美國航空 (AAL) 2006 Q2 法說會逐字稿

Welcome to the AMR second quarter 2006 earnings conference call. [OPERATOR INSTRUCTIONS] .

With that being said, we'll get right to the second quarter agenda.

Here with our introductory remarks is Managing Director of Amr Investor Relations, Mr. Kenji Hashimoto.

Good afternoon, sir, and please go ahead.

Good afternoon, everyone.

Thank you 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 second quarter along with some perspective for the rest of the year.

After that, we'll 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 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.

Tom 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 review the press release as well as the slide during the course of this call.

The Webcast will remain available on our Web site for several days.

Finally, et me note many of our comments today on our outlook for revenue and earnings cost estimates, and forecast 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 conditions, high fuel prices, and other factors referred to in our SEC filings, including our 2005 form 10-K.

With that, I'll turn the call over to Gerard.

Okay, good afternoon, everyone.

Thank you, Kenji.

I am very pleased to report what you've already seen in our press release, that we earned a net profit of $291 million in the second quarter.

While I realize this is just the second quarterly profit in the last 22 quarters, without the benefit of special items, I think it demonstrates we are on the right track towards returning our company to financial health.

The road ahead is not without significant challenges, high fuel costs, our cost competitiveness within the industry, low-cost carrier growth and our heavy debt burden are among the most prominent.

Our second quarter results reflect a combination of some positive trends counterbalanced by the increasingly difficult fuel environment.

One of these positive trends is the much-improved revenue environment.

Strong demand and our own capacity restraint has allowed us to raise fares several times over the past years to help offset record high jet fuel prices.

These fare increases, along with our revenue management initiatives helped us push our second quarter main line passenger unit revenue higher by 11.7% year-over-year.

Adding to this positive news is the fact that at least so far the fare increases we have implemented have not driven down demand.

Last year we set record high loan factor in every month of the year and this year we've set about breaking those records each and every month.

We've also improved our other revenue sources, growing that line of our income statement by more than 20% year-over-year.

The new products and services we've launched obviously serve our customers and provide AMR with additional streams of revenue.

When you add it all up, our second quarter total revenue from all sources, passenger, cargo, and other grew by $666 million year-over-year or 12.5% to nearly $6 billion.

Revenue performance allowed us to post a $476 million operating profit in the quarter despite an added $374 million in expense driven by higher fuel prices versus last year.

Our improved results also allowed us to further bolster our liquidity.

We ended the quarter with $5.7 billion in cash and short-term investments, including $522 million in restricted cash.

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

We have already made some good progress as demonstrated by today's results, but we obviously have a lot more work to do.

As I articulated last quarter, we planned to achieve about $700 million in cost savings this year, central to all of our cost-cutting goals to improve productivity and efficiency.

And we took another important step in that regard with our schedule reductions this year.

We talked with you about that in the past.

The greatest reductions in capacity are planned for the summer months and by flattening out our scheduled summer peak, we have been able to reduce the extra resources that we carry year round to fund that seasonal peak.

In addition to the 23 MD-80 aircraft already placed into temporary storage in the second quarter, we have decided to return 19 nonstandard 757 aircraft originally acquired by American from TWA when their leases expire in 2007 and 2008.

The decision will save more than $50 million in annual lease costs and also allow the Company to avoid costly upgrades and higher required maintenance costs.

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

While I'm not going to get into detail, this new deal provides us the opportunity for American to realize significant distribution cost savings , while preserving flexibility, for American to pursue new and cost effective technologies as they become available.

To date, we have signed agreements with Galileo, World Stand, G2 Switchworks and Fair Logics.

These savings initiatives and many more planned this year will help to offset expected nonfuel-related inflationary costs of about $6 million and these head winds coupled with now looks like more than $1 billion in added expense related to higher fuel prices will leave us with higher unit costs year-over-year.

And clearly that's not the direction we like our unit costs to be headed 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 expanded a test to reduce ground times and new gate manning procedures to six additional cities and to a limited number of gates at Dallas and Chicago.

We're taking the lessons we learned from that experience and we're expanding that program judiciously in September while continuing to ensure our customer service levels remain high.

And while you're going to hear some more details about our challenging fuel price situation from Tom, I want to announce that we are taking another step to ensure that our fuel consumption levels are as low as possible.

Beginning in early 2007, we will install winglets on the 104 Rolls Royce powered 757s that were not already destined to have them.

This will lead to significant savings in fuel consumption going forward.

And I think that step is a reflection of our satisfaction with the results we have seen so far with this program.

Everything is not, of course, about cutting costs.

We are investing in our international business class and ensuring we have the right product and service for our premium customers.

This update involves our 767 300 and 777 international business class seats.

We'll have new [inaudible] seats, audio and video on demand entertainment, new menus and larger overhead bins.

We have the first test 767 in service today and I'm pleased to report that the customer feedback is excellent.

We also continue with our performance leadership initiative, working with our unions and our non-organized group to identify gaps in our performance versus best in class.

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

And our challenge, obviously, is not to identify gaps, but to close them and we're going to do our best to work collaboratively with all of our constituents in the future to do so.

We recognize, clearly, that we have a lot of work ahead of us and we're going to continue our aggressive pursuit of continuous improvement to create a better long-term future for our Company.

With our vast network, the world's largest frequent flier program, and a premier set of alliances, and an experienced and engaged workforce, we believe we have the right set of assets and the right folks for long-term success.

And with all that said, I will turn the call over to Mr. Horton.

Thanks, Gerard.

Good afternoon, everyone.

As Kenji mentioned in his opening remarks, please refer to our press release and slides that accompany this webcast for reconciliations of any non-GAAP and certain other numbers.

Let's first talk about our second quarter revenue performance, which as Gerard mentioned, was once again drawn year-over-year.

For the quarter, main line unit revenue increased by 11.7% and unit revenue for our consolidated system was up by 12.8%.

In our domestic markets, second quarter unit revenue increased by 12.9%, compared to last year on a 3.4% reduction in capacity.

Domestic load factors increased by 3.5% and yield increased by 8.2%.

Unit revenue improvements were particularly strong in Miami and Dallas.

Internationally, second quarter yield revenue increased by 9.7% versus last year on a capacity increase of 3.7%.

Load factors increased 2.7 points and yield improved by 6%.

Atlantic second quarter unit revenues were up by 5.2% year-over-year on 5.9% more capacity.

Yields during the second quarter increased by 5.7% with load factors declining by 0.4 points.

In in the Pacific, unit revenue in the second quarter declined by 1.5% year-over-year on a capacity increase of 22.4%.

Pacific load factors declined by 3 points and yield increased by 2.3%.

And for Latin America, unit revenue increased by 17.8% compared to last year with a capacity decline of 2.7%.

Load factors increased by 6.4 points year-over-year and yields were up 7.7%.

Second quarter revenue for our regional affiliate operation increased by 25.1% compared to last year on a capacity increase of 7%.

After adjusting for a nearly 5% increase in length of haul, regional affiliate revenues increased by 20.4% compared to last year and yields improved by nearly 12%.

Average load factor increased by 5.4 points.

Turning to our cargo operation, I should remind everyone that effective in 2006, we are reporting cargo fuel surcharge revenue as part of cargo revenue rather than other revenue.

We've classified last year's data as well so the year-over-year comparisons may be made on a light basis.

For the second quarter, total cargo revenue increased by 4.6% year-over-year.

Compared to last year, fuel surcharge revenue increased by $10 million or nearly 34%.

Trade revenue declined by 2% while mail revenue increased by 9.8%.

Finally in the second quarter, our other revenue line increased by 20.9% year-over-year to $347 million.

Driven by maintenance contract revenue, along with fees for excess bags, ticketing, and ticket changes.

Moving now to the cost side for the main line, second quarter unit costs were 8.5% higher year-over-year at $0.1088.

For our consolidated systems, second quarter unit costs increased by 8.7% to $0.1145.

Most of the increase was driven by higher fuel prices, which added $374 million to our cost structure in the second quarter.

As expected, we also saw increases in benefits, landing fees and facility rent.

As a result of these increases, our unit costs, excluding fuel, rose by 1.4% main line and 2% consolidated.

Thanks to our fuel conservation efforts, however, our second quarter main line fuel price neutral unit costs increased less than 1% compared to last year.

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

Interest expense was also higher with variable interest rates rising year-over-year offset by interest income on our larger cash balance year-over-year.

Turning to the balance sheet, as Gerard mentioned, we ended the quarter with $5.7 billion in cash, including about $500 million in restricted cash.

In the second quarter, our principal payments on long-term debt and capital uses totalled $247 million.

Our capital expenditures, net of proceeds, totalled $136 million in the quarter.

Also in the second quarter we contributed $84 million to our defined benefit pension plan.

Since the close of the quarter, we contributed an additional $65 million for a total of $184 million this year.

And back in May, we raised $400 million through the issuance of 15 million shares of common stock.

Our total debt including capitalized value of leases is now $19.4 billion.

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

Our main line capacity in the third quarter is planned to decline by more than 2% year-over-year, so domestic capacity declining by about 5% and international increasing by nearly 3%.

Full-year capacity decline will be about 1% with domestic down about 3% and international increasing about 4%.

On a consolidated basis for the third quarter, capacity will be down by less than 2% year-over-year with full-year capacity being down less than 1%.

Bookings for each month of the third quarter are currently ahead of where they were at the same point last year, but we're keeping a close eye on them given current international events.

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

For the third quarter, we expect to pay about $2.32 per gallon.

With a full-year fuel price of $2.18 now built into our plan.

However, with the recent run up in fuel prices given the middle east conflict, our price per gallon could go even higher.

Consolidated consumption for the third quarter is estimated at 800 million gallons.

We have 36% of our consumption capped in the third quarter at an average price of [$56] a barrel.

For the full year, we're now 33% hedged at an average price of $64 a barrel.

So fuel at these prices for the third quarter, we're expecting unit costs to increase nearly 7% year-over-year for both main line and for our consolidated systems.

For the year, our main line and consolidated unit costs are expected to increase by about 7% year-over-year.

Excluding fuel, our third quarter main line and consolidated unit costs should increase 1-2% year-over-year.

Because of our fuel consumption initiatives, our fuel price neutral unit costs are expected to remain flat versus last year.

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

We continue to expect capital expenditures of about $600 million in 2006.

We plan to contribute approximately $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.

Finally, as a reminder, in any quarter where our earnings per share figure exceeds $0.25, as was the case in this quarter, our fully diluted share count includes about 32 million shares attributable to our outstanding convertible notes.

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 pushing towards $90 per barrel and other carriers reducing their costs beyond our own, 2006 is shaping up to be another challenging year for us.

A lot of progress has been made on our journey towards sustained profitability and this quarter demonstrates that progress.

But it also shows we still have a lot of work ahead of us.

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

Indeed. [OPERATOR INSTRUCTIONS] Representing Bear Stearns, our first question, we go to the line of David Strine, please go ahead, sir.

Thanks, good afternoon, Gerard and Tom.

A question to kick off on pensions and the follow up will be related to cash and the balance sheet.

It seems like the folks on Capital Hill are getting closer to striking a deal on pensions.

I was wondering if you could give us an update on what you think that's going to look like and whether you think there's any daylight with regard to the terms that you will get if they are in fact more lenient funding requirements relative to the companies that are now in chapter 11, Northwest and Delta.

Well, David I think really the only guidance that I could give you on that would be -- I'd have to refer you to the Q and the K where we talk about the implications of pension relief or not getting pension relief and I think we kind of need to stick with what we've said in those documents.

But I'll give you a little color on what I think is going on in Washington.

We're very pleased with the Senate version of the pension bill and there are, I'm told, extensive reconciliation discussions going on as we speak between the House and the Senate.

I know we've heard this story before, but I do think there's a lot of activity right now.

Obviously, what we're lobbying for is to be treated in a similar manner to those airlines that are talking about freezing their plans.

We want to take what the regulators deem to be an underfunded balance and amortize that over a longer period of time using a lower discount rate, because obviously this is an argument over discount rates to begin with.

So if we get the Senate version of this bill, and I'm told by the folks that I talk to that the Senate side is very strident on the subject to get this provision in the legislation, we're going to be very pleased with the outcome.

But until they work it out with the House and get the thing done, we remain in an uncertain situation.

Okay.

In terms of the implications of that, I'd just refer you back to the Q and the 10-K.

I asked because clearly what you stated publicly before is that there could be a meaningful increase in the required cash contribution in '07 and that's going to be a big impact on cash flow ultimately in that year.

And you've obviously been building up cash and now $5.7 billion and seem to be running a significant negative carry.

So if this thing ends up flowing through for you favorably and the funding standards are more lenient and we can expect a much less burdensome required cash contribution in '07, will that alter your strategic thinking in terms of how you're going to address the reparation of the balance sheet.

And how much cash you feel you need to carry?

Obviously it will, but what I would suggest, there are a number of moving pieces there and we've made no secret of the fact that we think from a risk standpoint that we do need to do some work on the balance sheet.

But in light of the factors that you just mentioned, and in particular, the recent volatility of fuel prices, we are proceeding very cautiously, recognizing that every day you wake up oil has swung $5, $10 one way or the other.

So in that kind of volatile environment, we're just proceeding very cautiously.

And I'll ask if Tom wants to add anything to that.

I think that's right on target, Gerard.

Balance sheet repair is a priority for us and we do have, obviously, a sizable cash balance.

I think in the foreseeable future, we're going to want to maintain a sizable cash balance.

But we have mentioned that we'll be seeking to improve the leverage ratios of the company in the coming months and that's what we'll be focused on.

Okay, thanks a lot.

Thanks.

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

Please go ahead, sir.

Good afternoon, guys.

Hey, Gary.

Just a quick question for you on the economics of regional jet flying are changing pretty substantially, punctuated by your 25% rise in gain in the regional arena.

Any thoughts on whether or not you might look to add more of that feed capacity, just as the economics of flying have improved so drastically?

I guess I'd come at it this way.

You're quite right to point out the improvement you see there in the results, but we're more focused on the overall results, the combined result of American and American Eagle taken together, and there's a lot of room for improvement there to get to the point where we are actually producing a return on capital.

So I think for the time being, we're remaining very focused on the thousand plus airplanes we have and trying through continuous improvement both on the revenue and cost side, going to try to drive those results higher around both the Eagle fleet and the American fleet.

And I think that's where we sit for the time being.

So not strong enough incrementally to think it's going to make a big different in internships of the impact as a whole?

Not in the near term.

I think a lot of what you're seeing there certainly is the effect of Independence Air is a big factor in a lot of regional results in the northeast.

So with that company out of business and having gotten rid of all the destructive pricing that a company -- that company you're seeing an improvement in the revenue environment.

Okay.

And just a quick follow-up for Tom on the question, I think it was David's, Have you said more specifically what those targets are for leverage ratios?

When AMR discusses its financial health, is there something you can point to and say, this is where we want to head, even if it's a range?

It's lower than where we were today.

I guess what I would say to you, is if you look back to the late 90s, the airline industry had debt to capital ratios in the 60-70%, which is higher than the U.S. industry on average but probably not unreasonable for this industry.

So I think that's the way we think about it.

Okay.

Thanks, guys.

Thanks, Gary.

Ray Neidl with Calyon has our next question.

Please go ahead, sir.

Just a follow up on the pensions.

There's been -- in your documents, there was figures that say the underfunded pension liability is anywhere from 2 to $3.2 billion, I was wondering if I could try to clear that up for us.

And the hard freeze, that they talk about, would American, if they got the pension reform go into a hard freeze which means switching your pension plan to a defined contribution?

Well, Ray, there are a number of different ways to make these pension calculations.

Whether you're talking to the accountants or whether you're talking to ARISA where they're using an ABO calculation or a PBO calculation.

I don't have all those methodologies sitting in front of me, but fundamentally they're different ways of looking at the potential liability under different set of assumptions.

One set of assumptions would say if you terminated your plan today, and nobody had anymore accrued benefit what's the liability?

Other assumptions assume, make actuarial assumptions about how long people are going to live and work and calculate the liability that way.

And then you get different discount rates in these various methodologies.

That's why you end up with different funding outcomes.

But our strategy, Ray, is to hopefully with the help of the government, not in terms of doing anything for us other than effect the timing of our contributions to the plan, we're not anticipating that we would freeze these plans, that we would work together with our unions and our front line employees to work towards continuous improvement in both the revenue and expense line of the equation.

And in doing so, be able to fund the current defined benefit pension plan.

So it's my great hope that we do continue to work together and close a lot of these gaps we've identified in this PLL -- PLI process.

And if we do that, I think our forecasting suggestions will be just fine in terms of funding these pension plans.

Ray, to be a finer point on what Gerard said, if you look at the ABO underfunding is about $2.3 billion and on a PDO basis, it's 3.2.

Depends which basis you're evaluating on.

Another follow up on another question I was asked in a regional feeder area, which is very important, becoming more and more important I think what your scope close restrictions and your contract, you're pretty much maxed up with the size of aircraft you can use and the number of aircraft you can use.

Is there any thought with high fuel costs of maybe getting around that a bit by using the 70C turboprops which seem to be becoming more popular right now?

That's a good question, Ray.

First I would point out to you that, yes, we do have scope limits, but we have the ability to add more 70 seat RJs to the fleet under the current scope clause if we thought that was an economically sensible thing to do, to continue to invest capital in the business given its current state of profitability.

To this point we've concluded that's not a sensible thing to do.

Candidly, I don't know if the turboprops and I'm familiar with the airplanes you're talking about, it's something I know Peter Bowler has looked at in the past, but I don't know if that's anything that the evil guys are terribly intrigued by.

I'll follow-up with Peter on that and have him follow-up with you.

Great.

And good quarter, guys.

Thanks, Ray.

Next representing Merrill Lynch, we have a question from the line of Mike Linenberg.

Please go ahead.

The 757s, the 19 planes that go out, they go out beginning in 2007?

That's correct.

Okay.

With those planes going out, you may have said this and I apologize if I'm asking something that's been answered, 2007 capacity, do you provide an early read on that?

Mike, we haven't done that y et and we're in the process of building our plans for next year.

We have made the decision to return those 19 airplanes that were nonstandard.

So they actually had Pratt and Whitney engines, different seating configurations, no powerports large overhead bins.

They were actually still on a different maintenance program, too.

A legacy TWA maintenance program.

So from the standpoint of simplification and commonality, it made a lot of sense to let those airplanes just return at their natural lease expiration.

We got 23 MD80s in temporary storage next year.

And we're in the process of working on building the plans for next year.

But I think our sense right now, given the fact that oil almost hit $80 a barrel this week is, I think we're going to become pretty prudent when it comes to looking at capacity, but we haven't finished building the plans for next year.

My second question on distribution, you talked about some of the potential savings.

You didn't throw a number number out there, based on where things have fallen out on the distribution front, sort of going into this actuals or savings that are to be realized, how do they compare to your expectations when you started this process probably more than a year ago?

Well, I don't know if Tom would have anything more specific other than the fact that I think we're right on track with where we wanted to be.

And I guess I would add to that, Mike.

I have mentioned the folks that we have deals with.

As the largest carrier in the world, we want to be a good partner for all of our distribution channels.

So we really want to be ubiquitous in terms of how we distribute our product.

We just want to make sure we do it in a cost-efficient way given the fact that we're competing with folks like jet Blue and Southwest that don't even use some of these venues for distribution.

So we're just going to continue trying to work with everybody and do that in the spirit of cooperation, but at the same time make it clear to everybody that we're getting our costs down across the entire company and that's going to include distribution as well.

So, Gerard, I noticed as you ran through the different channels, I noticed there was two major TDS systems missing from that list.

So in order to reach that objective, it could mean that there's one or two odd man out, is that the proper way to read that?

Mike, what we've instituted and I think it was announced last week is a cost recovery program -- I'm not sure if that's what we called it, but a cost recovery program for agencies that opt to use a more expensive distribution channel, we're going to send them the bill to make up the difference between what we end up paying in terms of booking fees compared to these lower cost channels that we've created.

I think the important thing is that all of these channels, to the extent that they want to work with us, will have full content and so our product will be available through every channel that we have today and those that use or like to use a high cost channel, unless we're able to work out something different with those that remain -- that we don't have a contract with yet, they're just going to -- we're just going to send them a bill for the difference and end up where we want to end up.

Okay, very good.

Nice quarter.

Thank you, Mike.

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

Please go ahead.

Gerard and Tom, good afternoon.

At what fuel level does the incremental cost to the MD80 exceed the capital cost of fleet replacement, and are you starting to worry about getting the replacement aircraft that ultimately you're going to want when you want them given how tight manufacturing supply is?

Well, the short answer is based on the work we have done up to this point, we have not convinced ourselves that we should go out and just one for one replace MD80s with the current version of the 737 - 800, but as you -- there's a lot of volatility and fuel and you got to make a lot of guesses about what's going to happen to fuel in the next 5-10 years, so that is something we continue to work on and think about and I guess with respect to capacity, I have a feeling that if we want airplanes, Boeing or Airbus will figure out a way to make them.

Okay.

And we actually, and more specifically, we do hold option positions in the case of Boeing in 2008, 9, and 10.

We hold a number of option positions we could exercise.

The other thing we obviously need to do is keep close eye on the development of next generation aircraft.

That will color our thinking on how quickly we will want to move on the MD80 with respect to the current generation.

Would you have any objection to be the launch customer of said aircraft if the cost and specks were right?

No.

Okay.

And secondly, Gerard.

Just following up on earlier questions.

Can you comment on the rumored tenure window in the proposed pension legislation and specifically whether some of the suggested changes in the mortality tables could actually negatively impact your funding requirements?

Jamie, I really can't because you're now into the specifics of what's going on.

And there are a lot of moving pieces.

And quite frankly, I'm not prepared to comment on -- at that level.

Okay, okay.

All right, thank you very much.

Appreciate it.

Okay, thank you.

Thank you, Mr. Baker.

We have a question from the line Helane Becker with the Benchmark Company.

Please go ahead, ma'am.

Thank you very much, operator.

Hi, guys.

Gerard, is there a reliability tradeoff at some point that you're going to have as the fleet ages that would make some sense for you to consider newer aircraft sooner rather than later?

Well, it's a good question, Helane, but that's really more of a, that's a maintenance cost question, not -- if we're doing the kind of job that I think we're doing, in our maintenance and engineering organization.

As you know, we are increasingly unique among many of our competitors in that we're doing all of our airframes in house here at American in Tulsa, Kansas City, and Alliance and the majority of our engines we do in-house as well.

So as long as we do the job that we're doing today, which I have every expectation that we will, we shouldn't see a decline in reliability as three airplanes age.

We may, in fact, see an increase in our maintenance costs as the airplanes get older, but we will just invest in order to keep the reliability where it needs to be.

Okay.

And then I think maybe Tom said something about maintenance costs or maintenance revenue from contract and maintenance that people give to you.

Could you just talk about the availability you have to expand that business?

Well, I'll start and then I'll let Tom jump in here.

Helane, we're pretty excited about the efforts that the Transport Workers Union have made and our front line mechanics, both on the line and at our maintenance base.

This process that we went through of benchmarking, working with our unions to do that, identified lots of opportunities for productivity improvement at our bases and at our flying stations.

So we're in the process and have been for quite some time now capitalizing on those opportunities to improve productivity.

And as we do, we're freeing up a lot of mechanics that were turning around and turning them to third party maintenance work.

So we're not adding mechanics as we're going through this process, we're just bringing them up from our own continuous improvement initiatives and then we're taking on third party work.

And I don't think that we could give you a specific number on how much opportunity there is there, because we keep finding more and more of it.

And we've set some goals at each of the bases and the folks are working really hard to hit those targets so I'm very enthusiastic about what we're doing there, but I can't really give you any number.

Okay.

Could I just have one thing clarified?

On commissions bookings, fees and credit card expense, that particular line item that was unchanged year-over-year, that has the GDF savings in there?

I'm trying to kind of figure out how that line item looks going forward, and so you have GDF cost savings in there among other things, is that it?

Booking fees are in there, Helane, but what you have going the other way is the effect of much higher revenue, year-over-year, which in fact some of the other cost items in that line.

Okay.

So is that tied to passenger revenue, then?

Yes.

Should we think about it that way more than anything else?

Yes, think about commissions and credit card fees being driven by revenue volume.

Got you, thank you.

Thank you.

Thank you, Ms. Becker.

William Greene with Morgan Stanley has our next question.

Please go ahead.

Can I ask how do you think about the tradeup between load factor and yield at this point?

With load factors approaching or at record levels, when does it make sense to see the load factors stop rising and focus more on yield, given that I think what you said earlier, not seeing much elasticity in demand.

William, I think it's a good question.

As you might imagine, there's been many spirited debates here over that subject.

And I guess what I would tell you it's as much an art as it is a science.

All things being equal, you'd rather take it on the yield side than on the traffic side because you don't have all the expense of carrying additional passengers and everything that comes with it.

So I think we've been consistently, if you look at our actions the past 12-18 months, I think I can say without the lawyers jumping on me that I think we've been consistently trying to raise prices.

And that is a reflection of our view of the elasticity equation as you have described it.

And we've -- I can't talk about what we'll do in the future, but I think it sort of supports the notion that you're putting forward, which is the demand has remained very strong despite a lot of price increases.

So we'll just see what happens going forward.

Okay.

If I switch to labor expense, Tom, the head count continues to fall.

How much more is there to do on that front, on a productivity basis, I guess?

Well, we still are implementing schedule changes to enact simplification.

And that's been very constructive for us.

We've rolled out more of that as we've gone along and we've got a little bit more to do.

We've had a number of efficiencies in the maintenance and engineering organization which have been a by-product of some of the PLI work and working together where we've taken the the last time of maintenance checks down significantly.

We did that through the MD80s, we're going to do it through the A300 and the 757.

It's about turning over every rock and trying to make the Company more cost efficient and productive.

So there's more work to be done in terms of proving our productivity.

I'd add to that that the benchmark data that we have pulled together, the work we've done with our consultants under the TLI effort and our work with our unions indicate there's a lot -- there's continued opportunity there.

It's harder and harder to get at, but there's more opportunity there.

Thank you.

We have a question now from the line of Kevin Crissey representing UBS.

Please go ahead, sir.

Thanks, guys.

Nice quarter.

In what regions, going back to the elasticity of demand question, and maybe I'm beating a dead horse a little bit here, but hopefully not.

In what regions or segments, regions maybe geographically and segments perhaps leisure versus business travel or however else you want to look at it, front of the plane, back of the plane, in what regions or segments are you reaching fair saturation, where there is starting to be the fall off in demand relative to fares?

Well, I don't think we've seen that yet.

Okay.

Because Southwest had kind of indicated there were a few spots they were seeing.

Maybe it's more at the lower end than your business travel.

I don't think we witnessed it.

Okay and in kind of a different switching gears a little bit here.

In terms of the likelihood for any kind of industry consolidation, do you have a view that it's becoming more or less likely?

We have a long standing policy of not really commenting on consolidation or what we may or may not view strategically.

Okay.

Thank you.

Thank you.

Thank you very much.

[OPERATOR INSTRUCTIONS] Next we go to the line of Dan McKenzie with Credit Suisse.

Please go ahead, sir.

Mr. McKenzie, your line is open.

Thank you.

Gerard, or Tom, one follow-up question on the PLI initiative.

I understand it represents a lot of opportunities and I think that you've touched on some of those.

I was just hoping that you could quantify some of these opportunities, whether they're incremental, whether they're included in the $700 million perhaps of that additional labor productivity and perhaps timing for when these benefits could phase in if they are in fact incremental?

Well, some of its included in the $700 million, those are the banks we have line of sight to, and we're in the process of implementing.

There are some things we have not yet determined how we are going to achieve and they are not yet in our plan.

So as Gerard mentioned, there is more opportunity and we'll be glad to talk to you more about how we see that playing out for '07 later in the year.

Okay.

And Tom, you've mentioned that you wanted to maintain a sizable cash balance.

I'm just wondering, what specific level of cash AMR would like to target, if you could comment on that, please?

I think I would just leave it at sizable.

Okay.

Thanks very much.

Or a little bit more.

And thank you, Mr. McKenzie, and ladies and gentlemen, members of the press, at this time, we will move directly into your Q&A session.

Representing Reuters, we have a [webcast ended here].