美國航空 (AAL) 2008 Q1 法說會逐字稿

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

Good afternoon and welcome to the AMR first-quarter 2008 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 an opportunity for your questions.

As a note, we will be taking questions first from the members of the analyst community and then, after a short break, moving into our media Q&A session.

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

I am very pleased to have with us today AMR's Chairman and Chief Executive Officer, 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, Eric Briggle.

Good afternoon, sir, and please go ahead.

Good afternoon, everyone.

Thank you for joining us on today's earnings call.

During the call, Gerard Arpey will provide an overview of our performance and outlook, and then Tom Horton will provide the details regarding our earnings for the first quarter, along with some perspective on the remainder of 2008.

After that, we will be happy to take your questions.

In the interests of time, please limit your questions to one with a follow-up.

Our earnings release earlier today contained highlights of our financial results for the quarter.

[This release continues] to provide additional information regarding entity performance and cost guidance, which should assist you in having accurate information about our performance and outlook.

In addition, the earnings release contains reconciliations of any non-GAAP financial measurements that we may discuss.

This release, along with the webcast of today's call, is available on the investor relations sections of AA.com.

Finally, let me note that many of our comments today regarding our outlook for revenue and cost as well as forecasts of capacity, traffic, load factor, fuel cost, fleet plan and other matters will constitute forward-looking statements.

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

These factors include changes in economic, business and financial conditions, high fuel prices and other factors referred to in our SEC filings, including our 2007 annual report on Form 10-K.

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

Good afternoon, everyone.

As you have seen in the press release we issued this morning, we lost $328 million in the first quarter, or $1.32 per share.

After six straight profitable quarters, this is our second consecutive quarter we lost, and it was $409 million worse than last year.

It is a disappointing result, and it is indicative of the challenges we're facing in 2008.

So I want to take some time to talk about some of these challenges.

I also want to reinforce some of the steps we're taking to mitigate some of the impacts associated with them.

Top of mind for the industry is obviously the price of fuel.

Fuel expense for the quarter was $[2.1] billion, a $665 million fuel price increase versus last year.

For the quarter, fuel prices represented about 35% of our total operating cost.

Not only are prices high, but they are also extremely volatile.

Every dollar-per-barrel increase in the price of fuel in equates to increased expense of about $80 million on an annualized basis to AMR earnings.

In 14 of 60 trading days during the quarter, the price per barrel of jet fuel changed by at least $3.00, so that equates to about a $0.25 billion annual swing in earnings.

This uncertainty obviously presents a challenge in planning for the future.

But this, of course, has become the new reality for American and for the industry, and there's certainly no silver bullet to that problem.

The bottom line is that fuel prices look to present a very significant challenge for us and the industry for the foreseeable future.

While our fuel bill is an obvious problem, there are other challenges that we face this year including operational disruptions driven by weather and the ATC system and growing concerns about the economy.

In terms of operations, last year's first quarter set a record for us in terms of weather disruptions, but unfortunately this year was almost as challenging.

Severe weather disruptions in Dallas and Chicago drove weather cancellations for the quarter totaling about 3% of our scheduled departures.

As all of you unfortunately know, we had about 450 cancellations during the quarter due to the first round of inspections of wiring bundles on our MD-80's that added to our under fly.

Last week, we had about 3000 cancellations relating to precise compliance with this airworthiness directive.

Because we believe last week that no safety-of-flight issue was involved, we applied for an alternative means of compliance with the FAA that would have avoided the grounding, but we were not successful.

As I mentioned last week in two press conferences, we continue to work in good faith with the FAA to demonstrate our ongoing commitment to ensure full technical compliance to their directives.

I'd like to, once again, thank our customers for their patience and our employees for their perseverance and their dedication to our customers during some very difficult times.

Like everyone else, we're obviously keeping a close eye on the health of the economy.

Our unit revenue for the quarter held up well versus last year, but we're mindful of what seems like a growing chorus of concern about the country's economic growth or lack thereof, and certainly our unit revenue is in no way keeping pace with the extraordinary increase in the price of oil.

Fortunately, we have been working hard for a number of years to strengthen our balance sheet, reducing and refinancing debt and building our cash reserves.

So we believe we are in far better shape to endure a slowing economy, coupled with record fuel prices, than we would have been just a few years ago.

We were very opportunistic in taking these actions while the capital markets were more stable and favorable, and in hindsight I really can't overestimate the importance of those decisions, given the conditions we now face.

That doesn't mean we're standing pat.

In fact, we're taking further action to mitigate risk and improve our results.

We have been very conservative in managing our capacity for the past several years, and I believe our growth has been very disciplined relative to some in the industry.

We entered the year with a conservative capacity plan for 2008 and revised our capacity forecast downward in our 10-K in February.

Today, as we outlined in our press release, we're taking additional steps to pull down domestic capacity in the back half of this year, and we now expect domestic mainline capacity to be down 4.6% versus 2007, a decrease of nearly 5 points versus what was reflected in previous guidance.

The volatility of fuel makes long-term planning more difficult, but we think this capacity decrease is a sensible move that will allow us to better weather fuel prices and the deteriorating economic environment.

We have also put in place a management and support staff hiring freeze.

We're clamping down on all of our capital spending moving forward, and taking prudent steps in light of the economic environment that we're faced with.

We're also picking up the pace on our fleet renewal strategy.

We've announced our intent to accelerate 14 more 737-800 aircraft.

We now expect to have 34 deliveries of these aircraft in 2009 and 36 deliveries in 2010.

In light of what our fuel prices are and the fuel efficiency of the MD-80 versus the 737, it makes good sense to accelerate this process.

We're very focused on improving our dependability metrics, so we're initiating several dependability and maintenance programs to help bolster our dependability of our operation across our maintenance and engineering organization.

We'll have some targeted additions, scheduled ground time to our operations, to create some more cushion around our system, among other things.

Before I turn things over to Tom, I'd like to also mentioned that, as part of our ongoing strategic review, we also announced today our plan to divest American Beacon Advisors.

I think many of you who have followed the Company for a long time know that we have been working on this for quite some time, and we have now found the right partner and have an agreement that reflects full value for AMR shareholders and results in a remaining equity stake for our shareholders for further upside potential in the future.

So with that, I'll turn things over to Tom to take you through some of the details and the outlook for the balance of the year.

Thanks, Gerard and good afternoon, everyone.

The first quarter was a challenging time for the US airline industry and for AMR.

In the first quarter, we lost $328 million versus a profit of $81 million in the first quarter of last year.

This is, as Gerard said, our second straight loss and highlights the steep climb facing AMR and the industry as a whole in 2008.

As Gerard pointed out, we're facing several hurdles this year.

Of course, the events of last week were a very trying time for our Company and for our customers, and we have been working hard to get the operation back to normal and take care of our customers.

But we have got other big challenges to face down this year.

Fuel prices seem to be hitting record highs every few days, and some experts think the US economy has already entered a recession.

Clearly, there's a lot of uncertainty facing the industry today, but it's also important to point out that we have put ourselves in a much better position to face these uncertainties than just a few years ago by repairing our balance sheet and bolstering our liquidity position.

That said, we're not sitting around hoping that oil prices drop or that the economy holds up.

As I'll talk about later, we have outlined several steps that will help us better handle these uncertainties, including capacity reductions, acceleration of our fleet replacement plan and costs and capital controls.

Before I move to the numbers, let me first point out that we have reclassified the marketing component of the sale of AAdvantage Miles from passenger revenue into other revenue.

We've outlined this change in our earnings release for the current quarter as well as the aggregate impact for the second, third and fourth quarters of 2007.

I'll point out that the first quarter was helped by the timing of the Easter holiday.

That said, our first quarter mainline unit revenue increased by 6.5% year over year on record load factors and improved yield while unit revenue for our consolidated system was up 6.7%.

In our domestic markets, first-quarter mainline unit revenue increased by 6.9% compared to last year on 3.5% less capacity.

Unit revenue improvements were particularly strong in Dallas, Chicago and St.

Louis.

On the international front, we saw solid unit revenue growth in the first quarter versus 2007 on both yield and load factor improvement.

We saw significant unit revenue improvements in the Pacific and Latin entities, with the Atlantic entity about flat versus last year.

Pacific revenue performance was strong with significant yield improvements and load factors that were flat versus last year on a 2.5% capacity decline.

Atlantic first-quarter unit revenues were down slightly versus last year on increased capacity.

We saw higher load factors, but yields were lower by 1.6% versus last year.

We're making good progress on our international product enhancements.

As many of you know, we completed our business seat upgrade on all of our 767-300's at the end of last year.

We have also standardized the 777 fleet around our flagship suite and the next-generation business class seat will be on the entire 777 fleet by midyear.

We shifted both of our DFW to London flights from Gatwick to Heathrow, and we look forward to starting service from JFK to Barcelona and Milan as well as Chicago to Moscow in the coming months.

Finally, Latin America continued its positive performance in the quarter as unit revenue increased year over year despite an increasingly competitive environment in some markets.

In particular, we experienced very strong unit revenue growth on our Central and South American routes as well as routes into Mexico, and we were pleased to announce last week that Mexicana will be joining the Oneworld Alliance in 2009 as we continue to grow our alliance by adding quality airlines.

Turning to other revenue items, first-quarter passenger revenue for our regional affiliate operation increased by 4.1% compared to last year and showed a unit revenue improvement versus last year of 9.8%.

Total cargo revenue increased by 7% year over year.

As in the last three quarters, our freight and mail traffic is lower year over year.

However, we are seeing significantly higher yields that have offset these declines.

Finally, in the first quarter, our other revenue line was $522 million, an increase of 6.1% year over year.

We've made a lot of progress in this category and for the quarter we saw significant improvement in Admirals Club revenue, change fees and baggage fees.

So to sum up, total RASM was up 6.9% on a consolidated basis versus last year.

While this is strong unit revenue growth by historical standards, unfortunately, it is far from sufficient to offset the cost increases facing us with the escalation of fuel prices.

And that's reflected in our first-quarter mainline unit costs, which increased 15.8% year over year.

On a consolidated basis, our unit cost was up 15.7% year over year.

Our fuel products came in at $2.74 consolidated, a staggering increase of 48%, raising our consolidated fuel costs in the quarter by $665 million, more than we would have paid at last year's prices.

While we continue to focus on conservation, it's clear that more must be done.

With today's earnings we're also announcing our intention to accelerate new aircraft deliveries under our fleet replacement plan.

We now expect to take delivery of 34 737-800 aircraft in 2009 and 36 more in 2010.

Given that the 737-800 is about 25% more fuel-efficient than the MD-80 and in light of high fuel prices, it makes sense to accelerate the replacement of our MD-80's.

And because of the results of our recent efforts to improve our balance sheet along with the significant flexibility of our Boeing contract, we believe we can meet the fleet renewal needs of the company in a way that makes a whole lot of financial sense.

Excluding fuel, our unit cost rose by 3.3% mainline and 3.6% consolidated.

The majority of this increase was driven by reduced flying due to severe weather disruptions in the first quarter.

However, we're also experiencing cost headwinds on a variety of fronts during the quarter.

These included higher material and repair costs, added distribution costs associated with the increase in passenger revenue and higher depreciation expense as a result of our fleet replacement strategy.

In light of reduced capacity, we'll likely face some unit cost headwinds moving forward, and we intend to keep a close eye on our cost structure as we progress throughout the year.

Moving to non-operating costs, on a consolidated basis these were better year-over-year by $26 million in the quarter, driven primarily by reduced interest expense associated with our balance sheet repair.

Now turning to the balance sheet, we ended the quarter with $4.9 billion in cash, including $426 million in restricted cash.

Keep in mind that, while this is about $900 million lower than a year ago, we paid off about $2.3 billion worth of debt in 2007, including $1 billion in debt prepayments.

In the first quarter our scheduled principal payments on long-term debt and capital leases totaled $254 million, and our capital expenditures totaled $216 million.

On the pension front, we contributed $25 million to our defined benefit pension plans during the quarter, and we contributed another $50 million yesterday.

Our total debt as defined in the earnings release is now $15.2 billion.

Our net debt, defined as total debt less unrestricted cash and short-term investments, is now $10.7 billion, its lowest level since the end of 1998.

This represents a $1.5 billion or 12% reduction in net debt versus the same time last year.

As we move to guidance, let me point out that we have included preliminary estimates of the effect of the cancellations from last week into both our capacity and unit cost forecasts.

In total, about 3300 flights were canceled, and we expect the impact of these cancellations to be in the high tens of millions of dollars.

With that said, second-quarter booked load factor is 0.7 points lower than last year, with international holding flat and domestic off by a little over a point.

Although our book load factor is only down slightly, we're keeping an eye on it, given the growing concerns about the economy.

While we don't comment on unit revenue guidance, I should point out that we will be facing a more difficult comparable period in the second quarter, due to the timing of the Easter holiday versus last year.

In light of this uncertainty combined with record high fuel prices, we are revising what was already a very conservative capacity plan.

As you may recall, on our February guidance, we reduced our full-year capacity guidance to be about flat compared to 2007.

We now expect full-year mainline capacity to be down 1.4%, driven by a 3.6% decrease in domestic and a 2.5% increase in international.

In addition to mainline capacity, we're also pulling down our regional flying.

For the full year we now expect regional affiliate capacity to decline by 2.1% year over year, with the majority of the decrease coming in the fourth quarter.

So, on a consolidated basis, we expect full-year capacity to decrease by 1.5%.

These decreases are driven primarily by a fourth-quarter pulldown of almost 5% of domestic mainline capacity.

In the second quarter we expect mainline capacity to decrease 1.4% year over year with domestic down 3% and international up 1.4%.

On a consolidated basis for the second quarter, capacity will be down 1.6%.

Turning to fuel, we forecast fuel prices to remain high with second quarter fuel price of $3.01 and a full-year price of $2.98 on a consolidated basis.

That is based on the April 4 forward curve.

In regard to hedging, we have 36% of anticipated second-quarter consumption capped at an average price of $72 per barrel, or $2.42 per gallon, and a full-year hedge of about 30% anticipated consumption capped at an average price of $75 per barrel or $2.41 per gallon.

Consolidated consumption for the second quarter is estimated at 771 million gallons.

Of course, as we reduce capacity, near-term we'll face unit cost pressure because it takes time to extract related costs from the system.

Our aim this year is to at least partially offset this and other cost pressure such as our increased maintenance expense and accelerated depreciation on MD-80's that we'll see as we move faster on our retirement plan for that fleet.

We're still working through many of the details associated with the capacity reductions, but as a first step towards lowering our non-fuel costs we have implemented a hiring freeze for management and support staff work groups.

In total, we anticipate both mainline and consolidated ex-fuel unit cost to increase by about 3.9% for 2008 versus last year.

In the second quarter we expect our ex-fuel mainline unit cost to increase 5.9% year over year and consolidated unit costs to increase 5.6%.

Given our expectation for sharply higher fuel prices, we expect overall unit costs to increase about 15% year over year for the mainline, 14.7% for our consolidated system.

For the second quarter, we anticipate overall unit costs to increase 17.7% year over year for mainline and 17% for consolidated.

Moving to cash forecasts, our scheduled principal payments from debt and capital leases are expected to equal about $1 billion for the full year.

We expect capital expenditures of almost $1.2 billion in 2008.

This includes over $600 million in predelivery payments associated with 737s.

While it makes sense in light of our current fuel prices to accelerate our fleet replacement strategy, we have put in place additional restrictions around our non-aircraft capital expenditures.

Many of the projects associated with our January guidance are either continuing due to operational necessity or have already progressed to a point where it would be costly to discontinue them.

For this reason, these hurdles will only minimally affect our current 2008 outlays, but we expect reductions in capital expenditures for projects commencing in 2009 and beyond.

So, to summarize our outlook, high fuel prices are a very serious concern for the foreseeable future, and uncertainties around the broader economy are top of mind.

That said, we think actions highlighted today will better help us deal with the challenges ahead.

Now, before I conclude, I also want to highlight the latest developments under our review of strategic assets that we highlighted last fall.

Over the past six months we have discussed our thinking about the ownership structure of American Beacon and provided some additional details about the business during the last two calls and on our 10-K.

As we announced today, we plan to divest American Beacon from AMR and have a definitive agreement with TPG and Pharos Capital Group.

The sale is intended to allow AMR and its shareholders to recognize the full value of American Beacon while allowing AMR to focus on its core airline business.

AMR expects to receive total consideration for the sale of $480 million, and we expect a substantial portion of this amount to be realized as a gain upon closure of this deal this summer.

This will be primarily a cash transaction, but AMR will retain a 10% equity interest.

As many of you will recall, last November we also announced our intentions to divest AMR Eagle.

We are still in the process of determining the best structure for the transaction and will provide an update when that process is completed.

We're still planning to finalize the transaction by the end of the year.

So, with all of that, Gerard and I would be happy to take any questions you may have.

(OPERATOR INSTRUCTIONS) Mike Linenberg.

Regarding the capacity cuts which come later this year, how should we look at that?

Is that reduced utilization, is that MD-80's getting put down?

Are there other airline getting put down, like 767-200's?

Any color on that would be great.

There will be some number of MD-80's that will be retired it.

We are still working through that number because we may choose to reinvest some of the freed-up aircraft for improved dependability, as Gerard mentioned.

So there will be some retirements of MD-80's, and in addition, we will have three A-300's that will come off lease this year, which we will return to lessors.

When we look at that gain on Beacon, Tom, that you talked about, the significant gain, when we look at calculations of the various metrics for the various debt covenants, does that figure into that calculation?

Is that a good guide in that calculation, or is that excluded because a lot of times charges and gains are out?

And what is the next measurement date?

I think there was a measurement date 12 months through year-end 2007, and I'm specifically referring to the covenant related to the credit facility.

We run the covenant calculation quarterly.

We'll do that every quarter.

And with respect to the gain, I believe that's excluded for purposes of that calculation.

James Higgins, Soleil Securities.

Do you have any early read on how revenues in and out of London are faring with all the additional capacity that's gone into Heathrow recently?

Well, it hasn't been helpful.

I should have guessed that.

Yes.

So what we've seen is our transatlantic revenue per ASM in the first quarter was actually down slightly, and the rest of Europe was up pretty significantly.

So the net of those two leads to the number I reported to year earlier.

So what we're seeing in the UK, in particular, is unit revenue performance that has been driven by load factor declines in the premium cabins.

I think that's to be expected, given more capacity.

But also, I think softer demand, as reflected in some of the weakness in the banking sector.

Any read on what the credit markets look like for debt refinancing?

Can you just review for us what you have coming due this year?

We have about $1 billion of debt prepayments this year which are embedded in the guidance we've offered up.

That includes the convertible debt facility that we have, which is about $300 million.

The markets are -- obviously, the financing markets are not very good.

I think with respect to secured financing on new 737 aircraft, probably not too bad, given the very strong demand for that aircraft worldwide.

But as to unsecured debt, it's obviously not a very good market.

Gary Chase, Lehman Brothers.

A couple of revenue questions first.

Gerard, I think I saw somewhere, and it might have been a communiqué issued to employees, that you were -- something about hopeful that capacity reduction in the second half would help you price a little bit towards this fuel challenge.

Do you guys think that we've seen enough come out to date through the shutdowns and announcements you've seen from American and others, to have some optimism there?

Can you just walk us through your the process there?

Well, Gary, I did in my letter to employees, talk about the fact that a number of smaller carriers have not only filed for bankruptcy but actually liquidated.

While I certainly feel for the employees of those companies, it's a surprising how much of an impact a small airline can have on pricing in a particular market.

So the reason I put that in the letter is I do think this is a business that -- pricing is driven by supply and demand.

For many, many years we have been talking about capacity, we've been constraining our capacity.

We took further steps today, and the industry, our competitors will do whatever they are going to do.

But we've got to get supply and demand to the point where we can recover our costs.

So I think -- I can't remember what I said in the employee letter, a glimmer of hope or something.

So it's certainly positive when capacity comes out of an industry that is consistently selling its product way below the cost to produce it.

Do you think that enough has come out through these announcements or are you just noting that there's a trend here that seems favorable?

Well, maybe I'd come at this way and say, based on were we sit today, we're nowhere near recovering this extraordinary increase in fuel price.

So we've got a long way to go, and I don't know that capacity is entirely the answer.

But we've got a long way to go to get our prices to the point to where we're recovering our costs.

Of course, every business has got to do that.

The capacity plan that we shared with you today was put in place when oil prices were lower.

They've continued to rise over the last the several weeks, as you know.

So I think we and, I suspect, the rest of the industry are going to have to go back in take a sharp pencil to the capacity plans and take one more look at it.

You alluded to it in your comments.

Just the volatility of fuel is -- it's almost incomprehensible when you think about the potential impact to you.

The last time you were in a down cycle, a standard deviation in oil was $5.

Today it's closer to $30.

What kind of changes do you think you need -- and obviously, there's cost reduction, there's capacity reductions, you have the fact that oil prices are high.

But how do you deal with the fact that energy is so volatile?

You think about a $30 a swing; that's -- boy, that's a heck of a lot of difference.

I think $30 to the downside, we'd see a different environment right now.

You're absolutely right.

And so it's -- the leverage is extraordinary.

We kept the pace up on our fuel hedging.

I think Tom said we got 36% in the second quarter, 32% in the second quarter at somewhere in the $70 range.

But yes, the leverage in this is extraordinary.

I just pulled out this morning -- I was looking at the history, and if you go back a few years, our oil bill in 2003 for essentially the same size airline, actually a little bit smaller today than we were then -- we spent $2.8 billion for fuel in 2003, and the guidance that we've given you today would have our fuel bill at $9.2 billion.

So an over $6 billion increase in fuel.

So obviously, a lot of our hard work in the Company has been obscured by this oil phenomenon.

We're doing everything we can to recover that on the revenue side of the equation because, as you point out, there are limits to what we can do on the cost side of the equation, and that's why we've been pushing hard on ancillary revenues for years now, why we have been a consistent price leader in the industry.

But I'd simply have to acknowledge that yes, it's very volatile.

It makes it difficult to do long-range planning.

We would have to plan in a disruptive environment and do the best that we can.

That's what we're trying to do is continue to look at our capacity real-time, look at everything we are doing on the revenue side and try to do everything we can to mitigate this.

Could it change your longer-term appetite to re-fleet?

Just with the uncertainty, and it could be a lot higher, how does that affect the decision to re-fleet?

Well, Tom talked about that.

Certainly, there's a direct linkage to our decision to accelerate the pace on the 737-800's.

I think we've been spending a lot of time thinking about the next generation narrow-body airplane that Boeing and Airbus are going to build that's going to be the equivalent of the 787 in the narrow-body field.

But, as that date continues to move out into the future and oil prices continue to be high, you can get very clear ROI just on the oil, near-term.

So yes, it has definitely impacted our fleet plan, and that's why we've accelerated airplanes in the next year and have outlined our plans for 2010.

Gary, you're hitting the nail on the head.

There's really no playbook right now for $110 oil.

So what it means is the revenue and expense equation is broken and we need to go about trying to fix that, and that's going to be everything that we talked about today, but it may very well mean for the industry a smaller industry, less capacity flying around.

What I'm driving at is, it could be $130, and I'm just wondering if the flexibility you have with the MD-80's is valuable and if you lose some of that by having a new fleet?

Well, I think we have a lot of flexibility there.

So it's a long way before we exhaust that flexibility.

We have 300 of those airplanes.

We're moving forward with fleet replacement at a faster pace, but we have a lot of flexibility to move the fleet up or down.

Frank Boroch, Bear Stearns.

A question about the CapEx.

What's the plan to finance or to pay for the PDP's today?

Are you looking for external financing, or is that going to come from cash on hand?

Well, we're looking at a PDP financing.

We've done that in the past, and that seems to be a sensible way to handle PDP's.

But we also have, as I pointed out earlier, ample cash on hand.

So if we can find a sensible financing, we'll probably do it that way.

And then follow up on a question Mike had about the fixed-charge covenant.

Are you exploring at present a relaxation of the covenant for the second-quarter test?

We have not had any discussions on that subject as of yet.

And then, when you talked about the advanced book loads, was that just really for April, or was that a six-week glance?

Is there anything you could tell us about May bookings?

What I gave you was the advanced bookings for the rest of the second quarter, so that says we're down about 0.7% year over year.

So down a little, but I think it's fair to say bookings have held up fairly well relative to what we've seen in downturns past.

Is there ever a point where the fleet replacement needs -- it could make sense to look at another small carrier that maybe has a large supply of new-generation aircraft, as a means of addressing some of the fleet issues?

Well, I wouldn't completely rule that out.

But the cost of standardizing these airplanes is considerable.

And, because of the flexibility we have in our Boeing contract, where we can step up deliveries on pretty short notice, compared to most in the industry, that is probably -- and because of the pricing we have in that deal, that is probably the most practical and efficient way for us to buy airplanes.

William Greene, Morgan Stanley.

I think we kind of have to ask about this.

So it looks like, if your competitors are successful merging, you will no longer be the largest airline here?

I know you guys think you make money where you are big, but do you think that's all that critical, particularly as we go into a period of weaker demand?

I worry that perhaps there are cost dis-synergies that are bigger, as you get bigger.

Can you just comment a little bit about how important size is?

Well, Bill, we're fortunate to have a very strong network, irrespective of any consolidation that may or may not take place in the industry.

We have built a very strong position in Dallas/Fort Worth, in Miami and Latin America and across the Atlantic to Heathrow and other major European cities.

We have what we believe is the most powerful frequent-flier program in the world.

We also have very competitive positions in key business markets in the United States.

I think we're very competitive in Chicago, L.A.

and New York.

All those locations have international service around the world to Asia and elsewhere.

I think our Oneworld partnership represents a collection of the best global airlines and brands in the world.

So we believe we will remain competitive, irrespective of any consolidation that occurs.

The real challenge is being profitable.

I think we are not unique in our struggle to meet that challenge.

Consolidation maybe one of the factors that leads to a more profitable industry, but it is just one factor.

So, having said all that, we may or may not participate in consolidation.

Your cautious remarks we are very mindful of, having been down this path before.

Any steps we take domestically or globally on that front would have to make sense for our employees, our customers and our shareholders.

So that's about the way I see it, Tom.

You can and any thoughts you'd have.

Nothing to add.

Can I just ask about antitrust (inaudible) with BA?

Is there any reason you wouldn't pursue this now?

Well, Bill, that has been a continuing subject of discussion between us and British Airways.

I certainly don't speak for BA, but historically, there has been a lot of opposition because the notion was, when we got to Open Skies in London and at Heathrow, folks weren't really going to be able to get in there and fly.

They weren't going to be able to get slots, they weren't going to be able to get facilities.

If you go back in the past, we were saying, well, that's not true.

You can get slots, you can get facilities.

We did it.

We didn't get into Heathrow by a gift, we bought our way into Heathrow.

What you have seen is our competitors have found a way to access the Heathrow market.

So we think that letting that play out, letting the regulators see that there has been access is going to be helpful to our case.

Speaking from American's perspective, I think there will be an appropriate time to cross that bridge.

And if you look at what has actually happened since the Open Skies agreement, the US and EU carriers alone have found 16 slot pairs to operate US/London service in that critical TransAtlantic window.

That's equivalent to American's operation.

So there's no shortage of slots.

You can get slots if you're willing to go out and trade for them, and that's what happened.

So we think that blunts the argument that American and BA need to [develop] slots.

Tom, maybe I could just ask a couple of just final little detailed questions.

Do you have the estimate of the exchange rate on your yields in the quarter?

No, but I'll have Eric try to run that down for you.

Just to clarify, the reason you mentioned that the credit markets don't seem to be open to you for unsecured debt, if you will, the convertibles, what not, I assume that means you'll end up paying these out of cash, if you are required to?

Is that a fair characterization of what you meant?

I didn't say that.

In fact, I just said it's a tough credit market.

That's no secret to anybody on this phone call, but the credit markets are tough.

But we haven't approached banks.

We haven't yet concluded that we will require a waiver on the credit facility.

If we did, we could go out and pursue that, as we have in the past.

And if we were unable to resolve that on terms that we thought were sensible, we'd simply just pay it off.

It's $400 million against a cash balance of $5 billion.

That number used to be a lot bigger, years ago.

It's not quite the number, not nearly the number it was years ago.

But it's not in the $1 billion you referred to?

No, it's not.

And after the convertible, the market does seem to be open to doing convert deals.

I'm not sure that's in the interest of our shareholders, but that's something we would certainly have as an option, as does every company.

So that market is vibrant.

As you probably know, we have the ability under our current converts to satisfy those, either with cash or with stock, or to do a replacement financing.

So those are all alternatives we'll be considering [this year].

Do you have a number for unencumbered assets?

I do not.

We typically don't disclose that.

Jamie Baker, JP Morgan.

Gerard, if we look at the equity performance as of late, and particularly where credit default swaps are trading, the market seems to be reaching a conclusion that an AMR bankruptcy filing is increasingly, shall we say, difficult to completely rule out.

I realize this is a very sensitive question to ask you point blank.

And you did touch on a few steps you are taking, in your prepared remarks.

But I think what we need to hear is, first, what you consider your minimum liquidity threshold to be; and, second, just how hard is this management willing to work in order to avoid Chapter 11, given what some would argue is a competitive disadvantage you have for not having gone through it already.

Well, Jamie, I think we have a demonstrated track record of how hard we are willing to work to protect the interests of our shareholders.

In fact, having spent the first two years in this job teetering on the edge of bankruptcy in 2003 and 2004, have been very mindful of that experience.

That is why we have, for many years, been working very hard on our capital structure and our cash balance and the pay-down of debt and putting ourselves in the best possible position to weather this kind of storm.

In terms of the guidance, in terms of the risks for this Company or any other airline, for that matter, in this oil or economic environment.

I'd just point you to our 10-K and 10-Q, and you can look at the highlights of all of the risk factors.

But there's a reason why we built that cash balance, and you will recall me being heavily criticized in the 2006 era for building such a large cash balance.

But I think there was a reason for that.

Maybe just to add to that, when I went to CFO school, I learned never to comment on stock price or the CDS market.

But, as you know, we've chosen to carry a significant amount of cash, given the volatility that we've seen in the business, particularly around oil prices.

So we stack up pretty well versus virtually all of our legacy competitors, whether you're looking at absolute cash balances or cash as a percent of revenues.

We've been working real hard to strengthen the balance sheet considerably over the last couple of years.

As we've paid down debt, we have created significant amounts of unencumbered aircraft.

The last point I'd make is, our sale of the American Beacon, which we announced earlier today, was really about creating value for our shareholders, something we have been working on for some time.

It does have the benefit of adding to the liquidity cushion that I just referred to.

So, at the end of the day, I think liquidity is an industry issue at $110 oil, but I think it would be incorrect to uniquely single out American.

On your point on our cost structure, because we didn't file for bankruptcy like all the other legacy carriers have done in their history at least one time, if you actually break it down in total, our total cost structure is not that far, on the stage length adjusted basis, off some of those guys that went bankrupt.

Our disadvantage is in our labor cost.

It's no secret.

On average, we have the highest-paid people in the industry.

But on the non-labor cost side, we've done a very good job of controlling those costs.

One of these effects you're seeing if this Delta-Northwest merger is actually completed, is you're going to see some labor convergence as a consequence of that.

So I think we have to continue to work hard to make our cost structure competitive, but if you actually look at us compared to United or USAir or a lot of these guys, we're really not that far off the mark in total.

And to your credit, Gerard, on hoarding cash, it's just amazing to me to think that six or eight months ago, there was so much pressure being applied to you to pay a dividend.

Is there a heightened sense -- just as a quick follow-up -- a heightened sense of urgency here to complete the sale of Eagle or monetize AAdvantage and or consider capital infusion from a partner, or is there not that sense of urgency just yet?

Well, we are proceeding with Beacon and with Eagle because we think those are sensible things for the shareholder.

I think there is a heightened sense of urgency around writing the revenue cost equation for us and for the whole industry.

So that's what the steps we talked about were all amount and we're going to keep looking at all of those things.

(OPERATOR INSTRUCTIONS) Kevin Crissey, UBS.

To be more specific -- Jamie mentioned it -- but the AAdvantage sale, is that not on the table; or, it hasn't been on the table and now may become on the table?

Well, as we've mentioned in the past, we're looking at all of our strategic assets under this review.

With respect to AAdvantage, the thought there, I think, has been that there's an ability to unlock some value for shareholders that may not be reflected in AMR's stock today.

But I think it's also important to keep in mind that's what's being considered or what has been talked about is a separation of AAdvantage, which would sort of involve dividing AMR into two parts -- a cash flow-driven business with the potential to generate ongoing dividends and the remaining business without the AAdvantage cash flow.

And that, as we've said in the past, raises some fundamental questions that must be addressed around cash usage and risk profile and such.

In the current economic environment and fuel prices, that seems a pretty long path.

But it's something we'll keep looking at and thinking about.

If there is value to be created there, we'll give it very serious consideration.

The follow-up question, then, would be AMR's view on the treatment by the Department of Justice of multiple mergers simultaneously.

Is there a three-week, a month window?

Do you have a view that you can share on, if you were involved in some sort of industry consolidation, the time under which you would have to do it that would be considered somewhat simultaneous with Delta-Northwest?

We don't really have a strong view on that.

I think some in the industry have thought that the current administration would be more accommodating to mergers.

If that's the case, then a subsequent deal would need to be done relatively quickly.

But I think it's unclear as to whether that is even true, given that we don't know how the presidential election is going to shake out.

Did you mention the multiple that was paid for Beacon?

I did not mention it, but you can do the math.

It was over a 10 times EBITDA multiple.

Mike Derchin, FTN Midwest Securities.

One of the problems that you've got with oil is the crack spread up in the $30 to $35 range.

Can you give us any insights on anything going on structurally in the refining business in the Gulf to account for that level of crack spread?

We cannot, and despite great efforts to understand the difference between crude and after you lay the crack spread on it, we don't have a good explanation for that.

And if there is one, I've certainly asked a lot of informed folks, and I have not gotten a straight answer.

So I think it's a commodity, it's driven by commodity forces and we can't make any sense out of it.

Do you have any guess on, or what is your assumption going forward on -- when you forecast going forward, what are you using?

We simply take the forward curve for oil.

Ray Neidl, Calyon Securities.

Being an ex-bond analyst, I congratulate you guys for building up such large cash reserves in good times, because we knew this was coming, something like this, anyway.

Ray, thank you.

That means a lot, coming from you.

Related to the cash reserves, though, with what's going on in the industry, M&A activity -- you kind of put your thoughts out on that.

But as other airlines merge, if certain assets become available that you thought were valuable to American Airlines, would you want to get in that type of game and use some of your precious cash reserves to acquire that, which might be a one-time opportunity?

Ray, I think we'll paying careful attention to that, if that opportunity develops.

And of course, we'll have to weigh the risk-reward for our shareholders in any such situation, should it develop.

So we'll definitely pay close attention.

As I said earlier, we may or may not participate in consolidation.

Anything we do domestically or globally will have to make sense for all our stakeholders.

If we do something tactically, we'll put it through the same [lens].

Regarding the possible spin-off or selling of American Eagle, I guess eventually you're going to break out some of those numbers for us so we can take a look at them.

But I think, in the past, you've indicated that your labor costs there are very high, and it might make it difficult to spin that off.

Is that still the case, or are you making reforms in that area?

Plus, the Eagle balance sheet regarding the aircraft, how would that be reformed?

Ray, we're working on all that.

Our primary issue at Eagle is not -- we do have a little bit higher labor cost, but that's primarily driven by high seniority levels at Eagle versus our competitors.

We're working on the whole issue of, depending on what form the separation takes, where the ownership of the airplanes ends up and how that will work.

That's not ready for prime time yet.

And the balance sheet -- do you have any idea how the aircraft will be financed on a lease basis or turned over to Eagle?

Or, are you still working on that, too?

Yes, we are still working on that.

Chris Cuomo, Goldman Sachs.

First, I think you alluded to some cuts in CapEx, non-aircraft related, in 2009 and beyond.

Could you just give some color as to where you are going to be making some of those adjustments?

Chris, really what we're commenting on there is, in this oil/economic environment, we are going to be real cautious with our discretionary capital spending to make sure that anything we do in this environment, we get a very quick payback.

That's really what Tom was highlighting there.

So anything that's discretionary, we'll just be real cautious in this environment, going forward, until, perhaps, we get a little bit more stable environment to deal with.

That sounds like a sensible decision.

Then just a quick detail.

I think you mentioned an estimate of $75 million to $80 million lost revenue, related to the weather and cancellations this quarter.

Is it possible to parse out the split between the two?

I think what we said was high tens of millions of dollars.

I think that's what we're on record saying.

Okay.

So, in total, for the two of them, high tens of millions of dollars?

[Or] you're saying just the -- I'm just trying to get at the differential between the two.

Yes.

So as we think about breaking that out, lost revenue is in the neighborhood of $75 million.

Again, that's an early estimate because we are just off of the event.

You get some cost savings, obviously, because you are not flying the airplanes.

And you've got some cost headwinds associated with disrupted passengers.

So you net it all out, the number we gave is sort of high tens of millions of dollars, until we've got some better information.

Ladies and gentlemen, that does conclude our analyst portion of today's Q&A.

We'll take a short break before we start our media portion.

And as a reminder, today's conference is being recorded for replay that will begin at 6:15 PM Central time today, running through April 18 at midnight.

You may access the AT&T executive playback service by dialing 320-365-3844, using the access code of 910706.