by about 1% year-over-year with the domestic capacity declining by about 4% and international increasing by about the same amount.

Full-year capacity declines will be similar.

On a consolidated basis, for the second quarter and for the full year, capacity will be down by less than a percent year-over-year.

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

As Gerard mentioned, we continue to plan for higher fuel prices year-over-year.

The second quarter -- for the second quarter, we expect to pay about $2.05 a gallon with a full-year price of $2.07 now built into our plan.

However, with the recent run-up in fuel prices, our price per gallon could be even higher.

Consolidated consumption for the second quarter is estimated at 796 million gallons.

We have 30% of our consumption capped in the second quarter at an average price of $62 a barrel.

For the full year, we're now 23% hedged at an average price of $61 per barrel.

With fuel at these prices for the second quarter, we are expecting unit costs to increase by more than 7% year-over-year for both mainline and for our consolidated system.

For the year, our mainline and consolidated unit costs were expected to increase by about 5% year-over-year.

Excluding fuel, our second-quarter mainline and consolidated unit costs should increase by about 2% year-over-year.

But because of our fuel consumption initiatives, our fuel-neutral unit costs are expected to increase by about half of that amount.

For the full year, our ex-fuel unit costs are forecast to increase by less than 1% year-over-year.

Our slightly higher unit cost guidance is partly attributable to added passenger and revenue variable costs as a result of stronger traffic.

For example, higher passenger volumes drive more expense in credit card fees, booking fees and commissions.

Of course, stronger traffic also drives stronger revenue.

We continue to expect capital expenditures of about $600 million for the year.

We plan to contribute $250 million to our defined benefit pension plan this year, and our scheduled principal payments are expected to equal $1.2 billion for the full year.

Going forward and in a quarter where our earnings per share figure exceeds $0.25, our fully diluted share count will include about 32 million shares from our outstanding convertible debentures, and the earnings used to calculate our EPS figure will increase by about $7 million due to reduced interest expense.

So, to wrap it up, I think it's fair to say that with jet fuel prices now above $80 a barrel and other carriers reducing their costs beyond our own, 2006 will be another challenging year for us.

A lot of progress has been made and we still have a lot of work ahead of us.

I'm happy to be part of the team again as we continue to move forward under the turnaround plan.

At this point, Gerard and I will now be happy to take your questions.

Indeed.

Well, thank you very much, Mr. Horton, Mr. Arpey, for your time and that overview today.

We do appreciate that.

Ladies and gentlemen, as you just heard, at this point we turn towards your questions and comments.

We invite you to queue up. (OPERATOR INSTRUCTIONS).

Just to reiterate, in the interest of time, we do ask all of you to limit yourself to one initial question and also a follow-up question.

Members of the media, we welcome your questions as well.

We will be entering into your Q&A session immediately following the analyst portion today, so please take this opportunity to queue up. (OPERATOR INSTRUCTIONS).

Representing Merrill Lynch, our first question, we go to the line of Mike Linenberg.

Yes, good afternoon and welcome back, Tom.

I guess two questions.

If you could elaborate?

There was a sizable increase in the Other Revenue category.

If you could talk about what's driving that and maybe it's what you've been doing on the revenue, unbundling the revenue side of the equation.

Well, Mike, I had the breakdown in front of me.

I can talk generally and then maybe Tom can dig out some facts, but I think you know, from prior discussions, that we have been unbundling, if you will, and the major things we have been doing is charging for reservations services.

I think we started at $5 and we are now up to $10 for somebody who chooses to contact AA Res as opposed to using our Web site.

We're also -- one of the things we did recently was we began to charge the travel agencies that are actually calling AA Reservations for assistance with customers that had booked through that travel agency.

Historically, we hadn't been charging them the $10 fee.

We've got fees at our self-service devices now for upgrades, where we prompt passengers if they want to upgrade from the coach cabin to the first-class cabin.

We build algorithms that go and check the demand for the first-class cabin, make sure we can accommodate our executive platinums, and if the answer is yes, we will offer them an upgrade.

It's mileage-based, so 500 miles I think is $50, 1000 miles is $100, and that is prompted at the self-service device.

The other thing we're doing at the self-service device, where we are getting a lot of take-up, is confirmed -- confirming yourself on another flight instead of standing by.

Historically, if you wanted to go earlier or later, we would just let you stand by, which we will still do, but for -- it's either $30 or $50, I can't remember -- the self-service device will prompt you.

If you want to be confirmed on that flight, you can swipe your credit card and move to that flight.

The other area that comes to my mind is we -- our folks in our maintenance and engineering organization have really been doing a great job generating third-party maintenance work.

So as the folks within the Transport Workers Union and our management team -- as they continue to reengineer our processes in Tulsa, Kansas City and at [Alliance] and indeed on the line, we are freeing up a lot of hours of mechanic activity and we're turned around and selling that.

So, I'm sure we've got a big year-over-year variance in the first quarter driven by third-party maintenance work.

In fact, somebody just pointed out to me that we are up about $12 million year-over-year for third-party maintenance work.

So there's just a variety of things we've been doing to try to drive the other revenue category and I'm really pleased to see that that line continues to move very well.

Gerard, the 25% -- I mean, I know you indicated that you had a bit of a bump-up on the maintenance piece, the 12 million, but going forward, maybe that 25%, maybe the number is 20%.

Is that a decent run-rate then to use?

Because it sounds like you're doing a lot in this area.

Yes, Mike, I think it's hard to predict because some of the maintenance work that we're doing looks like it's going to be recurring and continuing, and some of it is one-time.

So I think it remains to be seen how much of that is sustaining.

We're certainly working hard to make these permanent lines of business.

Obviously, as we go further, we leave the year-over-year effect, but I think some of these other lines (indiscernible) just another thing that comes to mind that with started, I can't remember when we began it but we rolled out this $2 per bag for curbside check-in and we I think pretty much have that everywhere domestically here in the U.S., and you know, that is just a lot of revenue for us.

That is something that we will continue doing and hopefully, eventually, we might bump that $2 charge.

So, I can't really give you a straight answer to that, Mike, but we are obviously going to try to keep pushing and flying as much as we can.

No, but that's very helpful; there's a lot of things going on.

Well, thank you.

I appreciate that.

Next in queue we go to the line of Gary Chase, representing Lehman Brothers.

Good afternoon, guys.

Welcome back, Tom.

Just one quickly for Tom and then maybe one for Gerard.

The 600 million in CapEx this year, I'm wondering if you can give us any sense of how sustainable you think CapEx around those levels is.

You don't have significant fleet requirements that we are aware of over the next couple of years.

I mean, could you get by with CapEx in that range, say, for the next two to three years?

Well, as you know, Gary, it all depends on what we do with the fleet plan and at this point, given where we are with profitability and returns on our assets, we can't really justify further investment in the fleet.

So, as long as we are in that mode, I think you can expect CapEx to be quite restrained, as it is now.

We obviously hope we're not in that mode for a long time, and we'd like to get in the mode of being able to grow this company again.

So, stay tuned on that.

Okay.

Maybe one for Gerard, and I'm not entirely sure exactly how to ask this, but I thought it was interesting wording the way you spoke to the opportunity you see in the summer revenue environment.

You referred to it as a golden opportunity.

I'm just curious if you can shed any additional light on what you're thinking there.

Do you think there is some kind of secular change in the pricing environment that really bodes well for how we look going forward?

What do you do? (indiscernible) get a hold of my employee (indiscernible)? (LAUGHTER)

Well, I just -- you know, I read it and then I reread it, and I said, Gerard doesn't say golden opportunity, you know, use language like that very often, so I figured I'd ask you about it.

You know, Gary, (indiscernible) really I think you are referring to the letter I put out to employees today, and you know, based on -- we set a record load factor every month last year, and so far this year, we are, at least the first three months of this year, we set records again.

Based on the advanced book, we're going to have a very strong summer.

But as Tom pointed out, we've got a long way to go to get the Company to the point where we can sensibly recommend to our Board and to you guys that give us money that we want to invest in the Company and get the Company growing again.

We've got to get the Company to sustainable levels of consistent profitability.

So the combination of the robust traffic environment that we are seeing and all this work that we've done internally that we've talked with you about, this performance leadership initiative, if we can do a great job for our customers and then collaboratively attack these areas where we see that we are not best-in-class, we've got a real opportunity to build on the momentum that we have made thus far and really capitalize on all the work that we've done.

But we've got to do some more tough things.

So what I was trying to say to our employees is that they've done a great job and they are going to have a busy summer, and we've got a lot more work to do.

If we do a good job and we keep working together, then we will capitalize on that opportunity.

All right, thanks for clarifying that.

Take care, guys.

Calyon Securities, Ray Neidl.

Gerard, I know, from everything we're reading, everything you're saying, you're still working very close with the employees, pointing out how you have to get your unit costs down and be more productive and so forth.

I think one area where you've really been emphasizing was the heavy maintenance area.

I'm just wondering.

Are you still making progress in that area?

Are you still feeling good about the progress you are making?

Do you still feel that you can get your unit cost structure down in the maintenance bases, where you can keep them in-house, whereas most other airlines seem to the outsourcing the heavy maintenance now?

Yes, Ray, I think it's a very good question, and obviously it's one we wrestle a lot with, because as a company, we're going in a different direction than most carriers in the industry.

That direction is predicated on the notion that we can drive enough efficiency into the maintenance work that we do that we can offset the labor arbitrage that all the other airlines are trying to capitalize on by outsourcing.

But as I think you know, there are a lot of [finishing] costs associated with outsourcing.

It's not all positive in terms of the cost side of things because of just the nature of moving the airplanes and the number of hours that the MROs throw in an airplane compared to what we can do if we can wring out all of the unproductive time that we've historically had in this company, as it relates to the various checks that we do on our airplanes.

So, I'm very encouraged by the progress that our folks have made within our maintenance and engineering organizations, but at the same time, I recognize that the rest of the industry for the most part is going in a different direction, and the proof will be in the pudding and where we end up in total cost per block power, per cycle, however you want to measure it, whether we can become best-in-class.

But I am encouraged, Ray, by the fact that more and more airlines that have historically outsourced their airplanes to the MRO world are knocking on our door, and we're doing -- (technical difficulty) -- for a number of airlines right now, both in Latin America and here in this country.

So I'm encouraged by that.

But I think it's going to take some time for all of this to play out.

Okay, great.

Another area where American is a little different than other airlines is in the regional feed area, American Eagle.

I'm just wondering.

Are you having any second thoughts about selling it off or partly selling it off, or have American Eagle, if you do keep it, bidding for outside business?

Or the third thing is you're restricted because of scope clause now to smaller RJs.

It seems the trend now is towards that larger RJs.

Is that some direction that you want to move in down the road?

Well, again, another good question, Ray.

I think that we are mindful of the fact that American Eagle is one of the largest commuter carriers in the country; it's not the largest and is primarily an all-jet fleet today.

We are limited in the size of the airplanes that we can operate there, and we do own the majority -- we own all of AMR Eagle but we do have other providers of feed to American, primarily in St. Louis.

We use a number of different carriers there, so we're not 100% internal in terms of our regional feed, but I think certainly the majority is internal.

We recognize we have a strategic asset there and I think one of the priorities for my new head of strategic planning, Mr. Horton, is going to be to help me and our team think about what is the sensible, best long-term structure for that feed going forward.

But I'm also mindful of the fact that a lot of the transactions that have been done in this industry, when you look back on them, they just look like very expensive financings to me because they -- if you look at the nature of the agreements, they just took profits from the big airline, moved it to the little airline and sold it, then they end up paying that back over time.

That looks like an expensive financings to me.

I think, as we think our way through this, in the long run, what we, American airlines, want and need is long-term, stable, cost-effective feed for the airline.

Figuring out how we get from here to there will be one of Tom's many challenges.

Bidding for outside business, is that a possibility?

Or, because they are owned by American or AMR, that that's not feasible?

No, I don't think there would be anything that would prevent Eagle from going out and trying to land some business, but you know, at the moment, all their airplanes are dedicated to American Airlines.

So you know, they would have to make economic sense out of doing that and buying airplanes, if they can do that economically, and I haven't seen anything like that yet.

JPMorgan Chase, Jamie Baker.

Yes, good afternoon, Gerard.

I guess I'm a bit shocked to hear that you didn't think the ExpressJet and [Pinnacle] (indiscernible) divestitures were good deals.

Look how good their stocks are doing!

Given the industry uptick in demand, the shift in the supply curve, your own cash balance, has the opportunity to achieve incremental labor savings essentially passed AMR by until 2008?

Well, Jamie, I think that, across the board, one of the things that we've tried not to do in our company is isolate labor as the problem or our union as the problem.

We've tried to tell ourselves and indeed we believe -- I believe labor is not the problem.

They are a seminal part of the solution, and this whole effort that we call performance leadership, you know, it's not been without a lot of bumps in the road and it's an evolving project, but it does, for us, highlight areas where we are not nearly as efficient or as strong as some of our principle competitors.

And so I think, Jamie, that work sits there.

We continue our monthly dialogue and we have JLTs, joint leadership team meetings throughout this company that are increasingly springing up at locations all over the company.

What we're trying to do is make organized labor and by extension our frontline employees are business partners and emphasize continuous improvement in the Company.

So no, I think there is much more that we can do outside of the traditional collective bargaining process, but that, by definition, is a collaborative effort and you've got to have people that want to work with you and want to make the Company more successful.

You can't order them to do it; you can just work, do your very best to educate folks about our company, how it stacks up and where the areas are that we can find improvement and then hopefully people will work in that direction.

I remain very hopeful that that is right path to achieving sustainable, competitive advantage.

We've been very busy in this company for many years now trying to reengineer what we do and do it in a way that's sustainable.

We're going to keep doing that.

Then of course, in the course of all of this, we're going to renegotiate our contracts, and we're going to do that in as collaborative and as constructive a way as we can.

I mean, given this approach with labor, Gerard, and the frequency with which you meet with leaders, should the May 2006 sort of meet and greet that's in the contract there with the pilots -- has that essentially been marginalized, or is that still a date that we should view as sort of a headline potential kind of date?

Jamie, I don't necessarily view that as some seminal date or opportunity.

I think you are referring to the fact that either any of the unions of the Company can open --.

Yes.

With the exception (indiscernible) discussions, that the more meaningful date is the fact that the contracts become amendable in 2008.

Yes.

No, I was referring to the language concerning May, 2006.

It sounds like that is an increasingly irrelevant date, just given your proximity with labor.

If I can just ask a quick follow-up so that we can model other revenue trends?

Somebody on the revenue management front, if you can answer the question as to, you know, on fuel surcharges, what fare categories -- and broadly speaking, what markets are they still applied in?

I mean, where are they not a part of the base fare construction?

(multiple speakers).

We should have brought somebody from our revenue management group.

I think the only place -- (multiple speakers) -- I believe, and we will get back to you on this, I think the only place that you see a true fuel surcharge that's not part of the base fare is in some but not all of our international markets.

Okay, great.

Well, maybe Kathy can follow-up with me after the call.

That's very helpful.

Thank you for taking the time to answer the questions.

David Strine in queue representing Bear Stearns.

Good afternoon and congrats on your return, Tom.

A question for you with respect to the balance sheet -- and I just want to get your thinking on, over time, what you think the appropriate leverage ratio is for the Company, or where you think you will be more comfortable with having it.

Then second, what your thoughts are about the negative carry that you have right now.

You've got a pretty good-sized cash balance, and it seems like there may be some opportunity to reduce the negative carry.

Perhaps what ties into that is the pension legislation that's on the Hill.

I understand that, in 2007, you could potentially have a real big balloon in your required contributions to the DB plan.

Would paying down a slug of debt with cash be contingent upon successful legislation in terms of more lenient funding requirements?

Okay, a lot of stuff there.

I guess I would start out by saying I think the leverage is too high right now and we need to work down our debt balance, which is just a little under $20 billion today, including capitalized value leases, so I'm not happy with where the balance sheet stands today.

I don't think it has us poised to begin to return the Company to some level of sustainable growth.

So we need to keep working on the balance sheet.

I don't have a specific target in mind just yet, but we've got some more work to do there.

In terms of the negative carry, you know, obviously that is an issue and that is a concern.

On the other hand, at this point, you know, we -- (technical difficulty) -- the flexibility that a significant cash balance affords us, given some of the volatility in the industry right now.

So you know, I think you can expect us to maintain a sizable cash balance for a while to come.

We have been doing some selective debt (indiscernible) buyback where that has made sense, and I think we will continue to do a bit of that, but we will have a significant cash balance for a while to come.

You mentioned the pension situation.

Obviously, we are working hard in Washington to get some legislative relief on the pension funding.

That process is on hold just momentarily, as the Congress is in recess, but we expect good progress on that and we expect a good result on that this year.

As we mentioned in our 10-K, our pension underfunding on an [ABO] basis is over $2 billion;

I think it's $2.3 billion.

Absent relief, legislative relief, we would be required to fund the majority of that next year.

We expect really -- but even in that case, we're going to wind up funding more than we will fund this year, so part of the cash is going to be dedicated to pension funding.

Okay.

Then a follow-up on the first part of the question with respect to just the balance sheet itself -- is there a timeframe that you have in mind, and perhaps you don't, as to how quickly you want to address repairing the balance sheet?

Is this something that you think should be achieved over, let's say, two years or something that should be achieved over five years?

You know, I don't really have a timeframe in mind yet.

It somewhat depends on what we see in terms of the operating environment in the industry.

You know, as with the fuel price situation now, we will be looking at a pretty sensible supply, demand and revenue environment driving a more healthy industry.

But fuel would certainly take (inaudible) a lot of that wind at our backs away.

Okay.

Then last minor question -- did you mention what you expected option expenses to be for 2006 in your comments?

I did not, but I can give you a sense for that.

I think we've got about $25 million in the budget for the year.

We booked about 11 in the first quarter.

Okay, thanks a lot.

Cathay Financial, Susan Donofrio has our next question.

Yes, Hi, Gerard.

Hi, Tom.

Just I think just one last question I have.

Can you talk a little bit about Varig and how a substantial grounding of that airline would help your Latin American revenues?

Well, Susan, let me just say, broadly speaking, Latin America is very strong right now.

Tom talked to you about the unit revenue performance in that region of the world, so we're doing very well in Latin America right now, although I guess the caveat I would put there is a lot of our domestic competitors are (indiscernible) capacity into that region and I think we all know what happens when folks do that.

So, we are concerned about some of our domestic competitors and what they're doing in that region of the world.

Brazil is one of the largest of our Latin American markets.

So, if that company ends up shutting down, that will be -- I can't quantify it for you but that would be a very big dent to us.

I should add that we are getting some of that benefit today because their operation has been not very consistent lately, and also the carrier in Argentina, (indiscernible) Argentina, has been experiencing some turmoil from their employee groups.

I think, undoubtedly, we're getting some benefit from that.

So, you know, any time you get capacity that comes out of this business, it can only be good.

Sure.

Okay, thank you.

Helane Becker with The Benchmark Company.

Thank you very much, Operator.

Earlier today, maybe an hour or so ago, CNBC carried a story that you guys had pushed through a fare increase.

Can you comment on whether that was accurate or not?

Helane, I don't know what you mean by "pushed through".

Last night, we did put out increases of $5 and $10 across the board.

Candidly, as I sit here today, I don't know who has matched and who hasn't matched, but that was a domestic fare increase and it was across all of our fares, and we will have to wait and see what happens.

Okay, great.

That was my question.

My others have been answered.

Thank you.

Thanks, Helane.

Thank you all.

Thank you very much, Ms. Becker.