美國航空 (AAL) 2006 Q3 法說會逐字稿

Good afternoon.

Welcome to the AMR third quarter 2006 earnings conference call.

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

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

As a note, we'll be taking questions first from the members of the analyst community.

And then after a short break, move directly into our media Q&A session.

So as a reminder, ladies and gentlemen, today's conference is being recorded.

I'm very pleased to have with us today AMR's Chairman and Chief Executive Officer, Mr. Gerard Arpey, their Executive Vice President of Finance and Planning and Chief Financial Officer, Tom Horton, and here with our opening remarks is AMR's Managing Director of Investor Relations, Mr. Kenji Hashimoto.

Good afternoon, sir, and please go ahead.

Good afternoon, everyone.

Thank you for joining us today.

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

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

After that, we'll be happy to take your questions.

In the interest of time, please limit your questions to 1, with 1 follow-up.

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

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

We have posted our earnings release on the Investor Relations section of our website at aa.com.

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

Gerard and 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 view the press release as well as the slide deck during the course of this call.

The Webcast will remain available on our website for several days.

Finally, let me note that many of our comments today on 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 filing, including our 2005 Form 10-K.

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

Okay.

Good afternoon, everyone.

Thank you, Kenji.

As you have seen in our press release, we earned a net profit of $15 million in the third quarter.

This result includes a $99 million non-cash accounting charge in the other income expense line to reduce the book value of certain outstanding fuel hedge contracts.

If you exclude that special item, we earned earned $114 million in the quarter, which is $209 million better than last year, excluding last year's special items.

Tom will go into more detail regarding this quarter's special item, but I must say that in the face of higher year-over-year fuel prices and the London security events, I am pleased, overall, with this quarter's performance.

Our third quarter load factor of 81.7% set another record for us.

That load factor, combined with higher yields, helped us push our third quarter mainline passenger unit revenue by 7.7% year-over-year.

While this is lower than last year's -- or last quarter's increase, remember that last year's third quarter had a 12.6 % mainline unit revenue increase, which we are not now lapping.

So the year-over-year comparison becomes a little bit more difficult.

In addition, we had the London security incident, which trimmed, we estimate, more than $50 million off our revenue for the quarter.

On the operational front, we had a solid quarter with our 814 on time arrival metric improving 2 points versus last year, driven by a 1.5 point improvement in our on time departure rate.

I think this is especially noteworthy given the record load factor, and all of the security challenges that we've had in the quarter.

So I would take my hat off to the entire American Airlines team out there in the field, who I think did a very good job this summer with lots of challenges.

As we articulated earlier this year, we plan to achieve about $700 million in cost savings throughout the year, and I'm happy to report that we're on track to meet that goal.

Central to all of our cost cutting goals is improved productivity and efficiency.

And to that end, in September, we implemented a more efficient schedule designed to improve asset utilization, improve dependability, while maintaining, if not improving revenue opportunities.

This is a continuation of all of the [depeaking] and simplification efforts that we've had underway for many years now.

Reducing our distribution cost is another important initiative this year.

And I'm pleased also to report that in the third quarter we successfully renegotiated our agreements with Galileo and Sabre.

I won't get into the details, but those agreements provide the opportunity for us to realize significant distribution cost savings, while at the same time preserving our flexibility to pursue new and cost effective technologies as they become available downstream, which we fully expect to happen.

In addition to our ongoing cost reduction efforts, we have also had success in growing our top line revenue.

Over the past year, we worked very hard with the United States Postal Service to ensure our capabilities were at their high standards, and very pleased that the Postal Service awarded us a new 5 year contract that is potentially worth $500 million.

And I think this is a demonstration of the hard work and collaboration of the Transport Workers Union and all of our employees, especially our cargo colleagues, for turning what might have been an adverse outcome into a very positive one for the Company.

And again I really take my hat off to the Transport Worker's Union and their leadership for stepping up and working with us, and getting to the right outcome for the Company and for our front line employees.

In a similar vein, a team of management and TWU employees at our largest line maintenance bases set a goal to obtain $95 million of annual value creation for the Airline by the end of 2008.

This is on top of more than $1 billion in similar goals set by the maintenance employees at our Tulsa, Kansas City, and Fort Worth bases.

We are also pleased that President Bush signed into law the Wright Amendment Reform Act of 2006 that applies to Love Field airport, and will codify into federal law.

This local agreement that all of you are familiar with that was reached by the 5 parties, the cities of Dallas and Fort Worth, Texas, DFW airport, American, and Southwest.

And again, I would thank the leadership of the North Texas Congressional delegation and all of our employees and union leaders for getting an oar in the water, and getting that legislation passed.

As all of you know, we have filed for DFW to Beijing service in a continuing effort to bolster our international offerings to our customers.

We believe we made a strong case, given DFW's access to so much of the U.S.

We've received the support of over 117,000 individuals, including 32 senators, 76 representatives, 15 governors, and hundreds of mayors and elected officials.

And so we are very hopeful about that route authority, and we will wait to see what the DOT decides.

Finally, our collaborative efforts with our unions and employees over the past year helped produce a good result in August, when Congress passed a bill that enhances our ability to fund our pension obligation.

Since the second quarter we have contributed an additional $104 million to our various defined benefit pension plans, and that brings our total 2006 contribution to to $223 million through October 13th.

As we look ahead to the fourth quarter, we are cautiously optimistic, as the recent drop in fuel prices combined with the continued unit revenue growth we've been seeing I think bodes pretty well for the quarter.

Obviously in this outlook, fuel remains a wildcard due to it's volatility, and we are continuing to watch for the residual effects of the London security events or other weaknesses in revenue.

So our outlook for the fourth quarter is much improved, but a good deal of uncertainty, I think it's fair to say, remains.

And with that said, I'll turn things over to Tom.

Thanks, Gerard, and good afternoon, everyone.

I'd like to start it off by discussing the special item we recognized during the quarter, and remind you of the 2 from last year.

This year's third quarter has a special item related to marking to market our fuel hedges.

The recent fuel price decline resulted in a $99 million charge in other income expense in the third quarter to reduce the book value of certain outstanding hedge contracts as required by Statement of Financial Accounting Standards 133, and as we've disclosed in last quarter's 10-Q.

We expect this non-cash charge to largely reverse itself in subsequent quarters.

As a bit of background, as you know, AMR regularly uses fuel hedging instruments, including options and collars, to dampen the impact of volatile fuel prices.

From 2003 to 2005, the Company's fuel hedging activities reduced fuel expenses by more than $300 million, and reduced year-to-date September 30th, 2006, fuel expense by $66 million.

The recent decline in fuel prices has reduced the Company's projected fuel cost for the second half of the year by more than $500 million compared to the guidance we provided back to the middle of July.

To those with long memories, you may remember that last year's third quarter contained 2 special items.

The largest was an $80 million charge for termination of a contract related to a construction project, and this was offset somewhat by a one-time credit of of $22 million resulting from a favorable legal decision.

So for the remainder of the call, I will exclude the impact of special items to more accurately reflect our performance on an ongoing basis.

And as Kenji mentioned in his opening remarks, please refer to our press release and the slide deck accompanying this Webcast for a reconciliation of any non-GAAP numbers.

Let's first talk about our third quarter revenue performance, which as Gerard mentioned, was once again strong.

For the quarter, mainline unit revenue increased by 7.7% year-over-year, and unit revenue for our consolidated system was up by 8.1%.

In our domestic markets, third quarter unit revenue increased by 7.8% compared to last year, on a 5% reduction in capacity.

Domestic load factors increased by 0.6 points and yield increased by 7%.

Unit revenue improvements were particularly strong in Miami and DFW.

Internationally, third quarter unit revenue increased by 7.1 % versus 2005 on a capacity increase of 2.5%.

Load factors increased by 0.5 a point and yield improved by 6.5%.

Atlantic third quarter unit revenues were up by 1.9% year-over-year on 3.6% more capacity.

Yield during the quarter increased by 4.3% with load factors declining by 2 points, and Atlantic performance was significantly impacted by the London security threat back in August.

In the Pacific, unit revenues in the third quarter increased by 8% year-over-year on a capacity increase of 21.3%.

Pacific load factors increased by 0.4 points and yields were up 7.5%.

And Latin America was particularly strong.

Unit revenue increased by 13.1% compared to last year, with a capacity decline of 3.1%.

Load factors increased by 2.5 points and yields improved by 9.5%.

Third quarter revenue for our regional affiliate operation increased by 13% compared to last year on a capacity increase of 4.5%.

And after adjusting for a 1.5% increase in length of haul, regional affiliate unit revenue increased by 9.2% and yields increased by 5.5%.

Average load factors were up 2.5%.

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

We have reclassified last year's data as well, so the comparison are apples-to-apples.

For the third quarter, total cargo revenue increased by 10.4 % year-over-year.

Freight revenue, including fuel surcharge, was up 3.6%, and mail revenue increased by 54%, driven by our new contract with the Postal Service that Gerard mentioned.

Finally, in the third quarter, our other revenue line increased by 13.3% to $333 million driven by maintenance contract revenue along with fees for excess bags, ticketing, and ticket changes.

Moving now to our operating costs.

For the mainline, third quarter unit costs were 5% higher year-over-year $0.1102.

For our consolidated system, third quarter unit cost increased by 5.3% to $0.1159.

Most of the increase was driven by higher fuel prices which added added $231 million to our cost in the third quarter.

As expected, we also saw increases in benefits and some revenue-related costs.

As a result of these increases, our unit cost, excluding fuel, rose by 1% mainline and 1.6% consolidated.

Thanks to our fuel conservation efforts, however, our third quarter mainline fuel price neutral unit cost increased only a 0.5% compared to last year.

Non-operating costs were somewhat better year-over-year.

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

Turning to the balance sheet, as Gerard mentioned, we ended the quarter with $5.5 billion in cash, including $464 million in restricted cash.

In the third quarter, our principal payments on long-term debt and capital leases totaled $220 million, for a total of $1.1 billion through today.

In addition, we have repurchased approximately $128 million of debt since January of 2006.

And going forward, depending on market conditions, our cash position, and other considerations, we may from time to time redeem [inaudible] our debt, or take other steps to reduce our debt or lease obligations.

Our capital expenditure totaled $103 million in the third quarter, and since the second quarter, we have contributed contributed $104 million to our defined benefit pension plan, for a total of of $223 million this year.

While there is still much work ahead, we have made some good progress on the balance sheet.

Our total debt, including capitalized value of operating leases, is now $19 billion.

Our net debt, defined as total debt less unrestricted cash, is now $14 billion.

That represents a $2.5 billion reduction versus the same time last year.

Moving now to guidance.

These cost figures and forecasts will exclude special items on the year-over-year basis.

Our mainline capacity in the fourth quarter is planned to decrease by about 0.5% year-over-year, with domestic capacity declining by more than 1% and international increasing by more than 1%.

On a consolidated basis for the fourth quarter, capacity will be just under flat year-over-year. [inaudible] load factor for the fourth quarter is currently a bit ahead of where we were at this same point last year.

But as Gerard mentioned, we're watching this closely, given current international events and some mixed signals in the economy.

Also, as Gerard mentioned, we are cautiously optimistic about fuel prices.

Fuel is a moving target, but we expect to pay about $1.85 per gallon for the fourth quarter.

While prices have decreased significantly since August, these prices are only a recent trend, and the forward curve remains at a steep upward slope.

Overall for the year, we have about 33% of our 2006 consumption capped at an average price of $65 per barrel.

Consolidated consumption for the fourth quarter is estimated at 770 million gallons.

With fuel at these prices for the fourth quarter, we're expecting unit costs to decrease by more than 4% year-over-year for both the mainline and for our consolidated system.

Excluding fuel, our fourth quarter mainline and consolidated unit cost should improve by nearly 2% year-over-year.

We expect capital expenditures of about $500 million in 2006, 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 operating -- where our earnings per share figure exceeds $0.25, as was the case this quarter when excluding the special item, our fully diluted share count includes about 32 million shares attributable to the outstanding convertible note, and the earnings used to calculate our EPS figure will increase by about $7 million due to reduced interest expense.

And looking forward for a minute to 2007, we are still finalizing our budget, so we'll have more information to share on our next call.

But right now our 2007 plan calls for about a 1% capacity decrease compared to 2006. [inaudible], we are currently planning for more than a 1% reduction in 2007 domestic capacity, while international capacity is planned to decrease by less than 1%.

Fuel is still very volatile, and while prices are lower than in recent months, the forward curve is steeply upward sloping.

Therefore at this point, the forward curve suggests a full year 2007 fuel price of $2.10 per gallon.

We now have about 10% of next year's consumption currently capped at about $67 per barrel.

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

As we progress through next year's planning cycle, we are focused on continued simplification and cost efficiency, along with top line revenue growth where possible.

Since 2001, we have implemented $3.5 billion of non-contractual cost reduction initiatives.

And although it is becoming increasingly difficult to find incremental opportunities, we have identified many revenue cost initiatives for 2007.

Some of our cost initiative decisions made this year will bear fruit in 2007.

These are items such as distribution cost savings, continued schedule and fleet simplification, and fuel conservation initiatives, including installing winglets on our 737 and 757 fleets.

We also expect revenue improvements in areas like cargo and mail operations through the recent awarding of the Postal Service contract worth $500 million over 5 years.

And we expect to get a combination of revenue and cost improvement at our largest line maintenance stations and [heavy check] bases.

So to wrap it up, I think it's fair to say that we have some cautious optimism about the future.

Fuel prices, while still high by historical standards, are much lower than they have been in many months.

Profitability and the balance sheet are improving.

And we will continue to take a measured approach toward capacity as we keep a watchful eye on demand.

And we'll stay the course on continuous improvement of our cost structure.

While big challenges remain, the Company is making steady progress under the Turnaround Plan towards longer term success.

So with that, Gerard and I will be happy to take your questions.

[OPERATOR INSTRUCTIONS] Kevin Crissey, UBS.

Could you walk me through the -- basically the monthly outlook?

So July looks real strong, and then you come into August and security measures.

Can you walk me through the months as far -- each month in terms of the demand side, and what you're seeing, and out as far as you kind of see?

You mentioned some questions on the economy.

Was that more from a macro what you hear from economists?

Or more from what you're seeing in bookings and that kind of thing?

It's really more what we're hearing from economists and same sort of things you guys see in the press.

But there clearly are some mixed signals about the economy.

As I mentioned, we've seen -- we see our advanced bookings up a little bit.

In fact, up about a percentage point [inaudible] load factor for the fourth quarter, so it's varies by entity.

Our domestic and certain international regions are strong.

The TransAtlantic is still -- it's a little bit weak following the security incident.

So that's really the picture, Kevin.

Okay.

And I guess I get 1 follow-up.

So I'll ask a question on any thoughts on timing or anything with regard to your -- the MD-80s?

And whether they -- whether they're staying.

The direction that those would be headed towards the desert?

Out of the desert?

And the replacement plan?

Yes, we're still thinking that through.

We're doing a lot of work on the fleet plan.

Obviously, one of the most significant issues for us in the near term is the replacement plan for the MD-80.

Having said that, it's a great airplane.

It serves us very well.

It's very much a work horse of the fleet.

But it does burn a lot more fuel than next-generation 737s.

And it has got an average now pushing 17 years.

So, it's very much front and center for us.

And I think as we roll into the early part of next year, we'll be thinking about our replacement plan.

Do you hear from Boeing that they could handle it if they -- if you wanted to?

I mean, I've always been under the assumption that if you decided to, that they would make room.

But what are your thoughts on that?

Well, we have a long-term contract with Boeing, and we have a lot of flexibility to order airplanes, depending on type, 15 to 18 months notice.

And so, we think we've got plenty of flexibility there.

As you know, we have 47 737-800 orders which we deferred until 2013.

And we could pull some of those forward and exercise some options at such time as we make a decision on MD-80.

Okay.

Thank you.

Gary Chase, Lehman Brothers.

Gerard, I wondered if you could address -- or Tom, I guess, you had spoken to the capacity plans in '07.

Wondering 2 things.

Is there some level of industry growth where you would reconsider that to the upside?

And is there some level of fuel, as you mentioned, Tom, the forwards are pretty upward sloping.

But based on where we are today, you got quite a bit of room between what the forward curve is implying and what you're paying today in terms of jet.

If things were to flatten out at the $1.80, $1.90 range, would it make sense to bring a little bit more of that capacity back out next year?

Gary, I'll let Tom jump in here.

But I guess the way I think about it is we've just come through a period of 5 years where our Company has lost $8 billion, the industry has lost $50 billion plus.

And it would seem to us, I think, that given the strength of the U.S. economy and most of the international economy that we serve, if you look at the past 2 years, the fact that the industry did not have the pricing power to offset this enormous burden that we have had with fuel, it really points to the capacity problem that made it difficult for the industry to recover one of it's commodity costs.

So as we look forward, I think we remain very cautious in terms of our own views of certainly our capacity, and what the industry ought to be thinking.

I think there is still a lot of destructive competition, particularly in the U.S. markets today, and particularly with flow traffic.

So that's why we remain very cautious in terms of our own capacity, and I think macroeconomics suggest that the industry should feel the same way.

Well, I hope so.

Also wanted to see if you'd be willing to -- you spoke a little bit about the the $700 million in savings initiatives that you announced at the beginning of the year, and that you have been -- that you're on track to implement those.

If we look at your CASM numbers, they are up slightly.

And obviously you had a lot of incremental revenue-related costs.

So we'll call that a high class problem.

But as you look into '07, or as you think about kind of the run rate, what's the inherent inflation?

In other words, what's the bogey on cost that you have to take out every year to remain sort of in that neutral, flattish CASM kind of range?

You know, I would think of it, Gary, as just general inflation.

In some areas, it's higher, certainly in the health cost area.

In other areas it's less.

But that's sort of the general -- that's the general increase we're fighting against.

And we have had some success this year in getting that back with some of our cost reduction efforts, and we're going to continue doing that rolling into the next year.

Obviously, Gary, when you are not growing and putting in more ASMs into the system, it makes the challenge harder.

But we're spending a lot of time right now looking at our -- the roll up and the plan for next year.

And the challenge for our management team and our unions and our front line employees will be to hold the line on our costs per ASM next year, despite the fact that we're not adding a bunch of ASMs for very good reason.

And so we've got lots of ideas as we begin to build a budget for 2007, and I think our track record for the past several years indicates that we have a record of finding ways to save money, and we're going to keep doing that.

But it sounds like it's about 6, 700 million.

Like what you did this year is kind of what you need to do on an ongoing basis to keep that flattish.

Is that fair?

Yes, it's probably a little bit below that I think, Gary.

But that's going to be our objective, is to try to get to something that's not too far away from flat.

Great guys, thanks.

Dan McKenzie, Credit Suisse.

I guess as AMR reverts to deep drilling here for savings, AMR has in the past talked about the cost of air traffic delays.

And wondering if you could provide some color on what the cost of air traffic control delays are today roughly?

Oh, gosh, Dan.

I don't know if I could quantify it.

But it is a very important issue for not only our Company, but for the entire airline industry.

And next year is the 10 year FAA reauthorization.

And my colleagues and I and the ATA are very eager to work on legislation that levels the playing field, if you will, in terms of how the system is funded and governed and managed.

And we think the whole thing could be managed a whole lot more appropriately and the resources given to ATC so that the systems can be modernized a lot faster than they are.

So, what we're doing though, in the context of the arguably slow pace at which we're evolving this technology, is we're trying as aggressively as we can to get RNAV approaches and departures into all of our major hub locations.

And indeed, here at DFW this year, multiple initiatives to change the in flow and out flow of aircraft into DFW, that's saving us millions of dollars.

So it's a big problem for the industry.

It's likely to get worse with the advent of these micro jets.

And there's a lot of people worrying about it, and we're going to try to affect public policy on it.

But it's a very good point that you highlighted.

Yes, it seems like it would be a great opportunity to work with labor, and by that I mean the pilots?

And certainly would benefit all of us in the public here.

And then Delta's international additions at JFK sort of leads one to believe that perhaps AMR and Continental have overlooked some interesting international opportunities.

And any commentary about why you might disagree with that, or agree with that?

Well, we don't think we have overlooked anything that's too obvious.

So we think that we're doing the right thing.

Obviously, we look at new opportunities to fly internationally all the time.

And this last year we added a couple of important new routes, both to China and India, but -- .

Yes, I think the challenge in a lot of these markets runs to the seasonality of our business.

And there are a lot of international markets -- and we've found this in our own experience over 25 years.

There's a lot of markets that will work really well in the summer, and then you'll just die for 9 months of the year.

I'm not saying that about necessarily what Delta is doing.

The proof will be in the pudding.

We'll see how they do.

But what we've been focused on the past couple of years is looking at all of our international markets and asking ourselves which of these markets are going to be successful operated for a full year.

And if we can't operate it for a full year, we've done a lot of work trying to figure out how much cost have we carried in the Company to operate flights just for the peak season.

And I think what we found was we were carrying a lot of overhead and, in fact, direct labor in the Company in order to fly these summer peaks.

So you're going to find over time that our schedule, if you look at it, has become and will increasingly become flatter and flatter, so the summer doesn't look a whole lot different than the winter.

Obviously, you can flex a little bit in the summer, even if you're not peaking.

But we think that's a better annual profit result than trying to do a lot of flying during the peak season.

And undoubtedly we will find some more international opportunities in the future, but I don't know if you have anything?

Seasonality just -- the airline business would be a great business if you just operated in June, July, and August.

Right.

Okay, good.

Thanks very much.

William Greene, Morgan Stanley.

[inaudible] what your pension contributions in '07 will be, as well as your CapEx For '07?

We haven't offered any guidance on '07 CapEx yet.

And as we bring our plan together we'll talk about that on the January call.

And our pension contribution is going to be about $360 million for '07.

Okay, well, on CapEx would it be reasonable to assume, given that you don't have a ton of aircraft coming, but it would be pretty much in line with this year?

Or is that -- is there something else -- ?

No, I guess I would say it like this.

We're going to keep a tight lid on CapEx and setting aside anything we may or may not do on replacing the MD-80 fleet, we're going to try to keep it down.

Okay.

And then the second question just on the repeal of the Wright Amendment, have you estimated what you think the impact will be on your revenue as a result of that?

We have not done so publicly and we're obviously still evaluating that.

As it in part, depends on how the competitive situation plays out there.

And I think you probably know, Southwest introduced a new destination one-stop out of Dallas, and a new pricing structure went in on Tuesday night.

In general, those fares were similar to our expectations.

So we have responded competitively.

And we are just going to continue to be competitive like we are in every other market that we serve.

So the one-stop flights do compete with our non-stop, and we're going to be real careful to keep our non-stop flight pricing fairly close to the one-stop so that customers will choose our more convenient service over less convenient service.

And, Bill, the only thing that I would add to that I think is that in a lot of these -- I think very much what Southwest announced yesterday was consistent with our expectations, and their pricing is very consistent with our expectations.

But I think while this will undoubtedly negatively impact our revenues going forward, many of these markets, Southwest, was already competing with us on a one-stop basis, even though the Wright Amendment hadn't been repealed, because you could buy 2 tickets and put them together.

So we've already felt some of this in the past.

Southwest is the largest domestic U.S. carrier on the basis of departures.

We compete with them across the United States.

This market will be no different than any other market where we compete with them.

Okay, thanks for your help.

Ray Neidl, Calyon Securities.

Yes, Gerard, just to clarify a couple of developments in the third quarter.

With the RASM increase, a lot of it was as a result of the London incident.

I'm just wondering, is there anything else that you can determine that might have caused a shortfall and RASM decrease?

The economy, I know that year-over-year comparisons in September are a little bit different.

In other words, was there any weakness in business travel that caused you to maybe have to discount in that area?

Ray, I don't -- I know what you're driving at there, and I don't -- based on the data that I've seen, I don't think we're seeing sort of general weakness or weakening trend in any of the patterns that we look at.

Having said that, I would say that the third quarter was a little bit difficult for us to get a handle on what was happening with our traffic, both internationally because of the security threat, but also because of the change in rules in terms of carry-ons In the U.S. market.

So and particularly, the short haul market.

And hard to pinpoint, but I think it's a very good development for us that the TSA has relaxed the liquid ban.

And so for business travelers, you can carry a bag onboard now and carry your toiletries onboard the airplane.

So I know I've read what some of the other short haul carriers have talked about a pretty significant impact on their short haul markets, I think undoubtedly we had some of that impact in the third quarter, although it was difficult for us to see and measure.

But I feel good about the fact that as we sit here today, the fourth quarter events book is up from where it was a year ago.

And so that's a good sign.

I think the only thing I would add to that, Ray, is the unit revenue, consolidated unit revenues were up about 8%.

That's a pretty solid increase.

A slower rate of increase obviously, from the second quarter.

But we are lapping some double-digit increases in unit revenue last year.

So compares get a little bit tougher, and as we mentioned, the London incident was worth about $50 million, which was around a point in unit revenue.

Now, on the other side of the equation, the non-fuel CASM, your doing a good job in keeping that flat from last year and from the previous quarter, especially since you're not growing your ASMs.

But with Northwest and Delta coming out of bankruptcy, and some of the things other airlines are doing, they are talking about having non-fuel CASM unadjusted for stage length of below $0.07.

At some point, being the only airline -- [inaudible] that has never been bankrupt, are you going to have to do something a little bit more drastic to get your unit cost structure down?

Well, Ray, you're highlighting that obvious challenge to the Company.

I mean, it's no secret that those that have gone through Chapter 11 have made seminal changes to their cost structure, primarily labor.

And our challenge has been and will continue to be, how do we remain competitive with those companies going forward.

And I think arguably we've done a pretty good job the past few years by staying focused on business process reengineering, both on the revenue side and on the expense side.

So as we sit here today, I think our non- labor costs are among the lowest in the industry.

I think Southwest is probably the only airline that has a lower non-labor unit cost.

And we continue to make progress on the labor front, despite the fact that we haven't gone the path that many of these other airlines have.

So particularly in our maintenance bases and out on the line, we continue to try to reengineer processes to create permanent change in competitive advantage.

And going forward, our plan is to continue to work collaboratively with our organized labor groups to look at how we stack up versus these companies that have gone through bankruptcy, and confront that reality, and work together to keep our Company competitive.

And at the same time, not lose sight of the fact that we want to work the revenue side of the equation as well.

And you saw that our other revenue line in the third quarter was up 13.3%, pretty solid increase year-over-year.

And you're familiar with the range of things we're doing there, including a lot of third party maintenance work.

So I think you highlight an important challenge that we're mindful of and we're just going to have to keep working hard to stay competitive with these guys.

Okay, great.

Thank you.

David Strine, Bear, Stearns.

A question about a small note in the release of about $128 million of debt that was repurchased.

Does that affect principal payments in '07?

No.

It's beyond '07.

Okay.

And then second, relating to a more general comment in the release, it's interesting you made a specific comment about saying that from time to time, you may redeem or repurchase debt, or take other steps to reduce debt or lease obligations.

And I was wondering, other than just straight equity, what you could be considering those other steps to be?

Well, we obviously have a lot of debt.

We have too much debt.

So one of the things we've talk a lot about is our committment to improving the balance sheet.

We've done some of that this year by paying down debt and by doing the equity issue.

There are a number of other things we could pursue with our cash.

We could consider funding the pension program.

We've given that some thought.

We have been keeping a pretty tight lid on CapEx, and we'll continue to do that.

But we do have the MD-80 replacement to think about.

But specifically with respect to debt, we have got some opportunities, and we're going to keep pushing ahead on driving our debt down.

If I may, just a brief follow-up on that.

I think I understand that either it's a clearer objective to continue to make the debt on the balance sheet look a little better.

The question was really trying to understand a little bit more thoroughly -- or maybe there isn't an answer, what the other steps might be, aside from using operating cash flow, or just straight equity issuance to help reduce the debt over the next couple of years.

Yes, we have -- as you know, we have a number of other assets at the Company that we from time to time think about.

We've talked I think in the past about our investment in an air to ground communication company, [inaudible] we own about 30% of that company.

And so if that were to be sold, there's obviously some potential proceeds there that we could deploy in the balance sheet improvement.

And when we think from time to time about our other range of assets, and how best to structure them for the long term shareholders benefit.

But we think about those things.

But at the end of the day, we are very thoughtful about running and building the business for the long run.

And we intend to use all of our assets in the way that we think is in the shareholder's interest for the long run.

So we think we've made some good progress on the balance sheet, and if we do choose to pursue any of those other avenues, there may be some more opportunity.

Thanks, Tom, appreciate it.

Mark Streeter, JPMorgan.

A question for you on the pension number you cited for 2007 of $360 million.

I'm assuming that's under the current legislation.

And I'm wondering if you or Gerard want to talk about the importance of getting an amendment and leveling the so-called playing field to what Delta and Northwest have achieved.

It seems like it's been pretty quiet in Washington about that amendment going through.

Yes, obviously we're happy with the pension legislation that we got.

It made a big difference to us in terms of what our required funding is for next year, and it gives us a lot more flexibility.

Had we not gotten that legislation, we would have been required to fund more than $1 billion to our pension for next year.

With the legislation, that number is, as I mentioned, $360 million.

So it gives us a lot more flexibility.

And having said that, it is somewhat disappointing that the carriers that have gone through bankruptcy have been given more leniency on this than have we.

So that's something we continue to work on.

But we're happy to have achieved what we have achieved.

Mark, I guess I would add to that, there is some pension fatigue in Washington right now, and I think a lot of folks are reluctant to even want to talk about pensions right now.

But we did work when we were getting this past legislation accomplished, we certainly did our best to put some markers down on what we considered fair treatment going forward, and we're going to do our best to try to get that accomplished in the next round.

So I'm not discouraged about where we are.

We're going to make another run at that.

A hard run at it.

Can you give us a sense for what that 360 would fall to, if you do get the level playing field that you seek?

I don't have that number in front of me, Mark.

I'll see if maybe we can give you guidance on that offline.

Okay.

And then just a question on the debt buyback.

And I'm just trying to get a sense for how quickly and how urgently you want to repay debt.

Because it seems like your cash balance is growing to a point where it's far and above what most would consider an appropriate safety net.

And I'm wondering, if you look at your cash generating capabilities next year and what you have in terms of cash and so forth, it seems like you could do a lot more going forward.

I'm wondering if you can talk about -- just give us some parameters for how you're thinking about what is sort of that minimum cash you need, and how important is it to very quickly repair the balance sheet.

Yes, I mean we've, in the last few months, we've moved fairly quickly in terms of raising some equity and paying down some debt, but there's obviously more opportunity there.

We're carrying more cash than we have historically.

And that is -- that's in part by design, because of the high level of volatility in the industry.

As I think most of you know, a dollar change in oil price has about an $80 million impact to our bottom line.

So oil has retreated a fair bit from where it was just a few months ago.

It was in the high 70s.

That's about $1.5 billion difference on an annualized basis.

So our forward-looking model has been moving around pretty significantly here, and it influences the way we think about cash deployment.

But clearly we've got some flexibility.

And as I said earlier , we are looking at a range of alternatives.

But I think we will consider moving more quickly on balance sheet repair.

Mark, it's also worth pointing out that while everything you highlighted is certainly accurate, I think for our Company, as well as most of the U.S. airlines, the access to the capital markets is not what it once was.

And given the state of the balance sheets throughout this industry, with perhaps the exception of Southwest.

So I think that would argue -- that, coupled with the volatility that Tom described, I think argues for caution in terms of overall liquidity levels.

Okay, thanks, gentlemen.

Helane Becker, The Benchmark Company.

On the new GDS contracts, can you quantify what the annualized savings is going to be for us?

Or give us some sense of what that magnitude of that is?

Like tens of millions or hundreds of millions, if you can't give us a number?

Tens of millions.

Okay.

Like, less than 50 or less than 90?

I'm not going to give you the number, Helane, but tens of millions.

Okay.

On the higher side.

Okay, well that's very helpful.

Thank you very much.

And then my other question is actually sort of mundane, and I apologize for asking it.

But on the maintenance line, maintenance costs are lower than I think I would have expected, especially given the MD-80 fleet and the average age.

So could you just maybe, you or Tom talk about how you're getting the productivity out of that fleet without necessarily having it cost so much money?

Or is there -- because I'm assuming there's not a reliability issue with those planes at this time.

No, not at all, Helane.

In fact, as I briefly commented on, our reliability was quite strong this summer.

There's a combination of things occurring in that line, Helane, there's a whole lot of stuff.

But at the core is the determination by the Company, the Transport Worker's Union and our line mechanics to stay in these airframe and engine business, and become world class at performing that service.

Not only for American Airlines, but increasingly for outside vendors.

And what we've said to ourselves, sitting around the table here, is most of the other airlines in the U.S. are outsourcing their maintenance.

And if we want to stay in this business, we're going to -- the only way to do it and do it sensibly over the long term, is to be the best in the world at it.

And so what we have been focusing on again, is business process reengineering across all 3 of our maintenance bases, and in our line maintenance organization.

And we are just driving more and more volume through those bases with the same number of folks, and getting better in terms of productivity per heavy check, productivity per engine check, and we're generating a lot of revenue.

At the same time, we did park some MD-80s this year, last year, so you're obviously not maintaining those airplanes anymore.

And so you've got lots of moving pieces, but I think we're just making really good progress on getting a whole lot more efficient at doing that work.

Okay, and then I notice that you're returning 757s to lessors, right?

In the first quarter, I think?

Throughout next year.

Okay.

Just, it's throughout the year?

And is there a replacement plane for that?

Well, because of all of the stuff we have done with our network, I think there are 19 757s that are going to be to the lessors.

But we are working very hard to build a plan for next year that has the airline, plus or minus, about the same size at this year.

And the way we're doing that is by pushing the metal a lot harder through all of the schedule initiatives that we have created.

So the schedule that went into effect this September was sort of, maybe not the last, but certainly getting towards the end of this whole flattening, depeaking of our schedule, where we touch a lot of the spoke cities in the September schedule.

And by that, we now have -- this last piece of this really has our major hubs operating omnidirectionally throughout the day, which means in the spoke cities, we are not peaking the spoke to hit the banks in the hub anymore.

So we get more of a continuous structure in the spoke, less ground time on the airplane.

So next year, we believe we can fly an airline almost as big as the one we did this year with 19 fewer airplanes.

If you look back, our aircraft productivity is up about 10% from where it was in 2003.

And this is just one of the byproducts of that.

Okay.

Great.

Thank you.

Michael Linenberg, Merrill Lynch.

Just 2 questions, maybe this for Tom.

When I looked at your restricted cash, it looks like was down $60 million from the previous quarter.

What's driving that, Tom?

And is that a trend that maybe continues into 2007?

We continue to work to get our restricted cash down in every way we can.

That particular reduction was pertaining to worker's comp reserves.

And Michael, that didn't just happen.

We've had an initiative in the Company that we've been rolling out over many years.

It's Partnership for Safety.

Our unions have been actively involved in that effort, and we've really partnered with organized labor and our front line employees to drive down worker injuries in the Company.

And that's paying off.

Very good.

And then just my second question, and Gerard, this now pertains over to the other revenue.

You've done a really good job of growing this third party maintenance.

As some of the older fleet -- or older aircraft get pushed out, what sort of capacity do you have to grow that business.

I mean, how much bigger can you get on the third party maintenance side?

Well, good question.

I think, Michael, it depends on how good we do at it.

If we can make money in this business, which if [Bob Redding] and the TWU and our mechanics can do what they are telling me they can do, there's no reason why we can't invest in this business.

So we have been leveraging pretty much our current asset base in Tulsa, Kansas City, Fort Worth and on the line.

But if we can land some contracts, we can make money, we can demonstrate to the world that we are best-in-class, maybe this is an area where it would make sense to put some capital.

Okay.

We're not ready to cross that bridge right now.

But I'm excited about what the TWU and what our mechanics are doing here.

Okay, great.

Thank you.

Thank you very much.

[OPERATOR INSTRUCTIONS] [Trevor Bonstetter], Fort Worth Star-Telegram.

I was wondering, Gerard, you kind of touched on this earlier.

But I was wondering if you could perhaps tell us a little bit more about how aggressive American plans to be in terms of competing with Southwest, now that they have some additional options at Love.

And as a second question, I'm also interested getting your thoughts on how much of a premium you think American can get for it's non-stop flights from DFW versus Southwest one-stops that they are offering from Love?

Well, Trevor, as you know, we compete with Southwest all over the country.

So the challenge of competing with Southwest, whom we admire greatly, they are a fierce competitor, is nothing unique.

And so we obviously watch with interest the schedule that they announced yesterday.

It was very, very close to what we expected.

Their pricing is very close to what we expected.

And I think that we will undoubtedly try to charge a modest premium for non-stop flights as is sort of the industry convention in the airline business to charge more for a non-stop.

On the other hand, people will take a one-stop flight to save money.

And therefore, we're going to have to be mindful of that, and watch the traffic pattern.

And I would suggest we're going to be very competitive with Southwest.

And I would urge people to check aa.com before you presume that Southwest has the lowest fare.

I think a lot of people would be surprised.

Great.

Thanks a lot.

Terry Maxon, Dallas Morning News.

Follow-up on that question, and it's an airline 101 question, because it's a question that readers sometimes send into me, saying well, why does American even respond to Southwest?

So explain the consequences if you had not responded to Southwest initiatives out of Love Field?

Well, Terry, of course, price is an important component to airline choice.

I mean, network is important, price is important, service is important, Frequent Flier programs are important.

But certainly, price is very important to the consumer.

So competing with the Southwests of the world is not a new phenomenon for us. [Audio ended abruptly]