美國航空 (AAL) 2009 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Good afternoon, and welcome to the AMR second quarter 2009 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'll be taking questions first from the members of the analyst community and then after a short break, we'll move into our media Q&A session.

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

We're 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.

And here with our 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 second quarter along with some perspective on the remainder of 2009.

After that we'll 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 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 2008 annual report on Form 10-K and the Company's current report on Form 8-K filed on April 21, 2009.

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

Thank you, Eric.

Good afternoon, everyone.

As you have seen in our press release, excluding special items, we had a net loss of $319 million for the quarter, compared to a net loss of $298 million in the second quarter of 2008.

These are obviously disappointing results and they reflect the challenges that we continue to face on a variety of fronts, from a global economic downturn that is affecting demand for air travel, to volatile fuel prices, to challenging capital markets.

Due to the economic downturn, this year we have been faced with a significant drop in demand that has resulted in a very difficult revenue environment.

The H1N1 virus added pressure to our second quarter mainline unit revenues which were down 16% versus last year.

Combined with lower capacity, this resulted in mainline passenger revenues down by over 22% versus last year.

And to put the magnitude of these revenue declines in perspective, we have to go back to the third and fourth quarters of 2001 to find steeper declines.

The good news is that last year's crisis in fuel prices has somewhat abated and fuel prices are significantly lower than last year's levels.

Our second quarter 2008 fuel price of $3.19 per gallon was the second highest quarterly price we have ever paid for fuel, while this year, our second quarter fuel price was $1.90.

Combined with lower capacity, this translated into a decline in fuel expense of nearly $1 billion.

That said, we're not assuming that fuel price concerns are behind us, as prices have crept up from their first quarter lows and they obviously remain very volatile.

In addition to these challenges, we are also facing capital markets that are much tighter than in years past.

This is a challenge not only for American but for the entire industry and other industries as well.

Even so, we were able to make some headway on this front with financings that bolster our liquidity and committed financing for 737 deliveries, which I think in part is a testament to our past track record of meeting our obligations.

Our results continue to remind us that while we can of course always hope for the best, we've got to continue to anticipate a tough environment.

We're not sitting still.

We have continued to take steps to put us in a position to confront the difficult climate as best we can.

Over the last couple of years, I think it's fair to say we've been disappointed with our capacity and with our announcement last month we are doing our part to affect a more rational supply/demand equilibrium.

We now expect mainline capacity in the second half of 2009 to be lower by over 12% versus the same period in 2007, comprised of a domestic reduction of about 15.5% and international pulldown of about 5.5%.

And we will continue to monitor the revenue environment to see if more must be done.

At the same time, we're making prudent investments in our fleet to better position us for the long-term.

And during the second quarter, we announced that we are taking eight additional 737-800 aircraft, bringing our total for the 2009 to 2011 period to 84 aircraft.

In the challenging credit market that I mentioned, we continue to make strides on the financing front, as we lined up $66 million in vintage aircraft financing and executed on an ETC worth $520 million.

With the ETC financing in place, we have arranged financing that we expect will cover all of our committed aircraft deliveries through 2011.

We are awaiting the Department of Transportation's ruling on our Antitrust Immunity application with BA, Iberia, Royal Jordanian and Finnair, which we expect will be issued by the end of October.

And we look forward to demonstrating the public benefits of our plans to European regulators as well.

In this very difficult revenue environment, fighting for every customer is critical, so I'd like to take this opportunity to thank all of our employees for their hard work and their determination in a very tough environment.

While there remains a lot of uncertainty about the trajectory of the economy, fuel prices and the capital markets, we're doing our best to stay focused on the things within our control, to better meet the challenges in front of us and better position ourselves for long-term success.

And with all that said, I'll turn things over to Tom to walk you through our results.

Tom?

Thanks, Gerard, and good afternoon, everyone.

As Gerard said, in the second quarter we lost $390 million or $319 million excluding special items.

This compares to a loss of $298 million excluding special items in the second quarter of last year.

We had special items totaling about $70 million in the second quarter of 2009 and about $1.1 billion in the second quarter of 2008.

I would refer you to the press release for the details of those items and for the remainder of the call I will exclude the impact of special items to more accurately reflect our performance on an ongoing basis.

As our results indicated, the second quarter was very challenging for the industry and for our Company.

This deep recession has significantly affected demand for air travel and cargo services.

And the H1N1 virus certainly had a negative impact on our results, particularly on our Mexico flying.

But beyond these impacts, we are also in the midst of continued volatility of oil prices, albeit at significantly lower price levels than last year.

And we continue to see a very challenging capital markets environment.

In short, there is great uncertainty on many fronts.

But through our efforts over the past several years, we have better positioned ourselves to face difficult times and we continue to take action.

We've long recognized that this industry will not be healthy until there is a supply/demand equilibrium that can generate meaningful returns for our shareholders over the long-term.

Toward this end, last month we announced further capacity reductions, beyond what was a very conservative plan, further demonstrating our capacity discipline.

We have been aggressive in pulling down capacity over the last year and while we are mindful of the competitive landscape and the impact to our network, we will continue to monitor the revenue environment to see if more must be done.

In the most difficult credit market in memory, we recently completed some meaningful financings.

We raised about $65 million in the second quarter through a sale leaseback transaction.

We also initiated a $520 million public debt offering, which closed last week.

This double ETC provides financing for 16 of our new 737-800 deliveries and also provided gross proceeds of about $150 million this month by financing four existing 777 aircraft that were also pledged as collateral.

Last month we announced that we have increased our commitments by eight aircraft to take 84 total 737s in 2009 through 2011, inclusive of the nine aircraft already taken through the end of the second quarter.

Our narrow body fleet replacement plan represents a tangible sign of our dedication to sharpen our competitiveness over the long-term.

And with the completion of the double ETC, we have now arranged committed financing that we expect will cover all of these aircraft.

We continue to find ways to wring costs out of the business and at the same time the investments we have made to improve our operational dependability continue to pay off through big improvements in completion factor, on time performance and baggage performance.

I'll go into some additional detail on these items in a minute, but let me first recap our second quarter revenue performance.

In the quarter, consolidated passenger revenues were down nearly 23%.

Unit revenues declined approximately 16% on about 8% less capacity.

Load factor was down by a half a point and yield was down nearly 16%.

Driving these results were weakness in business travel revenue, which was down more than the system average revenue, and the impacts of H1N1, which we estimate at $50 million to $80 million across the system, with a particularly strong impact to Mexico travel.

Second quarter unit revenue declines were significant across most of our system.

International saw the largest decline, with Atlantic, Latin and Pacific operations all experiencing declines that were greater than 20%.

Domestic fared better but was still down nearly 12%.

Given the weakness in business travel, transcon routes understandably saw the deepest unit revenue declines, down several points relative to the domestic average.

Hawaii and Puerto Rico, both leisure destinations with significant year-over-year capacity reductions, held up relatively well.

While these results are disappointing, it bears mentioning that the industry launched several rounds of fare increases last year during the first and second quarters, as we chased sky-rocketing fuel prices.

Consequently, the second quarter saw a challenging comparisons and we'll continue to see this effect into the third quarter.

There was, however, some positive traction towards the end of the second quarter, regarding fare increases.

Following a first quarter which saw no fare increase attempts, in the second quarter we saw several successful fare increases.

However, it remains to be seen whether this trend will continue as we progress through the year.

As it stands now, we expect a tough ongoing revenue environment.

Our mainline book load factor for the remainder of the third quarter is down about 1.5 points, with domestic down about 1 point and international down about 2 points.

On the regional front, quarterly revenue declined about 25% versus the prior year.

Unlike some airlines that are replacing mainline flying with regional capacity, we have continued to be disciplined with our regional fleet as well.

Our regional capacity was down about 11% for the quarter and unit revenue was down about 16% versus last year.

The economic downturn also continues to affect our other lines of business.

Our cargo revenue declined nearly 43% versus the second quarter of last year, on traffic deterioration that well exceeds our reductions in cargo capacity which reflects industry trends and global shipping demand.

In other revenue, we see increases driven by the service charges we put in place last June, including the first bag service charge.

However, these increases were partially offset by year-over-year declines from our divestiture of American Beacon Advisors in the third quarter of '08 and reduced mileage sales associated with our AAdvantage co-branded credit card and other AAdvantage partners, which of course reflects the broader decline in consumer and retail spending throughout the economy.

Despite these effects, other revenue increased almost $40 million or 7% versus last year.

Turning to our alliance efforts, on April 27th, we received a scheduling order from the DOT regarding our application for antitrust immunity with BA, Iberia, Finnair and Royal Jordanian.

We've complied with all requests for information and responded to all comments and while we can't make promises about the outcome of the process, we believe we've made a very strong case and we continue to expect approval by the DOT's October 31st statutory deadline and we look forward to continuing to demonstrate the public benefits of our plans to the EE regulators as well.

We're also pleased to have announced a codesharing agreement with Etihad Airways, the national airlines of the United Arab Emirates, and we've entered into a reciprocal frequent flier program with GOL Airlines out of Brazil, with plans to enter into a codesharing agreement with GOL in the future.

Shifting to costs, our second quarter unit costs excluding fuel rose 5% mainline and 3.7% consolidated, driven by reduced capacity and headwinds from pension expenses and investments in dependability initiatives.

As I mentioned, fuel price declines during the quarter were extraordinary.

Our fuel price came in at $1.90 per gallon consolidated, a decrease of over 40% versus last year.

Consequently, we paid $900 million less for fuel this year than we would have at last year's price, driving total mainline unit cost lower by nearly 13%.

Turning to the balance sheet, we ended the quarter with $3.3 billion in cash, including a restricted balance of $460 million.

In the second quarter, our scheduled principal payments on long-term debt and capital leases totaled about $400 million, including the maturity of our revolver.

Our capital expenditures totaled about $430 million.

Our efforts to repair our balance sheet during profitable years provided us additional financial flexibility and even after the double ETC, we still have unencumbered assets and other sources of liquidity that we estimate to be worth about $3.7 billion.

About a quarter of this amount is made up of aircraft.

Also included are Heathrow and other slots, American Eagle, and the potential value from a financing of our AAdvantage frequent flier program, among others.

With our other debt maturities this year, we expect to unencumber about another $500 million worth of collateral.

Our total debt as defined in the earnings release at the end of the second quarter was $14.2 billion, down from $15.2 billion last year.

Our net debt, defined as total debt less unrestricted cash and short-term investments, at the end of the second quarter was $11.4 billion versus $10.1 billion a year ago.

Although last year we were carrying over $800 million in hedge collateral in our cash balance.

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

We have taken a disciplined approach to capacity over the past several years, not only on the domestic front, but on the international side as well.

With our announcement of further capacity reductions last month, we expect to see third quarter mainline and consolidated capacity down almost 9%.

We expect full year mainline system capacity to be down about 7.5% versus 2008.

And we expect mainline domestic capacity for the year to decrease about 9% and mainline international to be down over 4%.

The amount of capacity we've removed from the system over the last year or so has been noteworthy, somewhat masked by the magnitude of our capacity reductions in the fourth quarter of last year.

So when comparing our second half 2009 capacity versus the same period in 2007, our mainline system capacity is expected to be 12% lower with domestic capacity down over 15.5% and international down over 5.5%.

So big capacity reductions.

In terms of cost, American faces headwinds that some of our competitors do not, including those from our incremental capacity reduction announcement in June and about $400 million in additional pension expense for 2009, because we have maintained our Defined Benefit Pension Plans.

We have made a lot of progress over the past years to extract cost from our system.

Some of the progress we've made this year is a byproduct of less traffic and thus, less variable expenses.

But some also comes through cost savings initiatives, such as our external hiring freeze and a pay freeze for non-contract workers, and a lot just comes from continually grinding away on cost in every aspect of the business.

All told, in the third quarter we expect our ex-fuel mainline unit costs to increase about 7% year-over-year and consolidated unit cost to increase about 6%.

We anticipate 2009 full year mainline ex-fuel unit cost to increase by about 6.5% and consolidated to increase by about 5.5%.

After a very challenging 2008, fuel has helped the cost equation.

Based on the July 7th forward curve, on a consolidated basis we forecast a third quarter fuel price of $2.05 and a full year fuel price of $1.98 per gallon.

With regard to hedging, we have about a third of third quarter consumption hedged with floors at $70 per barrel and caps at $99 per barrel on a crude equivalent basis.

And a full year hedge of 36% of consumption with floors at an average price of $70 a barrel and caps at $97 a barrel.

I'll note that we use hedge accounting and we will, therefore, see the full effect of hedging impacts in the period in which the hedges settle.

But under our current assumptions, we expect that we will see hedging impacts that add about $0.15 per gallon to our second half 2009 fuel price.

Moving to cash forecasts, our 2009 scheduled principal payments on long-term debt and capital leases are expected to total about $2 billion.

$1.2 billion of which we made during the first half of the year.

Our industry, and we are not alone, is facing a challenging capital markets environment.

But we continue to pursue opportunities to use our unencumbered assets to bolster liquidity.

We've also modified our agreement with our credit card processor that we estimate will limit our maximum potential credit card holdback to be between $250 million to $300 million for the remainder of the year.

This is inclusive of approximately $150 million that we had posted as of the end of the second quarter.

We continue to take a measured approach to our capital spending, trying to make sound investments that will help keep American Airlines competitive for the long-term.

We expect full year capital expenditures of about $1.6 billion.

Included in this total are non-aircraft CapEx of about $400 million, which includes investments in our Boston and London Heathrow Admirals Clubs, a program to add winglets to our 767-300 aircraft and conversion of part of our 757 fleet to support international flying.

Our aircraft capital expenditures are expected to total about $1.2 billion and as I mentioned earlier, we have arranged committed financing that we expect will cover all of our 2009 through 2011 aircraft deliveries.

So to wrap up, there is great uncertainty for the remainder of 2009.

The near-term revenue environment, volatility of fuel, and tightness in the capital markets all present significant hurdles, so we continue to take steps to better position American to weather these challenges.

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

(Operator Instructions).

And first go to the line of Kevin Crissey with UBS.

Please go ahead.

Hi, guys, how are you?

Hi, Kevin.

I wanted to see if you could give some thoughts on United's attempt to push the credit card cost onto agencies and I know you guys have done a nice job getting distribution costs down after September 11th.

Do you think this is an opportunity for the industry as a whole and for American specifically?

I think it would be inappropriate for us to comment about what we might or might not be thinking about where we're going with credit card fees and distribution costs, generally, so I'm going to no comment that one.

Okay.

And wasn't much discussion of labor, where do you stand there?

What are -- it's challenging negotiations in a challenging time.

Maybe you could give us a little thoughts on that.

Well, Kevin, I think candidly, we've not made much progress in our contract negotiations for a variety of reasons, but certainly the economic climate is a big factor.

I think from the Company's perspective, there's no secret to the fact that we have the highest labor costs in the airline industry, on average, and so there are things that we want to accomplish responsibly in our negotiations with all three of our labor groups and there are things that organized labor wants to accomplish on behalf of their members and so I think trying to find that right formula and balance is -- has been challenging and will continue to be challenging in this environment.

But I think we continue to go at it in good faith and we'll stay at it in good faith.

Terrific.

And if I could, one last one.

On the revenue front, how do your comparisons look as you look forward, maybe versus Q2, I mean, the comparisons, they're going to get -- continue to get tougher, if I'm not mistaken, and all the way through September.

Is September the worst comp?

When I'm looking at the data, it kind of looks like July might be a little bit better and then August looks like it's going to be a tough comparison and tough start so far and then where does September fit from a comp perspective?

Yes, I think your assessment is right, Kevin.

September was a bit of a high water mark last year before -- before the economy really took the dip down.

So I think that's the right way to think about it.

Okay.

Thank you.

Next go to the line of Gary Chase with Barclays Capital.

Please go ahead.

Hi, guys.

Hi, Gary.

Just a quick one for Tom and then one follow-up.

The credit card process or agreement that you referenced in the press release, if I'm not mistaken, that previously had a provision for August, so this is an extension from August to December, is that accurate or does this relate to your other agreement?

That is correct.

Okay.

And it's similar terms; right?

There was -- the maximum holdbacks were in that same ballpark.

You just moved the deadline out by about four months.

Is that right?

Yes, more or less.

And then on the capacity cuts, it's easy to get lost in the year on year comps, they're not changing very much as you move from the third to the fourth quarter, but of course due to huge capacity reduction last year that was really implemented in the fourth quarter.

So the overall capacity -- the size of your system seasonally adjusted is taking a big leg down in the fourth quarter and I'm just curious for your thoughts as to how that looks as we move into 2010.

Is there any reason to believe that those cuts would not remain in effect at least for the beginning and/or first half of 2010?

Gary, I -- Tom can jump in here.

But I see no evidence that we would want to restore any of the capacity cuts we've made last year and the ones that we've announced this year.

If anything, we continue to look at capacity in the other light, in terms of whether we have done enough, given the economic climate.

But when you look at what we've done and you look at what the rest of the industry has done, both domestically and internationally, and some of the foreign carriers have moved pretty aggressively this summer, there's been a lot of capacity taken out of the industry.

So I think if we can get any kind of economic recovery going, I think we and the industry are certainly much better positioned than we were a year ago.

But I just think it remains to be seen whether we've done enough.

But it's not in your view anything that's temporary, this is another step you've taken that you thing is needed?

Yes.

Okay.

Thanks, guys.

Thank you.

And next go to the line of Mike Linenberg with Banc of America.

Please go ahead.

Yes, hi, guys.

Hi, Mike.

Two questions here.

It was $50 million to $80 million in the June quarter, the H1N1 effect, and we're hearing out of Latin America now, at least deep South America, that there is some effect down there and it is winter, it is flu season down there.

Are you seeing anything down there in your bookings?

Is there a number that maybe we should use, some sort of impact in the third quarter?

Thoughts on that?

I think it's too early to tell, Mike, but if you look at -- as you look at Latin America, our RASM in the second quarter was tough.

It was down 20%.

And as you look at deep south, it was down even more than that.

So there is certainly some H1N1 impact in there and I think we're just going to have to wait and see how it shakes out going forward.

Okay.

And then just my second question, you -- Tom, you gave us the booking view for the third quarter, down 1.5 points.

Correct me if I'm wrong, but we are -- I think we are seeing a much shorter booking curve or more compressed booking curve this year versus last year and if that is the case, what do bookings look like closer in, because that may give us a better sense or maybe just for the fact that people, even leisure passengers, seem to be waiting until last minute to make their bookings.

I think you're absolutely right about that, Mike.

We are seeing some later bookings than we have customarily seen.

Unfortunately, that revenue has not tended to be the best revenue, so we're still suffering from a negative kind of mix effect but clearly there's been some -- there's been some late bookings, which is why our actual load factors came in a little bit better than we had guided to when we talked 90 days ago.

Okay.

That's helpful.

All right.

Thanks a lot.

You bet.

The next question's from Jamie Baker with JPMorgan.

Please go ahead.

Yes, good afternoon, everyone.

Tom, another question on the revised holdback.

What would the maximum holdback have been without the implementation of the $300 million cap?

And should we conservatively model that, whatever that prior cap was, is that what you're going to revert to next year?

Well, I think what we've said in the past is it's about a quarter of our air traffic liability, unconstrained, and we've obviously negotiated a new agreement with our credit card processor and to the extent that we felt that was sensable and necessary, we would seek to keep doing that again next year as this expires.

Okay.

Well, we can back into it from that.

How much progress are you making on the remaining processing agreements?

Well, we have -- we don't have any holdback under any other processing agreement.

Okay.

And then a follow-up I guess either for you, Tom, or Gerard.

United, as you're well aware, recently tapped some of their unencumbered assets at a pretty costly 17% rate.

I guess I'm just surprised that you still haven't pulled the trigger here on any sort of forward mileage sale with Citi, if for no other reason $4 stock price, a need to prove liquidity is available at reasonable rates and perhaps this growing chorus that is lumping you along side US Air and United, maybe that's the wrong view that the market should be taking.

I just haven't seen the real effort to dissuade anyone from that view.

Any comment on that or timing on a mileage sale?

Well, Jamie, I'll let Tom jump in here, but we tend to talk about things after we've accomplished them rather than ahead of time.

I think that's been our history.

Yes, I think that's a fair point, Gerard.

I would also add that I think the market is maybe distinguishing between us and some others because we recently did a double ETC in the public markets at a coupon of a little over 10%.

Obviously, that's not an attractive financing by historical standards, but it's a lot different than maybe some of the comparisons you're alluding to.

So I think there is a distinction in the marketplace, reflecting the fact that we do have considerable financial flexibility and unencumbered assets and degrees of freedom.

In a more normal capital markets environment we wouldn't even be having this discussion.

And just to be clear, it's not our view that we're lumping you equally, it's just more and more that I read chiefly on the, kind of on the commute in the morning puts you in the same camp.

We're trying to differentiate as well.

So thanks a lot, guys, appreciate it.

Thank you, Jamie

Thanks, Jamie

And next to the line of Bill Greene with Morgan Stanley.

Please go ahead.

Yes, good afternoon.

Tom, I know it's early but can you help us at all with sort of ranges of pension funding that you might have in 2010 and maybe think about the kind of return you might need this year, such that you could even get maybe to no funding required?

No, I think you should assume there will be pension funding required in 2010 and it will be substantial.

I don't know that we've provided any guidance on that to date.

You probably haven't.

Could we use the expense number as a fair baseline?

Over time it will trend towards the expense number.

There is some lumpiness in the early years, but I think you should think in terms of several hundred million dollars and we'll plan on trying to give you some more definitive guidance on the next earnings call.

Okay.

And then some of your peers have talked about business travel trends and how they have stabilized and maybe even there's a little bit of a less bad trend going on.

You mentioned that your trends were worse than system-wide, at least in the second quarter as an average.

Can you talk about near-term, have you seen any improvement?

You did beat your RASM guidance slightly.

Maybe that means July is getting better versus June.

I mean, any color you could provide there?

Yes, I think I would say corporate travel has been off more than system traffic and system revenue, but it seems to have leveled off after the very sharp declines we saw at the end of '08 and the beginning of this year.

But that's -- that's the silver lining.

The cloud is, it remains sharply lower year-over-year, but it does seem to have leveled off a bit here in the May/June period.

Bill, if I could add to that, I think that, and this is anecdotal I can't give you any numbers supporting this, but having lived through several down cycles in my career, I do think that companies in a tough economic climate instinctively do pull the handle on travel as they have done now.

But similar to what companies do in terms of their own inventory production, at a certain point corporations recognize that people were actually traveling not for pleasure, they were traveling for a business purpose and it takes a while for the consequence of that business purpose to manifest itself.

And then when companies realize, well, folks weren't out there goofing off, they were actually out there traveling to generate business for our Company, they tend to restore travel levels to previous points.

And whether or not this cycle will be similar in the past, I don't know.

That's been my experience.

And so I think the economy, both here in the US and around the world, and its recovery is an important factor in how this all evolves.

Just, Gerard, when I travel on business, I'm never goofing off.

Right.

Exactly.

That's helpful.

Gerard, could I just have one last question to you which is given all the stresses you have seen on this industry here in the last 12 months at least, do you hear anything from any of your discussions in Washington or whatnot, is there a movement afoot at all to try to reduce ticket taxes or perhaps have government relief at all for the industry.

Is there any discussion along those lines or is that just not happening?

Well, Bill, it's a good question and I think really as an industry we have not really done a very good job of educating public policy makers on the effect all these taxes have.

I did a calculation the other day and I'm going to ask Tom to jump in here if I get this wrong, but I was just looking at the number of customers we carried in the second quarter and looking at our loss and my back of the envelope calculation was we needed about $17 more per one way customer to breakeven in the quarter.

And that doesn't seem like a gigantic hurdle to get over, but when you step back and then recognize how much taxes and fees are placed on our tickets before we get any revenue, you see that that -- why that is more of a mountain than it would otherwise appear to be, despite the economic climate, despite all the other things going on.

So I think, Bill, we've not done as good a job as we should have.

I think most of our efforts right now are on trying to convince the government to not do any more harm in this environment, because I believe the President's budget has a couple of increases to the security tax and maybe one of the other taxes, as I recall, and that's obviously not something that would be wise at this time for this industry.

So --

Yes, this is probably the most heavily taxed industry on the planet and just to put that in perspective, if you look at what this Company pays in taxes, including excise taxes on tickets and fuel and ticket taxes and all of that, $3.5 billion in 2008.

Put that in perspective against our revenues, it is extraordinary.

That's just American.

Yes, or even the --

Okay, so that's American's annual taxes and fees and our market cap is here, right now, is about $1.2 billion, $1.3 billion.

So we're doing a pretty good job of feeding the government right now.

Right.

Thanks for the help.

You're welcome.

Our next question's from the line of Hunter Keay with Stifel Nicolaus.

Please go ahead.

Thanks.

Tom, do you guys have financing complete for the entire portion of your PDPs for the remainder of this year?

Can you hear me?

Yes.

We have -- we do not have financing in place for all of our PDPs.

A portion of it?

A portion, yes.

Okay.

Can you maybe explain, then, a little bit to me the rational of the pull forward aircraft in an environment like this when arguably cash conservation is probably the most important priority, because last year you were talking about how the balance sheet was too levered up for fleet modernization and that was when you really were staying with closer to $5.5 billion in cash.

Now you're pulling aircraft forward, cutting capacity and if anything I think you just implied that there might be more cuts to come in 2010, so what's changed?

And I understand the long-term strategy, but more near-term what changed?

Is it potentially, and I know you can't comment much on this, but maybe is it more favorable terms from the OEM.

What are some of the moving parts there that changed the strategy so starkly from last year to this time right now.

Well, I don't think we changed the strategy starkly.

We've said all along that we're going to continue with our fleet modernization program.

And to keep it in perspective, these are replacement aircraft.

This is not -- this is not growth.

But the planes that we most recently exercised were also -- also had financing associated with them, so there was a financing element there which made it attractive from our perspective to do, not just from a fleet renewal perspective, but from a liquidity perspective as well.

But I think at 30,000 feet, the answer to your question is we -- we are committed to building this Company for the future and making it competitive for the future and to do that we need to have a modern and fuel efficient fleet and so that's what we're -- that's what we're trying to do here.

Our MD80s are good airplanes, but we need to be in the process of replacing them, because it's going to take several years to replace a fleet of 260 airplanes.

Sure.

Okay.

That makes sense.

And this is probably just maybe a little nit-picky.

But you guys referenced the financing is obviously subject to terms and conditions and you have used that any time you have referenced the financing in any kind of public statements.

Is there any kind of terms and conditions in this financing that might be a little bit different from, say, historical maybe industry legalese standard size stuff.

Or is there anything in here maybe that has some sort of liquidity thresholds or covenants associated with it or anything like that or is it just kind of industry standard stuff?

Well, what financing in particular are you referring to?

Well, particularly the new -- when you referenced the -- all the firm 787's -- excuse me, all the 737 orders through 2011 are subject to certain terms and conditions covered by committed financing arrangement.

So I guess it could be any number of the sale leaseback, the ETC, anything.

Is there anything in those, any of those financing vehicles that might be a terming condition that might be, say, a little more stringent than historically has been the case.

No.

It's a fair question.

It's a whole range of financing, as you can manage, everything from sale leasebacks to mortgages, to back-stopped financing.

So they're all a little bit different, but I would say there's nothing unusual or non-standard in there.

Okay.

No, that's fair.

There's no like MAC clause or anything like that that would -- outside of a standard deviation, say, of normal legal talk, you know what I mean?

It appears what you're saying is there's not and that's fine.

I was just wondering if there was anything maybe out of the ordinary that we needed to sort of watch for.

I wouldn't add anything to that.

Got it.

Fair enough.

Thanks, appreciate it.

You bet.

Our next question is from the line of Doug Runte with Piper Jaffray.

Please go ahead.

Yes, a couple of aircraft related questions, if I could.

A few quarters ago you mentioned the prospect of looking at the 737-900ER, I guess maybe because you were fighting with Rolls at the time.

I'm wondering if that aircraft type is still under consideration given that all of your recent order announcements have been for dash 800s?

Doug, I think it's fair to say that we are maybe disappointed would be the right word.

We're struggling with the economics on the 757 fleet in light of some of the contractual issues that we have with our suppliers and so we're trying to figure out the best plan forward in terms of our narrow body footprint under our long-term fleet plan and trying to figure out exactly where the 757 is going to land is important to us and I think -- I don't think we can add much more color to what we've said before, except that that is something that we're spending a lot of time looking at in the context of our long-term fleet plan.

And I don't know where we'll end up and I'm not sure we'll have any definitive conclusions right away.

But it's -- the cost per seat miles that fleet is troubling to us right now.

And a question on the double ETC.

I guess just from the public disclosures you raised about $23 million for each of the new 737-800s which leaves a balance of let's say, call it $15 million to $20 million, just looking at the appraised values.

How is that gap being filled?

Do you have some ability to call upon your previous backstop financing to, say, take a subordinate position as they've done at times in the past?

Yes, we could -- in a more stable financing climate, we could sell another tranche of that double ETC, so I think that's probably the way to think about it.

But there's no expectation that the previous backstop commitment would potentially take that subordinate tranche?

They've not done so to date?

No, we can't -- we can't really talk about the backstop financing any more than we already have.

Okay.

I appreciate that.

Thanks very much.

You bet.

Our next question's from the line Helane Becker with Jesup & Lamont.

Please go ahead.

Thank you very much, operator.

Hi, gentlemen.

Thank you for taking my question.

Hi, Helane.

So, Gerard, I'm confused a little bit because I think about maybe two months or so ago, maybe one month ago, you were quoted as saying that you thought the credit markets were lightening up a little and enabling you to get some deals done, including probably the $550 million ETC you were referring to.

So are your comments today kind of reflective of the fact that maybe something in the credit markets have changed and it's harder to get deals done now?

No, I don't think so.

And I don't know what you're referring to Helane.

In fact, I think -- I'm not sure I said anything about the capital markets today other than they are challenging.

I think when I was at the conference this summer, was that Merrill?

At the Merrill conference I described the capital markets as non-functioning.

And so if anything, I think I have been more liberal in my comments, because we have managed to get some important transactions done.

So I think in my employee letter today I used the word erratic, for lack of a better word.

But I think we've demonstrated that we have gotten some important things done in a tough climate and quite frankly I'm encouraged by that.

Okay.

Good.

That's very helpful.

And then the other question I had, and you might have already answered this in your comments to Mike, Mike's question, is just related to traffic and kind of the outlook for maybe after Labor Day.

I don't think you made too many comments about that, but can you talk a little bit about whether you're seeing any signs of improvement in that area or -- and you matched the Southwest fares last week in markets where you had to match.

Did you see any pushback from clients or did those fares sell out rather quickly?

Helane, this is Tom.

I guess I would say it is too early to tell out there, particularly given what I said earlier about some of the late booking that we've been seeing.

But as we sit here today, our advanced book load factor is down by about 1.5 points for the remainder of this quarter and that on, obviously, a whole lot less capacity.

So a very tough environment and we're just going to have to wait and see how it shapes up beyond the summer.

Okay.

Okay.

And then did you -- can you say if on the fares that you matched, you sold out your allocation of inventory?

No, we wouldn't comment on that.

Okay, all right.

Well, thank you very much for your help on the other stuff.

Thank you.

And go to Bill Greene with Morgan Stanley.

Please go ahead.

Yes, hi, just had one quick follow-up.

Gerard, as you think about -- you mentioned the ATI and you expect government approval or whatnot.

What do you do if you don't get government approval?

Persevere.

Because, Bill, the facts are on our side and the fact that Continental just got approved is more evidence that the facts are on our side.

So I don't want to be overly optimistic here, but I do believe the weight of the evidence suggests there is absolutely no reason for us to not be put on a level playing field with our competitors.

Were that to happen, I think we will simply regroup and figure out how could that possibly be and make another run at it.

Fair enough.

Thanks for the help.

You bet.

And our next question's from Michael Derchin with FTN Equity Capital.

Please go ahead.

Yes, just going back to the ATI question, could you give us a little bit of more on kind of the timetable and the various parties involved, other than the DOT, on the EU side?

Are the individual countries involved?

I ask that because I think part of the reason for the Open Skies Agreement between the US and the EU was based on a more cooperation, as NATI kind of agreements.

I just wonder who else is going to participate in the decision making.

Michael, Tom might be able to give more precise -- a more precise answer to this, but I think the way this works is that the DOT has had jurisdiction over granting antitrust immunity with advice from the Justice Department.

They got some advice recently on the Star application and they did whatever they chose to do with that and they moved forward and permitted Continental to enter that partnership.

In terms of our decision, based on their timeline and process, I believe based on when they put the scheduling order in place, meaning that they had responded to comments by others about our application, by their timeframe I think end of October they would -- unless something outside of their normal process would change things, I think by the end of October we would expect to be hearing from the DOT on our application.

Now, as far as the EU is concerned, I think you're quite right that the notion of this -- these immunity approvals have been in the context of Open Skies Agreements in Europe, which have taken place.

So I do think there is a linkage between how the EU and certainly the UK would view the future of that aviation agreement between the US if there were not a level playing field granted to American and British Airways and Iberia.

So how that will all play out, I don't know, because I think the EU is -- continues to not only look at the AABA and Iberia, Royal Jordanian application, it's also continuing to scrutinize the other alliances and where that may lead, I don't know.

I think the most immediate significant hurdle is the DOT.

Good.

Thanks very much.

You bet.

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

That question will come from the line of Dan McKenzie with Next Generation.

Please go ahead.

Oh, yes, hi.

Thanks for squeezing me in here.

Hi, Dan.

Just following up on the Citibank question earlier, I guess I'm not sure if you shared in the past when the AAdvantage program with Citibank expires, but would you consider or perhaps even a better way to ask is what flexibility do you have to move that program to another bank, say, within the next year or two if you wanted?

That's confidential, Dan.

Unfortunately, I can't comment on that.

Okay, understood.

And then maybe another question here then.

I believe at the end of the first quarter, AMR had about $650 million in purchase deposits and just wondering, worst case, is a refund of some of those deposits a potential source of cash?

Dan, I'm not sure what you're referring to.

Just purchase deposits for aircraft on order.

No, I don't think -- I don't think -- I'm not sure of that number in particular, but I don't think you would expect to see a refund of purchased deposits, as we're proceeding with our fleet renewal.

Understood.

And then I guess one last quick question here.

Does AMR have the ability to post unencumbered assets in lieu of cash for credit card holdbacks if needed?

I think the right way to answer that is we have the right to negotiate with people whatever we can negotiate.

So --

understood.

Okay.

Thanks a lot.

I appreciate it.

You bet.

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&A session.

One moment, please.

And ladies and gentlemen, thank you for your participation and for using AT&T Executive Teleconference.

You may now disconnect.