美國航空 (AAL) 2006 Q4 法說會逐字稿

Please note that the media Q&A of this call has not been transcribed.

Good morning; good afternoon.

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

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

However, after the executive team's prepared remarks today, there will be opportunities for your questions. (OPERATOR INSTRUCTIONS).

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

So with that being said, we will get right to this fourth-quarter agenda.

Here with our opening remarks is American Airlines' Chairman and Chief Executive Officer, Mr. Gerard Arpey.

Happy New Year, Mr. Arpey.

Please go ahead, sir.

Okay, thank you very -- we are actually going to let Kenji Hashimoto open things up.

And then, I will take over.

So let me turn it over to Kenji.

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 the fourth quarter along with some perspective for 2007.

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 and the full year.

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 slide.

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 measurements we may discuss.

We encourage you to review 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 and our outlook for revenue and earnings, cost estimates and forecasts for 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 economics, 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 will turn the call over to Gerard.

Okay.

Thank you, Kenji.

Good afternoon, everyone.

As you have all seen in our press release, we managed to earn an annual net profit of $231 million in 2006.

This is our first annual profit since the year 2000 and I think a very significant milestone in our recovery, especially considering the fact that we paid over $800 million more for fuel this year than we did the year before -- this year being 2006 versus '05 -- driven by higher fuel prices.

In addition, we earned a modest profit of $17 million in the seasonally-weak fourth quarter.

This result is $426 million better than last year's result, excluding special items.

And as you are aware, it is our third consecutive profitable quarter of the year 2006.

Our return to profitability in '06 is the culmination of a tremendous amount of hard work, dedication and a lot of reengineering under our turnaround plan by all of our employees, our management team and our union leaders.

This progress has been achieved despite the intense competition and volatile fuel prices that continue to afflict our industry.

We have a lot of work left to do, but today's results give us a great deal of confidence that we are on the right track.

As we take our first steps into 2007, I think this is a good time to briefly reflect on our accomplishments in the fourth quarter and the full year 2006.

And I am going to turn things over to Tom Horton to do so.

So over to you, Tom.

Thanks, Gerard, and good afternoon, everyone.

Throughout the call as I discuss our results, I will exclude the impact of special items, which more accurately reflects our performance on an ongoing basis.

As Kenji mentioned in his opening remarks, please refer to our press release and the slide deck accompanying this webcast for reconciliations of any non-GAAP numbers.

Along those lines, I would like to remind everyone about the special items we recognized during the fourth quarter of 2005, which netted to a charge of $191 million.

These items are referenced in greater detail in last year's press release and earnings call.

Now, just to recap the highlights of this quarter's results, I don't think enough can be said about the tremendous progress this Company has made to get to this point.

As Gerard said, this is our third consecutive profitable quarter, which hasn't happened since 2000.

And additionally, we made an annual operating profit of over $1 billion, all while paying over $800 million more for fuel than in 2005 due to higher prices.

We still have a long way to go, but we are clearly moving down the right track.

So to move to the details of the quarter, let's first talk about our fourth-quarter revenue performance.

For the quarter, mainline unit revenue increased by 5.1% year-over-year on a record load factor of 78.8%.

Unit revenue for our consolidated system was up 4.7%.

While lower than the third-quarter increase, keep in mind that our fourth-quarter 2005 mainline unit revenue increased 13.7% year-over-year.

So our comps are clearly tougher this quarter.

In our domestic markets, fourth-quarter unit revenue increased by 3.1% compared to last year on a 2.3% reduction in capacity.

Domestic load factor increased by 0.6%, and the yield increased by 2.4%.

Unit revenue improvements were particularly strong in Miami and the transcon.

In regards to our transcon markets, we are investing $20 million to upgrade the aircraft use to serve our customers on those routes.

The upgrades include updated first-class and business-class seats, a lighter and brighter cabin interior, and new audio and video on-demand personal entertainment devices in first and business class.

Internationally, fourth-quarter unit revenue increased by 9.1% versus 2005 on a capacity increase of 0.9%.

Load factor increased 1.5 points, and yield improved by 7%.

Atlantic fourth-quarter unit revenues were up 2.1% year-over-year on 2.2% more capacity.

Yield increased by 5.5% with load factors declining by 2.6%.

In the Pacific, unit revenue in the fourth quarter increased by 15.4% year-over-year on a capacity decrease of 0.9%.

Pacific load factors increased by 4.7 points, and yield increased by 8.5%.

Our Pacific performance was particularly influenced by our cancellations of Dallas-Osaka and San Jose-Tokyo at the end of October as we have retained some of our traffic over our other Japan routes.

As part of our continuing investment in the customer, we relocated our Tokyo Narita operations to Terminal 2, which will significantly reduce connection times for passengers to our oneworld partners, including Japan Airlines.

Along with this relocation, we opened a new state-of-the-art Admirals Club lounge, conveniently located next to American and oneworld gates.

And last but not least, Latin America continued its strong performance as unit revenue increased by 13.5% compared to last year, with a capacity increase of 0.4%.

Load factor increased by 3.9 points, and yield improved by 7.5% as we saw a strong performance across all [such] entities.

Fourth-quarter revenue for our regional affiliate operation increased by 3.7% compared to 2005 on a capacity increase of 3.8%.

After adjusting for a 0.7% increase in length of haul, regional affiliate unit revenue increased by 0.2% compared to '05 and yields increased by 0.2%.

Average load factor increased slightly to 72.4%.

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

We have reclassified the prior-year data as well, so year-over-year comparisons may be made on a like basis.

For the fourth quarter, total cargo revenue increased by 5.2% year-over-year.

Freight revenue, including fuel surcharge, was down 1.3%.

And mail revenue increased by 46%, driven by our new contract with the U.S.

Postal Service.

Finally, in the fourth quarter, our other revenue line increased by 11.6% to $347 million, driven by maintenance contract revenue along with other fee revenue.

Moving now to our operating costs for the mainline.

Fourth-quarter unit costs were 1.9% lower year-over-year at $0.1092.

For our consolidated system, unit costs also decreased by 1.9%.

The decrease was driven by lower fuel prices, which lowered our costs by $120 million.

As expected, we saw some increases in materials and repairs as engine volumes increased, along with higher facility and other rent year-over-year due to airport rent credits we received in the fourth quarter last year that were received in the third quarter of this year.

Our unit costs excluding fuel rose by 0.5% mainline and 0.6% consolidated.

As everyone knows, battling high fuel costs has been and remains one of our top priorities.

And I am pleased to report that in 2006, employees from all corners of our Company stepped up to the challenge, generating ideas that we expect will save us more than 90 million gallons of fuel annually.

You can see this result as our fuel neutral unit costs increased by only 0.3%.

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

We had improvements in both interest expense and interest income, as we had both higher cash balances and lower debt balances.

Now turning to the balance sheet, we ended the quarter with $5.2 billion in cash, including $468 million in restricted cash.

In the fourth quarter, our principal payments on long-term debt and capital leases totaled $500 million for a total of $1.2 billion in 2006.

In addition, we repurchased approximately $190 million of debt since January of '06.

Going forward, depending on market conditions, our cash position and other considerations, we may from time to time redeem or repurchase our debt or take other steps to reduce our debt or lease obligations or otherwise improve our balance sheet.

Our capital expenditures totaled $158 million in the fourth quarter, bringing our total 2006 CapEx to $481 million.

Late in the fourth quarter, we contributed an additional $100 million to our defined benefit pension plans for a total of $323 million this year, which was $100 million beyond the Company's 2006 funding requirement.

These pension contributions, along with strong pension fund asset returns, helped to increase the assets held in trust for our defined benefit pension plans by $800 million and helped improve the accumulated benefit obligation funding status of AMR's pension plans to 85%, up from 78% at the end of '05.

So in sum, I think it is fair to say that while there is still much work ahead, we've made some good progress on the balance sheet.

Our total debt, which includes the principal amount of airport facility tax-exempt bonds and the present value of aircraft operating lease obligations is now $18.4 billion.

Our net debt, defined as total debt less unrestricted cash, is now $13.6 billion.

So that represents a $2.7 billion reduction versus the same time last year.

Looking forward this year, we finalized our budget.

And as promised last quarter, we have more information to share with you.

Our 2007 mainline capacity will decrease by about 1% compared to 2006 with more than a 1% reduction in domestic, while international capacity is slated to decrease by less than 1%.

Our mainline capacity in the first quarter is expected to be flat year-over-year, with domestic and international capacity basically flat.

On a consolidated basis for the quarter, capacity will be up slightly versus the prior year.

Booked load factor for the first quarter is currently a bit ahead of where we were at the same point last year, but we are watching this closely.

On the cost side, as you know, fuel price has been extremely volatile in the recent weeks and fortunately moving down.

Of course, this volatility adds a little challenge to our planning process.

As you know, the forward curve for fuel is now steeply upward sloping.

If one uses the December forward curve, which is what we typically use for our planning, the first-quarter price is $1.83 per gallon with a full-year consolidated fuel price of $2.12 per gallon.

Now, I realize that fuel prices have come off that mark quite a bit in the past few days, with the current forward curve suggesting about $1.90 a gallon for the full year.

So we will keep a close eye on this and update you as we progress through the year.

In regards to hedging, we have 29% of our first-quarter consumption capped at an average price of $66 per barrel, with a full-year hedge of 15% capped at an average price of $67 per barrel.

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

As we begin 2007, we are working against the usual inflationary headwinds, such as medical insurance costs and higher aircraft materials and repairs.

Our aim in 2007 is to offset these and other inflationary costs.

Therefore, we remain highly focused on continuous cost improvement and on continued simplification and cost efficiencies along with every opportunity for top-line revenue growth.

We have targeted $300 million for cost savings in 2007.

This was driven by some of our cost initiatives, such as distribution cost savings, schedule and fleet simplification, and ongoing fuel conservation initiatives, like winglets on our 737 and 757 fleets.

We also expect revenue improvements in areas like our cargo and mail operation through its recent win of the Postal Service contract.

We expect to get a combination of revenue and cost improvements at our largest line maintenance stations and heavy check bases.

What this means is that we anticipate mainline ex-fuel unit costs to remain flat for 2007 versus 2006, while consolidated ex-fuel unit costs increase 0.7%, excluding any impact from our employee profit-sharing program.

In the first quarter, our ex-fuel mainline unit costs should increase by 0.2%, while consolidated unit costs increase 0.8% year-over-year.

Given the December forward curve, fuel prices that we discussed earlier, we expect overall unit costs to increase about 1.4% year-over-year for the mainline and 1.9% for our consolidated system.

For the first quarter, we anticipate overall unit cost to decrease 1.3% year-over-year for mainline and 0.7% for consolidated.

Moving to our cash forecast, we expect capital expenditures of about $600 million in 2007, while our scheduled principal payments are expected to equal $1.3 billion for the full year.

And our expected pension contribution for 2007 is about $360 million.

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

The earnings used to calculate our EPS figure will increase by about $7 million due to reduced interest expense.

So to wrap it up, we think there is reason for some cautious optimism about the upcoming year.

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.

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

And we will stay the course on continuous cost improvements of our cost structure.

So while big challenges remain, we believe the Company is making steady progress under the turnaround plan towards longer-term success.

So at this point, Gerard and I will be happy to take your questions.

(OPERATOR INSTRUCTIONS).

Gary Chase, Lehman Brothers.

Just a quick question on -- towards the end of the quarter, when you put out some of the guidance just in terms of RASM performance, it looks like things came in a bit better.

I have to conclude that happened towards the end of December.

Is there a late December pickup in terms of the revenue climate that we ought to be thinking will carry into 2007?

Yes, Gary.

We did see some improvement towards the tail end of the month.

We obviously outperformed our fourth-quarter expectations, and there were a couple of reasons.

I should probably start off with a little background.

As I think some of you know, December is one of the tougher months to forecast due to the holiday period.

And this year, that holiday traffic was especially concentrated just because of the calendar.

But first and primarily, we had more sell-up opportunity during the high load factor holiday period than we had anticipated.

And that sell-up gave us higher yields, which really drove the revenue performance.

We are price competitive with the widespread, low-cost carrier presence in our markets most of the time.

But without fare caps, we are able to sell up more than they do on peak days and we do.

So as a result, we had a very strong Christmas and New Year's holiday period.

The second factor, which is a little bit smaller but we did see it in the numbers, is we probably got some of the connecting traffic that could not flow through Denver because of the weather.

So that is really the story on the revenue side.

It was stronger than we anticipated the last week to 10 days of the month.

And I cannot resist just a follow-up to that.

Latin RASM has been so good for you guys for so long that it just kind of begs the question of what is going on there.

We are beyond a year.

It is not like something happened, and things started to get better.

The results just remained exceptional there.

Just any thoughts on what is driving that, and should we think that's a sustainable phenomenon there also?

Well, there are a few things.

The economies in Latin America are doing well and growing faster in general than the domestic economy.

Our base of operations for most of our Latin traffic is South Florida.

And Miami is booming as well.

So the business activity is strong.

Capacity has been relatively restrained.

And of course, one of our big competitors out of Brazil has been having some trouble.

The situation at Varig has probably helped us out a bit.

But it has been strong, and it is strong really across all the sub-regions.

It is not one country in particular.

Gary, the only thing I would -- the only thing I would add to that is that you really don't -- well, it has been strong, and it has been strong for a couple of years now in terms of RASM growth.

You don't have to go back very far in time to find a period where we were struggling in Latin America.

And we made the conscientious decision to continue to invest in that region of the world.

What you are really seeing now is those investments paid off.

Some other guys got out of town, and we stuck it out in a lot of markets.

And that is paying off now.

I am concerned with a lot about -- what we are reading about political developments in Latin America.

So, I think we have got to be cautiously optimistic going forward.

Appreciate it, guys.

Congratulations on profitability.

Jamie Baker, JPMorgan.

Gerard, I know you have been trying in recent years to foster a new type of relationship with the workforce there.

It seems to be paying off with the mechanics.

But I was just looking at today's release from the pilots.

It doesn't seem at least to an outsider that the situation has really improved at all.

Is it possible to fix this situation or should we be uniquely concerned or fearful even of what the 2008 contract timeframe suggests?

Well, I think that our strategy hasn't changed with respect to organized labor.

We embarked on a path many years ago to try to make -- or organize labor partners, and our independent employees are business partners.

And we have been at that now for almost four years.

And I think a lot of the credit for the success of 2006 and the fourth quarter really goes to our unions and our front-line employees who have engineered a lot of the business transformation that has driven a lot of the cost out of the Company that drove us to profitability.

We have taken out -- we are approaching -- if we can hit these numbers in 2007, we will be approaching $6 billion of cost reduction in this Company.

So that is significantly more than -- by a very wide margin what occurred through the restructuring in 2003.

So I think that we have made a tremendous amount of progress in working with our organized labor groups.

But it takes -- we are only half of that equation, and we are not going to change our philosophy and our way of doing business.

To the extent that any of our unions and front-line employees want to work constructively with us to make the Company successful so that they can have successful careers, we have got all the time in the world for that.

And in fact, tomorrow, we have a joint leadership team meeting with all of our unions.

I expect all of them to be there.

So even though we are going to disagree from time to time, I am going to do my very best to continue to work together with all the folks in this Company to make the Company successful.

So I am disappointed by some of the rhetoric that comes out.

On the other hand, I am not discouraged.

I am going to just keep working as hard as I can to make the Company successful.

Thanks a lot, Gerard.

I appreciate it.

Well done.

David Strine, Bear Stearns.

A quick question with respect to some of the cash.

I know you said CapEx 600 and then pension cash contributions of a bit under 400.

Will there be a non-cash offset to that for the pension portion that is sort of similar in size in non-cash expense?

(multiple speakers) I'm not sure we follow your question, David.

We'll skip it.

With respect to the CapEx issue, are you any closer to making a decision on the MD-80 replacement order?

David, it is something that is certainly we are spending a lot of time thinking about.

And the timing of that will be dependent on the economic outlook and our conversations with the manufacturers.

But we recognize that we have got a lot of airplanes, and they like us get a year older every year.

And so, we are spending a lot of time making judgments about the timing of the next-generation narrow-body airplanes, the timing of the A350.

So, we are doing a lot of work on that subject right now.

But as for the timing, I think you just have to stay tuned.

Okay.

And then just a quick follow-up to Gary's initial question about RASM and sort of the quick pickup you had right at the end of the quarter and to the extent that continued into -- is continuing into the first quarter.

It sounds like there was a couple of one-off things that drove that.

So should I read you to say that as you see it now, the first-quarter RASM is sort of progressing in terms of the year-over-year growth rate that is sort of similar to what you had in the fourth quarter overall and not just in December?

Yes, I think that is probably fair to say.

We didn't see anything extraordinary at the end of December that I think would change the trend line.

But it does suggest some periods of very high load factors.

We do have some opportunity.

And we have made some enhancements to some of our revenue management systems, which we think has allowed us to capitalize a little better on particularly strong demand.

So we may see that around periods where load factor really spikes up.

So that was encouraging.

But as I mentioned earlier, our advanced book for the first quarter is up a little bit year-over-year, which is encouraging.

David, I think to your earlier question about the pension, maybe what you were driving at was what we think our booked expense will be --

Right.

-- which is different from the cash number.

We think for '06 that will be in the neighborhood of $300 million, so $300 million in '06.

Got it.

So the actual cash impact is not that big of a deal.

Good luck this quarter.

Mike Linenberg, Merrill Lynch.

Two questions here.

With the supply down about 1% in '07, is that -- when we look at the fleet composition, is that driven by some of the 757s that are going out that are going to Delta, or are you also looking to shrink the MD-80 fleet further?

There is a couple of things going on there, but we are returning the 14 757 Pratt-powered airplanes that we got in the TWA acquisition.

Those airplanes are going back to their lessors.

But through a combination of things, we are able really to keep capacity almost flat year-over-year.

And that is a combination of pushing the aircraft harder.

In fact, we will hit all-time high utilization levels in 2007.

Then, we had some increased density initiatives on a couple of our airplanes -- on the MD-80 in particular, where we are moving one of the rear galleys on the MD-80.

And we will be able to put four more coach seats in the back of that aircraft.

And then on a couple of other airplanes, we've got a seat here or there that we can add.

So the combination of flying the airplanes harder and the density improvement is allowing us to offset the fact that the 14 Pratt-powered 757s are going back to the lessor.

That is 14 of 19 in total that will go back, so 14 of them will go back in '07.

Okay.

And then just sort of as a follow-up on the MD-80s -- and this is a question I did not think I would be asking for some time -- but with oil prices in the low 50s, at what point all things being equal do you start thinking about potentially bringing back some MD-80s?

At what oil price level?

Is that a 45 or a $40 level?

And I realize it's probably much more of a complicated answer than that, but I am curious of your thoughts.

Well, I think it is a good question, Mike.

And I think having the MD-80s that we have in temporary storage gives us the flexibility to think about capacity as the year unfolds and as we begin to make the plans for 2008.

So right now, as we sit here today, we don't have any plans to bring those MD-80s back into the schedule this year, but I think we like the fact that we have that flexibility.

So depending on how the economic environment unfolds this year, we will see what makes sense.

Having said that though, we think keeping capacity in check is incredibly important to the industry's recovery.

So we are staying very mindful of that.

Okay.

Great.

Nice quarter, guys.

Ray Neidl, Calyon Securities.

Just to get back to your cost structure, you are doing an incredible job in reducing the cost structure on fuel.

But I think you had said before and it is obvious you still have more of a ways to go.

With labor becoming a little bit more militant going out there, how can you further bring down your unit costs?

Part of it is Company labor probably throughput activity, but how can you do that?

Do you also agree with me that you do have to bring down those unit costs further?

Well, as Tom alluded to, we have got something on the order of $300 million worth of initiatives built into our 2007 plan.

And there's a wide range of things that we're doing there, ranging from improved utilization of the airplanes, lower distribution costs, a lot more winglets on the airplanes in 2007.

We have got a lot of I think very solid purchasing initiatives across all of our suppliers.

We will be rolling out the rest of our simplification initiatives on our schedule through San Juan throughout 2007.

So we are going to be pushing on every front, and it is no secret that the folks that have gone through bankruptcy and have shed their pensions and retiree medical and have cut wages much more than we have have a substantial advantage vis-a-vis American.

On the other hand, I think we have been pretty aggressive about working together with organized labor and our frontline employees to make up for that difference.

I think we are very proud of the fact that thus far, we have been able to protect our folks' pension plans and in fact contribute more than was required under the law last year.

So I would agree with you that costs are key in this business, but I think we set a very solid goal for ourselves in 2007.

If we can keep our non-fuel costs flat this year, I will feel very good about 2007.

Now that remains to be seen whether we can do it or not, but that is our objective.

Gerard, kind of related to that -- and I know it's a pet project of yours -- is you are one of the few airlines that still have the heavy maintenance in-house.

In fact, you are looking for outside contracts.

Could you just give us an update on the progress you are making in that area?

Yes, we are excited about what we're doing there, and we could not be doing it without the support of the Transport Workers Union and our frontline mechanics.

In fact, we just signed over the holiday period a contract with Allegiant for a multiyear contract to do the heavy work on their MD-80s.

And we are continuing to transform all of our business processes in our maintenance and engineering organization.

We're doing that because we as a management team, the Transport Workers Union and our mechanics I think through all of our working together initiatives have come to the conclusion that the best thing for the Company, the best thing for our mechanics is to become best in class.

And so, we went through a very exhaustive exercise of running around the world, looking at all these MROs, looking at the Lufthansa techniques of the world.

And we have learned a tremendous amount about where we are good and where we're not so good.

We've got a lot of initiatives underway to address the areas where we are not very good.

And in fact, we had our January Board meeting this morning.

We talked to our Board of Directors about the fact that this MRO environment is growing very rapidly and that there is a real opportunity for us if we are able to capitalize on it.

But that is going to mean that we get better at a lot of things and that we invest in some systems, business processes that you need to be invested in if you are going to handle this outside work.

We have not got to the point where we are prepared to do that, but we're thinking very seriously about it.

And I'm very excited about the possibility of being in this business in a more substantive way than we have been historically.

But we have landed a tremendous amount of business.

I think -- I don't know if we report the M&E revenue line independently, but we're generating a tremendous amount more revenue in that line in '06 and we will do even more in '07.

So I'm enthusiastic about it, but enthusiasm won't make it successful.

We've got a lot more work to do with the TWU and our mechanics, and I think we're on the right track.

Down the road, are you considering setting that up as a separate subsidiary?

Well, I think you are a little bit ahead of me there.

But you have got to get to the point where you really have convinced yourself that you have got a business before you can be thinking about having a separate subsidiary and that kind of stuff.

But we are clearly trying to figure out what our strengths and weaknesses are, whether we can eliminate our weaknesses and whether or not this can be a real business for our Company.

And I'm certainly enthusiastic about that effort and that process, and we will see where it leads.

Dan McKenzie, Credit Suisse.

At United's investor day, a theme among the management there was their focus on customer service and improving that vastly over what they had previously.

As part of that discussion, they talked about winning some corporate contracts even at American's expense.

So I'm wondering if you can talk about what you're seeing there with respect to corporate wins versus losses and where we are with respect to business-related revenues as a percent of total revenue.

Well, I think we are doing just fine in holding our own against United.

At any given point in time, one company may take a contract from another, and we give-and-take with those guys a fair bit given that they are a big competitor of ours, particularly in Chicago.

But overall, we feel very good about our competitiveness relative to them and how we have been competing in the marketplace.

I guess what I would add to that, that regrettably you can always buy business in this industry.

And so, the thing -- the benchmark is not whether you land a corporate account or not.

The benchmark is whether you can actually make money servicing the account after you have won it.

And I feel very good about the corporate deals that American has done in '06 and will do in '07.

And I feel confident that those are sensible deals and that we can be -- we can make money.

But I don't speak for my competitors.

Understood.

And I guess the second part of the question with respect to business-related revenues as a percent of total revenues.

Can you provide any color on that?

Well, it sort of depends on how you define business.

It is pretty tricky to define what of your traffic is a business travel, because you really don't have visibility into that.

So that is a pretty difficult question to answer.

Okay.

Then if I could just ask this one last one here.

Investors are increasingly focusing on consolidation.

It appears that United/Continental is becoming increasingly probable given the Northwest/Delta discussion.

So I'm hoping you can provide some perspective about what it would take for AMR to compete effectively in an United/Continental world that seems increasingly likely?

Dan, I'm not sure what is increasingly likely or not in this industry.

I think I would simply reiterate what we have said in the past on this subject, which is the fact that many industries that have the kind of chronic profit problem that the airline industry has, either consolidate their way to a more stable industry or you have real failure and real liquidation and capacity reduction.

And of course in the airline business, neither one of those things happens very easily.

You're very familiar with the Chapter 11 process and how it works in the airline business.

As it relates to consolidation, historically, the barriers to successful consolidation in our industry have been the government that has historically looked unfavorably on the airline mergers.

And in fact, the paradigm through which the Justice Department looks at airline mergers is a very difficult lens to get through.

So the government has been a barrier historically.

Organized labor has been a barrier historically because often in a merged entity in order to get workforces integrated, the costs of doing so either in the form of disruption or the economic terms becomes a real obstacle.

And then finally, there has been a third barrier which is just the general weakness of these companies because it does take a lot of money to put two complex organizations together.

Now whether or not those barriers will exist in the future or whether or not some of these mergers you had speculated on will happen or won't happen, your guess would be as good as mine.

As far as we are concerned, we have not commented nor will we comment on what our Company may or may not do.

Robert Barry, Goldman Sachs.

I just wanted to make sure I was understanding what you were saying on the cost side correctly.

Because it looks like in '06, the CASM ex-fuel went up a little bit and you had about I think $700 million in cost initiatives and now you expect it to be flat with only $300 million in cost initiatives and I think about the same delta on ASM.

So is there some annualizing impact from the '06 initiatives or am I missing something there?

Yes, it is really that the cost headwinds were higher in '06.

In other words, we were offsetting more cost headwinds to get to almost flat unit costs.

In '07, we don't have as much headwind.

We have headwinds but they are in the neighborhood of the $300 million that we talked about.

One of the factors there is pension expense being a little bit lower year-over-year because of the drop in the discount rate and some other things -- stronger return on assets.

But there are a handful of other things.

So it is really about what the baseline headwinds are.

I see.

Got you.

And then just to follow up on something mentioned before, taking out the TWA 75s and I think you also took out or put in the desert 20 some-odd MD-80s last year.

Does that have an impact on the RASM or is that really more of a -- I don't know -- ROA kind of impact utilization of assets?

Well it has an impact on capacity obviously, and capacity has an impact on RASM.

So the fact that we have been pretty disciplined in managing our capacity I think has been part of a healthier industry environment.

So that has been good.

Then, obviously one of the ways we have been doing that is by being -- more efficiently utilizing our assets, so pulling some planes out but using our operating assets with higher utilization.

Okay, great.

Thank you.

William Greene, Morgan Stanley.

I was wondering if you can comment a little bit on regional RASM, which was flattish in the quarter, and how that looks going forward?

Why would it be so weak when mainline is still pretty solid?

Yes, we had a year-over-year -- a year ago, regional RASM was very strong.

So we think it is more in the compare than it is anything else.

We did not see anything particularly unique with respect to the regional business other than a little bit more competition on the East Coast from JetBlue.

Okay, so it would be fair to say then that if we have lapped out of that comp, we should not see much in the way of improvement from here if it was flat in the fourth?

Is that (multiple speakers)?

It should be more comparable to the mainline.

Then on productivity, you have gotten your head countdown quite a bit at the mainline level.

Is there much more to do there or have we started to get to a point where we're probably going to hit a wall on productivity, sort of employee count?

Yes, I think we have really focused at this point more on management and management productivity.

And so that is what we built into the plan for '07 -- is improvement in management and support staff, administrative productivity.

So you're saying that this total FTE number at the mainline could actually go lower for management productivity or we're about as good as it can get?

Yes, it could actually go lower.

Kevin Crissey, UBS.

I just had a quick one regarding the paydown of debt.

Would that certainly come from cash flow from operations?

I have you generating quite a bit of free cash considering where oil has gone.

Or would you rule out an equity issuance at all given what the stock has done?

Well you know obviously, we are producing some free gas so that gives us more flexibility.

And improving the balance sheet is something we are very focused on.

We cannot comment on specific plans with respect to equity or debt buybacks.

But as you know, balance sheet repair is a big priority for us.

We have made a lot of progress in 2006, and we're going to keep working on that in 2007.

So as is our custom, we will keep all our options open and analyze them carefully and then proceed in the way that we think serves our shareholders best.

Helane Becker, Benchmark.

This is my question.

Your pilots are kind of aging.

Can you just kind of go through the replacement cycle for pilots?

How many are retiring this year?

How many you have to bring through a training program and how that factors into your cost outlook?

I feel like I'm aging a lot faster than our pilots are.

No, no, no, Gerard, we're not getting older.

The average age, if I recall, of our pilot group is about 45, 46 years old.

And I think our number of retirements this year is something in the order of 300 plus or minus.

As you know, we have begun the recall of some number of pilots here in January, and we will step that up later in the year.

So I don't -- that is not an issue that has really crossed my mind as a concern -- the age of our pilot workforce.

As you know, there is an NPRM out there that the FAA has put forward that would actually extend the flying career of our pilots from age 60 to 65 which we have opposed and have joined with our pilots' union in opposition of that initiative.

So that is not something I'm terribly concerned about.

Just on another subject, I noticed a lot of airports, especially like L.A., are starting to increase landing fees quite a lot.

Is that kind of keeping those under control part of the 300-and-some-odd million of cost reduction?

Absolutely.

That is an ongoing -- maybe battle is too harsh a word.

But we are in a constant dialogue with all of the airports where we operate in terms of the projects underway at those airports and whether or not we think they are economically feasible or desirable.

And we have done a pretty good job I think -- in particularly the past couple of years.

I think what happened in the late 1990s when the industry was doing very well, a lot of projects were launched at a number of airports across the country.

And many of those came online in 2004, 2005, and we saw the cost hit from that.

We really put a lot of pressure on the airports, and we continue to do that to this day.

We have constrained a lot of spending, but that are a lot of initiatives out there.

And it is something that we continuously work at.

Well, ladies and gentlemen of the analyst and financial community, that does conclude your Q&A session for today.

We do thank you very much for your participation.