美國航空 (AAL) 2008 Q2 法說會逐字稿

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

Good afternoon and welcome to the AMR second quarter 2008 earnings conference call.

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

However after the executive team's presentation 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 into our media Q&A session.

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, Gerard Arpey; their Executive Vice President of Finance and Planning and Chief -- or I should say, Chief Financial Officer, Tom Horton; and here with our opening remarks is AMR's Managing Director of Investor Relations, Eric Briggle.

Good afternoon, sir.

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 second quarter, along with some perspectives on the remainder of 2008.

After that we will be happy to take your questions.

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

Our earnings release earlier today contains 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 section of AA.com.

Finally, let me note that many of our comments today regarding our outlook for revenue and costs as well as forecasts of capacity, traffic, load factor, fuel cost, fleet plans 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.

And with that I'll turn that call over to Gerard.

Thank you Eric, good afternoon, everyone, as you have all seen in today's press release excluding special items we posted a loss of $284 million in the second quarter which obviously compares very unfavorably to the $317 million profit we earned a year ago.

There is no mystery as to why or how our results have deteriorated so badly in the last 12 months.

While we have certainly been impacted by the slowing economy the extraordinary rise in the price of fuel has overwhelmed our efforts to keep revenues and costs in line.

During the second quarter we paid $1.10 more per gallon of jet fuel than we did a year ago and that price increase drove $838 million in additional expense.

While it is beyond frustrating to see the progress we have made over the last several years eclipsed by fuel prices we are confronting reality and taking the steps necessary to adjust to a slowing economy coupled with extraordinary fuel prices.

One big factor has been our capacity.

We have announced substantial capacity reductions which will eliminate a lot of unprofitable flying and we hope improve the supply and demand equilibrium to give us more pricing traction.

We have already announced plans to remove from service 40 main line aircraft, 37 regional jets and 26 Saab turbo props this year, but given the trajectory of fuel prices more needs to be done.

Today we are announcing our intent to retire our A-300 fleet by the end of 2009.

We are currently working through the 2009 capacity planning process, but suffice it to say at this point that as a result of these retirements and other actions we are reducing our capacity expectations for next year.

We are, of course, doing everything possible to raise revenues beginning with higher ticket prices and yield management strategies.

They are beginning to pay off over the second quarter.

AA has initiated or participated in over 30 domestic fare and surcharge increases that were at least partially successful and from our results it is evident that yields are trending in the right direction.

We also recently announced additional fees including the first bag fee that should generate several hundred million dollars of added revenue.

We're doing our best to manage our costs.

We've got an uphill battle to keep costs down in the face of our capacity reductions and unfortunately reduced capacity means we need less people to run the airline.

We announced a couple weeks ago that we're planning to reduce our work force commensurate with our capacity reductions in the fourth quarter.

We're taking steps to further bolster our liquidity.

We are starting from a good spot with $5.5 billion in cash at the end of the second quarter.

We've raised $720 million in financing since our last call and $500 million of that was funded last week, so it is not captured in our second quarter cash balance, so that $500 million is not reflected in the $5.5 billion reported in the press release.

We're looking to the future and as such we are continuing to evaluate our fleet plans.

On our last call we announced our intention to take 70, 737-800 aircraft over the next two years as part of our fleet replacement program and certainly at today's fuel prices this makes more sense than ever.

And of course, in addition we're continuing to evaluate our plans for the next generation wide-body aircraft for our fleet.

Before I turn things over to Tom, I want to reiterate that while times are certainly tough in the airline business, these are not the first tough times we have encountered, and I'm pretty sure they won't be the last.

We have faced and met similar challenges in the past and we will do so again, and in the process create the best outcome possible for our shareholders and all of our constituencies.

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

Thanks, Gerard, and good afternoon, everyone, I would like to briefly discuss two special items that we recognized during the quarter.

Both of which are related to our capacity reductions.

We recognized a non-cash impairment charge of $1.1 billion related to write-downs of MD-80 and ERJ-135 aircraft.

In addition, we recognized a severance accrual of $55 million related to recently announced head count reductions.

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.

So excluding these special items we lost $284 million versus a profit of $317 million in the second quarter of last year, a change of over $600 million.

The increase in fuel prices has been nothing short of breath-taking.

We spent almost $840 million more for fuel than we would have paid at last year's second quarter prices.

Each month appears to bring new fuel price records and it is no secret that this is having a profound effect on the industry and AMR is no exception.

Nevertheless, through our efforts over the past several years we have put ourselves in a better position to weather this storm, and we continue to take action in light of the challenges we face.

For several years we have taken a very disciplined approach to our capacity plans and we recently announced system capacity reductions to help the industry achieve a more stable supply demand balance.

And we are currently working on our 2009 capacity plan and also evaluating our fleet requirements.

As a first step in this process we've decided to accelerate the retirement of our A-300 fleet.

We continue to -- efforts to bolster our liquidity position and toward this end we have completed additional financing and have taken steps to reduce our capital expenditures this year.

On the revenue front we have taken the initiative on numerous fare and fee increases, as we work to ultimately pass along the increased costs of flying to our customers.

So we're not standing still, but there is a lot more to do, and with that I'll first discuss our revenue performance.

Our second quarter mainline unit revenue increased by 7% year-over-year on yield improvements of about 8.5%.

While unit revenue for our consolidated system was up 6.9%.

Within the quarter yields showed positive trends and overall these numbers are moving in the right direction, particularly as this quarter did not have the benefit of the Easter holiday.

In our domestic markets, second quarter mainline unit revenue increased by 5.9% compared to last year on about 3.5% less capacity.

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

On the international front we saw solid unit revenue growth in the second quarter versus 2007, across all entities led by Pacific and Latin.

And driven primarily by yield improvements.

In total international unit revenue was up 8.7% year-over-year.

And a quick product update.

We have completed the standardization of the 777 first class product around the flagship suite and we have installed our next generation business seat on 44 of the 47 aircraft and we expect to have the project completed in the third quarter.

Starting out with Pacific, unit revenue was strong with yield improvement of over 12%, and slightly higher load factors.

Latin America also continued its positive performance this quarter as unit revenue increased year-over-year despite a very 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.

Finally, Atlantic second quarter unit revenues were up modestly at 6% versus last year on 2.2% lower capacity.

Load factors were off a little over 1 point but yields were stronger by over 7.5% versus last year.

Turning to other revenue items, second-quarter passenger revenue for our regional affiliate operations increased 3.8% even with capacity lower by about 3%.

Total cargo revenue increased by 16.5% year-over-year on very strong yield performance.

And we continue to make progress in the other revenue category which saw an increase of 6.5% versus last year.

The first bag fee is still ramping up but we expect this and our other fee increases to drive several hundreds of millions of dollars of new revenue to the Company.

To sum up, total RASM was up 7.5% on a consolidated basis versus last year.

Like last quarter, this represents relatively strong growth by historical standards.

Unfortunately it is far from sufficient to offset the rising costs of fuel, so we have a long way to go.

And given the run-up in fuel prices our costs are continuing to face very significant head winds.

This is reflected in our second quarter mainline unit costs which increased 19.3% year-over-year.

On a consolidated basis our unit cost was 19.1% higher than last year.

Our fuel price came in at $3.19 consolidated.

This represents an increase of 53%, and as mentioned earlier -- as I mentioned earlier, this raised our consolidated fuel costs in the quarter by almost $840 million, more than we would have paid at last year's prices.

In past calls we've walked through various initiatives focusing on conservation from aircraft winglets to tail cone and we're continuing down this path.

But it is clear we must continue to do more.

Excluding fuel, our unit costs rose by 5.1% mainline and 5.3% consolidated, driven by reduced capacity and head winds from higher materials and repair costs, depreciation and amortization, as well as costs associated with MD-80 cancellations.

Now, turning to the balance sheet, we ended the quarter with $5.5 billion in cash including $434 million in restricted cash.

The total value of our fuel hedge at the end of the quarter was $1.3 billion.

And included in our unrestricted cash is hedge collateral balance of about $830 million, which we hold from our counter-parties.

$5.5 billion is a sizeable amount of cash, but given the industry environment, it is sensible to maintain significant liquidity and we've been successful in raising cash through aircraft mortgage and aircraft sale lease-back financings.

Since our last conference call, we've raised new financing of $720 million.

Of this amount $500 million was funded on July 8, and thus is not reflected in our June 30, cash balance of $5.5 billion.

Furthermore, through our efforts to repair our balance sheet over the past few years, we've created additional financial flexibility and even after these financings, we still have unencumbered assets and other sources of liquidity that we valued at approximately $4.3 billion.

In the second quarter our scheduled principal payments on long-term debt and capital leases totaled $125 million, and year-to-date we've made payments of about $380 million.

Our capital expenditures totaled nearly $250 million in the second quarter and about $460 million thus far in 2008.

Of the full year capital expenditures $240 million have been predelivery payments on aircraft and it bears pointing out that we have not included our PDP balances in our $4.3 billion in unencumbered assets and other sources of liquidity.

On the pension front, we've contributed another $53 million to our defined benefit pension plans, bringing total contributions for the year to $78 million.

As we've pointed out previously, we've funded over $2 billion since the beginning of 2002, and at the end of 2007, our pensions were funded at 96%.

With our latest payment we have reached our minimum funding obligation for the year.

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 $10.1 billion.

Its lowest level since the end of 1998.

This represents a $1.2 billion or 11% reduction in net debt versus the same time last year.

Shifting to guidance, it's an understatement to say that the industry is facing big hurdles in the coming quarters.

There remains considerable uncertainty about the price of fuel and the direction of the economy, both of which can significantly impact the airline business.

That said, at least on the demand front, things have been holding up reasonably well.

Third quarter book load factor is 0.8 points higher versus last year, with international up almost 1 point and domestic up about 0.5 point.

As you may recall in our May capacity guidance we outlined our fourth quarter mainline domestic capacity to be reduced by approximately 11% to 12% versus the prior year, along with regional flying reductions of 10% to 11%.

In conjunction with this we are removing from service 30 MD-80s, 10 A-300s, 37 regional jets, and 26 Saab turbo props this year.

In total, 103 aircraft.

We continue to evaluate optimal capacity levels for 2009 and we're currently working through the planning process which I expect to share on the next conference call.

But as Gerard mentioned, we have decided to accelerate the retirement of our A-300 fleet by the end of 2009.

We expect these retirements and other actions to result in further capacity reduction next year.

We expect full-year mainline capacity to be down 3.4% compared to last year driven by a 5.7% decrease in domestic and a 0.7% increase in international.

On a consolidated basis we expect full-year capacity to decrease 3.7%.

In the third quarter we expect mainline capacity to decrease 2.7% year-over-year with domestics down 4.6% and international up 0.8%, and on a consolidated basis for the third quarter capacity will be down 3% versus last year.

Turning to fuel, on a consolidated basis we forecast fuel prices to remain high with third quarter fuel price of $3.81 and a full-year price of $3.42, based on the July 7, forward curve.

In regard to hedging we have 35% of third quarter consumption capped at an average price of $95 per barrel or $2.92 per gallon.

And a full-year hedge of about 34% of consumption capped at an average price of $82 per barrel or $2.60 per gallon.

Consolidated consumption for the third quarter is estimated at 772 million gallons.

We are currently rebudgeting the rest of the year to ensure that we extract as much costs as possible, but in the near-term we expect to face unit cost pressure from the capacity reductions.

Under our accelerated A-300 retirement schedule we will incur charges associated with retiring leased A-300 aircraft.

The amount of these charges will represent the present value of the remaining payment streams and will be taken as the aircraft are retired.

For purposes of this guidance we have excluded any impact of these charges.

That said, we anticipate full-year mainline ex fuel unit costs to increase by about 4.1% and consolidated to increase by 4.6%.

Given our expectation for sharply higher fuel prices, we expect overall unit costs for the full year to increase by over 21% for both the mainline and the consolidated system.

In the third quarter we expect our ex fuel mainline unit cost to increase 3.6% year-over-year and consolidated unit costs to increase 3.9%.

Moving to the cash forecast, our scheduled principal payments from debt and capital leases are expected to equal about $1 billion for the full year, and year-to-date we have paid about $380 million.

On our last call we mentioned that we would be looking very closely at our capital expenditures.

We have removed about $100 million from our 2008 plan and we now expect capital expenditures of approximately $1.1 billion in 2008.

This includes over $600 million in pre-delivery payments associated with 737s as part of our fleet replacement program.

So to summarize our outlook, high fuel prices are a grave concern for us and the entire industry for the foreseeable future.

And uncertainties around the broader economy continue to be top of mind.

That said, we are working diligently to right-size the airline, bolster liquidity, increase revenues through fares and fees, and reduce costs where possible.

All told, these actions will better help us deal with the challenges ahead.

Before I wrap up, I want to briefly touch on Eagle and Beacon.

Last November we announced our intentions to divest American Eagle.

While there has been interest from potential buyers, we have decided to put this transaction on hold for the time being.

The strategic rationale remains intact.

However, in light of ongoing market volatility, rising fuel prices and the uncertainty around the economy, we've decided that we'll reserve our flexibility at the current time and wait until the industry is stabilized before moving forward with the divestiture.

On our last call we announced that we had reached a definitive agreement with TPG and Pharos Capital Group to buy American Beacon Advisors for $480 million in total consideration.

The process for this transaction is progressing on schedule.

We have received HSR approval, the sale has been approved by the Board of Trustees.

Proxies are now out for mutual fund shareholder approval and we expect to close the deal in the third quarter.

So with all of that, Gerard and I would be happy to take your questions regarding our results.

Thank you very much.

(OPERATOR INSTRUCTIONS) And our first question at this time comes from the line of Daniel McKenzie with Credit Suisse.

Please go ahead.

Hi, good morning.

Good afternoon, sorry.

CASM trends so far are outstripping RASM trends and, from your perspective, what would AMR and for that matter, the industry, need to do to not only narrow the gap but potentially here close the gap?

Dennis, the way I think about it, and there are a lot of ways to look at that, but at today's fuel prices AMR's 2007, so last year's yield would have had to increase 24% to reach break-even.

However, that ignores price elasticity, so the yield increase -- the price increase probably needs to be even higher than that.

That said, as you saw in our second quarter results, yield was up 8.5%.

So we've already gotten part of that but there is clearly a ways to go.

And, Dan, the only thing I would add to that, is we're obviously trying to attack that equation not just through ticket price.

We're going after it through all of the various means of unbundling, including the first bag fee and a whole range of things that we've done, not only recently, but over the past few years.

So we're continuing to drive more and more revenue off-ticket, and so that dampens the amount that you've ultimately got to get back in the form of higher ticket prices.

But obviously to Tom's point, the driver is -- is getting our yields up, and that's what is behind our capacity reductions is to get capacity to a level where our price increases can stick.

Right.

And I guess my second question is, I'm just getting rumblings from a number of different corporate travel manager sources suggesting that corporations are going to want to cut back on corporate travel by roughly, their spend by 20% or so.

Would that suggest that the industry or at least AMR would need to cut capacity 20% to offset that drop in corporate demand?

Or is that not necessarily the right way to think about that?

Well, I think time will tell as to what the actual reductions are.

We're hearing that companies are being more cautious and more closely scrutinizing their travel.

And we've actually seen that business traffic has been down a bit year-over-year, but pretty modest reductions thus far.

So I think time will tell.

But it does, again, underscore, I think, the point that Gerard just made, the industry will need to reduce capacity to create a supply demand balance that allows us to get prices to a level that support the business.

And as prices go up there is elasticity, so it will mean less demand, and that, again, underscores the need for capacity reduction.

Okay.

Great, thanks a lot.

Thank you, Dan.

Thanks, and our next question comes from the line of Bill Mastoris with Broadpoint Capital.

Please go ahead.

Thank you.

Tom, question for you on your credit card processing agreement.

Are the financial covenants the same as the bank debt?

I mean, there has been a lot of, as you indicated, skittishness about the industry in general.

And maybe you could kind of help us out just in terms of what the credit card processors are thinking or whether they're still comfortable.

Any color you can lend there would really be quite helpful.

You bet.

That is a very good question.

Our credit card agreements aren't linked to our bank covenants like some others are.

So we don't currently have a credit card hold-back under any of our current agreements.

Under one of our credit card processing agreements, the processor has the right to hold back proceeds based on a matrix of unrestricted cash and a fixed charge coverage ratio.

Based on our current projections it is possible that we could have hold-backs in place by the end of the year to the tune of about $200 million to $300 million and to give you a sense for the magnitude of a potential hold-back under this agreement in a worst-case scenario, at some point in the future, hold-backs could equate to about a quarter of AMR's air traffic liability.

So that's a way to think about the range.

Okay.

And, Tom, what is the renewal date on your largest credit card processing agreement?

It is March 2010.

Okay.

All right.

The follow-up question I have would be under your $1 billion in long-term debt payments for '08, does that include a cash payment on the 4.25 convertible which is puttable I think on September 23?

It does.

Okay.

Thank you.

You bet.

We do have a question then from the line of Ray Neidl with Calyon Securities.

Please go ahead.

Very generally speaking, how much more capacity do you think American can cut out of their system without cutting into muscle?

In other words, cutting capacity that might affect your banks at hubs or even total hubs, entirely, and did you give an estimate for 2009 what the capacity cuts might be?

Ray, we haven't given a number yet in terms of the percentage for next year, and as Tom indicated, I think on a -- on the next call we'll probably be able to give some preliminary guidance for 2009.

I think we've got -- I think we've got a reasonable amount of head room here in terms of additional frequency reductions that we can take across our hubs in an effort to get more domestic capacity out, without really threatening the fabric of our network.

I can't put a number on that, or a number of airplanes, but I think we've got a good deal of maneuvering room still left.

Okay.

Great.

And as you take out capacity, how quickly do you think you can reduce the cost structure?

When you put down a whole fleet type, you usually get cost benefits quicker but then you have problems with your aircraft, are they leased, are they owned, do you have debt on those aircraft, do you have storage on those aircraft, plus, of course, you've got the compensation for laid off employees.

How quickly do you think you can get benefits from the capacity cutbacks?

Well, Ray, we're working that pretty hard.

And as we mentioned in a recent forum, we intend to reduce our head count commensurate with our capacity reduction.

So that's the biggest chunk of cost that is actionable.

Obviously the variable costs come out with the capacity automatically like fuel burn, food and such.

But the real question I think will be getting at the more fixed overhead, and the long run, there is no such thing as a fixed cost, in my opinion.

But in the short term there are costs that are fixed.

I think we're going to have to take a hard look at our maintenance capacity.

Our maintenance capacity obviously is sized for much larger airlines, so that is something we're evaluating.

And as you mentioned, as you retire an entire fleet, that tends to create disproportionate cost efficiencies.

So while short-term will take some unit cost headwind as we pull capacity down, longer-term I think we're going to create a more sufficient enterprise.

Do you have to do a lot of negotiating with the leased aircraft and with the banks, do you still have to service that debt if it's the aircraft on the ground; is that correct?

We will, that's right.

Great.

Thank you.

Thanks, Ray.

And our next question then comes from the line of Gary Chase with Lehman Brothers.

Please go ahead.

Hey, good afternoon, guys.

Hey, Gary.

Sorry, I apologize, I missed your prepared remarks, but, I guess what strikes me is, a lot of the questions that are being asked of you today and of others recently, really sort of get at one issue, I think, which is, how far are you willing to go, and what are you willing to do to fix the problem that we're all -- we all can see from fuel?

People are asking how much can you do before you tear at the fabric of your network?

Maybe there is another way to think about it and maybe you can talk to it just from the standpoint of what are you managing to, and should we be thinking that anything is off the table in this environment?

If oil goes to $150 or $180, you guys don't strike me as the type that are just going to throw in the towel and give up.

No, Gary, of course nothing's off the table.

I think what we're -- certainly the way that we're thinking about it is we're thinking about reconstituting our Company for it to be successful in a world of $130 a barrel oil.

So we're not counting on necessarily oil going down and we're not necessarily counting on it being $200 a barrel.

We always pretty much take the forward curve, look at it, and then confront that reality.

So by a combination of thoughtful capacity reductions, price increases, yield management techniques, and the unbundling of our product, we are trying to move in the direction of having a framework that will allow us to be profitable in the oil and economic environment that we find ourselves in.

And, of course, we're coming up short at the moment, but I think we've got a number of the trend lines that we need to be moving in the right direction.

We got them going in the right direction.

They're just not going fast enough.

So nothing's off the table.

And so we're continuing to restructure ourselves around the current reality of a soft economy and higher fuel prices.

We're trying to do it in a manner that we don't do more harm than

And--?

I don't know if that answers your question, but I think it is -- what we're not -- all of the carriers have various degrees of hedging.

Tom referred to how much our hedges are in the money and that is a considerable amount of money.

But all the hedges are really doing is deferring the point at which you have to live in the reality of $130 a barrel oil.

So you have got to configure your capacity, your pricing structure, your ancillary fees, so that you can live at oil prices at that level.

Otherwise, you're just kidding yourselves.

So that is what we're trying to do.

You just look, oil sits at $135 as I look at my screen right now, it has been as high as $147, and while it is only a few days in the energy markets it's obviously a huge difference in terms of P&L impact to American.

If energy moves higher, is there any reason for us to believe that there won't be a new plan that you formulate to help you deal with it?

And I guess maybe you could say, too, what's guiding the thought process?

What objective are you managing to as you cut these plans at different energy prices?

Just the viability you referred to?

Yes, I think that's it.

Trying to return the Company and hopefully the industry to profitability.

So that's the end objective.

And, Gary, one of the reasons we can't be maybe more precise than we are being, is it is a rapidly changing environment.

We've had a single day where oil prices have moved $11, in a day.

That is worth almost $900 million a year to us.

And over the period of a quarter or so we've had oil prices move $50.

So, it is a period of extraordinary volatility and we need to be nimble in managing against that and that is what we're trying to do.

The other thing we don't know is how this will impact others in the industry, and whether that will alter the competitive dynamic and the supply demand balance.

So we have to take the steps as Gerard described them to try to maintain our optionality and flexibility to keep the Company strong for the long run.

Gary, I think going back to where we started this year, I think we said on the January conference call there was a lot of economic uncertainty and a lot of oil price uncertainty, and we were going to be continuously revisiting our plans throughout this year.

And I think we've done that.

We made our first capacity adjustment in February.

We announced another big capacity adjustment in May; on today's call, we're announcing the early retirement of our A-300 fleet.

Those airplanes had previously been scheduled to retire -- to fly through 2012 and we pulled that in to next year.

So we're continuously revising the plan based on market realities.

Okay.

Guys, thanks.

Thank you, Gary.

Thanks.

And just as a general reminder we do want to remind everyone just ask one question and one follow-up just for time purposes and our question comes from the line of Mike Linenberg with Merrill Lynch.

Please go ahead.

Yes, two questions.

The first for Tom.

You walked through the impact of the A-300s that are going out, the financial impact.

As you get out of the MD-80s and some of the smaller Embraer's, the Saabs, are those airplanes, are they owned or leased or are you going to be out there selling those airplanes?

Any benefit to the balance sheet, et cetera?

In the case of the MD-80s, those are owned airplanes.

We have 300 MD-80s today.

About 170-something of them are leased and the rest are owned.

But the ones that are going down will be owned and we'll be looking to dispose of them.

And the question will be whether we part them out or find a buyer for them and that will be done on sort of on a tail by tail basis.

And on the -- on the small regional jets, likewise, we'll be looking for buyers.

Okay.

My second question on the $4.3 billion of unencumbered assets, Tom, is there anything in that number that relates to advantage or anything, some value on maybe present value on future sale of miles.

Is that in that number at all?

There is a number in there associated with AAdvantage in terms of selling miles forward.

That is something we haven't done and many of our competitors have, given that we have the world's largest affinity program, we think there is considerable value there.

So that is embedded in the $4.3 billion.

We haven't broken it down.

Okay.

Great.

Thanks.

Thank you, Mike.

And our next question then comes from the line of Jamie Baker with JPMorgan.

Please go ahead.

Good afternoon.

Tom, the difference between last month's cash guidance and the actual cash that was shown today, it's about a $500 million difference there, that is a combination of the $200 million on sale lease-back proceeds and then the additional cash collateral, more cash collateral than expected on hedges, or is there something else in there?

Yes, the biggest piece of it, Jamie, is the cash collateral.

Because from the time we gave that guidance, the oil prices moved way up and that had--.

Right.

And that had a [corresponding] effect on the cash collateral.

So that is the biggest move there.

Okay.

Good.

Secondly, Gerard, Mark and I asked this question on your last call, but wanted to revisit it, particularly in light of obvious growing market concerns over bankruptcy, what's been happening with fuel, looking at where CDS is trading and of course, not to mention your own admission there are certain benefits that could be achieved in Chapter 11.

Has anything in the marketplace changed your willingness to keep on fighting?

Is your resolve any different than when we asked you the same question 90 days ago?

No, of course not, Jamie, I think we as a team have a demonstrated track record of executing on our fiduciary duties to run the Company in the interests of our shareholders and we'll continue to do that.

And I think we've pointed to a lot of steps today, and on our last conference call, that are intended to strengthen the Company and better the outcome for our shareholders.

Okay.

Thank you for that color.

I appreciate it, gentlemen.

Thank you, Jamie.

(OPERATOR INSTRUCTIONS) And we do have the question from the line of William Greene with Morgan Stanley.

Please go ahead.

I just have a question on the fourth quarter capacity cuts.

Can you maybe walk us through a little bit about how you arrived at the numbers you did for cuts, and what oil price assumption is in there?

Because obviously we're all trying to figure out, as are you, is it enough and when does it get revisited.

I would love to kind of know the mechanics and the though process behind how you got there?

Yes.

When we did those, we made the decision on the capacity cut.

Oil prices were at $125 a barrel.

Obviously they've moved up from there, so our view on how much capacity needs to come out has moved up.

And as a consequence we've taken more action in terms of accelerating the retirement of the A-300.

So we've taken another step, and as I mentioned in the -- at the outset, I think there will be more to be done, but we're working through that and we'll have more to say about that on the next call.

When you think it through you do it in isolation or do you make an estimate about what the rest of the industry will do?

We make an estimate about how much the entire industry needs to move to get the industry back to profitability, and we do a little game around who will do what?

And that is how we come up with our estimates.

All right.

And then just a follow-up then, when I look at the capacity cuts, when you look at it on a root basis, what you've actually announced, you announced some cuts I think in Chicago and LaGuardia, but those are capacity constrained airports, the slots in LaGuardia.

If you don't operate those slots or you don't operate the authorities that you have in Chicago, do you lose those?

Well, we don't think we should.

We're eliminating five American flights and 37 Eagle flights at LaGuardia, and we estimate that reduction of our service at LaGuardia represents more than a third of overall reductions needed to alleviate the big delay problem at LaGuardia that plague one out of every four departures and four out of every 10 arrivals at this airport.

So LaGuardia is operationally performing very poorly for the industry, and we think that the takeoff and landing authorities associated with the 42 flights we're eliminating should simply be retired, and that would be a step in the right direction for improving dependability at LaGuardia.

Bill, if you go and look at our press release when we announced the LaGuardia cuts, we went to great lengths to highlight some of the operating data at LaGuardia, not just for American, but for the entire industry, and we made the point that LaGuardia simply cannot operate anywhere near reliably at the capacity they're trying to operate it.

We had some data in that press release and what we indicated with those cuts was that the FAA should not only, in effect as all of our slots, they need to do more than that if they want to get LaGuardia operating anywhere near a standard that's acceptable from a customer service standpoint, and I think the acting FAA administrator, Bobby Sturgell was quoted this week in the New York Times, essentially saying LaGuardia cannot run reliably at today's levels.

They do not have a plan to do it.

So our hope is that the DOT FAA will step in and do something to further reduce operations at LaGuardia until air space redesign, ATC modernization takes hold in a manner that will allow us to run reliably.

You're willing to relinquish these because there is a hope that there won't be -- there will be no sort of new-comer to those slots at this point and that is how you're operating I assume?

Yes, that is correct.

And we'll obviously pay very attention to what the FAA and DOT does.

And we could add flights back in LaGuardia.

That is certainly an option if we decide that's in our best interests.

But that's not what we want to do.

Got you.

Thanks for your help.

Thank you.

Thanks, and our next question then comes from the line of Chris Cuomo with Goldman Sachs.

Please go ahead.

Good afternoon, guys.

Hey, Chris.

Just a couple of questions, details on the liquidity.

Is it fair to assume that the $4.3 billion that you're citing includes absolutely no estimate for Eagle given that you put that on hold?

It does include a number for Eagle.

But it's obviously something we're not pursuing in the near-term.

And are there any tax considerations that we should be thinking about on the $480 million with respect to Beacon?

Is that a post-tax number?

No, there's no tax, there is no book tax on that.

Okay.

And did I hear you correctly, did you indicate that the convertible in September, the assumption is you're going to be satisfying that in cash?

That is the plan.

Okay.

And then just maybe a broader question.

If you could just update us on your latest thinking with respect to antitrust immunity with BA, has you're thinking evolved at all along those lines?

Well, Chris, I would, I think at this point simply reiterate what we've said in the past.

It is no secret that we and British Airways have applied for antitrust immunity in years past.

We have not been successful.

I think everyone on the call knows that the aviation treaty and environment between the UK, the EU and the US, is very, very different today than it was the last time that we applied for immunity, and the obstacles that we've had in the past were the fact that the UK was not open skies.

Heathrow was congested.

Et cetera, et cetera.

Today we have an open-skies agreement there.

All of the US carriers that wanted to get into Heathrow have in fact gone out and gotten slots and have accessed that market.

So it's a very different regulatory environment than it's been in the past.

When and if we do apply for immunity, it's something that I -- well, you'll hear about when and if we do it.

Have there ever -- I mean, can you share at least maybe your thoughts, perhaps it's too early to ask such a question but I'll try it anyhow, your thoughts around the economic opportunity between a relationship with BA, is it in the few hundred millions?

Can you put any sort of numbers around what could be achieved by that relationship, enhancing that relationship?

Well, Chris, I can't put a number around it, but I would come at it this way.

I think that we are at a reasonably significant competitive disadvantage against United and Lufthansa across the North Atlantic, who enjoy immunity and of course Delta/Northwest and KLM/Air France who enjoy immunity.

That allows those companies to participate in a wide range of marketing, sales and pricing activities, and frequent flier activities, that we are prevented from doing.

So while I won't put a number on that, I would acknowledge that we are at a significant competitive disadvantage today, and that's not a place that we want to stay.

Great.

Thank you, and our next question comes from the line of Michael Derchin with FTN Midwest Securities.

I think you said your book load factor for the third quarter was up a little less than 1% with the international stronger than the domestic.

I was wondering if that includes the post-Labor Day period and if you could give us a little flavor of pre-Labor Day and post-Labor Day in terms of your booking curve?

It does include the post-Labor Day period through the end of September, since the third quarter.

But, no, I don't think we can offer any breakdown on the bookings.

But I do think we're all going to have to keep a close eye on what happens when we get beyond the summer period.

And in particular I think in the international environment where some in the industry have added an awful lot of capacity across the Atlantic, and, I think we all know, having watched this industry for a long time, that tends to be a very cyclical market and this doesn't feel like a good cycle right now, at least for the fourth quarter.

Great.

Thank you.

And our last question today from the analysts' portion or the analyst portion of our Q&A session comes from Kevin Crissey with UBS.

Good afternoon, two quick ones, any operational impact, or what are you expecting for that first checked bag fee?

Well, we put -- we put that in place this quarter, and actually what my operating guys are telling me is that it has gone off reasonably well at this point.

We haven't had any issues that have really risen up.

We did a lot in preparation, and we had a lot of automation in place in order to be able to collect it.

So I don't think there's been any operational issue related to it.

And back onto the antitrust immunity if I could for just a second.

In reviewing the kind of the -- I guess I'm not sure what the legal term is, but the final order maybe it was, for why you received approval but had to give up slots at Heathrow, in reviewing that it looked like they simply just looked at the market between New York and London and some other markets as well, not in totality, and I think you talked about that in the past that you need to look at it in totality, in terms of the alliance, but they really have never -- really that is not the history there.

So I guess I wonder what has significantly changed, because when you lost -- when you had that kind of denied, if you will, they had a contemplated open skies and some access to Heathrow and I wouldn't say that the other carriers have received what they would desire at Heathrow.

Maybe you could argue with the Continental/United, but maybe you could address that in terms of them looking specifically at the London/New York market I guess primarily?

Well, I think there are a couple of issues there.

I think the regulators are more apt to look at competing alliances now that Star and Sky Team have become quite strong.

I think there is an argument that a strong OneWorld is pro competitive against those two very strong alliances.

But the other point is that since the last go-round, where the regulatory authorities had suggested a slot divestiture, Heathrow has been opened up.

And the carriers who have wanted slots at Heathrow have found a way to get them.

And as we sit here today, there will be 16 new entrant services across the Atlantic out of Heathrow, and those are slots that people found a way to get.

So I think the -- I think the arguments for remedies would seem to be an artifact of the past.

Not all of those additions were really in the New York market which is the trouble and didn't United depart that market between the last application and today?

Yes, but I think you need to look at the entire pattern of service across the Atlantic.

I don't think you can pick a single market and define the market that way.

Otherwise I think, if you look at some of the other alliances, you would find similar situations.

Okay.

Thank you.

You bet.

Ladies and gentlemen, that does conclude your conference for today.

Thank you for your participation and thank you for using AT&T Executive Teleconference service.

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