美國航空 (AAL) 2008 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

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

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

After the executive team's presentation today, there will be an opportunity for your questions.

As a note, we will be taking questions first from members of the analyst community, and then after a short break the media.

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

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

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

Please go ahead, sir.

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 fourth quarter, along with some perspective on 2009.

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, lease 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 our quarterly report for the third quarter of 2008 on Form 10-Q.

With that I will turn the call over to Gerard.

Thank you, Eric.

Good afternoon, everyone.

As you have seen in our press release, we reported a net loss of $2.1 billion for the full year 2008, compared to a net profit of $504 million in 2007, including several special charges in both years.

As all of you know too well, the biggest challenge of 2008 was the price of fuel.

While cheaper oil prices have dominated the headlines for the past few months, in 2008 we paid about $2.7 billion more for fuel than we would have paid at 2007's prices.

To put that in some perspective, our largest net profit in our company's history was $1.3 billion in 1998.

The run-up in fuel during the first half of the year was extraordinary, and the fall of oil prices since then has been nearly as remarkable.

We took action by cutting capacity levels and by stepping up our efforts to unbundle our product, both of which were critical to our ability to weather 2008 severe storm.

As it turns out, the capacity reductions that we and our competitors put in place during the run-up in oil prices has left us, and arguably the industry, in better shape as we face another significant hurdle presented by the global economic downturn.

Nevertheless, one only needs to look at our fourth quarter and our full year results to see that high fuel prices left a lot of damage in their wake.

And, of course, now the downturn in the global economy is top of mind for everyone.

It's certainly no secret that demand for air travel has declined.

But while the airline industry is certainly affect by this downturn, as I mentioned, the industry's capacity reductions last year turned out to be very well timed.

I think it is fair to say that this is the first time the industry has acted proactively in front of a recession to pare back capacity.

So the prospects for American in 2009 I think are much better than they would have been without the capacity reductions put in place late last year.

We intend to continue our capacity discipline in the year ahead, and based on the tougher economic climate that we're seeing today we announced a modest downward revision to our capacity outlook.

And as we've done in the past, we'll continue to monitor conditions and take action as necessary.

On the operations front, we hit a very challenging year for a variety of reasons, some within our control and some outside of our control.

We're pleased that the steps we took in the fall to address reliability issues within our control have begun to pay off.

In the fourth quarter we had very good operating performance, which we expect to carry forward into this year.

Last year on this call I pointed out how much work we had done during two profitable years in 2006 and 2007 to repair our balance sheet.

Indeed those efforts proved fruitful in 2008 as many airlines scrambled to shore up their liquidity.

In the fourth quarter the credit markets tightened very significantly, as everyone knows.

Fortunately we had taken advantage of opportunities to raise cash earlier in the year.

We completed the Beacon divestiture shortly before the market's melt-down.

We opportunistically issued equity when we felt like we had a good opportunity, and we closed several financing transactions to bolster our liquidity.

We raised $200 million in the fourth quarter and in total we raised nearly $2 billion during the full year 2008.

Our efforts toward balance sheet repair in profitable years provided us, I think, this flexibility, and as we look forward we will redouble our efforts towards undoing the damage to our balance sheet that we had to incur in 2008.

And I think by doing this we'll better position American to face adversity in the future and prepare for the investments, needed investments, in our airline and prepare to protect all of our stakeholders.

So we have and we will continue to take on the challenges that we see and plan for the ones we don't,, all the while trying to build our airline for long-term success.

As most of you know, I've been in this industry a long time, and the one thing that is certain in the airline industry is uncertainty.

But I am guardedly optimistic about our prospects for 2009 against a backdrop of a very difficult economic climate.

While we'll be a smaller airline in 2009, we will be ramping up our fleet renewal with 29 new 737-800 aircraft that will be coming this year, with another 39 coming in 2010, and eight more coming in early 2011.

We're very much looking forward to getting approvals from the various regulatory authorities for our application for antitrust immunity with British Airways, Iberia, Royal Jordanian, and Finn Air, and once we've got those approvals we'll be on a level playing field to be able to compete with the other alliances across the transatlantic.

So we're optimistic we are going to get that done this year.

With all that said I'll turn it over to Tom.

Thanks, Gerard, and good afternoon, everyone.

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

The most significant of these was the $103 million pension charge associated with the early retirement of pilots and a $23 million charge associated with our capacity reductions.

In the fourth quarter of 2007 we had a one-time gain of $39 million related to the expiration policy for Advantage miles, a charge of $63 million for the write-down of retired MD-80s, and $138 million gain on the sale of Air Inc.

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

Excluding these special items we lost $214 million versus a loss of $184 million in the fourth quarter of 2007.

A change of $30 million.

Clearly fuel prices continued to impact our results.

We started the quarter with oil spot prices near $100, and thus the average fourth quarter fuel prices remained relatively high.

As a result, we paid $133 million more for fuel than we would have paid at fourth quarter '07 fuel prices.

The fall in the price of oil has been nothing short of remarkable, and while fuel may have abated for the time being, fuel prices remain volatile, and we will continue to do our best to dampen that volatility through our systematic hedging program that continues to serve 0its purpose.

As seems too often the case in this industry, a new challenge has been posed to American Airlines and to our industry, and that is the impact of the global economic downturn and its resulting impact on demand.

Through other efforts over the past several years we have better positioned ourselves to face troubling times, and we continue to take action in light of these challenges.

We have been steadfast in our view that a big part of the solution is to effect a more stable supply/demand balance, and for several years, we've taken a very disciplined approach to our capacity plans.

And much of the industry is now doing the same.

These actions have dampened the impact of what would have been an even more challenging fourth quarter and put us on sounder footing to face the uncertainty in the year ahead.

As you may recall, in May of last year we announced capacity reductions that hit full stride in the fourth quarter, with consolidated capacity down about 8.5% versus the fourth quarter of '07.

In October, we announced a disciplined 2009 capacity plan, and we said that we would be quick to act if more should be done.

Given the economic uncertainty, the delay to our aircraft deliveries by a couple of months due to the Boeing strike has provided us an opportunity to further reduce capacity, albeit modestly.

We've decided not to back-fill expected flying from our delayed 737 deliveries with MD-80 flying.

And we're announcing a revision downward to our 2009 mainline capacity of over a point versus our previous guidance.

But the revenue environment isn't the only challenge facing us this year.

As Gerard mentioned, from an operational perspective, we had a challenging 2008, but we're taking action to address those challenges in 2009 and we're excited that we'll begin executing on our fleet renewal plan with the 29 737 deliveries scheduled for this year.

But with these initiatives and other cost headwinds that I'll talk about later will come challenges from a unit cost perspective.

In short, there's a lot on tap for 2009, but let me first recap our fourth quarter performance starting with revenue.

Our fourth quarter mainline revenue increased by 5.5% year-over-yield on yield improvements of over 8%, while unit revenue for our consolidated system was up 5.1%.

While we currently face a challenging revenue environment moving forward, yield and unit revenue improvements of these levels during a tough quarter demonstrate the pricing traction possible under rational capacity levels.

In our domestic markets, fourth quarter mainline unit revenue increased by 4.8% compared to last year on over 12% less capacity as yield improvements more than offset lower load factors.

I would like to point out that we've taken several steps over the past year to improve the customer experience.

We continue to enhance our on-board food and wine offerings.

We've introduced priority access to provide a more differentiated product for our premium passengers.

And we're testing a mobile phone and PDA boarding pass initiative at certain airports.

On the international front we saw positive unit revenue growth in the fourth quarter versus '07 across all entities, with yield increasing more than offsetting load factor declines.

In the aggregate, international unit revenue was up over 6% year over year.

Latin America continued its positive performance in the fourth quarter, posting a unit revenue improvement of over 7% despite a very competitive environment in some markets.

For our Pacific operations, we also saw unit revenues rise by 11% driven by higher yields.

And finally, even as competition continues to evolve under open skies, Atlantic fourth quarter unit revenues were up about 3% versus last year on 3% less capacity.

While our fourth quarter unit revenue performance was reasonably strong, the weakening global economy was evident in the second half of the quarter.

And this weakness has continued into the first quarter.

In addition, the Easter shift from the first quarter into the second quarter this year will make for a tougher comparison in the first quarter.

Currently, mainline book load factors are down significantly at about 4.5 points lower versus last year.

With domestic down about 2.5 points, and international down nearly 8 points.

Given the weakening economy, it is fortunate and a bit uncharacteristic that the airline industry appears to be the first industry to have taken actions on capacity.

These actions have significantly improved the outlook for 2009 relative to what it would have been at 2008 capacity levels.

On the regional front, quarterly revenue declined by 8.5% versus last year, but much like our mainline capacity we've been disciplined on the regional side as well.

Our regional capacity was down over 12% for the quarter, resulting in unit revenue improvement of about 4% versus last year.

As many of you know, in addition to passenger travel, we have other lines of business that are impacted by the economic downturn, to varying degrees.

We also experienced effects of the recession in our cargo business as well as revenues associated with mileage sales.

Our cargo revenues declined significantly versus the fourth quarter of '07, declining nearly 14% on traffic deterioration that accelerated during the quarter.

And in other revenue we've seen substantial year-over-year increases from the service charges we put in place in June, including the first bag charge.

However, these increases were partially offset by year-over-year declines driven by our divestiture of American Beacon Advisers in the third quarter 2008, and reduced mileage sales to our Advantage co-branded credit card and other Advantage partners, which is consistent with the broader decline in consumer and retail spending as being seen throughout the economy.

The net impact of these effects was an increase in other revenue of almost $48 million, or 9.5% versus last year.

On the alliance front, our application for antitrust immunity with B.A., Iberia, Finn Air and Royal Jordanian rests with the regulators, and we have been on schedule with the customary requests for follow-up information.

As Gerard said, while we can't make promises about the outcome of that process, we believe we've made a very strong case and we continue to expect that approval will occur in the second half of 2009.

Shifting to costs, while spot fuel price declines during the latter part of the fourth quarter were remarkable, the average costs over the quarter were still high by historical standards.

Our fuel price came in at $2.60 per gallon consolidated, representing an increase of almost 8% versus last year.

And as mentioned earlier, this raised our consolidated fuel costs in the quarter by over $130 million.

Excluding fuel, our unit costs rose by 6.8% mainline, and 6.6% consolidated, driven by reduced capacity and head winds and higher materials and repairs costs and increased foreign exchange charges.

Now turning to the balance sheet, we ended the quarter with $3.6 billion in cash, including $459 million in restricted cash.

Hedged collateral held by counter parties totaled $575 million at the end of the quarter.

Although down from recent levels, $3.6 billion is a sizable amount of cash by historical standards.

Nevertheless, with the damage done in 2008 by high fuel prices and given the uncertainties facing us in 2009, we continue to look for opportunities to build our financial flexibility.

Even in a challenging credit market, during the quarter we raised $200 million through a sale-leaseback transaction involving our fleet of ATR aircraft.

It bears mentioning that our efforts to repair the balance sheet during profitable years provided us additional financial flexibility such that even after the financing we secured in 2008 we still have unencumbered assets and other sources of liquidity that we valued at over $3.5 billion.

In the fourth quarter, our scheduled principal payments on long-term debt and capital leases totaled over $180 million, and our capital expenditures totaled about $190 million.

Our total debt as defined in the earnings release is now $15.1 billion, down from $15.6 billion last year.

Our net debt defined as total debt less unrestricted cash and short-term investments is now $12 billion.

This is the first year-over-year increase in net debt since 2002, and while we've made a lot of progress in whittling it down from a high of almost $19 billion at the end of '02, it highlights the need for us to regain the momentum on the balance sheet that we lost during 2008 when fuel prices eroded much of what we had accomplished.

Looking forward this year, I want to first touch on capacity.

Obviously the direction of the economy remains a big uncertainty as we enter the new year.

As I mentioned at the beginning of my remarks, due to the delay of our 737-800 deliveries caused by the Boeing strike, and given the uncertainty around the economy, we think it's sensible to revise our capacity downward for 2009.

We now expect mainline system capacity to be down over 6.5% versus 2008, more than a point lower versus our last guidance.

On a year-over-year basis, we expect mainline domestic capacity for the year to decrease by about 9% and mainline international to be down over 2.5%.

Within 2009, we expect the first quarter to see the steepest year-over-year capacity decline with mainline and consolidated capacity expected to be down over 8.5%.

With a decline of this magnitude comes significant unit cost pressures.

We've done a lot over the past years to extract costs from our system, and in terms of ex fuel, ex labor unit costs, on an absolute basis we've consistently been at or near the best of the Big Five for years.

We continue to be diligent towards finding additional cost savings, and this years we're targeting another $130 million.

That said, our operational performance last year was sub par, and so we're making some investments in our operation to improve dependability and the customer experience.

We've put some of these initiatives in place in the fourth quarter, and we've already seen some improvement in our dependability metrics both on an absolute and on a relative basis.

In addition to our dependability initiatives, we're fighting several cost head winds with some specific to us and other airlines, and others the type of cost pressures that many companies are facing.

As you know, unlike most of our peers who have terminated or frozen their defined benefit pension plans, we have preserved our plans and continue to meet this important commitment to employees.

And while we believe through responsible stewardship of our pension asset, our pension asset performance compared well relative to that of other companies amid the severe market downturn.

Pension expense is increasing dramatically due to the asset value declines.

This alone represents three points of our forecasted ex fuel unit cost increase.

Other cost pressures come from rising employee and retiree medical expense and other inflation factors, increased facility costs and landing fees, additional aircraft rent associated with the sale-leaseback transactions on our 737 deliveries, and other cost head winds from our capacity reduction.

That said, in the first quarter we expect our ex fuel mainline unit costs to increase about 10% year-over-year, and consolidated unit costs to increase 9%.

And we anticipate 2009 full year mainline ex fuel unit costs to increase by about 9%, and consolidated to increase by about 7.5%.

Fuel expectations are a different story.

On a consolidated basis, we forecast a first quarter fuel price of $2.04 per gallon, and a full year price of $2.06 per gallon.

With regards to hedging, we have 42% of first quarter consumption hedged with floors at $68 a barrel on a crude equivalent basis, and caps on 45% of consumption at $93 per barrel.

And a full-year hedge of about 32% of consumption with floors at an average price of $67 per barrel and 35% of consumption capped at $94 per barrel.

As of January 16th, the average 2009 market forward price for crude was $51 per barrel.

In total for 2009, we expect to pay about $2.7 billion less than we would pay at 2008 prices.

This decrease in fuel expense will result in full year total unit cost improvement of about 6.5% for mainline and about 7% consolidated versus 2008.

With the fuel price volatility we've seen over the past year, fuel hedging has certainly dominated the headlines, and I would like to take a minute to say a few words about our program.

From early this decade, when we couldn't afford to hedge very much, until today, we have steadily built up a systematic hedging program that is designed to dampen the impact of fuel price volatility, and it is not designed to take risky speculative bets on what we believe the price will be at a specific point in the future.

In periods that fuel prices rise, hedges can buffer expense increases, while in periods where fuel prices are falling, hedges will offset some of that favorable impact.

We believe this approach has served us well, and for the full year 2008 our hedging program lowered our fuel expense by over $380 million.

Moving to cash forecast, our principal payments on long-term debt are expected to equal about $1.8 billion with the principal portion of our capital lease payments accounting for an additional $110 million.

These are sizable outflows but with these payments include maturities of two double ETCs and our revolver that we expect will unencumber about $1.2 billion worth of assets.

In terms of the pension, as I mentioned earlier, it's no secret that the broader market has seen a significant decline in most asset classes.

Accordingly, the asset value of our pension plan has declined significantly.

Due to our high pension funding levels last year, we have no minimum obligation for this year.

And given the uncertainty in the economy, we have not yet decided our expected funding for 2009.

This year we expect capital expenditures to total about $1.6 billion.

We expect our non aircraft capex for 2009 to be about $500 million, which includes investments in our Boston and Heathrow Admirals Club, interior modifications to our 767-200 aircraft, and we're converting 18 of our 757s to support international flying that will include coach and business class cabin upgrades.

It bears noting that we have committed financing for all of our 2009 aircraft deliveries, totaling approximately $1 billion from mortgages and sale-leasebacks associated with these deliveries.

So we continue to take a measured approach to our capital, with the aim being to make sound investments in our business that will help keep American Airlines strong and competitive for the long term.

So to conclude, there's a lot of uncertainty around where 2009 will take us.

The near term revenue environment will present a significant challenge but we've taken meaningful steps to reduce capacity in front of this weakness, while fuel has declined substantially.

With that, Gerard and I would be happy to take your questions regarding our quarterly results.

Thank you.

(Operator Instructions) Also in the interest of time we do ask that you limit yourself to one initial and one follow-up question.

Our first question today is from the line of Jamie Baker with JP Morgan.

Your line is open.

Good afternoon.

A question for either Gerard or Tom.

You moved last year to strengthen and enhance the value of the Infinity agreement with Citi, but you didn't do a forward mileage sale, as I recall, which is something that at least we've been assuming you may still have in your back pocket should you seek additional liquidity.

First question is if there's any allowance for this in the $3.5 billion unencumbered asset level that you identify.

Second, if you care to make any thoughts or comments given the situation at Citi and whether a mileage sale is still something that externally we should be considering.

Jamie, it's a very good question.

You are correct, we have not tapped a forward mileage sale as many of our competitors have, so we do consider that a potential source of liquidity moving forward, and it is reflected in the $3.5 billion I mentioned earlier.

Okay.

That's helpful.

That will do it.

Thank you, Jamie.

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

Your line is open.

Good afternoon.

Two questions for you.

First on the dependability initiatives that you described, sounds like the pension headwind year on year is like $400 million.

Do you have a dollar in the chasm that comes from trying to run a better operation the way you described in the release?

Gary, I think you're pretty accurate on the pension number.

It's north of $400 million.

Dependability initiatives plus or minus about $100 million.

Then when you guys give the book load factors, it's been a little confusing over the last couple years because I feel like those have been all over the place to a much greater extent than the revenue trend.

Can you help us think about what it might mean to be running a down eight book load factor internationally and down two domestic?

Maybe if you could give us some perspective on where we started the fourth quarter with an overall load factor that was only down two.

Gary this is Tom.

I wish I knew the answer to that question.

It is going to be dependent partly on how the economy starts off the year and how it progresses during the first half of the year, and I don't think any of us have terribly good visibility on that.

But at this point, as I mentioned, our first quarter system book load factor is down 4.5 points.

One point I would make to you, though, is that the Easter shift historically accounts for about 1 to 2 points of load factor from March into April.

So that's going to be driving a portion of the decline.

But clearly we're in an environment where demand is weak.

I mean, you just to have look at our fourth quarter results, and even though our RASM was respectable, we had 10% less traffic.

And I think sometimes that gets lost in the -- when we all look at RASM and load factors and things like that.

But we had 10% less traffic on our airline.

Is there a way to go about this on a trend line, like you have been running down 1 or 2, and now it's down 4.5?

I think it's too early to say, I really do.

I just don't know.

It is conceivable that we would have some stronger build later in the quarter, but as we look at the quarter right now it's down, and March in particular looks weak.

I think, Gary, it's somewhat indicative of other markets.

Not that it's a perfect analogy, but I think there's a lot of volatility generally, and I think we have a lot of volatility in advanced bookings.

So I wouldn't be surprised to see advanced bookings build closer into the actual travel date in light of the economic climate we're in.

So I agree with Tom, I think it's too early to tell.

Okay.

Thanks, guys.

Our next question in queue will come from the line of Mike Linenberg with Merrill Lynch.

Please go ahead.

Two questions on that pension, Tom.

I want to make sure I heard you correctly.

For 2009 you are not required to make any cash contribution?

That's correct, Mike.

Okay, good.

My second, in the press release you give us the ABO funded status, 69%.

Is that a GAAP calculation or is that an ERISA calculation?

That's a GAAP calculation.

Okay.

That's it.

Thanks.

You bet.

The next question in queue will come from the line of William Greene with Morgan Stanley.

Please go ahead.

Could I follow up a little on Gary's question?

Gerard, you mentioned that the industry and American in particular had benefited so much from cutting in advance, particularly in the domestic market on the demand side, yet we're not really cutting that much in the way of international capacity at this point, yet load factors are down eight points.

So why wouldn't you be cutting a lot more at this point just to address that before it happens?

Because I think it's inevitable we'll see a slowdown in international more so than we're already seeing.

Bill, we were not aggressively adding international capacity last year, like many of our competitors.

As I indicated in my remarks, we are going to be looking at capacity very carefully this year, and looking at economic trends just as we did last year at this time, and if it would be prudent to make a cut in our international capacity, or our domestic capacity, we'll be prepared to do that, as difficult as that is to do.

But I think as we sit here today, we're not prepared to take that step based on what we're looking at but we're certain watching the trends very carefully and we'll be prepared to act in a manner similar to what we did last year if we think that's prudent.

I think we said last year, as maybe others in the industry were adding international capacity faster than we were, that this industry has a tendency to overshoot and try to chase profitability, and with a bad ultimate effect.

We did not add a lot of international capacity when it looked like perhaps that was the fashionable thing to do so as a consequence I think we probably have less to pull down today.

But as Gerard said, we are going to keep a close eye on it throughout the year, and if that makes sense that's something we'll do.

Okay.

Then on your CASM ex fuel guidance, does that include a profit sharing assumption for 2009?

It does not.

Okay.

Thanks for your help.

Thank you.

The next question in queue will come from the line of Ray Neidl with Calyon Securities.

Your line is open.

Just some general things.

Regarding the FAA with some of the investigations they're doing, is there potential of a large cash liability for any fines that they may put to American?

Not that I'm away of, Ray.

Okay.

And as far as the unencumbered assets that you talked about, the $3.5 billion, you commented on one item that might be in there.

What are some of the other items?

Is it pretty much unencumbered value on aircraft and ground facilities, as well as your loyalty program and things like that?

Is that what you're calculating in there?

Yes, You hit the nail on the head, it's all of those things.

We've also got a big portfolio of Heathrow slots We've never encumbered that.

Aircraft.

And the frequent flyer program.

And then some other corporate real-estate type assets.

So it's a collection of things.

Finally, British Airways, if they don't get antitrust they have been talking about dropping out of the alliance.

Is there any danger there?

Ray, I certainly read those comments from BA's chairman with interest, and, having not been there during that discussion, I'm not sure exactly in what context those comments were made, but I think I would just come back to the fact that, I think One World Global Alliance is a very strong alliance.

It represents, we believe, the best global brand in the world.

One World is designed to emphasize quality over quantity.

And it's no secret that we have felt, to some degree, handicapped by the fact that we don't have immunity across the North Atlantic.

We very much want to level that playing field so we can compete effectively with Star and Sky Team.

And based on the facts, if the facts guide the regulators, we will get that playing field leveled this year, and that will be a good thing for American, it'll be a good thing for One World.

If we don't get it approved this year, which I think would be unlikely, I do not think that that spells the end of One world.

I think it would be a big setup, it would be a disappointment, but it would not be, in my view, the end of One World, by any means.

Okay, great, thanks, guys.

The next question in queue will come from the line of Hunter Keay with Stifel Nicolaus.

Question, can you enlighten us, without getting into specifics, just procedurally, how the change in presidential administration is going to impact things -- your labor relations at NMB.

I assume Mediator Tosi will remain in place but I'm just wondering if there's going to be any kind of impact that we may not be aware of in terms of shift in people involved or any kind of major change in philosophy from NMB, given the new appointments or any kind of reversal of groundwork that may have already been put in place with regard to the negotiations you've already done so far.

Well, Hunter, I really don't know how to respond to that because I just think it's hard to say.

You obviously have a lot.

You've got a change in administration and party, and you are going to have lots of players change in all kinds of organizations in Washington.

So I think to predict the implications of that for our company or our labor negotiations, I think it's very difficult at this point to say.

I don't think it changes at all, though, our approach to our labor negotiations.

I think we are going to continue to try to strike the right balance towards trying to get ratified agreements with all of our unions that on the one hand protect the long-term interests of our employees, and on the other hand, allow our company to be competitive, because if the company doesn't have a competitive cost structure over the long run, that will be bad for the employees.

So trying to strike that balance and reach common ground with organized labor remains our objective.

So I don't think that changes, irrespective of what happens in Washington.

Sure.

Of course, I absolutely understand that but just in terms of the mediator that's going to be involved, there's not going to be anything -- I don't know if it is going to be disrupted in terms of who you are dealing with in that regard.

There should be no potential change there, right, in terms of the mediator that's involved in dealing with the unions and whatnot, right, just because of the presidential administration changed?

No, I don't think there will be any seminal changes there.

Okay, great.

And just one quick follow-up.

With regard to the impact of the delays from the aircraft deliveries because of the Boeing strike is there going to be any incremental cash flow tail winds here or maybe an expense that you had budgeted for that might be helping the cash flow line in '09 in terms of deposits and whatnot?

Yes, a little bit, Hunter.

It's reflected in the capex and financing numbers that I quoted.

Very good.

Thank you.

Our next question will come from the line of Helane Becker with Jesup & Lamont.

Thank you very much, Operator.

Hey, gentlemen.

So I just have two questions.

One is with respect to the salary line in the fourth quarter.

I would think that with capacity coming down that number should not be increasing so much.

So could you just talk about third quarter to fourth quarter, could you just talk about what was in those numbers that would cause to it to do that?

And how we should think about it in the first quarter?

Yes, Helane, I think most of what's going on there that you are seeing is the special charges.

We called out the $100 million pension charge is in there, and then much of the severance charge is in there as well.

Okay.

And then just in terms of as we think about the pricing and the demand, normally we would see traffic down, something on the order of 5% or 7% or 10%, and we would see airlines quick to cut prices but you don't seem so much to be doing that in the first quarter of '09.

Can you just talk a little bit about how you think about that and whether or not you can hold the line on prices going forward?

I think that remains to be seen.

Obviously our view is that air travel remains an incredible bargain and thus is underpriced, but we'll have to keep an eye on the demand environment where every day our revenue management guys are out there trying to make the right trade-off between fares and availability and demand to maximize our revenue.

And they do that on a market by market, flight by flight basis, and we'll continue to do that.

So I think as we've seen in the latter part of the last quarter, rolling into this quarter, while fare levels have remained relatively tame, we have seen some shift in the fare mix.

And that's reflected in the yield numbers.

So we're just going to keep managing that on a day-by-day basis, try to maximize our revenue.

The only thing I would add to that is I think if you look historically at our company, I think you'll see that we have been consistent capacity, either reducers or constrainers, consistent price leaders in terms of increasing prices, and we certainly have advocated or initiated a number of service charges that we believe are appropriate and serve the industry well.

So going forward, I think that those principles will continue to guide us, but certainly we have to be mindful of elasticity and we've got to be mindful of what our competitors are doing.

But the philosophy of being disciplined about capacity, raising prices, because I agree with Tom, airfares have been an extraordinary bargain since 9/11, and unbundling and charging modest service charges are all appropriate and needed ways to raise revenue in an industry that needs more revenue so that it can produce the profits that it needs to continue to reinvest in itself.

And, you know, of course there's been a lot of dislocation in the industry because of disparate hedging positions that have led to different views on pricing and capacity.

And that just is what it is.

It hasn't been helpful.

Got you.

Thank you very much.

Thank you, Helane.

And our next question in queue will come from the line of Bob McAdoo with Avondale Partners.

Your line is open.

Thank you.

Just another round on the pension question.

If you could talk to me about what the accounting rules are, what the process is.

You've given us a couple of points here of $400 million and 3 points in your CASM.

When there is a shortfall because of pension asset performance in a year, how do they calculate what needs to be made up and how quick it needs to be made up?

And how much has to be piled into '09 versus future years of a shortfall that occurred because of losses in '08?

How does that work?

This is Tom.

It gets amortized over a period of time, and in our case, that's approximately 12 years.

So that's given rise to this year's increase in pension expense.

By the time we get to this time next year, we've had a meaningful rise in the pension assets owing to stronger returns in '09.

I don't know whether that will happen or not, but if it does, it may mean that we have the converse effect next year.

So we'll just to have wait and see.

This is obviously an extraordinary year from a return standpoint across all asset classes.

I will say that Bill Quinn and American Beacon Advisers who manage our pension money have done a terrific job even in a very difficult market, and as a consequent, our asset return on average was roughly a negative 19%, which, while it's a very unhappy story, I think it will compare pretty well.

It beats negative 35% and 40%.

Exactly.

One other quick thing.

Gerard, I think earlier a couples quarters ago said when he was looking at all the kinds of things that might happen that we might be able to do to go out and get money, he said the single biggest item was this whole issue of charging to check bags.

And as I recall, there was some number upwards of $300 million, it seems like was the number that you guys quoted.

And I'm curious, is that number turning out to be anywhere near the right numbers?

And on what line do you find those kind of dollars?

Where is that buried in terms of what line in the revenue stream?

It's in the other revenue line, and it is pretty much tracking with the run rate we had expected.

One last quick one.

When Obama put out this thing that stopped all changes in regulations that were being considered or in process or whatever, does that have any effect on this issue of trying to force people to give up slots at LaGuardia?

Does that put a hold on that?

I think that's a good question, Bob, that I don't know the answer to.

Okay, thank you.

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

Your line is open.

Thank you.

Tom, recognizing that we're in the most difficult credit market environment certainly in either one of our careers, but also giving account to the fact you've got a lot of collateral, as you previously indicated that's freeing up, he I'm wondering, do you have financing lined up for any one of the following transactions, either the spare parts deal which matures, obviously in February, and the EETC transaction which I think matures right around mid October?

I know you have back stop financing, but any other transactions for which at least there is at least a letter of intent or there is a reasonable certainty that at least a portion is going to be refinanced?

We do not have anything lined up for either of those, Bill.

As I mentioned earlier, we've got a pretty good pool of unencumbered assets which will increase as we pay down some of the debt that has collateral associated with it.

So I think we're going to have to wait and see how the capital markets evolve, but when they do begin to thaw I think we've got a pretty good story to tell and a pretty good pool of assets to finance against.

And as you pointed out, we feel pretty good that we last year were very aggressive in financing.

I got a little bit ahead of this situation, particularly with respect to our new deliveries coming in 2009, those all being financed.

But I think we're going to have to wait and see how the capital markets behave this year.

And, Tom, I assume the same is also true -- I skipped over the bank debt agreement -- I assume the same comments are also true for collateral which would be freed up for the bank debt.

Is that correct?

That's correct.

Historically, you have indicated in the past you would like to maintain a much higher liquidity position than what it is now.

I think it is about a 15% liquidity position as a percent of LTM revenues.

I think historically in the past you preferred anywhere between 20% and 25% which is where you have been in the past.

Where would you anticipate you might be at year end?

Well, not ready to comment on that just yet.

We don't typically forecast our cash.

But I will say that I think holding higher cash balances has served our company well as we've gone into this period of incredible market turmoil.

One of the reasons we've carried higher cash balances in the last year or so has been that given the state of the industry, it's very difficult to have a sensible stand-by credit facility as you might in another sensible industry, if you can find a sensible industry right now.

So we think it's made a lot of sense to keep ourselves more liquid and financially flexible.

We'll continue to do so.

Okay.

Thank you.

Thank you.

And ladies and gentlemen, this will be our last question for this session of the analyst Q and A.

And that question will come from the line of Kevin Crissey of UBS.

Please go ahead.

Good afternoon, everybody.

When I look at your CASM ex-fuel guidance, I think it's reasonably high, does it include any accrual for labor increases?

It does not, Kevin.

We don't have any insight on that, so we're not going to guess at it.

But I certainly appreciate your perspective on that, Kevin.

But if you take out oil from our cost guidance for the year, our expenses are up $125 million, but if you take out, what Tom talked about, the pension bad guy is over $400 million.

So if you neutralize for that or set that aside, our expenses are down on a budget basis about 2% on 6.5%, 7% reduction in capacity.

If you take out fuel and the pension bad guy.

And so I think we haven't lost sight of managing our costs in this tough environment, but it is more difficult when you are reducing capacity to control your unit costs obviously than when you are increasing your capacity.

So we've worked hard on our budgets for this year with an eye towards continued vigilance on the cost front but also some reinvestment in the quality of our products which we think will pay dividends on the revenue side of the equation.

And so we'll continue to work the cost side along with the revenue side throughout the year and if we can do better, we will, on both front.

Thanks.

The last follow-up would be, on foreign exchange, and you may have touched on it, I may have missed it, there's been a lot of detail here, if the foreign exchange stays where it is today, what kind of, at this point, head winds does that create from a RASM perspective?

Well, it is a headwind.

I don't know if I can give you a number right at hand.

But you are quite right that the strength of the dollar has impacted our business in the various market we operate in around the world, not just on the Atlantic and Pacific but also in Latin America where if you just look at the fourth quarter results, we saw an impact from the stronger dollar on particularly the premium cabin.

And that's the translation effect, Tom?

Because there should be some booking benefit, right?

from point of sale going to the US, or am I wrong on that?

The net effect we find is negative.

Okay.

Thank you very much.

You bet.

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 Q-and-A session.