美國航空 (AAL) 2010 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Good afternoon and welcome to the AMR first quarter 2010 earnings conference call.

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

After the Executive Team's presentation today, there will be opportunities for your questions.

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

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

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

And here with our opening remarks is AMR's Managing Director of Investor Relations, Chris Ducey.

Please go ahead.

Good afternoon, everyone.

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

During the call Gerard Arpey will provide an overview of our performance and outlook and then Tom Horton will provide details regarding our earnings for the first quarter, along with some perspective on the second quarter and the remainder of 2010.

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 released 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 a 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, including statements regarding our outlook for revenue and costs, forecasts of capacity, traffic, load factor, fuel costs, fleet plans, and statements regarding our plans and expectations 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 2009 annual report on Form 10-K.

And with that I will turn the call over to Gerard.

Thank you, Chris.

Good afternoon, everyone.

As you have seen in our press release, excluding special items we had a net loss of $452 million for the first quarter, which compares to a net loss of $362 million a year ago.

It was obviously a disappointing result as higher fuel prices largely outpaced the progress we made in generating nearly $230 million of additional revenue.

In spite of the short-term challenges we faced in the first quarter, which Tom will walk you through in a few moments, we did make some important long-term progress on a number of fronts.

On our last earnings call we shared our framework for the next decade, which we call internally FlightPlan 2020, and it is intended to set the foundation for making this decade one of success and not just of survival.

It's five tenants are -- invest wisely; earn customer loyalty; strengthen and defend our global network; be a good place for good people; and fly profitably.

These are the principles that will guide our Company over the coming years.

The revenue generating power of our network is critical to our future and in the first three months of this year we will, we were able to strengthen our global network, as JAL reaffirmed its commitment to American and One World, and together we are moving forward with our application for antitrust immunity.

At the same time we think Government regulators on both sides of the ocean are poised to finally approve our joint business agreement with British Airways and Iberia.

Also we announced plans to significantly strengthen our presence in New York through a number of steps, including an innovative partnership with JetBlue.

In addition, this month we have started implementing our corner stone strategy, bolstering our flying in New York, Los Angeles, Chicago, Dallas/Fort Worth, the four largest business markets in the United States, and in Miami, the hub of the Americas.

We believe these network initiatives build the revenue generating power of the best network in the airline industry and position us well for the future, all without jeopardizing our long track record of capacity discipline.

As Tom will discuss, while there are signs of a recovery in demand, the last thing we can afford to do is get ahead of ourselves with supply and our capacity plans for this year remain modest.

Our 1% mainline capacity increase in 2010 is driven by the launch of service to Beijing, China and the reinstatement of flying canceled during last year due to the H1N1 virus.

While we are keeping a lid on capacity, at the same time our fleet renewal program is picking up speed.

We are taking delivery of a lot of 737-800s, which are a lot more fuel efficient than the MD-80s they are replacing.

We are also adding more CRJ -700s with first class seats and installing first class on our existing CRJs.

We ended the first quarter with a strong cash balance of just over $5 billion.

That is $1.7 billion more than our total cash balance at this time last year.

And that increase reflects both the financing transactions we executed last year to bolster our liquidity, as well as an improving revenue environment this year.

Even though we are seeing some positive signs, we along with the entire industry continue to face a host of uncertainties regarding the broader economy and fuel prices, but macro uncertainty is certainly nothing new and we remain committed to working hard to return our Company to profitability.

Today's results certainly indicate that we have a lot of work to do, but in terms of our long-term future, it was an important quarter with a lot of progress on several fronts.

And with that said, I will turn things over to Tom.

Thanks, Gerard, and good afternoon, everyone.

In the first quarter we lost $505 million or $452 million excluding special items.

And that compares to a loss of $362 million excluding special items in the first quarter of 2009.

We had special items totaling $53 million in the first quarter of this year and $13 million in the first quarter of last year.

And you can refer to the Press Release for details of these items.

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

As the results show, the first quarter proved to be quite challenging for our Company.

Lingering weakness in the economy, rising fuel prices, and cost pressures, mainly resulting from capacity cuts, combined to produce a disappointing result.

While we are seeing positive signs that corporate travelers are back on the road and our unit revenues have nearly returned to early 2008 levels, high fuel prices and increasing costs overshadowed our progress.

That said, during the first quarter we made significant progress toward securing our Company's future, as we are on track to implement our joint business agreements with British Airways and Iberia, as well as to Pan Airlines.

And we announced plans to bolster our presence in New York.

All of these steps are consistent with our cornerstone strategy, which focuses on five key markets, New York, Los Angeles, Chicago, Dallas, and Miami.

And I should note that although we announced our cornerstone strategy last year, it is only this month that we actually began making schedule changes to implement it.

So as we wrap up a difficult first quarter, we remain optimistic about the future of our Company.

We are building a solid foundation under FlightPlan 2020 and taking steps to return to profitability.

Our future depends on the revenue generating power of our network.

And this quarter we made significant progress to strengthen our global network, one of the key tenants of FlightPlan 2020.

First JAL announced that it will continue and expand its relationship with American and One World.

We believe that JAL has made the right choice and our companies are already working on our joint application for antitrust immunity, as well as working together with our One World partners to support JAL's restructuring.

Across the Atlantic our efforts to strengthen our alliances and level the playing field moved much closer to reality when the D.O.T.

tentatively approved our application for antitrust immunity with British Airways, Iberia, Royal Jordanian and FinnAir, as well as our plans to operate a transatlantic joint business with BA and Iberia.

We anticipate D.O.T.

approval of our joint business proposal by the end of the second quarter, with EU approval following in midsummer.

And more recently we announced a series of steps to bolster our commitment to New York, including starting service on 13 new routes, adding 31 new American and American Eagle flights, enhancing our facilities and launching an innovative arrangement with JetBlue to feed our international flights.

All told, after our relationship with JetBlue is implemented by the end of this year, our customers will have access to 81 unique nonstop destinations from New York.

This is a great deal for both American and JetBlue.

On top of these steps we are also working to implement previously announced plans through 2010 and beyond to further strengthen the revenue generating power of our network, including taking delivery of 45, 737-800s this year, including ten that arrived in the first quarter, representing a further execution of our fleet replacement plan.

And adding first class seating to our existing CRJ-700 fleet by the middle of this year and taking delivery of 22 new CRJ-700s, all with first class sections beginning later this year.

And later this month we will be launching our second flight to China with service to Beijing from Chicago.

We believe all of these steps will significantly enhance the power of our network, as well as our business results over the long-term.

At the same time the best network in the industry isn't enough by itself to insure our long-term success.

We must have competitive costs.

So we are also focused on making sure our expenses remain in check and we have many cost saving initiatives underway throughout our Company.

Turning to our first quarter results, let's first recap our revenue performance.

In the first quarter mainline unit revenues increased almost 7% on 2.5% less capacity.

Load factors were up over 2 points with yields up over 3.5%.

Our consolidated passenger unit revenue increased by 7.3% for the quarter.

Now to put this number in context, it is important to note that we have outperformed the industry in year-over-year consolidated RASM change for seven consecutive quarters, leading up to the first quarter of 2010.

In fact, in the first quarter of '09, our year-over-year performance was 2.5 points better than the industry.

So it makes sense that, as early disclosures indicate, our increase this year would be moderated versus the industry, as we are starting from a position of relative strength.

Domestic unit revenues improved by almost 6%, while international unit revenues increased by almost 8.5% versus last year.

Furthermore, for each month during the quarter our year-over-year unit revenue performance improved, both domestically and internationally.

Domestically business markets, such as New York and Los Angeles, were particularly strong, while the Atlantic entity led the pack with the strongest unit revenue improvement internationally.

In terms of corporate travel, we are seeing signs that business travel demand is accelerating.

For the quarter our corporate revenues increased by over 17%, with two-thirds of the increase driven by traffic and the rest resulting from higher yields.

Importantly, March showed even more improvement, as domestic corporate revenue increased close to 30% year-over-year.

And we are seeing companies loosening restrictive travel policies and increasing travel spending to stimulate their own business activity.

We are also seeing fewer fare sales.

At the same time, the industry is having more success in raising fares.

In the first quarter last year, there were no successful fare increase attempts, while this year approximately two-thirds of industry fare increases were at least partially successful.

As we have said before, our revenue performance will largely be determined by the pace of economic recovery and so some uncertainty remains.

Looking forward, our advance bookings are up slightly versus last year, with domestic down about three-quarters of a point and international up almost 2 points.

Importantly, yields are trending up significantly versus last year and we are seeing more close-in bookings.

For example, at the beginning of the first quarter we were seeing flat advanced bookings, but we ended the quarter with our mainline load factor up over 2 points.

So while we are seeing some hopeful signs, we will need to keep an eye on the economy as we move through the rest of 2010.

And I should also point out that we are closely monitoring the impact of the transatlantic flight cancellations we have experienced due to volcanic ash.

Through Tuesday, April 20th, we have canceled approximately 350 flights.

We anticipate that this disruption will have a negative impact on our second quarter results and we have estimated that the cancellations so far have resulted in a loss of approximately $15 million, with reduced revenue partially offset by lower fuel and operating expenses.

Of course, it is too soon to estimate the total financial impact of this event, but suffice to say it was a very unwelcome development in the midst of a fragile recovery.

On the regional front quarterly revenue increased 9% versus last year.

Our regional capacity was down about 1.5% for the quarter and regional unit revenue was up almost 11% versus last year.

Our cargo revenues increased over 6.5% versus the first quarter of last year.

Cargo traffic was higher by over 20%, but yields continued to see some year-over-year pressure.

In other revenue, we saw year-over-year improvement of almost 5%, as we saw continued strength in baggage and Advantage partner revenues.

Shifting to costs.

Our first quarter unit costs excluding fuel rose just over 5.5% for both the mainline and consolidated, driven by headwinds related to capacity reductions, airport and facility cost increases, costs associated with maintenance events that were completed earlier than planned, and of course revenue related expenses.

Fuel prices increased during the quarter to $2.23 per gallon consolidated, up about 16.5% versus last year.

Consequently, we paid about $210 million more for fuel in the quarter than we would have at last year's prices.

And these higher fuel prices drove consolidated unit costs to be 8.5% higher versus last year.

Turning to the balance sheet, we ended the quarter with just over $5 billion in cash and short-term investments, including a restricted balance of about $460 million.

Our cash balance represents almost 25% of trailing 12 months revenue.

A year ago we ended the first quarter with $3.3 billion in cash and short-term investments, also including restricted balance of about $460 million.

Our current cash position is a result of our efforts to bolster liquidity in 2009, through financing activities, as well as improving travel demand so far this year.

In the first quarter our principle payments on long-term debt and capital leases totaled about $290 million.

Our capital expenditures for the first quarter totaled about $315 million, including less than $50 million of non-aircraft CapEx.

Our total debt, as defined in the earnings release, at the end of the first quarter was $15.9 billion versus $14.4 billion last year.

Our net debt, defined as total debt less unrestricted cash and short-term investments, at the end of the first quarter was $11.4 billion, down a bit from $11.5 billion a year ago.

Turning to the second quarter and full year outlook, I will first touch on capacity.

We expect to see second quarter mainline capacity up slightly, about three-quarters of a percent, with domestic down less than 0.5% and international up about 2.5%.

For the full year 2010 we expect mainline capacity to be up about 1%, with domestic down slightly and international capacity up about 3% on the reinstatement of flying that we pulled down related to the H1N1 flu virus and the commencement of Chicago Beijing that we deferred from 2009 to this year.

Turning to costs, for the full year we expect consolidated ex-fuel unit costs to be up about 1.5%, with much of this increase explained by revenue related expenses such as credit card fees and commissions, airport related expenses and financing costs related to our new Boeing 737-800 aircraft.

In the second quarter we will be facing headwinds from these issues, as well as materials and repairs expenses and we expect our ex-fuel mainline unit cost to increase about 3.5% and consolidated ex-fuel unit cost to increase slightly less than 3.5%.

And I should point out that our capacity and cost guidance doesn't yet include the impact of the disruption of transatlantic flights we have seen over the last week.

However, as it looks like we will be able to restore a full schedule soon, we believe the impact on our guidance will be relatively small.

Fuel prices have been volatile and moving upwards in recent weeks and there remains significant uncertainty about the direction and volatility of fuel prices.

But based on the April 9th forward curve, we forecast a full year fuel price of $2.40 per gallon consolidated.

And based on this forward curve we would expect full year unit costs to increase a bit under 6% versus 2009.

Due to our systematic hedging program, we have built our hedging position for 2010 to about one-third of expected consumption, with average floors at about $67 and caps at about $93 per barrel on a crude equivalent basis.

Again, based on the April 9th forward curve.

For the second quarter of 2010 we have about 39% of second quarter consumption hedged with floors at $70 a barrel and caps at $95 per barrel on a crude equivalent basis.

We also expect 2010 principle payments on long-term debt and capital leases to total about $1.1 billion, with about $160 million of this amount coming in the second quarter.

We continue to take a measured approach to our capital spending by making sound investments that we believe will help keep American strong and competitive for the long-term.

For the full year 2010 we expect -- we continue to expect about $400 million of non-aircraft CapEx and about $1.7 billion of aircraft CapEx.

In addition to our fleet replacement plan, we continue to invest in Admirals Clubs, including recent upgrades at London Heathrow and Boston, winglets for our 767-300 aircraft and standardization of our 737-800 fleet.

So in conclusion this quarter was very challenging, but we are focused on returning the airline to profitability.

The economic environment and the volatility of fuel continue to present plenty of uncertainty.

But with the progress we have made on the alliance front and in implementing our cornerstone strategy this month, we have taken important steps to grow the revenue generating power of our network and we believe we are on the right track.

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

(Operator Instructions) Our first question is from the line of Hunter Keay with Stifel Nicolaus.

Please go ahead.

Thanks, guys, good afternoon.

Hi, Hunter.

Gerard, do you think that there's a risk that your network would be marginalized by a merger between two of your network carrier competitors.

Well, Hunter, I was asked that question in Los Angeles a couple of weeks ago at a One World meeting that we had and I guess I would express the same view I did then, which is that I think that we have a strong network today.

I am confident in our corner post strategy, because I think our footprint is in the most important business markets in the United States already.

And so we are not necessarily threatened by talk of consolidation in the industry.

In fact, I think Tom and I have both commented publicly about the fact that consolidation could be good for the industry.

But having said that, that's not to say that we are not focused on strengthening those corner posts.

So, if you just look at this quarter's announcements and what we are doing in New York and what we are doing with our One World partnership around the world, I think that we are -- we have to be mindful of how our network evolves, not just here in the US but around the world and obviously we've had a lot of focus outside the United States in recent months and I think that will continue to be the case.

Okay, great.

Thanks for that.

And just briefly on Pacific, I would love to flush out a little bit more color there.

It was a little bit softer than I think I was looking for personally.

The ATA data last night showed about 10.5% growth out of the Pacific.

You guys reported about a 90 basis point decline.

How is JAL or is it impacting that at all, because I think we initially thought that maybe there was some opportunity there for you guys to sort of pick up some of the traffic that JAL would be will losing as they're restructuring, but is it actually having a negative impact in the sense that some of their domestic restructuring is impacting a lot of the feed into Narita?

No, I don't think so, Hunter.

I think it is more a matter that if you look at our Pacific presence it is more heavily weighted Japan as opposed to other Asia.

And if you dissect the results for the quarter what you will see is that other Asia was a bit stronger then Japan in general.

So I think it is more of an entity mix question for us.

Okay.

So there's really not much of an impact then from a fee perspective with JAL's restructuring?

No, I don't think so.

Okay, thanks for the time, appreciate it.

You bet.

And next to the line of Jamie Baker with JPMorgan, please go ahead.

Hi, good afternoon, guys.

Hi, Jamie.

Gerard, I don't want to beat around the bush here, you have got the highest costs, you have got the lowest margins.

You are the only major airline expected to lose money this year.

Your year-to-date equity performance has trailed that of your peers.

I mean, in other businesses that I can think of when there's a Company standing out like this you sort of expect a really major overhaul.

And it isn't clear to me that FlightPlan 2020 is that plan.

I am trying myself to find a reasonably intelligent question here.

I guess it has to be is this really all you got?

Well, Jamie, I think that the pressure that -- well, of course, all the airlines are facing profitability pressure.

No secret to you or anybody that by the fact that we are the one network carrier that did not file for bankruptcy, we have a pretty significant labor cost disadvantage versus all of our network peers, which tends to obviously depress our operating margin relative to those companies.

But, as I have said for quite some time, I don't think that that is long-term sustainable competitive advantage for those airlines and I would expect now that all of the contracts are amendable, virtually across the industry, that there's going be a lot of convergence in the cost structures across the network carriers.

In fact, there are something like 19 major contracts either being negotiated or mediated across the industry.

So I think the gap that you are describing on the cost side is going to be mitigated and there is going to be convergence.

On the revenue side, as Tom has indicated, we are out performing our network competitors and so we feel good about the footprint of our network, we feel good about our relative revenue performance, and of course we feel good about the partners we have chosen around the world.

And I would acknowledge, we do have a cost challenge relative to the industry that is both rate, productivity, legacy, pensions and medical benefits, but I don't think that creates long-term competitive advantage for all those bankrupt companies.

I think that over time that will not be a sustainable competitive advantage for them, but maybe they will prove me wrong or you will prove me wrong.

Yes.

I may be -- maybe it is just a lack of urgency, maybe it is just me, but I think a lot of your owners don't really detect all that much extreme urgency there that we would hope you would be feeling.

I guess you just don't sound all that fired up, but I do realize a conference call may not be the easiest place to convey that emotion.

I do appreciate your comments.

Thanks.

Jamie, I would just add one point to that and that is we have also been a little bit disadvantaged in recent years on the alliance front because we haven't had antitrust immunity with our Atlantic partner and now we are in a position where we are going to have antitrust immunity and a joint business agreement with two big transatlantic partners and now a Pacific partner.

So we view that as a big step forward on the revenue side, where we already have a revenue premium to the industry and we think we can make it that much better.

So that in addition to the labor cost convergence that Gerard talk to a minute ago, I think those two things together are quite significant from a margin perspective over the next couple of years.

Would you care, just holding everybody's labor cost constant for the next year, would you care to guide on just how much margin, relative margin improvement that that might drive?

I mean, what sort of relative margin disadvantage the lack of ATI and immunized alliance has driven in the past?

Well, I think it is premature to say, because we will need to be able to sit down with our partner and talk about how we restructure the flying and how we coordinate our sales activities.

And those are things we can't do until we have antitrust immunity, but if you just look at what some of the other airlines have offered up as disclosure to the benefit of their transatlantic deals, it is measured in the multiple hundreds of millions.

Okay.

We'll keep waiting.

Thanks.

Our next question is from Gary Chase with Barclays Capital.

Please go ahead.

Good afternoon, guys.

Hi, Gary.

Wanted to just ask a quick one on Latin America and then move to sort of a broader network question.

Latin America was a bit light, at least relative to what we were thinking in March.

Saw the ATA date a couple days ago.

Wondered if you had any perspective on what was driving that and whether we expect that to continue as we move into the second quarter.

Delta had mentioned Venezuela as a place that was soft yesterday and -- so just curious for your perspective on how that's going to play out.

Gary, this is Tom.

Latin America had been stronger in the prior year period than had the Atlantic and Pacific.

So as you look at the year-over-year our unit revenues were up 6% in Latin and almost 17% in the Atlantic and part of the reason is you just have a stronger base year.

But as we look forward into the second quarter, we have seen an improving fuel surcharge and fair environment in Latin America and particularly strong premium demand in Argentina and Brazil.

So, looking into the second quarter we would expect much stronger sort of double-digit RASM growth that would be more consistent with what we have been seeing in the Atlantic.

Okay and then, guys, if you read the release there is just a lot of talk about investing in the network, bolstering your position, defending the network, kind of reads like underperformance.

And I am just wondering, what is your thought?

I mean, are you making investments that you think we ought to consider as you are taking a hit in the near-term for longer term gain?

Do you expect to underperform the industry because of some of these decisions that you are making?

Or is it, do you think you can keep pace and enhance the network at the same time?

Quite the contrary.

We think the things we are doing are going to improve our relative performance, everything from replacing the fuel inefficient airplanes with much more fuel efficient airplanes, which have immediate margin impact to the network efforts we are making with respect to the cornerstone strategy, which we also expect to be unit revenue positive and we announced that last year, but we have only been implementing the schedule changes just starting this month.

So we are right at the beginning of that curve, as well.

So all of those things, Gary, we expect to be accretive not dilutive.

And, Tom, just to clarify, you mean accretive from the get go, not that you have got a period of underperformance followed by payback later.

That's absolutely correct.

Okay.

Thanks very much.

You bet.

Your next question is from Bill Greene with Morgan Stanley, please go ahead.

Hi, good afternoon.

Gerard, can I just follow-up on your comments on labor costs.

I think we all agree with you, you do have a bit of a disadvantage, but your labor groups don't seem to agree with that sentiment.

And I am not sure how we can bridge the gap.

Is the strategy just to wait for the others to catch up over time or is there actually really and truly a possibility we could see your labor costs fall?

Well, Bill, I think the -- of course we are in mediated discussions with all three of our organized group today, as are a number of other carriers.

So I think the dialogue that we are having with organized labor is one in which what we are suggesting is that it is very important as we try to negotiate new agreements that we balance the competitiveness of the Company and our employees' long-term job security against everybody's desire, of course, to do better in the short-term and the fact that we start from a position of having the highest labor costs in the industry means that we have to be mindful of where we are going end up once all of these contracts are settled.

And so our objective is to protect all of our employees' long-term interest and job security by making sure that we don't end up pricing ourselves out of the market.

And so my expectation is that through the process of all of these contracts that are going through mediation and eventual settlement is that that gap that today ranges anywhere from $300 million or $400 million a year all the way up to $1 billion a year.

In comparison, if you take some of the bankrupt companies and put their contracts on American that that gap is going to close.

Now, I don't expect that to happen this summer, but I do think it will happen in the course of all of the contracts being renegotiated.

In fact it is already happening.

If you look at the contracts signed at Delta and Alaska and Hawaii and those were rate increases that bring some of those pilot contracts in line with ours.

Now, of course, they have more flexible contracts which lead to better efficiency.

And that's something we are going to have to address as we work through our new contracts, but convergence is no longer a theory, we are already seeing it play out around the industry.

Okay.

And that will benefit us from a relative standpoint.

Okay.

Thanks.

Can I ask a little bit of a different question on M&A and that is some of your competitors have argued that if you are going to change the return profile of the industry, you have got to change the structure and I am just curious if you agree with that because I would think if you do, wouldn't it make sense to be more aggressive about consolidation?

But I am just curious as to your views there.

Well, I will let Gerard chime in, but I certainly think that the industry does need a more rational structure and that can happen in many different forms, but consolidation has proven to be a way to achieve a more rational return profile in a lot of industries, including telecom where I spent a little bit of time.

So I think that's absolutely true.

But as Gerard said, I think we feel very confident about our network position irrespective of what happens around us.

But I think consolidation can only be good for the industry and only be good for us whether we participate in it or not.

Yes, Bill, I think it does come back to not consolidation for consolidations sake.

It is the issue in the industry of too many hubs and too many airplanes and what that does to pricing, particularly one stop pricing in this industry.

And so whatever vehicle would lead to a more rational balance between supply and demand would be effective in getting prices to the point where you are covering your cost, so that can take many forms.

Could it also be a form where a legacy and a low cost could merge or could that never work?

No, I wouldn't say never to anything in this industry.

Okay, thanks for the time.

You bet.

And we will go to Helane Becker with Jesup & Lamont, please go ahead.

Thanks very much.

Hi, gentlemen.

Thanks for taking my question.

Hi, Helane.

So these are easy questions.

One is on that $1 billion of debt due this year, are you just writing checks out of cash or are you refinancing it?

What is your thought.

We are doing a little bit of each, of course.

We have arranged a lot of financing for our new airplanes this year, to the point where they're all fully financed at this point.

But some of that debt is just being repaid out of cash as well.

Okay.

So as we look to the balance sheet, what should we think of in terms of net debt by year-end, let's say, assuming maybe a breakeven level for the airlines?

Well, net debt at year-end will be a product of earnings and we don't give forward guidance on earnings.

So I'm not really prepared to comment on that, but we produce, what, $1.2 billion of depreciation a year.

So you can sort of do some quick math based off of your own assumptions about earnings.

Okay.

That's fair.

I was going to say at breakeven, but that's all right.

And then the other question is with respect to labor, still can you just give us kind of an update of where the contract negotiation stand and how that's going?

I noticed that, I guess, the NNB sent you guys back to negotiating with your flight attendants and your mechanics.

So my thought was that perhaps you were making some progress that they didn't want to interrupt.

Can you comment at all, I mean, without negotiating publicly, can you comment on that at all.

Well, I think just to confirm really what you said, Helane, which is that, yes, more meetings have been scheduled by the NNB with the workers that you mentioned.

I know, but do you have a sense of the progress?

Well, Helane, I just have to come back to what I said earlier, which is that the challenge is balancing the position that we are in today, which we have already commented on in terms of our labor costs versus the industry, and insuring that the Company is competitive for the long-term because that's the only way that we will be able to secure jobs in this Company.

So that is why the contract negotiations are taking a long time because we are trying to balance the Company and our employees long-term interest against short-term desires and at the same time, as Tom indicated, see where the bankrupt companies land in terms of their new contracts as they settle those.

So I can't give you a specific timeframe.

Okay.

Well, actually that was very helpful.

Thank you very much.

You are welcome Thank you, those were all of my questions.

Thank you.

And we will go to Kevin Crissey with UBS, please go ahead.

Hi, two quick ones.

CapEx guidance for 2011, do you have a kind of a, if you haven't given a specific number a rough number for that?

No, we haven't given a specific number on that and we wouldn't yet.

But, as I think I might have mentioned earlier, we have only eight firm 737s on order for next year.

Now we may choose to increase that, but at this point that's what we have as firm aircraft orders for next year.

And ground CapEx, you can kind of see how it's been spending over the last couple of years and assume it is roughly in that zone.

Okay.

I guess it would, it is a lot of analysts had somewhat similar different ways to get a similar thing, but I guess I would go back to Jamie's thought of it doesn't seem radical changes here.

And I guess you have some limitations on what you can do that is radical to change things, but when I think about the loss in this quarter, unless my numbers are wrong, it is basically as big of a loss in this quarter as you've had in a profit in any year in the last decade, or something in that vicinity, and yet labor is looking for increases and likely to get it even if there's convergence and others are going to lose more money as well.

That doesn't, shouldn't make investors feel much better.

They have other alternatives outside the airline industry.

So I guess -- and then I put that together with the growth of 1%, 1.5% and say, okay, well I know there's reasons why you have that growth, but why not have shrink 7% again?

I just -- I don't mean just you, but everyone in the industry should be shrinking 7% again until the cost of capital is reached.

I think that's a legitimate question and what I think everybody in the industry is trying to ascertain is what is the new level of demand.

Obviously, we have just come off of an extraordinary downturn in the economy, which has produced extraordinary losses in the airline industry around this country and around the world.

But now we are seeing a pretty significant inflection point in terms of demand, corporate demand, and even pricing, which is a by-product of the very significant capacity cuts we made in the last 18 months.

In fact, if you look at the network carriers capacity is down about 12% from the first quarter of '08.

So that's a pretty big reduction in capacity and I think the question is, and your question is, is that enough and that remains to be seen.

But I think it would be premature for us to make another big cut in capacity until we see how the economy begins to settle out.

But we are seeing, obviously, some pretty big improvements in unit revenues and we need more.

I understand what you are saying, it is kind of like we don't want to miss out on the peak, but it seems like the industry is always trying to capacitize for the peak demand and when the peak isn't exactly where we want it or you are losing money in the first quarter, in the fourth quarter and then there's money made in the summer and most industries they have some seasonality, but it is profitable all the time if not, or most of the time if not all the time.

And so I still -- I am not sure, what is lost.

You are going to lose some cash flow or whatever, but what is really lost.

If consolidation is about getting seats out, which a lot of people argue, well just take seats out and see what happens.

And, okay or maybe we lose out on the peak, but we will be well better positioned for the next problem that comes, which we all know will happen.

Yeah, I guess I would just say we've done it, the industry has done it, the question is, is it enough and we are just going to have to wait and see.

Okay, thank you.

You bet.

And we will go to Will Randow with Citi, please go ahead.

Thank you.

I understand that on a multi-year basis you RASM comparisons look relatively in line with the [group], but when you think about that there's a 300 to 400 basis point margin differential between you and peers to make up either through labor conversions or RASM and that your corner post strategy is starting to hit, how should we start thinking about your revenue comparisons starting to bridge that gap in the second quarter.

Are you guys going to perform as well as the industry and how should we think about that for 2010.

If I understand your question correctly, Will, it is regarding our RASM performance and I would just make a couple of sort of key points there and the first is over seven quarters our year-over-year RASM performance has outperformed the industry.

That, I think, is worth noting.

Our mainline absolute RASM continues to be better than all the legacy carriers.

And as I mentioned in this most recent quarter, there has been a little bit of a favorable entity mix for some of our competitors, more transatlantic than us, less Latin.

But I think looking forward I would expect our unit revenue performance to continue to look quite good.

And as I mentioned to, in response to an earlier question, I think the cornerstone strategy, as well as the implementation of the joint business agreement, should be even more net positive.

But I guess my point is you guys have a large margin differential that needs to be made up either in RASM or labor and labor is probably not going to happen for a while.

Given your corner post strategy should reflect some relative RASM improvement starting in the second quarter, do you think that on a year-over-year, not a multi-year basis that you will be able to generate a sufficient amount of RASM in premium and start bridging that gap?

I am not sure what gap you are referring to, because we have a premium today and we have been outperforming the industry for seven quarters.

I'm sorry.

So when we need to extend that.

I'm sorry, I meant on an EBIT margin basis.

On a margin basis that's our plan is to by virtue of both the revenue initiatives we talked about, cornerstone strategy, and joint business agreement, and some labor convergence we would expect the margin gap over time to narrow significantly.

And then just lastly, how should we think about capacity for 2011, sort of going back to Kevin's question.

Given that the fares are improving and your comments that you could take a few more planes based on your current expectation rate to take -- .

But we would be driven.

We continue to be thinking about that, Will, from a replacement standpoint.

Okay.

And I think back to the earlier line of questioning, given the returns that the industry has had the past decade, of course, growth wouldn't -- is not going to be helpful.

So that's not the way we would be thinking about it.

We would be more oriented towards trying to drive ourselves to some sensible level of profitability.

Thank you very much.

You bet.

(Operator Instructions) We will go to the line of Bill Mastoris with Broadpoint Gleacher, please go ahead.

Thank you.

Tom, on the last call you mentioned that there is still some remaining aircraft to be priced into the 2009 -1 Double ETC.

I wonder if you could kind of give us an update on that, whether that is fully financed now or whether there is still aircraft that yet to go in.

I believe there are three airplanes left from that Double ETC, which was used for that purpose.

Okay.

So three more to go, if I have that correct.

That is correct.

Okay.

And for all of the other aircraft deliveries, what additional aircraft do you have that is non-backstop financing and I am just trying to get a pulse on the demand for or your ability to go ahead and attract maybe less expensive, again, non-backstop financing.

All of our airplanes on firm order now are financed.

So, outside of the backstops or the backstop remains in effect.

And, of course, as we look to take additional airplanes as part of our fleet replacement plan, we will be looking to line up further permanent financing, but we still have the backstop as dry powder.

Okay.

Thank you, Tom.

You bet.

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

And we will go to Dan McKenzie with Hudson Securities, please go ahead.

Hi, good afternoon, guys.

Hi, Dan.

I wanted to see if I could peel back the onion on how and I guess to what extent AMR's fleet strategy may be driving the earnings deficit relative to peers.

And I know AMR is adding more RJs this summer, but when I look at seats flown across the system, I am finding that roughly 25% of those seats are flown by RJs and that compares to 40% at your four biggest competitors.

So I am wondering if you can talk about how this RJ disparity is impacting or perhaps not impacting AMR's earnings and also in general the competitive position relative to your peers.

Well, we are constrained as to what we can do with RJs by the scope clause of our pilots contracts.

So this year we are adding some CRJ -700s, which bring us up to the limitation on what we can do under the scope clause.

So, we are doing as much as we can, but you are quite right, Dan, that it is less than most of our competitors in the industry and there's a earnings impact associated with that.

Is that impact that you can help us get our arms around or quantify relative to your peers.

I don't have anything at my fingertips, but let us think about that and maybe we can give you a little more guidance on that on future calls.

Okay.

That will do it for me.

Thanks a lot.

Thanks, Dan.

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.

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You may now disconnect.