美國航空 (AAL) 2011 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Good afternoon and welcome to the AMR second-quarter 2011 earnings conference call.

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

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

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

As a reminder today's call is being recorded.

We are very pleased to have on the call with us today AMR's Chairman and Chief Executive Officer, Gerard Arpey; 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.

Good afternoon, everyone, and 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 Bella Goren will provide details regarding our earnings for the second quarter along with some perspective on the third quarter and the full year of 2011.

After that we'll be happy to take your questions.

In the interest of time, please limit your questions to 1 with a related follow up.

Our earnings release earlier today contains highlights of our financial results for the quarter.

This release continues to provide additional information regarding entity performance and cost guidance, which should assist you in having accurate information about our performance and outlook.

In addition, the earnings release contains reconciliations of any non-GAAP financial measurements that we may discuss.

This release, along with 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 2010 annual report on form 10-K and our most recent 10-Q.

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

Thank you, Chris.

Good afternoon, everyone.

As you have seen from our earlier announcements we have a lot of significant news to cover today, so let me take just a few minutes to hit the highlights.

All of us know that our Company and our industry face a long list of challenges.

At American even as we work to address the immediate hurdles of an uncertain economy, much higher fuel prices and a very competitive industry environment, we are also squarely focused on building a successful Company for the long term.

So with the major decisions we are announcing today, we are continuing to execute under our Flight Plan 2020 framework and are determined to position our Company for long-term success.

At the same time we are working diligently to address the current environment.

First I'd like to cover today's news regarding our landmark fleet deal with 2 outstanding partners, Boeing and Airbus, and our next steps with American Eagle.

Both of these announcements are major developments in our plan to position American Airlines to compete vigorously.

Over the last couple of years we significantly strengthened our flexibility to make sensible investments by completing over $6 billion of financing in the midst of the deepest recession in a generation.

We dramatically restructured our network with over 98% of our capacity now touching our 5 cornerstone cities and we launched joint businesses with British Airways and Iberia across the Atlantic, and Japan Airlines across the Pacific.

And these are just a few examples of the foundational changes that we are making and continue to make.

Today we are taking another seminal step forward by announcing plans to significantly accelerate our fleet renewal efforts.

The nature of the transactions we have been able to structure are certainly unprecedented in our Company's history and perhaps in aviation history.

In relatively short order our fleet will be transformed from one of the oldest to one of the youngest in the industry, and this will be accomplished with the help of our partner's capital.

We believe this move in its scale will yield major benefits for all those who have a stake in the future of American Airlines; our investors, our customers, our people and the communities we serve.

There are numerous benefits to the fleet transactions we announced including the fact that our new fleet will dramatically improve the travel experience for our customers with better in-flight comfort, amenities, seats and entertainment.

We expect these new planes will also help us to better match our capacity to passenger demand in a wide variety of markets, thereby improving the revenue generating power of our network and increasing the number of markets which we can effectively serve.

In our current fleet we have a gap between our CRJ 700 aircraft with up to 65 seats in a 2-class configuration and our 140 seat MD80s.

Today's deals help us to bridge this gap with airplanes in the 120 seat neighborhood.

With this deal we'll also be able to have the opportunity to replace some of our current 757 flights at airports with high altitudes and/or shorter runways with smaller aircraft offering lower operating costs.

So this plane gives us more opportunities and operational flexibility in our narrowbody fleet going forward.

This fleet transformation brings us more than just a significant benefit of current generation technology.

With firm orders for 230 next-generation Boeing and Airbus aircraft, we will be the first in line among our US competitors to benefit from the newest narrowbody aircraft and engine technology available.

With current technology, each aircraft we take burns about 35% less fuel per seat compared to our current MD80 fleet.

The next generation of airplanes we have ordered for delivery beginning in 2017 are anticipated to be an additional 15% more fuel efficient than current generation aircraft.

The best hedge we can have against high and extremely volatile fuel prices is to burn less fuel on every flight.

And these new aircraft will help us to cut fuel consumption beginning on the first day they are delivered.

Importantly, improved flexibility comes as we are moving to reduce 4 unique types of airplanes, MD80s, 737s, 757s and 767-200s today to 2 families of airplanes, 737s and A-320s in the future.

So our plane gives us a more flexible fleet anchored by 2 modern narrowbody aircraft families.

In addition, as Bella will describe momentarily, these transactions represent very favorable and flexible financing and leasing terms.

I

n total, the deals represent about $13 billion of committed financing.

And finally, under the right circumstances these deals provide us with options to facilitate growth.

However, to be clear, it is obvious that the circumstances we face today and our relative cost structure need to change for us to consider any meaningful growth.

In another strategic milestone for AMR, today we also announced that we are taking the next step in the divestiture of American Eagle and we anticipate filing forms during the next month with the SEC for a potential spin-off of Eagle stock to our shareholders.

While we certainly have not closed the door to other options including a sale, we are prepared to pursue a spin off and are proceeding along that path.

We believe that a potential divestiture of Eagle into a separate company is in the best interests of AMR and Eagle, our shareholders, customers and employees.

Strategically, a divestiture gives us the opportunity to ensure access to the most competitive rates in service for our regional fee.

Independence from AMR will provide Eagle an opportunity to more efficiently and effectively vie for the business of other main line carriers.

I'm proud of the accomplishments of American and Eagle as a combined group of Companies under the AMR umbrella for the past 26 years and I look forward to Eagle's future independent success.

So with today's major announcements regarding the transformation of America's fleet and the future of Eagle, we are continuing to take important steps in executing under our strategic plan.

Turning to this quarter's results, as you saw earlier today our net loss for the quarter was $286 million and that compares to roughly break even in the second quarter of 2010.

This is clearly a disappointing result and despite all of our efforts to improve our results, the loss this quarter highlights the immediate challenge we continue to face as a result of sharply higher fuel prices.

In the second quarter, our fuel prices increased over 30% year-over-year.

Higher fuel prices drove almost $525 million in increased expense this quarter alone, and that's after we recognized a benefit from our hedging program of about $135 million this quarter.

So as a result, in September we plan to suspend our service to Tokyo's Haneda Airport until the middle of 2012, further reducing our international capacity.

We are adjusting our network for the fall including the cancellation of our San Francisco to Honolulu and Los Angeles to San Salvador flights as well as a number of other adjustments.

We also continue to carefully evaluate our capacity plans.

In conjunction with our Transatlantic joint business partners, we are evaluating our winter flying and anticipate making seasonal route and day of week flying adjustments to early 2012 flying to improve our performance.

We're taking additional steps to improve our revenue performance.

Anyone who flies today knows that our planes are full, especially during peak travel times during the week.

With this in mind, we are fine tuning our pricing structure to better match demand patterns at different times during the week which we think will yield benefits.

We also intend to discontinue operations at our reservation's office in Dublin, Ireland, to reduce our operating costs.

While this is not an easy step, with more and more customers moving online, driving our call volumes down, it makes sense to pursue other alternatives to serve our customers.

We will work with our colleagues in Dublin to make this transition as smooth as possible.

As we work to improve our results, it is clear that a more competitive labor cost structure must be part of the equation.

With virtually the entire industry in negotiations across all labor groups, our objective in our discussions with organized labor continues to be to strike a balance between the desires of our unions and our people and the realities of the competitive marketplace.

And by striking that balance is really the only way to establish a long-term successful Company and provide a secure future for our people.

So we are continuing negotiations in good faith with each of our unions and we are doing so with the support of the National Mediation Board.

I think it's fair to say that we're making some progress.

And we are hopeful that our discussions will help us to reach deals that achieve the balance I mentioned and give America the opportunity to be competitive both now and in the long term.

In summary, our team is intensely focused on overcoming the challenges we face and improving our results, even though the waters are currently choppy with today's landmark announcements, we firmly believe that we are continuing to set a strong course for our Company.

And now let me turn things over to Bella to walk you through our results.

Bella.

Thank you, Gerard, and good afternoon, everyone.

If you have seen in our press release this morning, our loss in the second quarter was $286 million.

This compares to a loss of $11 million in the second quarter of last year.

We did not call out any special items in the second quarter either this year or last year, thus my comments this afternoon about our results and future outlook will not include a reference to any special items.

As the results indicate, the second quarter was a challenging period for us.

Much higher fuel prices drove almost $525 million in additional fuel expense year over year.

In addition, the impact of extreme weather at our DFW hub and the ongoing effects of the earthquake in Japan represented an estimated combined revenue impact of about $60 million in the second quarter.

In light of the current environment, we are announcing a number of actions to improve our financial performance, which I will cover in more detail in a few moments.

As we are taking action to address a number of challenges in the near term, we are also taking both steps to strengthen our Company's future.

We are confident we have a strong plan and we also recognize that we must take immediate action.

Let me start with our efforts to address our near-term challenges by adding more detail to some of the items Gerard mentioned.

In terms of capacity, in addition to canceling non-strategic high-cost flying such as San Francisco to Honolulu, we are looking carefully at our scheduled flying for the winter season.

In particular, we are evaluating our early 2010 Transatlantic capacity in conjunction with our joint business partners.

In the Pacific, we have applied to the DOT for a slot waiver at Tokyo's Haneda Airport through mid-2012.

We plan to suspend our service to Haneda beginning in early September.

This step will help to us offer service more in line with the market demand as Japan continues to recover from March's earthquake.

Suspending the service is anticipated to reduce our fourth-quarter capacity by at least half a percentage point.

As a reminder, our guidance for the full year 2011, before incorporating the Haneda suspension, calls for our main-line capacity to increase by 1.9% and our consolidated capacity to increase by 2.6%, well below our initial plan of 4.3%.

While year-over-year capacity changes are certainly important, it is also helpful to look at the landscape over a longer period of time.

Over the last few years, we have made thoughtful decisions to focus and refine our network.

Currently we anticipate that our 2011 capacity will be down more than 9% versus our 2006 capacity, while the overall US airline industry, excluding us, is down just over 1%.

And the other legacy carriers are down just over 5.5% over the same time period.

In addition to focusing on schedule adjustments, we have ongoing cost cutting initiatives across the system and we are evaluating additional cost reduction actions.

And as we take steps to improve our current results, I now would like to highlight a few points regarding the aircraft transactions we announced this morning.

It goes without saying that there are significant operating cost benefits available with these new aircraft, in particular, versus our current MD80 fleet.

The deals we announced today greatly accelerate our fleet renewal efforts and put us at the front of the line to receive even more fuel-efficient next generation narrowbody aircraft in just a few years.

With these transactions, we expect to be able to quickly improve our fuel efficiency and overall operating economics, while at the same time reducing the up front cash required for fleet replacement.

As Gerard mentioned, our deals include about $13 billion of pre-negotiated lease financing covering all current generation aircraft in both agreements.

This means that the first 230 new deliveries we announced today are fully financed.

This structure reduces our exposure to financing market fluctuations and eliminates residual value risk at current generation -- on current generation aircraft when the new technology aircraft enter service.

In addition, we forecast that the NPV of this transaction, looking just at the firm orders, is approximately $1.5 billion which translates to an NPV of about $3.3 million per aircraft.

This forecast captures the improved operating economics we expect from operating a more fuel-efficient fleet as well as the financing benefits of these transactions.

Last week we also entered into a major sale lease-back arrangement with AerCap, a leading independent aircraft leasing company to finance up to 35 Boeing 737-800 aircraft including 29 firm deliveries.

This agreement significantly expands our relationship with AerCap and helps us to diversify our financing strategy.

We also increased our order book for 777-300 ER aircraft bringing our total to 8 airplanes.

As with the other orders we announce today, our new 777-300 will enhance the efficiency of our fleet while also improving our flexibility to better serve our customers in long [whole] markets and at slot constrained airports.

With our new fleet transformation plan, we expect our total 2011 CapEx to be about $1.7 billion, including over $300 million of non-aircraft CapEx.

This is unchanged from our prior guidance.

Now I would like to take a few minutes to update you on our alliance efforts.

Across the Atlantic, this summer we are operating a coordinated schedule in our Transatlantic joint business with British Airways in Iberia.

Our teams are now selling on a joint basis and signing combined agreements with corporate accounts as they come up for renewal.

In fact, we anticipate moving well over 200 corporate accounts to joint business contracts by the end of the third quarter.

We are also fine tuning our approach to the marketplace and we continue to find significant opportunities to enhance our joint business.

Across the Pacific, we are working very closely with JAL on many fronts.

For example, coordinating our flights, enhancing the experience we offer our customers and implementing joint selling efforts.

Obviously, the aftermath of March's tragic earthquake and tsunami in Japan continues to impact demand.

Although that marketplace is under pressure in the near term, we have a strong commitment to Japan and Japan Airlines, and we believe that our partnership puts us in a much better position to manage through the near-term issues and to achieve our joint long-term success.

We are also pleased with the development in the Pacific region with respect to our oneworld Alliance.

In June, Malaysia Airlines agreed to join oneworld, and we expect to welcome them into the alliance in late 2012.

Malaysia Airlines serves over 85 destinations and adds a fourth Pacific partner to our alliance.

Business travelers will appreciate the convenient connections that Malaysia adds to the oneworld network in Southeast Asia.

Their decision to join oneworld is also a great example of the importance of our efforts to enhance the connections we offer in Los Angeles, which is Malaysia Airlines' North American gateway.

Turning to revenues, in the second quarter consolidated unit revenues increased by about 5% and about 3% more capacity compared to the second quarter of 2010.

Consolidated load factors were 83% and passenger yields were up over 5%.

Main line domestic unit revenues improved by almost 5% while international unit revenues increased by about 3.5% versus the second quarter of last year.

Internationally we saw very strong growth in Latin America.

And as I mentioned earlier, our Japan routes continued to experience the impact of the devastating earthquake.

Corporate revenue increased on a year-over-year basis in the second quarter and we are very focused on maintaining our corporate revenue share premium versus the industry.

In the second quarter, the revenue environment improved modestly on a year-over-year basis, but, unfortunately, not enough to offset higher fuel prices.

While the pace of fare increase activity slowed versus the first quarter, we did see a benefit from earlier pricing actions.

Turning to advanced bookings, as we look out to the remainder of the third quarter, our book load factor is up slightly versus last year.

And to give you some more perspective on revenue generally, at this point the summer months are shaping up reasonably well in terms of year-over-year unit revenue growth.

In particular, compared to what we saw in June.

While the current trends are better than what we saw in June, it is clear that we still need more revenue traction to offset the higher fuel prices.

On the regional front, quarterly revenue increased about 18.5% year over year.

Our regional capacity was up 14% for the quarter driven by new 2 class CRJ-700 deliveries.

On the cargo side, our revenues increased over 9.5% versus last year.

Freight traffic was down about 3% but freight yields posted at greater than 14% improvement.

This improvement was driven by strong fuel surcharge revenue and premium product volumes.

While freight traffic was down slightly overall, we saw improvement in the Pacific on a year-over-year basis.

In the other revenue category we saw year-over-year improvement of almost 5.5%.

Just this week we announced a major enhancement to the products we offer within our AAdvantage Citi partnerships, specifically the introduction of the new Citi Executive AAdvantage World Elite MasterCard.

This card will offer an extremely attractive set of elite benefits, including priority check-in and boarding, waived baggage charges for first domestic checked bags and Admiral's Club membership benefits.

And speaking of Admiral's Club, we also announced a new 30-day membership offer to give our customers more options.

Furthermore, we continue to work to diversify our revenue stream and are focusing on expanding our revenues from optional products and services, and we believe there is more opportunity in this area.

Shifting to costs, our second quarter unit costs, excluding fuel, increased 1.4% on a main line and consolidated basis.

Fuel prices during the quarter were $3.12 per gallon, up 31% versus the second quarter of 2010.

Our hedging program reduced our fuel expense by about $0.19 per gallon resulting in a savings of over $135 million for the quarter.

Looking at our cost guidance for the third quarter, we anticipate that our unit costs, excluding fuel, will be up just over 2.5% both at the main line and on a consolidated basis.

As a result of much lower or slower capacity growth year over year in the third quarter, we are facing more challenging unit costs comparisons this quarter than we did in the first half of the year.

For the full year, our unit costs are expected to be consistent with our prior guidance, which, as a reminder, is up between 0.5% to about 1.5%.

Both our long-term strategy and our ability to meet today's challenges require that we have competitive costs and we are focused on cost controls.

To keep costs in check, we are working to offset a number of headwinds, including among others, facility and healthcare costs as well as having fewer air sands over which to spread our fixed expenses.

As part of our original plan for 2011, we identified over 60 initiatives worth hundreds of millions of dollars.

Thanks to the hard work of our teams across the Company, we have since identified over $100 million of additional savings this year and we are urgently evaluating additional cost reduction actions.

Our press release contains more information on our debt, cash position, fuel hedging, as well as specifics on our 2011 capacity and cost guidance.

With respect to liquidity, I would like to point out just a few highlights.

We ended the quarter with about $5.6 billion in cash and short-term investments, including a restricted balance of $457 million and hedge collateral of approximately $130 million.

A year ago we had about $5.5 billion in cash and short-term investments including a restricted balance of about $461 million.

Our capital expenditures in the second quarter totaled just under $400 million and we expect third quarter CapEx to be just over $500 million.

In the second quarter, our principle repayments on long-term debt and capital leases totaled about $460 million -- I'm sorry, $860 million.

Our total repayments this year are expected to be about $2.5 billion with about $340 million of that amount coming in the third quarter.

In summary, we are intensely focused on both the short-term results and our long-term future.

We are aggressively pursuing immediate action to improve our results, and as today's announcements underscore, we are determined to set a bold course to secure our future for the benefit of our shareholders and all of our stakeholders.

So with that Gerard, Tom and I will be glad to take your questions.

Thank you.

(Operator Instructions)

Mike Linenberg from Deutsche Bank.

Yes, good afternoon.

I guess 2 questions here.

With respect to the spin off of Eagle, how is that structured -- is that a partial spin, is that a full spin?

Any light you can shed on that would be great

Well, Mike, what we announced today was our intention to spin off Eagle, and the presumption there is that it would be a full spin off of the Company, and we'll file the Form 10s with the SEC in short order.

And we have not foreclosed on the opportunity of a sale were we to conclude that was in better interest of our AMR shareholders, but clearly headed down the tracks to a full spin.

Okay.

And then secondly, when I look at your margin performance -- and thus far you're the only one to report -- but if we look at where the estimates are out there, the last couple of quarters it looked like that there was definitely some convergence between you and the others, although it feels like this last quarter that the gap has widened again.

And I didn't know if there was anything -- you mentioned Japan, and I know that impacts some of your competitors; and some weather in Dallas, I wasn't sure is it-- was anything maybe related to what's going on, on the GDS front, or maybe just the fact that you had a pretty meaningful ramp up in flying out of LAX; maybe there' some geography issues.

I mean was there anything that was maybe a driver or some of the drivers behind that?

Mike, I'll take that one, and in addition to, as you point out, we did have some weather impacts.

We also referred to the fact that our capacity was lower than we had originally planned, so that put a little bit more pressure on our costs.

And in general, I would say we are taking action both in the short term; and as today's announcements point out, we are at a disadvantage with respect to our fleet of fuel efficiencies; and so those impacts that to a considerable extent.

So the GDS issue, I would say, is not what we're referring to as far as the drivers.

Okay, thank you.

Dan McKenzie from Rodman and Renshaw.

Hi.

Thanks.

Good afternoon, guys.

Good afternoon.

I'd like to circle back on the potential network changes that you mentioned in the prepared remarks.

It does seem like there is some low-hanging fruit that could be restructured domestically, and I guess when I peel back the onion on AMR's network I am seeing capacity up double digits in at least 6 of your top 15 markets.

The common theme in each of the 6 markets is increased exposure to low cost competition.

I guess what I'm taking away from the prepared remarks is possible capacity adjustments in 2012.

How should we be thinking about those; and in particular, what, if anything is holding AMR back from taking a more aggressive approach to cutting the unprofitable flying?

Dan, I would just refer to maybe a 5-year history on the capacity changes, and the fact that if we look back to 2006, our capacity is down almost double the other major legacy network carriers.

And I think the way we'll look at our network where we stand today, that is not what is going to yield us a better result.

And so I think that on a year-over-year basis it's sort of one look, but if you look at a 5, 6-year trend we stack up pretty well versus the industry and showing considerable capacity discipline.

Dan, this is Tom.

I would just add to that, you alluded to us growing or getting stronger in some of the top markets.

Well, that is, in fact, our strategy.

And so the flip side of that is that you would see us maybe pulling down in some of the markets that we view as less strategic; it's sort of the essence of the cornerstone strategy.

So that's what we're doing, and that shouldn't come as a great surprise to anybody, and we think it's the right strategy for the long term.

It is a big change in our network, and that's what we have been doing over the past couple of years.

But at the same time we're, in addition to making the adjustments that Bella referred to, we are making some adjustments in terms of the way we just schedule the airline, which I think are going to be quite positive.

And that is in terms of reducing capacity on days of weaker demand and yield.

So in the fall, main line American will cancel about 270 departures, targeted at weaker travel days.

And that'll be sort of pull downs on Tuesdays and Wednesdays and Saturdays.

And I think that's going to allow us to improve our unit revenue performance and improve our profit margins as well.

So I think they're smart things to do for the long term.

But think of those as day of the week reductions as opposed to pulling back from markets that are important to us.

I understand.

I guess for my second question here -- under the scenario where AMR's content becomes invisible to corporate travel managers from the Sabre dispute, is it logical to conclude corporate travel managers are no longer obligated to honor their market share obligations?

And I guess what I'm getting at, is there does seem to be some material revenue risk from the dispute.

And I'm hoping you could help me understand that revenue risk a little better, if revenue risk in fact even exists.

Dan, I guess I'll get started on that answer.

And at this point, we are fully available in the GDSs, and so I think it probably would not be productive to speculate about various outcomes.

We do feel that we have a strong position in certainly pursuing all of our options through legal channels, and intend to do so, and believe that our position is pretty strong.

So without speculating further, I would just say that our intent is to manage our content and to do so wisely.

Dan, this is Gerard.

Look, there's no secret to the fact that there is enormous revenue at risk here, and there are enormous stakes in the outcome of these discussions with the GDSs.

And that's why, candidly, they have wound up in court, because what we're trying to do is break some of these monopolistic practices.

And whether or not we will be successful remains to be seen, but there is no doubt there's a tremendous amount at stake.

Okay, thanks much.

You bet.

Hunter Keay from Wolf Trahan.

Hi.

Good afternoon, guys.

How are you?

Good.

Good.

So can you verify that the pilot contract does not allow for the operation right now of the NEOs, the 777-300ERs and the 787?

And I guess, if so, doesn't that kind of just give the pilots a significant bargaining chip in these negotiations?

Hunter, I think using the language doesn't allow is a bit strong.

I do think it is fair to say that we don't have rates of pay for Airbus and narrowbody airplanes, but we certainly have the equivalent for 737s.

And so I think that the fleet plan that we announced today should really be viewed as really the potential catalyst for a restructured pilot agreement that'll allow American to be much more competitive than we are today.

So I don't necessarily come at it the way that you did, but I would acknowledge that we don't necessarily have those rates of pay in the contract.

But I have no doubt that by 2013, when we take delivery of the first Airbus, that that issue will be behind us -- and behind us in satisfactory way.

Okay.

Thanks, Gerard.

And hoping to get a little bit more color from you guys in terms of how to model this cash commitment.

We talked about it briefly on the call this morning.

But when you say these aircraft are fully financed, is there a PDP portion that's included in that?

I mean obviously there's no cash CapEx outlay for the purchase prices, but maybe some color on how to model 2012 CapEx, and maybe on a longer term basis, where this is going to impact the cash flow statement will be very helpful.

Hunter, I'll ask my colleagues to jump in here.

But the terms under these deals are confidential; but we feel very, very good about the PDP structure and other sorts of things that tend to go with these deals.

We feel very, very good about what we've structured with both companies in comparison to what we've had in the past and what we believe our competition has.

So we actually look at it going forward in a very positive light relative to where we were before this morning's announcements.

And I might just add for folks that maybe weren't with us this morning, that the fleet deals we've announced today include $13 billion of operating lease financing, which really covers all of these current generation deliveries -- 230 airplanes, which run out to 2017.

So essentially all of our fleet replacement and growth, to the extent that we choose to do that, is covered by the financing in these deals 100%.

Okay.

Thank you.

You're welcome.

Bill Greene from Morgan Stanley.

Yes.

Good afternoon.

Can I-- just 1 point of clarification on that?

If you found better financing outside of this deal, could you use it?

Those kind of terms are confidential, Bill.

You don't -- I just didn't know if you had an option to keep looking for-- is this back stop in other words, or is this something that is -- it's done, this is it, no more, we're not looking?

We just don't have the option to talk about it.

Okay.

Can you -- you mentioned in the conference call earlier today that you had modeled out the complexity costs, and that this deal more than offset that.

Can you give us a sense for the magnitude of the complexity costs -- how do we think about putting those into the model?

It's modest.

It's net of the rebates and coverage we got from the suppliers.

I would say on the order of less than $1 million an airplane.

Okay, because we had a pretty big effort to simplify the fleet, I was under the impression that complexity costs were much bigger than that.

Maybe it's because the fleet was more complex, I'm not sure.

One thing you got to take into account here is that today our domestic fleet, while it's all Boeing, it's also all disparate.

We have MD80s, 737s, 757s and 767-200s.

So while we've been trying to simplify -- and it is much simpler than it was -- going to 2 families is a whole different thing.

So 2 families -- the Boeing family 737s and the A-320s -- inside of that family will have common cockpit, common training, common engines, common parts, common maintenance.

That's going to be actually a pretty good layout for us.

Okay, no, that's fair.

And then just 1 quick follow up, on the labor issues, it sort of sounded like maybe there's some movement here.

When we think about the big differential, pensions are obviously a big part of it.

Is it too much to hope that there could be any movement afoot to address some of the longer-term pension consequences here, as a result of this potential growth that we have for some of the unions?

Or how do I think about what you can do with pensions?

Well, Bill, I think the way that I would think about it is -- I think I would think about it differently for active employees versus employees not yet on the payroll.

So I think, clearly, for what we affectionately refer to as the unborn, we're talking about pension plans that mirror the market.

And so across all of our labor groups, that's pretty much what we have on the table with organized labor.

And when you look at benefits, structural benefits, the biggest place where we're off market is actually not pensions; because if you look at our defined benefit pension plans over the long run, and you take their costs as a percentage of salary, you'll find that that math leads to about 5%, 6% in terms of pension costs over time.

And if you look at what the former bankrupt companies have put in place, that terminated or froze their DB plans, many of them are approaching matching DC kind of contributions that are headed in that direction.

So we don't look at, from an ongoing standpoint, our active employee DB plans necessarily as the biggest structural disadvantage we have.

I think the bigger structural disadvantage we have is that our active employees do not contribute nearly as much to their medical plans, their medical contributions, as the other airlines.

And certainly our retirees are still being paid retiree medical benefits; and for all of the bankrupt companies, they pretty much wiped that out in its entirety.

So, order of magnitude, that's $200 million, $250 million a year that we're still paying versus the other guys that's virtually nothing.

So for active employees we are talking to them, not about wiping out their retiree medical benefit, but having a contribution for that benefit that more looks like what they have seen in their active career.

And then, of course, for people who don't work here yet, we would change that in its entirety.

So I hope that gives you some flavor for how we're thinking about that.

Jamie Baker from JPMorgan.

Yes.

Good afternoon.

On the Eagle, what's the amount of debt that can realistically be spun out along with the divestiture?

I'm assuming you have a sense for this, and the potential Eagle capitalization.

And do you expect that that debt would remain recourse to American?

I am trying to get at whether the spin reduces the mother ship's financial burden.

Hi, Jamie, it's Bella.

We will be filing the SEC documents within the next month, and it'll provide more information on the actual transaction.

All that we have announced today is the intent to take that next step and proceed with the spin off, but have not disclosed any specifics at this point.

Okay, fair enough.

And a follow up on Mike's earlier question -- what's your confidence that the margin gap to the industry?

And just to add some numbers around that, it does appear to be worse in the second quarter than at any point in the last 15 years.

What's your confidence that this quarter was in fact an outlier, and that from here things do genuinely start to get better?

And at what rate and what magnitude are you targeting?

Well, Jamie, obviously it is a huge priority for us.

We've outlined some things that were specific to this quarter, and also kind of shared with you what our plans are for the remainder of the year.

And what I can tell you is that our entire team is working very hard to keep closing that gap and improve our results both in the immediate time frame as well as in the long term.

Okay, Bella, that'll do it.

Thank you very much.

Thank you, Jamie.

Helane Becker from Dahlman Rose.

Thanks very much for taking my question.

Hi, everybody.

Can you comment with respect to training costs for the A320 on the pilots, and how that will be handled?

Do you have to pay for that, or will the manufacturers pick up those costs?

Helane, this is Tom.

As Gerard mentioned earlier, we really can't comment too much on the nature of the agreements with the manufacturers, other than to say there are incremental training costs associated with introducing a new fleet type, and I alluded to that a minute ago.

But it is baked into the economics that we shared with you all this morning, which are overwhelmingly positive, for replacing present airplanes with these new generation airplanes.

So it's a big win for us, and we obviously drove as hard a bargain as we could with the manufacturers, so you can bet that we took that into account.

Okay.

And then, on my follow up, as we think about adding this and adding the AerCap deal to our models, we should be thinking about these as being off balance sheet debt.

So I guess balance sheet debt declines, off balance sheet debt increases.

Do you have a number of what at the peak of this CapEx program -- or this re-fleeting program your debt is going to look like, or your balance sheet will look like maybe?

Helane, at this point I think what we can share with you is that the financing and the structure of the deals in the $13 billion in financing, as we look at our capital plan over the next few years, it looks better than what we had anticipated before -- significantly better.

And so, this year, as we pointed out, it will be the same even with these deals, and going forward it is better than what we had anticipated.

So, overall it's a very positive deal for us.

Okay.

Thank you very much.

Thank you.

Glenn Engel from Bank of America.

A question, please, on [rising] gains.

One, if you look at you versus the industry, domestically you were up 4.9 the industry up 8.9, if I look at the Atlantic you were down 4.7, the industry was up 5.

Why are we seeing such big gaps and will that change?

Glenn, your question on revenue side is obviously a really important one.

And what I can share with you is that we're continuing to maximize our joint business agreement value; and as we've said all along, there is going to be a ramp up period and some growing pains as we synchronize our deals and also as we are able to convert our corporate accounts to the joint deals.

So that's part of the answer.

Another aspect to it is, we think and we, I think, have stated it publicly, is that over the Atlantic that there's been too much capacity, and so we are pleased to see that that is changing and we think it'll be a stronger marketplace going forward.

I guess I'm still puzzled why the RASM gap would be getting worse in the June quarter?

You would have thought it start to close some, and it really wouldn't explain why domestically there's that big RASM gap.

Well, $60 million of it is explained by the weather impact and the earthquake effect.

That's about a point.

I'm sorry?

That's about a point.

Yes, and I guess we'll have to see where everyone else comes in.

But what we're seeing for the remainder of the summer is better than our June trends.

And finally, can you clarify with me the capacity?

The numbers that you show do not include some of the more recent cuts like Haneda or San Francisco or -- I was a little bit confused.

Okay.

So it does not include Haneda, but as we-- so, some of the other adjustments is how we're going to achieve the product capacity cuts that were announced that have been shared previously.

The additional one is Haneda, and in the fourth quarter it's about half a point reduction in our fourth quarter capacity, incremental to what we have previously provided.

Gary Chase from Barclays Capital.

Hello.

Good afternoon, everybody.

Let me just ask a quick clarification question, and then one on contingencies.

You mentioned the summer months better than June now a couple of times, Bella.

What's -- can you give us --I guess we can estimate it -- but can you give us a sense of what June was, so we get our arms around what's better than what; would it be better than the quarter?

I am not sure, Gary, that I can -- that I have it in front of me to provide that; but I would certainly say that June was a bit disappointing for us versus May, for example.

Okay.

And then the main question I have is about contingencies.

I also was intrigued, Gerard, with the way you addressed a question about labor earlier, and what I'm wondering is, is any part of the aircraft order contingent upon achieving the convergence that you've been describing on the labor cost side?

Gary, I think contingent is not necessarily the right word because we've committed to the airplanes.

But I think there's a real opportunity here for our labor groups, since our interests are aligned, to work together to make the most of this transformational opportunity that's in front of us.

I think it's a great opportunity for our pilots, the TWU, and our flight attendants to recognize the opportunity that's in front of them; and hopefully we can capitalize on it.

And then, maybe in a similar vein, just curious if there's any thought that the Eagle spin would require some form of concession from any stakeholder, or whether that's something that you're going to pursue regardless of that?

I don't know of any labor obstacle that exists, Gary, although if there is one maybe it has not manifested itself yet.

But as we have thought it through, and we clearly have been transparent with all of the unions at American and at American Eagle, and as we sit here now, I don't see any obstacles.

But I -- sorry, Gerard, maybe I didn't word that right, I guess I meant you're not -- from your vantage point, you don't need them to -- there's no stakeholder that needs to make a concession in order for you to proceed with that transaction?

A cost reduction or debt relief or anything like that -- you're going to do this regardless?

Yes, that's accurate.

Although I want to be sure when you see what comes out that you look back on this question and we've answered it clearly.

I think there is going to be the opportunity for labor at Eagle perhaps to do some things that might make the deal better for American Eagle.

But irrespective of whether or not they take that opportunity, we're going down this path -- if that helps?

That's exactly what I was looking for.

Thanks very much, guys.

You bet.

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

Kevin Crissey from UBS.

Hi.

Thanks.

Can you guys just lay out the CapEx aircraft other and scheduled debt maturities this year and next?

Yes, Kevin, if you just give me one moment.

I am going to go back to my notes so we can do that accurately.

Okay.

Okay.

So for the year --

Yes.

Our CapEx is about $1.7 billion.

Yes.

Of which about $300 million is non-aircraft related.

That's for 2011.

Yes.

And how about for 2012?

That at this point we have not provided guidance on.

And you had $2.5 billion of scheduled debt maturities this year?

Yes, that's correct.

And some of that becomes unencumbersome aircraft that maybe could be refinanced, is that right?

Yes, throughout the remainder of the year we do have aircraft that becomes unencumbered.

Okay.

And so it's safe to say that perhaps this new deal reduces your CapEx demands next year?

Because I'm looking at it, and I look at your results, and I say, okay, you raised -- your debt went up a decent amount, but your cash didn't.

And if that continues over a decent amount of time, you run out of cash, so -- and particularly when you've got $2.5 billion of debt to pay down, and you've got $1.4 billion of CapEx, and your losses are about the same size as your depreciation.

There's just not a lot of cash flow there, so --

So, Kevin --

Any guidance you guys could give towards this would be great, because I can't imagine I'm the only one thinking about where your cash goes to by the end of 2012, because these planes -- whether or not they're good or not -- you got to get to that point first.

Kevin, that's a fair question, and now that I understand what you were looking at a little more closely, I guess I'll point out to the fact that as we structured these agreements, we were very mindful of what our prospects are for capital spending.

And we're very thoughtful in doing the finance.

And the deals that we struck today make our prior plans look better.

Okay.

When would we expect to get guidance on the 2012 type --

I think we typically provide it in the fourth quarter -- or in the third quarter -- so, in a few months we'll be able to share more with you about capital spending for next year.

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.

(Operator Instructions)

Ted Reed from TheStreet.

Thank you.

I have 2 things.

First, from the ATIs there was a benefit of, I think it was $500 million, supposed to kick in from those when you got the joint ventures approved, and has that started to kick in yet?

And secondly -- Gerard, in your prepared remarks this morning, you referred to a benefit, that you have always paid your debts, never sought bankruptcy protection, and that led to a benefit in the financing of the aircraft.

Could you be a little more specific about what exactly it meant?

All right, thanks.

Well, Ted, we're clearly off and running on our joint ventures across the Atlantic and Pacific.

It's clearly not helpful to have a tsunami in the middle of a launch of a joint venture across the Pacific.

And I think as Bella indicated, the Transatlantic has been heavily impacted by a lot of capacity that has impacted our results.

But I think it's fair to say -- and I think there were some -- a lot of work that had to be done aligning the interests of companies that had competed for 25 years against each other, and getting alignment on pricing and capacity and sales decisions.

And I think we're just now getting to the point where British Airways, American, and Iberia are beginning to sell on a joint basis.

And so I think we're beginning to get the traction that we anticipated and perhaps we anticipated a little bit too soon.

In terms of the deal we announced this morning -- and I don't remember what I said, Ted; it's kind of all a blur to me at this point -- but I do think that our track record certainly had an influence on Boeing and on Airbus; and the fact that over the past 10 years we honored all our commitments to both of those companies -- and I think that question is probably better asked of them.

But I don't think it -- my own sense of the discussions is that it did matter to them.

All right.

Thank you.

Ted, this is Bella.

I'll now kind of touch on your question with respect to the $500 million benefit, which was really combined benefit of what we expected from the joint business agreements both with British Airways and Iberia, as well as JAL, and our cornerstone realignment.

And we conveyed that we expected to achieve the full run rate by the end of 2012.

And to your question, have we started seeing some of the benefit, the answer is yes.

At the same time there's been a lot of movement; for example, the earthquake obviously impacted that Transpacific, but we anticipate achieving that by the end of next year, and it is a ramp up period.

All right.

Thank you very much.

Thank you.

Jeremy Lemer from Financial Times.

Thanks.

Hi.

I had 2 questions.

The first was just a broad one about the outlook for demand.

Been a few sort of hiccups in the early part of the year, and we've had increasing concerns about the debt crisis in Europe and debt defaults potentially in the US.

I'm wondering whether you can give me some top line views as to your expectations for demand for travel around the world, particularly in the corporate segments?

And then I had another question, but I'll let you answer that one first.

Okay, with respect to our advanced bookings -- as we look for the remainder of this quarter, our booked load factor is up slightly compared to last year.

But as I mentioned previously -- what -- so we are seeing better trends than what we saw in June.

And on the pricing side, the activity that we saw in the first quarter has slowed down.

We are benefiting from that still; however certainly the revenue environment today, from what we're seeing, is unfortunately not enough to fully offset the higher fuel prices.

So what's happening is that the increase in fuel overwhelms the traction that we've seen on the revenue side, despite the fact that that's been relatively strong.

Okay.

And then the second question I had was about the aircraft orders you announced this morning.

What do those -- what is particularly the ones that you're leasing do to the net debt of the Company?

Any sort of a very crude overview of how the balance sheet accounting works in the US, but I believe you have to account for some long-term capital leases obligations under the net debt column.

So I wanted to know what you expect these -- this tranche of lease debt aircraft in particular to do to that debt?

Jeremy, this is Tom Horton.

Those leases are going to be operating leases, so they don't show up in the balance sheet, they're relatively limited term leases.

I don't think we've been able to disclose the terms of the lease, but they will be operating leases.

And they will be fully funding the first 230 airplanes under this deal; and as we talked about earlier today, the replacement economics on these airplanes are really quite extraordinary.

So we'll get a cash benefit on day one from operating the airplanes, even taking into account the monthly rental costs.

And does it have any impact on your leverage then, if it doesn't impact the specifics of the net debt, what does it do to your overall leverage?

I'm sorry, can you say that again?

Does it impact your leverage?

Somebody was talking to me about the fact the way the rating agencies account for certain of these aircraft leases is to -- as part of their calculations, it does affect the way they think about a company's leverage if they add on more leases.

How you are you expecting it to affect your Company's leverage?

Jeremy, I'll take that, and what I'll share with you is that obviously we've just announced these agreements today.

We do plan to meet with the rating agencies.

We'll explain to them what that means to the overall strength of our Company of the balance sheet going forward.

And I think the key point here is that these deals maximize our balance sheet flexibility and reduce our risks, because this is guaranteed financing through 2017 on 230 aircraft, which will-- with much better operating economics.

So the NPB and the bottom line impact from the first day that we take delivery of the aircraft -- and the first day may be bit of an overstatement, but basically, as soon as they enter service, it's a positive impact to our bottom line.

So, overall, it really does strengthen our Company as opposed to the opposite.

Dan Webb from Flightglobal.

Hi.

Good afternoon.

My first question, quickly -- as for the 737 and A320 order, have you really any preference at this point for any variance within that family; and if not, when will you start having to make that decision?

Dan, as you've seen in all of the materials that we've released today, we have talked about the family of aircraft within 737 and A320, and that's because we do have rights in the structure of both of these deals to choose among the specific types, whether it be Dash 7, Dash 8, Dash 9, or in the case of Airbus, the 1920 and 1921.

And so, within that we have what we believe to be large degrees of freedom based on the deal that we signed today.

And the debt -- those terms again, I'm sorry, but a lot of this is confidential with the manufacturers.

But I think what you're going to find is that as we hit those periods within the contract that we have to decide, that's when we'll make public our choice of variance.

Okay, thank you.

And a quick follow up about Haneda.

Have you yet received that waiver from the DOT?

And also, are you still going to -- I believe based on some of your prior filings -- are you still, with the DOT, are you still planning to pursue better slot times perhaps?

I don't believe we've gotten the approval yet, although I'd note that one of our competitors was given similar approval.

And yes, we are continuing to pursue a better slot time.

Great.

Thank you.

Thank you.

Thank you all very much.

Ladies and gentlemen, that concludes our earnings call for this second quarter.

Thank you very much for your participation, as well as using AT&T's Executive Teleconference Service.