美國航空 (AAL) 2008 Q3 法說會逐字稿

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

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

After the executive team's presentation today, there will be opportunities 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 move into our media Q&A session.

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

We are very pleased to have on the call with us today AMR's Chairman and Chief Executive Officer, Gerard Arpey; and Executive Vice President of Finance and Planning and Chief Financial Officer, Tom Horton.

Here with our opening remarks is AMR's Managing Director of Investor Relations, Eric Briggle.

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 third quarter along with some perspective 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 and 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 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 costs, 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 will turn the call over to Gerard.

Thank you, Eric, and good afternoon everybody.

As you have all seen in today's press release, excluding special items in the third quarter, we posted a loss of $360 million, which obviously compares very unfavorably to the $215 million profit that we earned in the third quarter a year ago.

As in previous quarters this year, fuel prices were the big driver of our performance and the volatility of fuel prices continues to be quite extraordinary.

The last time we were together on one of these conference calls, the cost of a barrel of oil was about $135 a barrel.

Yesterday oil closed at about $79 a barrel, which is obviously a big drop, but I do think we need to all keep in mind that $70 plus barrel per oil is not really a bargain by historical standards.

And volatility continues to be a significant concern.

As so often seems the case in the airline industry, there's another challenge on the horizon.

As we have all witnessed over the last month, the financial markets are in turmoil and this is certainly having an impact on the economies both here in the United States and abroad.

Events of this magnitude will undoubtably have an impact on our business, although how much of an impact remains to be seen.

I'd like to reiterate that we have accomplished a lot over the last several years to prepare us for difficult times, and whether our challenges are historically high fuel prices or troubled economies, we are continuing to move forward.

As you will hear today, we continue to take steps to ensure that we not only can meet our near term challenges, but also build for the future.

One big factor in our ability to navigate this tough road has been our capacity discipline.

As fuel prices climbed throughout this year, we have not been shy about eliminating unprofitable flying and attempting to improve the supply and demand equilibrium in order to gain more pricing traction.

Earlier in the year, we announced our mainline capacity reductions of 11% to 12% domestically and 7% to 8% for the system versus the fourth quarter of last year, and we are certainly on track to do that.

Given the uncertainties of the economy and the volatile fuel environment, we are setting our capacity conservatively for next year as well.

We continue to believe that a more balanced supply/demand environment is necessary to offset some of the disruption caused by the economy and fuel prices, and we continue to do everything possible to raise revenues through higher ticket prices and the unbundling of our products and services.

And as you can tell from our third quarter revenues, those efforts have begun to bear some fruit.

We are doing our best to manage cost.

Capacity reductions make that difficult, so it will take some time to wring these costs from our system.

But as always, costs will be a priority for us as we work through the planning process for next year.

We continue to focus on the balance sheet.

I think it's fair to say we are in a relatively good spot with approximately $5.1 billion in cash at the end of the third quarter, and we are looking to further strengthen that cushion to help us better face the challenges ahead.

It has certainly been a busy quarter for Tom and his team.

We closed the sale of American Beacon Advisors in mid-September.

We raised several hundred million dollars in financing over the quarter and we secured financing for 20 of our 2009 737-800 orders in addition to the previous backstop financing that we talked about in the third quarter.

That means we have financing commitments covering most of the 76 737s we expect for delivery in 2009 and 2010, and given the current credit environment, getting those deals done I think was a significant accomplishment and a credit to our treasury team.

We are also of course looking to the future.

We have announced our joint business agreement with British Airways and Iberia, and we have of course applied for antitrust immunity with these carriers along with Finnair and Royal Jordanian, and we are optimistic on our chances of getting that approved.

We continue to move forward with our fleet replacement program, and in the third quarter we increased our commitment to 76 737-800s over the next two years.

We mentioned on the previous couple of calls that we have been analyzing our next steps on the wide body front, and I'm pleased that today we did announce that we have entered into an agreement with Boeing under which we intend to take delivery beginning in 2012 of 42 Boeing 787-9 aircraft, with options for 58 more to replace our existing wide body aircraft and provide the potential for long-term growth opportunities in conjunction with our joint business agreement with BA and Iberia.

So while we certainly face near term challenges along with the rest of the airline industry, we continue to be firmly focused on the future and building a company that can be successful for the long run.

I do think it's fair to say we have faced and met tough challenges in the past and we plan to continue to do so, and in the process we hope to create the best outcome for our shareholders and all our other constituencies.

With that said, I will turn things over to Tom.

Thanks, Gerard, and good afternoon everyone.

As you can see laid out in the press release, we recognized a few special items during the quarter.

Most significant of these was the $432 million gain associated with our sale of American Beacon Advisors.

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

So excluding these special items, we lost $360 million versus a profit of $215 million in the third quarter of last year, a change of over $575 million.

The driver of this change was clearly fuel prices.

Remarkably, in this quarter alone, we spent almost $1.1 billion more for fuel than we would have paid at last year's third quarter prices.

The good news is that spot prices for fuel have come down from the record highs of early July.

But fuel prices remain high and volatile by historical standards and remain an enormous challenge.

While fuel may have abated somewhat for the time being, these are extraordinary times.

The turmoil in the financial markets reflects yet another challenge we intend to face head on.

Through our efforts over the past several years, we have put ourselves in a better position to face difficult times, and we continue to take action in light of these challenges.

A part of the solution is to effect a more stable supply/demand balance, and for several years we have taken a very disciplined approach to our capacity plans.

Earlier in the year, we announced capacity reductions that have begun to take effect and we'll see the full effect of these cuts towards the end of the fourth quarter.

These reductions will help to offset weakness in the revenue environment associated with a recessionary economy -- and given that, we think it makes sense to revise our capacity downward further for next year while at the same time accelerating our fleet replacement with more fuel efficient aircraft.

In terms of liquidity, we have arranged financing for a number of our upcoming aircraft deliveries and we've completed a number of significant financing transactions and taken additional steps to reduce our capital expenditures this year.

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

And along with the capacity reductions, we have begun to see the impact to both passenger and ancillary revenues.

There remains a lot more to do, and with that I'll first discuss our revenue performance.

Our third quarter mainline unit revenue increased by 10.9% year over year on yield improvements of over 13%, while unit revenue for our consolidated system was up 10.4%.

While we currently face a challenging revenue environment moving forward, yield and unit revenue improvements at these levels are encouraging and demonstrate the pricing traction possible under rational capacity levels.

In our domestic markets, third quarter mainline unit revenue increased by 7.7% compared to last year on about 5% less capacity as yield improvements more than offset lower load factors.

On the international front we saw unprecedented unit revenue growth in the third quarter versus 2007 across all entities led by Pacific and Latin, driven by very strong yield performance.

In total, international unit revenue was up almost 16% year over year.

And a quick product update -- we have now completed the standardization of the 777 first class product around the Flagship Suite, and we've installed our next-generation Business seat on all of our 767-300 and 777 aircraft.

Latin America continued its positive performance this quarter, posting remarkable unit revenue improvement of almost 20% despite a very competitive environment in some markets.

For our Pacific operations, we also saw very strong yield improvement of almost 17.5%, offset by lower load factors that drove unit revenues higher by nearly 14%.

And finally even as competition continues to evolve under Open Skies, our Atlantic third quarter unit revenues were up 11.5% versus last year on a bit lower capacity driven by yields which were stronger by over 14% versus last year.

Turning to other revenue items, third quarter passenger revenue for our regional affiliate operations increased over 3%, even with capacity lower by about 4%.

Total cargo revenues increased by over 17% year over year on strong yield performance.

And in other revenue, we've seen substantial increases from the fees we put in place in June including the first bag fee.

So for other revenue, we saw an increase of over $70 million or 14% versus last year.

On the alliance front, we were pleased to announce during the third quarter a joint business agreement with our oneworld partners, BA and Iberia.

And in conjunction with this agreement, we've also applied for antitrust immunity with BA, Iberia, Finnair and Royal Jordanian.

With granting of antitrust immunity and implementation of the joint business agreement, our customers will have access to more destinations, more convenient and coordinated flight schedules, increased access to lounges, and enhanced frequent flyer benefits.

There is no denying that the Star and SkyTeam alliances have strengthened substantially over the last few years, particularly as they have extended antitrust immunity to cover more of their member carriers.

A stronger oneworld will counter balance this evolving duopoly and will help ensure customers have ample alternatives over the long-term.

Our application for antitrust immunity now rests with the regulators, and while we can't make promises about the outcome of the process, we believe we've made a very strong case.

Turning to costs, while the spot price for fuel has decreased substantially since its peak in July, in the third quarter we recorded the highest fuel prices we've ever experienced in our company's history.

This drove a sharp increase in our third quarter unit costs, which were up more than 22% year over year.

Our fuel price came in at $3.57 a gallon consolidated.

This represents an increase of 64% and, as mentioned earlier, this raised our consolidated fuel costs in the quarter by $1.1 billion more than we would have paid at last year's third quarter prices.

Excluding fuel, our unit costs rose by 4.3% mainline and 4.4% consolidated, driven by reduced capacity and headwinds from higher materials and repairs costs, facilities expenses, and foreign exchange.

Now turning to the balance sheet.

We ended the quarter with $5.1 billion in cash, including $456 million in restricted cash.

$5.1 billion is a sizable amount of cash, but given the uncertainties with fuel prices and softening economies both here and abroad, it makes sense to maintain significant liquidity, and we continue to seize on opportunities to build our financial flexibility.

During the third quarter, we completed the sale of American Beacon Advisors, raised $300 million from the sale of new equity, drew our revolver and we raised aircraft financing of over $500 million.

Furthermore, we've arranged financing for 20 of our 737-800 deliveries for next year, which combined with the recently announced backstop facility, will cover most of our 2009 and 2010 deliveries.

Furthermore, through our efforts to repair our balance sheet over the last 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 over $3.5 billion.

In the third quarter our scheduled principal payments on long-term debt and capital leases totaled approximately $500 million, and our capital expenditures totaled about $200 million.

On the pension front, we've contributed $78 million to our defined benefit pension plan for this year and we have reached our minimum required funding obligation for the year.

Our total debt defined in the earnings release is now $15.4 billion.

Our net debt, defined as total debt less unrestricted cash and short term investments, is now $10.7 billion.

This represents a $450 million reduction in net debt versus the same time last year.

Shifting to guidance, it would be an understatement to say the industry is facing big hurdles over the coming quarters.

There is great uncertainty about the direction of the economy, and the volatility in the price of fuel remains a concern, both of which can significantly impact our business.

With a weakening global economy, we have seen softening demand with fourth quarter booked load factor about 2 points lower versus last year, with domestic down about 1 point and international down about 4.5 points.

Throughout the year, we have discussed that the supply/demand imbalance in the industry was hindering our ability to pass along our cost to the customer.

In May, we took action by announcing our fourth quarter capacity reductions for the mainline system of 7% to 8% and domestic capacity to be reduced by approximately 11% to 12% versus the prior year, along with proportional regional flying reductions.

The industry followed, and as you can tell from our booked load factor statistics, these reduction are taking effect not a moment too soon.

In the fourth quarter, we expect mainline capacity to decrease 8.3% year over year, with domestic down 12.5% and international down 0.6%.

On a consolidated basis for the fourth quarter, capacity will be down 8.4% versus last year.

With the exception of 9/11, reductions of this magnitude are unprecedented in our industry's history.

But given the economic environment, we have revised our 2009 capacity plan modestly downward.

Using full year 2007 as a baseline, we expect full year 2009 mainline system capacity to be down over 9%, with domestic down about 14% and international about flat.

Let me add that we've been quick to act in the past when we felt that additional reductions were needed, and to that end, we'll be keeping a close eye on the revenue environment and fuel prices.

Turning to fuel, on a consolidated basis we forecast fuel prices to remain high, with fourth quarter fuel price of $2.76 and a full year price of $3.07 based on the October 6 forward curve.

In regard to hedging, we have 38% of fourth quarter consumption capped at an average price of $116 per barrel, or $3.33 per gallon, and a full year hedge of about 37% of consumption, capped at an average price of $91 per barrel or $2.78 a gallon.

We are beginning the budgeting process for next year and we'll have estimates of next year's unit cost to share on the next call.

But over the next few quarters, we expect to face unit cost pressure from reduced capacity.

That said, we anticipate 2008 full year mainline ex fuel unit cost to increase by about 4.9% and consolidated to increase by 5.2%.

In the fourth quarter, we expect our ex fuel mainline unit cost to increase 7.7% year over year and consolidated unit cost to increase 7.8%.

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've paid about $900 million of that.

We've been diligent in monitoring our nonaircraft capital spending, and in the third quarter we entered into a predelivery payment financing arrangement that will reduce our expected full year PDPs by -- for 737 aircraft to approximately $400 million, or $200 million below our prior guidance.

In total, we expect full year 2008 capital expenditures to be approximately $850 million.

So we are taking a measured approach to our capital, with our aim being to make sound investments in our business that will keep AMR competitive for the long term.

While we are on the subject of capital, I want to provide an update on our fleet replacement program.

On the narrow body front, we announced in the third quarter we are accelerating our fleet replacement program, and we've now committed to take 76 737-800 aircraft over 2009 and 2010 to replace our MD-80s.

Given the cost efficiency of the 737-800 versus the MD-80, this makes a lot of sense particularly in this volatile fuel environment.

We are going to continue to look for opportunities to move even faster.

In terms of our wide body fleet, I think many of you know that we've been giving this a lot of thought.

As Gerard mentioned and as seen in our press release this morning, through our long-term purchase agreement with Boeing, we intend to acquire an additional 42 787-9 aircraft scheduled for delivery beginning in 2012 through 2018, with the right to purchase up to 58 additional 787s, which may be scheduled for delivery between 2015 through 2020.

This agreement illustrates how we remain focused on the future even as we battle through the present.

This state-of-the-art aircraft will offer many cost and environmental benefits, particularly fuel efficiency and customer friendly attributes and comforts.

We expect that the 787 will be an important part of our wide body replacement plan and also help to support the international growth that we expect down the road from our closer relationship with BA and Iberia.

While the agreement contains a provision that allows us to forego purchases of some or all of the 42 aircraft, if we haven't reached a satisfactory agreement with our pilots' union to operate it, we remain confident that we will be able to move forward with our 787 purchase plans that we firmly believe are in the best interest of all of our stakeholders.

So to conclude, while fuel prices have eased off their incredible heights in early July, the volatility remains and uncertainties around the global economy are certainly top of mind.

This said, we are working diligently to rightsize the airline, opportunistically bolster liquidity, increase revenues through fares and fees, and reduce costs wherever possible.

These are the right things to do for our company to better help us deal with the challenges ahead.

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

(OPERATOR INSTRUCTIONS) Our first question today will come from the line of Jamie Baker, with JPMorgan.

Your line is open.

Good afternoon, gentlemen.

Gerard, having joined in, what, 1982, you've been in the industry through two recessions and obviously one terrorist attack.

I think that's a bit more industry experience than some of your peers.

Given the current size and shape of AMR and the industry and given the spot-jet kero price in the $2.30 range, have you ever witnessed a demand environment that you couldn't handle at today's fundamentals?

Because quite frankly, I'm struggling, and I think others are as well, to come up with a plausible scenario where you don't make money next year unless the economy does something meaningfully worse by several orders of magnitude than anything that's ever happened.

Well, Jamie, I think you've been around a long time as well, so you've seen many cycles.

And I do think we are sitting here compared to where we were in July with oil at $147 a barrel and the crack spread then -- I can't remember what it was.

But the leverage in that oil number is obviously very significant.

And it has obviously moved significantly in our direction since mid summer.

But oil is still -- again, it's moving every day but it's still up a little bit from where it was a year ago and it's very volatile.

So I think we can't necessarily depend on oil one way or the other.

And we've been I think for many years focused on the fact that we were going to get in difficult times again, whether that was going to be the economy, whether it was going to be oil or, God forbid something else that would put the industry in some difficulty.

So we have been building our cash reserves, paying down debt, and preparing for difficult times.

And we certainly had them this year.

And I think the wildcard which you highlighted is the economy.

And this industry is highly correlated -- traffic is highly correlated to GDP.

And that's going to be the wildcard along with oil for next year.

And I don't think anybody really knows what the fallout is going to be from all of this financial turmoil.

But I do think the capacity reductions that we decided on early this year are coming just in time.

And we've got lots of degrees of freedom to work next year if GDP really significantly goes in the wrong direction or if oil likewise goes in the wrong direction.

So I think we are -- have been and continue to do everything we can to prepare for very, very difficult times in the near term, while at the same time recognizing that we are running the business for the long term and we are trying to do the right things for our shareholders for the very long term and that's what the aircraft replacement program and the 787 decision is all about.

So I'm not specifically answering your question, but I think I'm giving you a feel for how I look at it.

Well, you came pretty close.

I didn't think you were going to let me paint you in a corner there.

But that brings me to a follow up though, Tom -- Mark and I were wondering if there's any more color you could give us on the financings, what parties are were involved in the sale leasebacks and whether it's Boeing that's the backstop provider.

Unfortunately, given the confidentiality provisions of those contracts, I can't disclose that, but those were significant moves forward in financing.

We've obviously accelerated our fleet replacement plan, which we feel pretty good about.

And in the last month, we've also secured most of the financing with respect to that.

So the backstop deal covers two-thirds of the 76 airplanes.

Now we've got permanent financing for 20 of those, so the way to think about that is almost all of those airplanes are now financed one way or the other.

So in this market, I think that's good.

We have got more work to do, but I think we're in a pretty good spot right now.

If I could just add something to that, I would again credit a lot of good work by our treasury team and a lot of my colleagues in the finance organization.

The point I'd like to add to is that I do think that I've been saying -- my team has been saying for a long time, that it should matter to the capital markets who pays you back and who doesn't.

And as you know we have paid folks who have lent us money -- over many, many years we have paid them back, and I'd like to think that that does matter and is mattering right now.

Understood and I appreciate that.

And, Gerard, just one final question here, now that you have got 787s on order -- if I'm not mistaken, that plane has to be painted, which is a concept you are somewhat unfamiliar with.

Have you chosen a color?

Jamie, I'm sure our engineering staff is wrestling with that very (multiple speakers).

It's not one I'm terribly troubled with right now.

Not a top priority.

I realize that.

We've just been waiting for the 87 order for a long one.

So well done.

And thank you very much.

You know Gerard is a Texas Longhorn, so we've been looking at burnt orange.

Next question in queue, Bob McAdoo with Avondale Partners.

Your line is open.

You talked about booked load factor but didn't give us any sense about -- do we have a sense about what yields are looking like in the upcoming period and are new bookings continuing to flow in at normal rates or do we see any kind of degradation here in the last few weeks?

Bob, this is Tom.

We generally don't comment forward on yields, but I think the way to think about that is we've got a little bit of a mixed bag here.

We have got unit revenues, which have really been quite strong, up almost 11% in the most recent quarter.

But if you look at the third quarter, traffic is off around 5%.

So going into the fourth quarter, we've got capacity down much more.

It's down 8.3% for the system.

And a booked load factor that's down a couple of points.

So all of that implies that traffic in the fourth quarter is going to be a fair bit weaker than it was third quarter.

But fortunately, we've got the meaningful capacity reduction in place.

And that seems to have had the predicted effect on unit revenue.

So I think we are just going to have to wait and see.

That leads us where I thought, where I was hoping it would go but (inaudible).

The way the prepared remarks were, it wasn't clear whether you were trying to paint a darker story than maybe we've seen here in the most recent quarter, where obviously squeezing capacity does in fact drive the RASM up.

The other thing is, can you give us any clue as to what you've done so far in hedging out into 2009?

Do you have anything out there that would drive your costs higher than what spot prices might imply in terms of fuel going forward?

As you probably know, we've tried to take a very disciplined and systematic approach to fuel hedging.

So we haven't reacted strongly one way or the other as oil prices have moved.

And I think that's served us pretty well.

So for this year our hedges have saved us over $500 million, and that's worked out reasonably well.

As you look out into '09, we do have today about 20% of our consumption hedged.

The cap on that is about $109 a barrel.

So that's what we've got going out into next year.

It does have a floor.

Some of it has a floor.

It's around in the $80 a barrel range.

So if we were lucky enough or at least got rid of the volatility and stayed at $80 a barrel throughout, you wouldn't necessarily be paying a penalty on that 20% -- is that what that says?

That's right.

Good.

Thanks a lot.

Appreciate it.

Next question in queue will come from the line of William Greene with Morgan Stanley, and your line is open.

Gerard, I'm wondering if you can talk a little bit more about this order on the 787.

It's pretty big and I realize that it's quite flexible.

But am I right in assuming you either have tremendous flexibility or an incredibly good price?

Because it's not clear to me why at current return levels you'd even want to look at investing?

And I realize this is way out in the future, but even so we are talking about at least the next 12 months being rather uncertain, so how should we think about what you are trying to do here?

I think that's a fair question on the basis of certainly our current earnings and the past several years, although we did manage to get ourselves profitable in '06 and '07.

But as you point out, not very profitable.

I think, Bill, the way to think about this order is it positions us to begin to replace our 767s as they reach their maturity level, and the economics of that airplane against an old 767 I think are going to be very favorable.

So I think the 42 airplanes in the context of the entire wide body fleet that we have, which of course includes the 34 A300s that will be out of the fleet by the end of next year and then 150 plus or minus 767s, I think we've got lots of room there for replacement economics.

And then the options position us for growth that we anticipate if we, when we however best to say it get into more calm waters.

And I've thought for many, many years that once this industry reaches some sort of supply/demand equilibrium so it can price its product in a way that we can get sensible returns for our shareholders -- once we are at that point, there's no reason why our company shouldn't be able to grow with GDP here in the US and around the world.

And if you couple that with the AA/BA/Iberia immunity application, which just puts us on a level playing field with Star and SkyTeam, we should have some growth opportunities there.

But that's a long way out and we got a lot of flexibility to decide whether these airplanes are replacement or growth, and so that's the way I'd describe it.

Okay.

Maybe I can turn it as well now to CASM.

If we look at your CASM guidance I guess for the fourth quarter here, it's going to go up a fair amount which seems like you've had maybe less success recently taking out some of the structural cost, maybe just more on the variable side versus some of the competitors.

And I'm just wondering if you can talk a little bit about are there any other options you have here to remove cost permanently, or is a lot of what we're going to see here based on the capacity cuts going to lead to pretty big CASM growth ex fuel?

I think what you are seeing is that as you pull out capacity, it takes a little while to get some of the fixed cost out.

And that's reflected in our fourth quarter cost numbers -- specifically we've got capacity down pretty significantly but at the same time we have maintenance and repairs costs going up as our fleet has aged a bit and as we continue to work on our dependability.

So those are things that will begin to abate as we start moving the fleet age in the other direction.

But we are seeing that for now.

And we are also seeing as we pull down capacity and the rest of the industry pulls down capacity, some of these facilities costs at airports don't go away.

They just get spread over a smaller base.

So that tends to have an unfortunate effect on unit cost.

The last thing in the most recent quarter was pretty significant foreign exchange impacts as foreign currencies were moving around on us.

But I think the important point is it's going to take us awhile to get the fixed costs more in line with the size of the company, and we are going to be very focused on that as we roll into the '09 planning process.

So we will have some more to say about that on the next conference call.

Okay.

One quick last one.

Debt payments and pension in '09, do you have those handy what they will be?

Yes, in '09 our total debt maturities are $1.5 billion.

That includes the $300 million roughly convert.

And we don't have any required pension contribution for '09.

Thanks for your help.

You bet.

(OPERATOR INSTRUCTIONS) Next, Mike Linenberg, Merrill Lynch.

Two questions here, my first one, maybe this is a bit of a nit and it's to Tom -- when you put out your 8-K in the middle of September, I think you were forecasting a cash balance of $4.9 billion at the end of the quarter and you came in at $5.1 billion.

I'm curious, the $200 million swing, was that something near end of quarter, maybe financing or one of the deals tied to the aircraft?

A little bit bigger than expected seasonality associated with the air traffic liability.

But nothing material other than that, Mike.

Good.

Just my second question, and this is to either Gerard or Tom.

When I guess the DOT, I think it was last week when they put out the August Consumer Report, we saw that on-time was the best in five years.

I think the rivals were up like 6 percentage points.

I think that they indicated it wasn't really weather but it was supply was coming out.

August was down, but September is going to be down a lot and I'm wondering, when we talk about obviously there's a lot of cost headwinds, Tom, you just ran through them, but when we start thinking about the size of your operation and the block hour times and the schedule, is there an opportunity as maybe delays and congestion come down that you can reduce block?

And as you know there's obviously significant cost savings on that -- what's your thoughts or just where you are on that?

Mike, I think that is a good question.

We have not been happy with or satisfied with our dependability this year.

We, American, and there's a lot of reasons why we haven't performed up to the standards we hold ourselves to, some of those within our control and some outside of our control.

One of the biggest ones outside our control is the fact that with the high degree of concentration of operations that we have at O'Hare and in the Northeast, we are subject to something like 30% to 35% more ATC ground hold activity on average than any other airline in the US.

And that's just because of the percentage of flights we have in those locations.

So we start every month knowing we are going to be in the hole because of that.

And I think that certainly over the years we have worked really hard to push the utilization of our airplanes to extract block time, to extract ground time.

And some of those initiatives, as our fleet has aged, have not synched up as well as we would like.

So we are having to reinvest some ground time and some block time into our network in order to offset some of the ATC environment, some of the reliability issues we are dealing with as our fleet ages.

And hopefully we will pick up the benefit that you highlighted, which is with the reduction in overall flying in the country, it will take some pressure off the air traffic control system, which today certainly in the Northeast and in Chicago is absolutely over scheduled.

It cannot handle the scheduled operation.

We can't operate reliably in New York on a good weather day given the amount of flights that are today scheduled.

So I don't anticipate a lot of relief in New York, but we may get some relief across the country.

And then one more thing I would add which is everybody focuses a lot on the A14 rank in this industry and certainly we pay attention to it.

But one of the things the industry does and certainly we are a part of that is add block time in order to improve your relative performance in your A14 rank.

You can be number one pretty easily in A14 if you accomplish it through block time, but that is very expensive.

And we have been reluctant this year up until the fall, when we felt like we had some more degrees of freedom financially to add block for our flights and add ground time.

But we did those primarily to react to things we had done over the past few years and give our line maintenance folks more touch time on the airplanes for reliability reasons.

So we are not trying not to play the A14 rank game by spending a lot of money adding block time, because as you know, we pay the greater of schedule versus actual on block as do many of the other airlines.

But I think if you do some comparative block analysis, you'll see there's been a lot of block added in the industry which contributes to some of the rankings you are seeing.

I apologize for the long winded answer, but that's the way I see the landscape.

That's helpful.

Just one quick follow up, because you did bring up O'Hare and capacity.

The additional runway comes on, will that help you or are you -- I'm just trying to figure out where the capacity comes from and maybe it's new entrants?

Or do we have some unintended consequences where you get more capacity in Chicago, and I don't know, the --?

Mike, I think, sure, the new runway is going to help.

But I believe what we should be doing is lowering the capacity levels at these congested airports until we get the capacity levels to the point where we can run reliably.

And then when we get them there, then we can start talking about how do we increase capacity at these airports, but do it in a way where we don't take it out on our customers.

And the notion of not -- that airlines over schedule, that is, I think a confusing and fallacious discussion or argument because we schedule the airplanes when people want to go.

That's why there's lots of flights at 5:00 out of LaGuardia.

It's not because we are trying to jam the ATC system.

That's when people want to leave New York or go to New York.

So that's why when we cut our schedule earlier this year, we cut significantly LaGuardia.

We said very publicly to the DOT and the FAA, here are some slots at LaGuardia.

You should vanquish these slots, draw capacity down, use these as a first cut, draw it even further down and we suspect other airlines that have capacity at LaGuardia may or may not participate.

We can't talk to them.

But thus far the FAA and DOT have not taken us up on that, and so we ended up adding back flights into LaGuardia.

Now, we kept our capacity cut the same.

So we took the flyings out elsewhere, but we put the flying back in LaGuardia to protect a lot of our slots.

So we are not making much progress on my worldview as to what we ought to do with capacity, but I think until you can get more volume in the system, you ought to just reduce it until we can figure out how to build more runways, create more ATC, and let people travel reliably.

And we'll keep sending that message and see what happens.

As a road warrior, I'm in full agreement of what you said.

Thanks.

Our next question in queue will come from the line of Gary Chase with Barclays Capital.

Your line is open.

I wonder, Tom, if you could give us a little context.

You talked about the booked load factor comparisons in the fourth quarter.

I think we've heard that booked loads have actually been running up, or people have been booking in advance from if not American, others during the year.

How does that experience that you described compare to where you've been in prior quarters this year and do you think there's some read that we ought to get on what's happening as a result of that?

Gary, I don't know that we have enough insight on that to be able to give you a good answer as to whether the booking pattern is changing as we roll into the fourth quarter.

We have seen a little bit lower corporate travel.

That's down a few percent in the month of September, though it's down less than it was in August.

We saw pretty good downdraft in corporate travel in August.

So it's really a little too early for us to have a good look at that because it tends to be late booking.

But I guess the point is a little bit of a mixed bag over the last couple of months on that front.

We have seen that with the turmoil of the financial markets, the demand out of New York is softening more than other parts of our domestic system.

So as we look at our advanced book load factors out of New York, it's weaker than the rest of the system.

So I'm not sure if that answered your question directly, but it's too early to tell, but clearly some weakness in corporate travel, and certainly what you would expect to see given the headlines.

I think when you said not a moment too soon, I was wondering if you were trying to telegraph that it was more -- not a mixed bag and something a bit more negative, so was curious.

No, I just think given the traffic reduction that we saw in the third quarter and is implied for the fourth quarter it's awfully good that we got in front of the capacity.

Just shifting gears entirely, as you look at the aircraft replacement decisions that you've been making, thinking particularly on the narrow body side, obviously the calculus there very sensitive to fuel prices, and I understand your point -- it's volatile, they could be back north of $100 shortly.

But at current levels, would that change the thought process on the -- on how compelling those replacement decisions are?

Gary, I don't think it would, because I think the other variable you are trying to manage is the overall age of your fleet, not that you're concerned necessarily about age but you are concerned about maintenance costs and reliability as the fleet ages.

And when you have a fleet as large as ours, you've got to stay at that every year or you get behind the curve.

And certainly we've had the hatches battened down here for many years as we have navigated our way through some tough times.

So I think irrespective of fuel prices, we are doing the sensible thing on the narrow body fleet side given the size of our narrow body fleet.

I think the same goes for the wide body fleet.

Appreciate it.

Thank you.

Thank you.

Ladies and gentlemen, we have approximately five more minutes for this portion of the conference call.

We will move on to our next question in queue, that will come from Hunter Keay, Stifel Nicolaus.

Your line is open.

Thanks a lot.

A question for you, again on pension, (inaudible) no minimum required contributions next year, but how has the funding status been impacted by the recent conditions in the market?

We formally update that analysis at the end of each year, so we don't have the formal answer, but you can surmise from what's happened in the markets that the funding status is down considerably from where it was at the end of last year.

Now, we've been working real hard to improve our pension funding status through funding and through returns that have exceeded our peer group.

And by the end of last year we were up to about 96% funded status.

So it's down from there but moving day by day.

Moving today, in fact.

Right.

So the declines wouldn't necessarily impact the potential cash obligation that you would have next year, if you do redress at year end?

Right, not for 2009.

So that's pretty much set in stone.

Okay.

Just another quick one on the financing, I know you are -- your hands are tied with regard to confidentiality.

But as you look at the sale leaseback and the backstop financing, can you at least maybe give us any indication if this is from maybe a new provider of financing?

Or is this from somebody that -- an organization that you guys have used before in previous transactions?

Any color there at all?

I can't really give you any color unfortunately, because we have got to comply with the confidentiality provisions, but I will say it's really important to have that financing in place in an environment like this.

And I credit Bev Goulet and our entire treasury team for doing a great job of getting out in front of this and being really aggressive about getting the financing lined up for the fleet replacement, which is something that's going to be really, really good for our company going forward.

Got it.

Okay.

Thanks a lot.

We'll take our next question in queue, and that will come from Kevin Crissey with UBS.

Please go ahead.

Good afternoon.

Tom, maybe this is for you, FX impact on terms of RASM this quarter and maybe on a go forward basis at current exchange rate?

Let's see if I have that handy here somewhere.

There was an impact.

It was about 2 points of our third quarter transatlantic RASM improvement.

Yes, about 2 points of it was driven by FX.

Terrific, thanks.

What about your ability to cut more international capacity?

What is your ability there?

Well, we have an ability to do so if we choose to go down that track.

I think we are going to have to watch the international environment very carefully.

In recent quarters it's been quite strong, but I think we all know that the international part of our business, part of the airline business, transatlantic in particular, tends to be more cyclical than the rest of our business.

So as the global economies get softer, we are going to have to keep a real close eye on what happens with that part of the business.

And as you saw from our booked load factor numbers, our advanced bookings internationally are a little softer than they are for the system.

(multiple speakers) So that would be -- I'm sorry.

I think you've seen some of the other airlines have added a lot of capacity across the Atlantic over the past few years.

And I think it remains to be seen whether there's perhaps a little more capacity there than we need right now.

Right.

I think in your prepared remarks you were talking about the difference in capacity international, flat to slightly down I thought was your overall number.

I mean, would the capacity be through -- what are you going to do, park those aircraft, just go from five flights to four flights?

How would that work?

It seems to be you have less flexibility on the international front, given the long stage length and the size of the aircraft and so forth.

How might that work?

It's too early to the say.

If we chose to pull back on international capacity, there are lots of different ways to do it.

You could fly fewer frequencies, you can pull some of the flying back into the domestic long haul system.

It's also important to remember that we've got the Airbus A300 aircraft retiring in 2009.

So that's a meaningful chunk of wide body capacity that's going to be coming out, and some of that will be backfilled with 767s.

One last question if I could.

How did you get the 787 slots so early?

Was it your relationship?

Did somebody cancel?

We've been saying by virtue of our long-term agreement with Boeing, we have access to 787s and this is just a manifestation of what we've been saying.

Thank you very much.

You bet.

Our next question in queue will come from the line of Bill Mastoris with Broadpoint Capital.

Okay, that's Broadpoint -- but, Tom, my question for you, the aircraft that you are going to take out of your system next year besides A300s -- are they all encumbered or might they have debt attached to it that might suggest a future additional charge?

It is, it's a mixed bag.

I don't know that there's anything that would drive an additional charge.

Some airplanes when you lease

Aren't the A300s -- ?

Other than what we put in the press release about the A300s as we retire those.

But other than that, I'm not aware of anything that would drive an additional charge.

Do you have the flexibility if conditions -- general economic conditions get worse to further ground other unencumbered aircraft?

Yes, we do.

I assume these would be all MD-80s, correct me if I'm wrong here.

We have considerable flexibility, and yes, the MD-80 would be the most likely candidate.

Are there any other aircraft that would be candidates?

I'm just curious.

No plans at this time.

The only other thing I might add, Bill, is there are the economics of the 737-800, potentially the 900 traded against the 757.

I think it's something we are going to want to be looking at very carefully in the next couple of years because we are looking at some stiff increases and nothing -- stuff that would be a rounding error to you guys in terms of your modeling, but something that we are paying attention to related to the costs on the [roles] powered 757.

So we are going to be looking at those 75s in comparison to a new 737-800, possibly [900], and trying to decide whether there is better trade-off there for us going forward.

So it is safe to say, and this is just for capacity through the end of next year that really all of these are unencumbered aircraft.

Did I state that correctly, Tom?

What are you defining as these, Bill?

On capacity reduction, aircraft had that is going put on the ground.

There's no associated ETC or double ETC that might be impacted, is really what I'm getting at.

No, I don't believe so.

I think you're materially correct.

Okay.

All right.

Thank you.

Thank you, Bill.

Thank you.

And ladies and gentlemen, members of the analyst and financial community, that does conclude your question and answer session for today.

After a brief break, we will begin the media question and answer session.

Ladies and gentlemen, thank you for your participation and for using the AT&T executive teleconference.

You may now disconnect.