美國航空 (AAL) 2010 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

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

As a reminder 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; the President of AMR and American Airlines, Tom Horton; and Senior Vice President and Chief Financial Officer, Bella Goren.

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

Please go ahead.

Thanks, operator, and good afternoon, everyone.

Before we begin the call I'd like to point out that today's call may contain forward-looking statements.

These include our forecasts of costs and revenue performance, fuel prices and fuel hedging, capacity and traffic estimates, and other statements concerning our liquidity and our expectations of future performance.

Today's call will be concluded with a question-and-answer session.

I'd like to ask the analysts to limit themselves to one question with a brief related follow-up.

And with that I would like to turn the call over to our CEO, Gerard Arpey.

Thank you, Chris.

Good afternoon, everyone.

As you have seen in our press release this morning, we reported a profit of $143 million for the third quarter, our first profit since the third quarter of 2007.

Our results are substantially better than a year ago in spite of significantly higher fuel prices.

If you exclude special items, our third quarter results are better by over $400 million versus the same period last year.

Obviously we have a lot of room for improvement, but the fact that we generated our first profit since the third quarter of '07 demonstrates a meaningful step forward.

The progress we are making takes the dedication of our entire team and I would like to just take a moment and thank all of our employees for their efforts to serve our customers during a very busy summer, as well as their ongoing efforts in what is shaping up to be a very busy fall as well.

In a few moments Bella will walk through our results in more detail, but first let me highlight a couple developments.

Today we announced significant steps to bolster our already strong presence in Los Angeles.

This plan is the next step in our cornerstone strategy, which focuses our service in five key markets, New York, Chicago, Dallas/Fort Worth, Miami, and Los Angeles.

Next year we will be increasing our service at L.A.X., adding flights to Shanghai, China, as well as to nine new markets in the U.S.

By next summer we expect American and American Eagle to offer 153 daily departures from Los Angeles with numerous connections to our own network and to our unmatched network of partners.

Our oneworld partners, including American, will offer 18 daily international departures to key markets including Sydney, Hong Kong, and London, and beginning next April Iberia will fly from L.A.

to Madrid.

In addition we plan to expand our bilateral relationship with Alaska Airlines in Los Angeles, offering customers the ability to purchase tickets to eight destinations in Mexico.

Earlier this month we launched our transatlantic joint business with British Airways and Iberia.

As all of you know, we have been working on this for longer than any of us would like to remember, but on October 1st we were very pleased to actually get started.

This has tremendous positive implications for both American and British Airways.

With the launch of the (inaudible - technical difficulty) enhanced our frequent flyer program, adding the ability for Advantage members to earn and redeem frequent flyer miles on B.A.

flights across the Atlantic, something that was not possible before.

We've also better aligned our frequent flyer programs, in particular the benefits offered to our premium customers, which they obviously value greatly.

We started code sharing on numerous additional routes on October 1.

For example, British airways added its code to over 2,000 American and Iberia flights serving 181 destinations and we've added the American Airlines code to over 320 B.A.

and Iberia flights to 101 destinations.

So in total, the joint business combined network serves more than 400 destinations in 105 countries with about 5200 flights and that is a powerful combined network we can now sell.

We've realigned our own schedules and expanded our service, including announcing American Airlines service to oneworld partner hubs in Budapest and Helsinki, new British airways flights to San Diego, as well as Iberia service to L.A.

in 2011.

New York and London are key markets for our business customers and indeed business customers all over the world and we plan to have 11 daily American and British airways flights between Kennedy and Heathrow.

And these flights will be much more evenly and conveniently spaced throughout the day.

In fact, during the peak periods we are going to be in effectively operating a shuttle between Kennedy and Heathrow.

So we're very excited about our plans for that market next year.

And this is just the beginning of our joint efforts.

All of these initiatives, as well as our broader alliance strategy, are uniquely focused on premium customers.

In fact, in each of the top four airports for premium travel in the world, Heathrow, Kennedy, Hong Kong, and L.A., our oneworld alliance has the largest share of premium seats.

And our alliance has hubs in five of the top eight premium travel airports in the world, providing an unmatched network for our premium business customers.

So we remain focused on expanding our own network and our alliance footprint even further.

In fact, within the last week we have announced new relationships with Jetstar and WestJet.

These announcements cap a very busy couple of months of activity on the alliance front.

We've added Air Berlin as the newest member elect of oneworld.

I think many of you know that is the fifth largest carrier in Europe.

We launched our commercial agreement with JetBlue and added new codeshare routes with (Goal) in South America.

Of course we recently had good news regarding our proposed transpacific joint business with Japan Airlines when the U.S.

Department of Transportation tentatively granted U.S.

antitrust immunity.

And all of us are looking forward to a much closer relationship with JAL in the coming months, once our joint business if fully approved..

So as we look forward to next year, we're working hard to lay the track for continued improvement in our results.

At the same time, we have a significant amount of flexibility in terms of our fleet and we will continue to exercise capacity discipline as we move into 2011.

So to sum up, we're glad to report a profit.

At the same time we're intensely focused on improving our results going forward.

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

Thank you, Gerard.

Good afternoon, everyone.

The third quarter continued the trend of significant improvement for AMR.

We posted a profit of $143 million.

This compares to a loss of $265 million, excluding special items, in the third quarter of 2009.

We had special items totaling $94 million in the third quarter of last year and no special items this year.

Please refer to the press release for details of these items.

For the remainder of the call I will exclude the impact of special items to have a more meaningful discussion of our performance on an ongoing basis.

We improved our net results by $408 million versus last year and this is despite paying $123 million more for fuel than we would have paid at last year's third quarter prices.

This is our first profitable quarter in three years, since the third quarter of 2007.

Our profit this quarter is a step in the right direction and we are committed on building on the momentum we have created.

Earlier this year we outlined our road map forward and I would like to provide a brief update on the work being done to continue improving our performance.

First looking at revenue.

We are laser focused on building upon the revenue improvement that we posted this quarter.

As a reminder, we estimate that we will see over $500 million in revenue improvement and cost savings from our network realignment and our alliance activity.

We expect to realize much of this improvement in 2011 and reach the full run rate by the end of 2012.

This estimate includes our partnerships, as well as the impact of our cornerstone strategy, focusing our network on the largest markets in the United States -- New York; Los Angeles; Chicago; Dallas/Fort Worth; and Miami, the Gateway to Latin America.

Today's announcement of enhanced service in Los Angeles is another step in executing our cornerstone strategy.

Next year we plan to start new service from Los Angeles to Shanghai and add service from Los Angeles to nine new domestic markets, including Albuquerque, Houston, Phoenix, and Salt Lake City, and further build on our alliance and our partner relationships.

With our fellow oneworld carriers, including Cathay Pacific, Qantas, and JAL, across the pacific, LAN to Latin America, as well as British Airways, and starting next year Iberia across the Atlantic.

We have an unmatched set of partners at L.A.X., especially when it comes to attracting premium traffic.

A big component of our expected revenue improvement and cost savings comes from our joint business with British airways and Iberia, launched earlier this month.

We are now offering coordinated service to over 400 destinations in more than 100 countries.

We offer expanded opportunities to earn and redeem frequent flyer miles and more choices for our corporate customers.

And we're working together to align our schedules to provide better connections and patterning of service.

Additionally, our team, including sales, pricing and marketing, are now able to coordinate activities within the joint business.

One of our highest priorities is to quickly implement all aspects of our partnership to achieve its benefits.

And we plan to do the same with Japan Airlines once our proposed transpacific joint business is fully approved, which we expect later this year.

As you're aware, earlier this month we received tentative approval from the U.S.

Department of Transportation for antitrust immunity with JAL.

And with our focus on the specific operations, we're looking forward to initiating New York to Haneda service in early 2011.

As Gerard mentioned, we are moving expeditiously to further expand our already strong alliance portfolio, both by strengthening our current relationship and by adding new partners in key markets.

With our oneworld partners we are working together to enhance and expand our alliance in key regions with quality carriers and we're looking forward to welcoming S7 in Russia and Kingfisher in India into our alliance.

Furthermore, during the third quarter we announced that Air Berlin, the fifth largest airline in Europe, will be the newest member elect of oneworld.

At the same time American is expanding our list of bilateral partnerships.

In fact, within the past week we have announced new relationships with WestJet in Canada and Jetstar in Australia.

Within American considerable energy is fueling our efforts to further enhance the experience we offer our customers, especially to our premium customers.

We are rolling out new and modified CRJ-700 aircraft, with first class seats, upgrading the interiors in seats of our original Boeing 737-800 fleet to match our new delivery, and enhancing the value of our Admiral's Club membership.

We're also continually working to make it faster and easier for our customers to get through the airport.

For example, knowing how important time efficiency is to our customer, we are now offering mobile boarding passes on smartphones at 50 airports.

We offer a new application for the iPhone and online check-in for more international flights on AA.com.

As we work to improve our results, we are also sharply focused on costs.

Heading into the fourth quarter we anticipate lower unit costs excluding fuel.

While this is a step in the right direction, we still face a number of challenges on the cost side of the equation, such as increases in airport costs, revenue related expenses and aircraft rent.

However, our main challenges are mostly related to our status as the only major airline which did not file for bankruptcy, resulting in the highest labor cost in the industry.

That is, of course, history and we are focused on improving our performance for the future.

So let me summarize why we believe that labor cost disadvantage will be reduced going forward.

There is clear evidence that our labor cost gap is closing this year, as carriers like Delta restore some of the compensation restructured by the court.

Right now, across the industry, more than 50% of union contracts are open.

By the end of next year we anticipate 24 of 30 contracts, or 80%, will be amendable.

And of course as United and Continental, as well as Southwest and AirTran, work to combine their Company and negotiate with their unions, we believe their labor costs are likely to rise going forward.

However, we're not waiting for the industry to change around us.

Much is up to us and our team is dedicated to achieving fair, responsible and competitive labor agreements.

That is the path to the most opportunity and job security for our people.

As we work to reach new agreements and as the labor costs of other airlines increase, we believe that the current cost gap will continue to narrow.

Now I will take a few minutes and comment on our third quarter results, starting with our revenue performance.

In the third quarter mainline unit revenues increased 10.7% on about 3.5% more capacity.

Load factors remained high in line with last year's level and yields were up 10.7%.

Our consolidated passenger unit revenue also increased by 10.7% for the quarter.

Up until this year, our unit revenue growth outpaced the competition for almost two straight years.

And as we reviewed the trend, it is important to keep in mind the impact of differences between geographic regions, particularly those areas where our network is concentrated versus our competitors.

For example, we continue to see strong unit revenue growth in the third quarter in Europe and in China.

These markets are rebounding from hard hit they took at last year's downturn.

And a relative share of capacity in those regions is less than that of our U.S.

airlines.

On the flip side, we have significant presence in Latin America and the Caribbean where our unit revenues remain healthy on an absolute basis, but increased last year year-over-year than other geographic entities costing gross of 7%.

Within Latin America we saw significant unit revenue increase in deep South America, which was moderated by our results in Central America and the Caribbean, entities that were particularly strong last year.

So our geographic mix continues to affect our unit revenue comparisons to the industry this quarter.

Domestic unit revenues improved by about 10%, while overall international unit revenues increased by almost 12% versus 2009.

Domestically, we saw year-over-year improvements in all of our five cornerstone markets.

In terms of corporate travel, we continue to see positive signs.

Corporate revenue increased for the quarter versus last year and we continue to have a corporate revenue shared premium versus the industry.

As we head into fall, we are continuing to see fewer fare sales and at the same time the industry is having success in raising fares.

Turning to advanced bookings.

Our bookings for the rest of the fourth quarter are strong, in line with last year.

In summary, we are sharply focused on improving our entity by entity revenue performance and we are quickly implementing our joint business with British Airways and Iberia.

Furthermore, we are looking forward to strengthening our pacific operation by implementing a joint business arrangement with Japan Airlines once it is fully approved.

Our strategy is to build the strongest network in the most important markets across the globe for the long-term and we are committed to executing our plan.

On the regional front quarterly revenue increased about 18% versus the prior year.

Our regional capacity was up 8.5% for the quarter, driven by two class CRJ 700 deliveries.

Our cargo revenues increased 23% versus the third quarter of 2009.

Freight traffic was higher by 18% and freight yield continued to show double-digit improvement.

In other revenue we saw year-over-year improvement of about 3%.

We saw continued strength in baggage revenues, partially offset by the decision we made this summer to enhance our offering for premium customers by no longer charging a fee for certain Advantage Award redemption.

We are focused on growing our revenues by increasing the variety of customized product options we offer.

And in the third quarter we introduced Express Seat, a feature that enables customers to purchase the right to sit in the first few rows of coach and board aircraft as part of group one boarding.

Shifting to costs.

Our third quarter unit costs excluding fuel improved 0.7% for the main line and almost 1% on a consolidated basis.

We achieved this improvement through a lot of hard work and through relentless focus on cost control.

Fuel prices increased during the quarter to $2.24 per gallon, up over 8% versus last year.

Consequently, we paid over $123 million more for fuel in the quarter than we would have at last year's prices.

With respect to our balance sheet, I would like to direct you to our press release for more information on our debt, cash position, fuel hedging, as well as 2010 capacity and cost guidance.

But first let me point out a couple of highlights.

In terms of cash, we ended the quarter with over $5 billion in cash and short-term investments, including a restricted balance of about $450 million.

A year ago we had $4.6 billion in cash and short- term investments, including a restricted balance of about $460 million.

In the third quarter our principal payment on long-term debt and capital leases totaled about $400 million.

We expect 2010 principal payments and long-term debt and capital leases to total about $1.1 billion, with approximately $270 million of this coming in the fourth quarter.

We have completed our planned cash pension contributions for 2010.

Our contributions total approximately $460 million.

For 2011 we expect to make contributions of approximately $520 million.

Of course this estimate may change somewhat by year-end.

And we will provide an update on our next call.

Looking at our cost guidance, we continue to expect full year 2010 unit costs excluding fuel, to be just over 1% higher than last year, with fourth quarter 2010 unit cost, excluding fuel, improving by 3.5%.

This improvement is a result of numerous cost control initiatives and modestly higher year-over-year capacity.

We continue to take a measured approach to our capital spending.

Our capital expenditures for the third quarter totaled about $675 million, including approximately $75 million of non-aircraft CapEx.

For the full year 2010 we continue to expect about $2.1 billion of total CapEx, including approximately $1.8 billion in aircraft capital expenditures, all of which are financed.

And next year, we expect that our aircraft CapEx will be reduced significantly to approximately $900 million as 737-800 deliveries are expected to be reduced from 45 this year to 15 in 2011.

We have arranged financing for all of these aircraft subject to certain terms and conditions.

Finally, I'd like to give you a preview of our capacity for 2011.

At the mainline we anticipate domestic capacity to be up about 1%.

Internationally we have already announced that we are adding long-haul flights, including Los Angeles to Shanghai and New York to Tokyo Haneda in Asia Pacific, Chicago to Helsinki and New York to Budapest across the Atlantic and both JFK and DFW to Rio in Latin America.

We will also see the full year impact of the service we launched from Chicago to Beijing earlier this year, the reinstatement of some of day of the week cancellations we put in place last winter, as well as the impact of new service we recently announced to Mexico, back filling some of Mexicana's capacity.

All of these services make sense in terms of our network strategy and alliance partnerships.

Our biggest area of new international service is Asia, which of course is the area of the world seeing the fastest economic growth.

This adds up to contemplated 2011 capacity being up about 3.5% at the mainline.

On the regional side, our capacity plan reflects the impact of the 22 CRJ 700s we are adding to the fleet.

As a reminder, deliveries of these airplanes, all of which have first-class seats, started in the middle of this year and will continue until spring of 2011.

For a number of years American has had significantly less regional feed than our U.S.

competitors.

These CRJ 700s, which we are deploying primarily to provide service in key business markets, start to level that playing field.

So, to wrap up, this quarter was one of significant progress, which reflects our dedication and commitment to further improve our results.

So with that, Gerard, Tom, and I will be happy to take your question and thank you.

(Operator Instructions) Our first question is from Bill Greene with Morgan Stanley.

Please go ahead.

Yes, hi, good afternoon.

I'm wondering if we could just talk a little bit about the JV and the ATI with JAL.

Can we get a sense for how the mechanics of it work?

If you went over that, I'm sorry.

I jumped on a little bit late, but I am just kind of curious thinking about how to sort of model the revenue and profit impact from anything that happens over the transatlantic or ultimately transpacific.

Hi, Bill, this is Bella.

And let me sort of start off on your question and then, of course, open it up to my colleagues.

So what we have shared publicly is -- the way to think about it, and I'll point right now to the transatlantic example, we have a $7 billion business and it is [metal neutral, meaning that we share proportionately in terms of revenues based on our capacity that we offer, each airline offers in the market, but we are indifferent as to whether a customer chooses a seat on BA or American Airlines or Iberia.

And as a matter of fact, to Gerard's example that he gave earlier between two top business markets in the world, JFK and Heathrow, will be offering 11 frequencies.

It will be a shuttle-type service and a customer can fly in one direction on British Airways and return on American Airlines and we will share in that proportionately to the capacity we have in that market.

And I guess is it safe to say the margins once fully ramped are materially higher than average?

Well, Bill, without speculating on that let me give you, this is Gerard, let me give you -- and I don't know that this will help you with your modeling, but maybe a different take or perspective.

I think one of the challenges that we have had in our partnership with British Airways has been the fact that while we have been great partners for many, many years, we have also been ferocious competitors, because we orchestrated that partnership around the fact that we didn't want people riding on BA to London, nor did they want anybody riding on American to London.

And thus we had all kinds of head-hurting restrictions or, in fact, outright elimination of codesharing and frequently flyer benefits, because we did not want to see any of our traffic diverted to BA or their traffic diverted to us.

And of course all that ended on October 1, which means we now really do have a partnership where our economic interests are aligned and they are aligned to take business, not from each other, but from the other guys.

And so I think -- again, I don't know if that helps you with your modeling, but now we truly have a partnership where we are working together to price, sell and provide good customer service to all of our passengers and to do that in concert with one another.

So I really can't overemphasize the change from what we were doing before to what we are doing today.

And, Bill, the only thing I would just add to that in terms of what we have shared publicly is that we have not broken down each component of what we have communicated with respect to Atlantic, how much of the $500 million, and quite frankly $500 million in our view is a pretty conservative estimate, but I will just say that that is inclusive of obviously our joint business agreement with BA and Iberia.

Our plans for our relationship with JAL, as well as enhancements and the beneficial effect we are anticipating in our cornerstone market, as an example.

So as you think of that number of $500 million, it is incorporated in that.

We will start seeing the results immediately.

A large portion of them will be in effect next year and then a full run rate by the end of 2012 and it will be, and I want to emphasize that p;oint.

We have been saying $500 million plus and we do believe there is a plus at that end of that number.

Okay, that's great.

Just one quick question on, I guess I'll describe it as sort of assets that you still have there.

It has been on some news on selling Eagle again.

Can you just give us sort of a rundown of kind of what the assets are that you have if we think about kind of whether you want to think about them as unencumbered or what not, sort of what assets you've got there that could still be monetized.

You mean in terms of what we have at American (multiple speakers).

Yes, I think you just have Eagle at this point, but maybe there's more assets there that I am not thinking of that you could monetize.

Bill, we've got of course Eagle.

Most of our competitors have done slot and route financings.

We have not done that.

So all of our slots at Heathrow or in Narita and gates and that kind of a deal is not one that we have done, but certainly other carriers have done.

And then as we've paid off debt this year and we're going to pay off debt next year, we are going to free up a lot of airplanes.

And most -- many of those airplanes are good aircraft in terms of their ability to be refinanced.

And then you have got things like spare parts and other guys, I believe, have done spare parts deals.

We haven't done that.

So there is quite a number of things on the shelf.

Thanks for the time.

Thank you, Bill.

And next go to Michael Linenberg with Deutsche Bank, please go ahead.

Hi, good afternoon, guys.

A couple questions.

Just back to, I guess, the point that Bill brought up about Eagle being in the news and you probably can't comment what ultimately, I guess, maybe the course that you go down, it's just other than what's been said in the press and I think that there's a date where sometime in 2012 a deal either has to get done or maybe [Gan Garten is free to move on, et cetera.

But when I think about Eagle there's a lot of aircraft debt that could be tied to Eagle and the question that I'm getting to is I believe AMR may be the guarantor on some of that debt.

And so the question is, is there a way that you could structure a deal that a divestiture of Eagle would also include the removal of some of the debt on the AMR balance sheet?

Well, I think, Michael, that's -- I can't give you a definitive answer to that question, but it's certainly one of the things that we're puzzling through as we figure out what's best for Eagle in the long run and what's best for American Airlines over the long run.

And it would just be redundant with our prior comments about American Eagle, but our goal there is to provide long-term stable cost effective feed to American Airlines and also give American Eagle the opportunity to exploit their many strengths and their future and we have thought that that might be better done under a different ownership structure and that's what's being explored.

Okay, good.

Fair enough.

And then just my second question, Gerard, and this is sort of bigger picture to you and this is just in regards to the emissions trading scheme.

It looks like that there will be something out there in 2012 and yet you get one view from Ike Hale a week ago and you have a different view from the EU.

Do we see any sort of resolution on this anytime soon or are we going to be facing some sort of process that runs into litigation?

What can you say, if anything, can you say about how this potentially plays out?

Well, it's a good question, Michael, and it's hard to answer other than to tell you that I think the airlines, both here in the U.S.

and our counterparts around the world through IATA and through ICAO, have made some very strong commitments to address climate change and our part in helping to improve our impact on the environment.

So I don't think we're expect any rulings until the back half of next year.

Okay.

But I do think we have targeted, and you'd have to check me on this, but through IATA we had targeted a 2% efficiency goal or reduction in greenhouse gases across all of the carriers and that is, I think, a pretty aggressive goal that we took on, on our own and we've committed to do that through 2020.

And then we continue to work on what we're going do beyond that, but a lot of that has to do with the engine manufacturers and Boeing and Airbus.

I think the industry is making good faith efforts to be a good steward when it comes to the environment.

Okay.

So then Gerard for now it sounds like that still though you're sort of on this dual track, right, because -- I may be wrong on this or not, but per the EU ETS I guess carriers have to provide information or had to provide information about potential carbon footprint and so I guess you walk down that path until we get this resolved.

Yes, that's right and we've done that.

We are providing them with the data that they have requested.

Okay.

Very good.

Thanks and nice to get back to profitability.

Yes, thank you, Michael.

Okay.

And next we go to Gary Chase with Barclays Capital.

Please go ahead.

Good afternoon, everybody.

Hi, Gary.

Wanted to see if I could get you to flesh out a little bit more on the $500 million.

A lot of the stuff that you're talking about in these joint business agreements is stuff that should be up for most of the year.

And I know you've talked about how the majority of it would be recognized in '11 but not entirely.

Is it something we should be thinking we will see as early as Q1 or is it going to take more time than that before you really start seeing some of these benefits that you're describing?

Well, Gary, I think Bella's comment was accurate.

She said much of it would be achieved next year, but full value would not occur until the end 2012.

And that's based on our looking at what we can do immediately and have already done with B.A.

and Iberia, but some of the additional plans we have for next year and then trying to figure out when we might get the final approval for the partnership with JAL and actually get that thing up and running.

So there's some art and some science here, but I think those are the right words.

Absolutely.

And, Gary, the only thing I would add to that just to kind of give you an example of why there's a phasing aspect to it is if you think about, for example, coordinating and realigning our schedules, obviously, we don't change schedules on 30 days notice, because that's very disruptive to our customers.

So much of that will be going into effect early next year and through the spring and summer.

On the other hand, obviously joint selling will start much sooner.

And we have already started many aspects of the joint business with British Airways and Iberia in terms of how we service customers, in terms of how we sell our product through our direct channels, in terms of pricing coordination.

So there is immediate aspects to it and there is also some phasing items just due to the operational nature.

And as Gerard pointed out, JAL, for example, obviously we have to wait the final approval to be able to talk about some specific, for example, joint pricing, but there is a lot of work that has been done that is legally available to us in anticipation of that.

Okay.

And then I'm wondering for your thoughts on you can do this analysis in an all else constant kind of framework, but as I think we all know, all else isn't going to be constant next year.

You have got what is now, as of a few weeks ago, the largest airline in the world, they're going to be implementing a merger.

They are describing a lot of their own kinds of revenue synergies.

As we think about what's shifting in the competitive landscape, should we be thinking that there are material offsets to those numbers or do you really think that even when you clean up for the activity that's going on, you will actually be able to recognize an incremental $500 million in benefits?

Gary this is Tom.

When we did our analysis around what we thought the joint business and network realignment was worth, we took into account the fact that that merger was on the horizon.

So it's reflective of that.

Okay.

All right, thanks, guys.

Thank you, Gary.

And next we go to Bob McAdoo with Avondale Partners.

Please go ahead.

Hi.

Going back and getting, just kind of making sure I understood what was said.

Bella was talking about there at the end about 2011 capacity and there was a 1% mainline domestic and 3.5% international and I assume that includes all the new stuff with L.A.

and whatever.

She talked then about RJs, but didn't really talk, didn't give us a number and we don't have kind of a composite what does the whole thing turn into.

Okay.

So, Bob, let me just clarify make sure that all of us are on the same page and everyone is looking at the time same number.

So for the mainline domestics we were talking about 1%.

When you include our mainline international into that equation, the overall mainline is going to be about 3.5% and if you look at the consolidated number, including regional, that is roughly around 4%.

Okay.

All right, fine.

And then the other thing, I want to go back one more time to make sure I'm understanding what you're saying about this metal neutral concept.

Let's just take for example, let's just say you had 60% of the seats back and forth between Kennedy and London and British Airways had 40%, and what you're saying is that if it's a 60/40 split on the number of seats then no matter who carries the passenger or on what -- whether it's front of the plane, back of the plane or whatever, you would get 60% of all revenue that the group carried back and forth.

And if they happen to do a better, because of their time of day or whatever, they happen to get a better share of the, in terms of physically the better share of the front of the plane kind of customer, you still get 60% of that, or conversely, if your costs were something less than theirs on a per seat basis you could actually get a higher profit out of it because it's -- the revenue was just split 60%/40%?

Is that the way you said it?

Well, I think, Bob, there is a lot of interpretation that was involved that in question.

So I think because of the confidential nature of our actual agreement, we have not given a lot of detail.

What I can share with you is that, don't think of it as seats, think of it as we started with a certain share of capacity and we will be sharing revenue based on how our capacity was at the base year and then changes over time.

Beyond that, due to confidentiality of the actual agreement, we do not share more than that.

But, Bob, you're conceptually where you are going there I think is right in that all three of the carriers that are in the joint business are motivated irrespective of whose airplane to drive more passengers in any cabin of business to expand the pot and most importantly to stop trying to take passengers from each other, which we have been doing, even though we have been long time oneworld partners, and take traffic from the other guy.

So it goes back to the same, what I was just saying then that if your share of capacity, whether you call it seats or capacity, if your share of capacity is 60%, then regardless what your costs are you are supposed to get about 60% of the revenue.

Yes.

Well, the reason Bella is being careful in the way she answers that is we have a contract that has some conditions that limit what we can say about the mechanics.

So I think what we're trying to say to you is conceptually I think you have the picture correct.

Okay.

Very good, that's what I had.

Thanks.

Okay, thank you, Bob.

(Operator Instructions) We'll go to Hunter Keay, Stifel Nicolaus.

Please go ahead.

Thanks, good afternoon.

Hi, Hunter.

I think there's a, in my opinion, a bit of a misperception out there amongst the investment community that a lot of the work rule disadvantage that you have, particular as it pertains to regional flying, exists almost exclusively with the pilot contract.

I don't think that's really the case.

Can you maybe help me flush out sort of how much, whether it's an ASM cap or just a skill clause, how much of the regional disadvantage you have relates to the TWU contracts and how much is in the APA contracts.

Maybe just at a high level.

Well, at a high level, Hunter, you're accurate.

We have restrictions in both of those contracts that we are trying to address in these rounds of negotiations, because the other network carriers, either through bankruptcy or through their own collective bargaining, don't have those restrictions.

And the way we use Eagle is to buttress the American Airlines network.

So it's important to American that it -- that the Company had the same degrees of freedom that our competitors have to feed their network.

So that is one of the important topics that we're discussing both with the APA, where we have a number of restrictions, and with the TWU, where we likewise have restrictions.

But that's an area where if we bring the facts to the table, I think there should be common ground, because if we have the degrees of freedom that the other airlines have, we can feed more traffic to the American Airlines network and make American Airlines stronger and bigger.

I don't want to oversimplify, over generalize this, but sort of can you maybe ballpark, is it like maybe -- this is very difficultly to do, but 75%/25% of your disadvantage you would attribute to the pilot contract or is it more like a 50/50 split?

Can you even have this conversation meaningfully?

It is hard, Hunter, because -- yes, it would be hard to quantify it that way, because in certain ways, the pilot contract allows to you fly a lot of airplanes at Eagle, but those airplanes are not economic, so you never do it.

So it would be hard to put that in percent.

All right, I appreciate that.

And you talked about the fleet flexibility, obviously with your order book but how flexible might you be or how open might you be on maybe introducing a different fleet type to the mainline?

I'm specifically referring to say like the larger C-series, for example.

Is that something you would consider adding to the mainline fleet if you were to get really favorable pricing or are you pretty much dedicated to the Boeing fleet on the mainline side indefinitely?

I think it is something definitely worth considering and that is an interesting airplane.

I do think that we think about airplanes in the context obviously of capacity and the way that we think about capacity is correlated to GDP.

So I think the long-term vision, if you will, or strategy under our flight plan 2020 would be to grow the American Airlines network consistent with GDP growth in the regions of the world that we operate, which are most of them.

So, yes, I think subject to that way of thinking about the need for lift, the C series is an interesting airplane.

I appreciate that perspective, because I think it is interesting for the seat count, C series to an MD-80 versus the three 7-800s.

It is interesting.

Okay.

Well, thanks a lot for that.

You got all the complexity of adding a different airframe, potentially different engine, and quite frankly, the labor agreements are not friendly today, anyway, to added fleet types because of all the training that is required the way we do it today.

Now, it doesn't have to be that way.

You don't have to train everybody through every type of airplane you have and there again, there are ways to do that smarter that would be good for the Company and I think good for our pilots and those are the kind of things that we're talking to them about.

That's really great.

Thank you for that.

Thank you, Hunter.

And we'll go to Jamie Baker with JPMorgan.

Please go ahead.

Hi, good morning, everybody, or good afternoon, rather.

Hi, Jamie.

Hi.

Gerard and Bella and Tom, we've all discussed before how the lack of alliance immunity and the labor disadvantage explains the margin deficiency relative to your peers.

Obviously the alliance situation is being reversed and thanks to United, the labor disadvantage should moderate a bit in the next year or so.

The thing is when I look at the third quarter, your margin deficiency actually worsened year-over-year versus your peers and in 2009 it also worsened year on year versus your peers.

And, of course, during those periods Delta labor expense was rising and it isn't clear that SkyTeam or Star had any particular incremental alliance momentum.

Obviously they had immunized components, which you did not.

Is there a possible third or fourth or fifth or sixth factor other than just alliance immunity and labor that explain why your relative position appears to have been worsening?

Well, Jamie, certainly there is a lot of components there involved.

You highlighted the two and then kind of raised the question about the others and so let's just kind of step back and one that I think we have been talking about, which going forward we actually think will moderate in American's favor, but the entity mix is not insignificant.

And so as we look on a year-over-year basis versus, for example, taking a look to 2007, which was a more normalized year, there is a considerable entity mix impact that has impacted our revenue numbers.

So that's one that we have explained and I think has impacted our current quarter results.

There is also, when it comes to, for example, the pension expense, not the cash component but the expense component, there is more variation in our numbers year to year than some of the other network carriers' numbers.

And I think that I will just kind of add one more point on the alliance.

While others have been in place for awhile, I think it's fair to say and is reflected in our plans as well, that it does strengthen over time.

That's kind of the beauty and the benefit of having partnerships and alliances is that you are able to do so much more and it doesn't just happen in one month or even six months.

So we think that they've benefited considerably, which when I say there's a lot of components, it's almost impossible to separate them all into specific buckets because the entity mix in the alliance strategy in the alliance, immunized alliances kind of go hand in hand, as well as the impact on the domestic system.

Okay, those are good observations.

One other factor, Jamie, I would add to that and that is that because we have had for some time a very systematic approach towards fuel hedging, we hedged right on through late 2008 when prices were high and as a consequence we had a penalty for that.

Earlier this year it was most notable in the first quarter, but it's continued.

So that's the bad news.

The good news is going forward that's largely behind us.

And so I think the fuel hedge comparability to the rest of the industry should be more normalized.

Also a good point.

A quick follow-up.

You've talked about capacity discipline, but at the same time you're entering a market like Los Angeles, Phoenix, which has, oh, I think 21 daily flights already.

You offer a number of explanations as to why 2011 mainline is going to be up and I understand first class on RJs, L.A./Shanghai, but 4% consolidated growth is still higher than any of your competitors, at least so far.

Growth in excess of real GDP has proved damaging in the past, so I wonder why you think it's going to be different this time?

I think we're doing the things that we think make sense for our Company.

And if you lack at the growth, it is, as Bella pointed out, principally international growth and principally capitalizing on our joint business agreements where we have been a little bit hamstrung in the past.

So this is really about doing things that are smart for our Company and that I think are unique to our Company.

Your next question is from Helane Becker with Dahlman Rose.

Please go ahead.

Thanks very much, operator.

Hi, guys.

Hi, Helane.

Just wanted to talk about capacity in this sense - up until now we've had most of the airlines kind of focused, yourselves included, on growing out of your hubs and growing from a position of strength and we're seeing things like L.A.-Shanghai.

So you guys announce it and a week later United announces it.

And then you are already in Heathrow to Miami and Delta is going into that market.

So I'm kind of wondering if you're thinking airlines are not really playing well in the sand box any more together and that this is a back-handed way of market share grab or is it still a position of strength?

And is Los -- I mean, I know your focus of share was on L.A.,so that's consistent for you.

But could you maybe discuss that?

I think the L.A.

add was one that makes a lot of sense for us across the Pacific, because we, today we have a very strong position at L.A.

with oneworld.

We have 18 international flights a day out of L.A.

and so it made sense to build up the feed a little bit and to add a flight to one of the most important and dynamic cities in the world, which is Shanghai.

So that made a lot of sense to us.

It may not make as much sense for two airlines to be adding that flight, but we thought it made a lot of sense for us.

I can't speak to how the competition thought about it.

But L.A.

is a really important market for us and if you look at it from an alliance context, I think you will see that oneworld is very, very strong there, not just with American's flying, but B.A., Qantas, Cathay, JAL, and it is of course far and away the most important gateway from the U.S.

into Asia, much more important than, say, San Francisco or Seattle or Chicago.

So made a lot of sense for us.

And with respect to Miami, of course, we think we'll be successful Miami to Heathrow for a long time to come, effectively having a hub on either end.

Got you., Could I just ask a JAL-related question?

Gerard, are you worried about them emerging from Chapter 11 smaller than having gone in?

I notice they're grounding their 747 aircraft and they are shrinking.

How does their changes or how do their changes affect the alliance and affect your growth opportunities in the Pacific?

Thank you.

Well, Helane, yes, they are, of course, restructuring through bankruptcy and that is going to ultimately affect the size of the airline, but they are doing the right things to make the Company successful in the long run and they are going to come out of this bankruptcy still a very large airline and I don't have the math in front of me, but they're going to be a, still remain among the largest airlines in Asia.

I think they probably were the largest prior to the bankruptcy.

I don't know where they will rank coming out of it, but I don't think it will be a whole lot different.

And divided by us, Helane, it's all about connectivity.

And we've got five flights to [Tokyo and we're going to go into the [Haneda market.

And I think if - it is not a great analogy, but I think of Haneda kind of like I think of Love Field, being a closer airport to the city and JAL has a very strong presence at that airport and so we're excited and optimistic about what we're going to be able to do there.

And just like I said earlier about B.A., without immunity JAL has been a great partner, but still we were very competitive with each other across the Pacific and if we get all this immunity finalized, we will be able to focus on the other alliances as opposed to each other.

So we're really excited about what we're going to be able to do there.

Our next question is from Dan McKenzie, Hudson Securities.

Please go ahead.

Hi, good afternoon, guys.

Thanks very much.

Two very quick housecleaning questions and then a more high-level question and apologies if you have already answered this, I did join late.

But first, was the non-fuel cost guidance as down 3.5% for the fourth quarter a mainline only or a consolidated stat?

And then secondly, what are the dates exactly when AMR can begin sharing the profits on the new JVs?

Let me kind of take the second one first, then I will get back to you on the specifics of this quarter.

So on the joint business, what we had mentioned, Dan, is that we have provided an overall number that includes our joint business agreement with British Airways and our anticipated antitrust immunity agreement with JAL, as well as the impact, for example, of our cornerstone market.

So the short answer to that question is that a lot of it is taking effect as we speak, but it will be phased in over next year as we coordinate schedules, et cetera, and then the full run rate will be by the end of 2012.

But much of it is unfolding as we speak.

But, Dan, if you are asking will we be producing JV, joint business, P&Ls, we won't be doing that going forward.

No, I guess my question was if there's profits to be had from the JV would they be hitting the fourth quarter results and I know you've talked about them phasing in in 2011 and 2012, it was just more of a technical question.

Yes, I think Bella did answer that.

Okay.

And so to your other question on the mainline excluding fuel, our fourth quarter unit cost guidance is down, but our cost per ASM will be down 3.5% and on a consolidated basis it will be around that number as well.

Got it, okay, thanks.

And then my other, my final question here is on the $500 million improvement from the JVs and the cornerstone strategy, if the first $500 million falls to the bottom-line, it seems to me there would be substantial upside for AMR earnings versus the consensus outlook, but I am wondering from your perspective where the confidence comes from to the extent that you can provide some perspective that the benefit does fall to the bottom-line versus, say, to labor, fuel, or passengers benefiting from lower fares.

And I know you can't talk about fares, but I only add it because we did see Southwest pass along billions in (inaudible) savings to passengers via lower fares.

Thanks very much.

Well, Dan, I would really think of it as a almost as like a merger synergy.

We're putting together these companies effectively and their businesses across the Atlantic and it's going to be an enterprise worth over $7 billion a year in revenues.

And so think about the synergies that are brought about by joint scheduling, fully reciprocal frequent flyer programs, joint marketing, joint sales to corporate accounts, and all of those sorts of things and then just sort of the network effect of putting together a bigger network that we can go out and sell.

So I would think of it as revenue synergies in a merger.

That's really effectively what we're talking about here.

I think, too, Dan, I would add, what I would add to Tom's comment is that, as I said earlier, working with B.A.

for many years, they've been a great partner, but not knowing whether we would ultimately get immunity made it difficult to work on projects, for example, like the Kennedy terminal.

As you know, B.A.

is in a different terminal at Kennedy than we are, but now that we have immunity we have worked together very constructively with B.A.

and with our other oneworld partners about a expansion of our footprint at JFK that would allow all the oneworld carriers to move into one terminal.

And as you can imagine, that has tremendous benefits for customers when we can get there.

And so those are the kinds of things that aren't going to produce any benefit next year, but they're the kinds of things that we're working on now that down the road, if we can make that vision a reality and we can all get in the same terminal, we can have something very, very powerful at Kennedy that is very good for our customers.

And very hard to replicate.

Ladies and gentlemen, members of the analysts 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.

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

You may now disconnect.