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Operator
Good day, and welcome to the American Airlines fourth-quarter 2013 earnings call.
Today's conference is being recorded.
(Operator Instructions)
And now I would like to turn the conference over to your moderator, Managing Director Mr. Daniel Cravens.
You may begin.
Daniel Cravens - Managing Director, IR
Thanks, Marquita, and welcome, everybody, to the American Airlines fourth-quarter 2013 earnings conference call.
Joining us on the call today are Doug Parker, our CEO; Scott Kirby, President; and Derek Kerr, our Chief Financial Officer.
Also in the room for our Q&A session are Robert Isom, our Chief Operating Officer; Elise Eberwein, our EVP of People and Communications; Bev Goulet, our Chief Integration Officer; and then lastly who is on the call is Steve Johnson, who is dialed in, is our EVP of Corporate Affairs.
We are going to start the call this morning with Doug, and he will provide an overview of our financial results.
Derek will then walk us through the details on the quarter and provide some color on our guidance for 2014.
Scott will then follow with commentary on the revenue environment and our operational performance.
And then after we hear from those comments, we'll open the call for analyst questions, and lastly, questions from the media.
But before we begin, we must state that today's call does contain forward-looking statements, including statements concerning future revenues and costs, forecasts of capacity, traffic, load factor, fleet plans and fuel prices.
These statements represent our predictions and expectations as to future events.
But numerous risks and uncertainties could cause actual results to differ from those projected.
Information about some of these risks and uncertainties can be found in our earnings press release issued this morning, the AMR Corp and US Airways' Form 10-Q for the quarter ended September 30, 2013.
As well as the 2012 Form 10-K for both AMR Corp and US Airways.
In addition, we will be discussing certain non-GAAP financial measures this morning, such as net profit and CASM, excluding unusual items.
A reconciliation to those numbers to the GAAP financial measures is included in the earnings release.
And that can be found on our website at AA.com under More About American Investor Relations.
The webcast of this call will also be archived on our website.
The information that we're giving you on today's call is as of today's date, and we undertake no obligation to update the information subsequently.
So thanks again for joining us this morning.
And at this point, I'd like to turn over the call to our CEO, Doug Parker.
Doug Parker - CEO
Thanks, Dan, and thank you all for being on.
We're happy to announce our fourth-quarter and full-year 2013 results.
There are -- as Derek will walk through the GAAP results, there are, of course -- as the Company has merged -- as American has emerged from bankruptcy, there are a number of special charges on top of that through merger accounting.
We can only account for the -- we can only compare results from the time of the merger.
So the GAAP results in this period, we don't find particularly -- find somewhat confusing.
So to help them be less confused, we have gone through and reporting all of the -- everything on a combined basis.
It's a non-GAAP basis, but I think much more in line with what our investors want to analyze.
So anyway, my comments will be on all those non-GAAP combined results.
The fourth quarter we made a profit of $436 million on a combined basis, excluding special charges.
That compares very nicely to a loss of $42 million in the fourth quarter of 2012.
Full-year 2013 combined profit, excluding those special charges, was $1.9 billion, a $1.5 billion improvement, versus the $407 million the Companies made on a combined basis in 2012.
So, look, it's really early in the merger.
But we are off to a great start.
The teams are working extremely well together, both at the management level and also all of our employees out in the field, during difficult times, as we're working through tough weather situations, and bringing these two companies together.
And just been doing a fantastic job of taking care of our customers.
So I want to begin by thanking all of them for what they are doing to help build the new American.
Our customers are already experiencing the benefits of our combined network, with more of that to come soon.
And Scott will talk more about that.
We have a lot of work ahead.
We know that.
But these financial results are evidence of the strong foundation we have in place as we go into this merger.
We are looking forward to improving on these results in 2014 as we further integrate our airlines.
So with that said, I'll turn it over to Derek, who will give us more details on the financials.
And then Scott will tell you more about the revenue environment.
Derek?
Derek Kerr - CFO
Thanks, Doug, and good morning, everybody.
As everyone is now aware, we did report our fourth-quarter and full-year results this morning.
As you have seen, there is a lot of information contained in the tables of our press release, including financial statements for the new American on a GAAP basis, which include the results for US Airways only for the period from the completion of the merger on December 9, 2013, through the end of the year.
We have also included standalone American Airlines, standalone US Airways, and combined financial results that include both airlines on a non-GAAP basis.
And as Doug said, because the merger closed during the quarter, we believe reviewing the results -- the financials -- on a non-GAAP combined basis -- that is American Airlines and US Airways for the entire quarter -- is the best way to review the financial results.
Unless otherwise noted, all of my comments will be based on the non-GAAP combined results, which can be found in the press release tables under the heading American Airlines Group Inc.
Non-GAAP Combined Consolidated Statements of Operations.
For the fourth quarter, the combined recorded GAAP net loss of $2 billion or $8.66 per share, which includes $2.4 billion of net special charges.
This compares to a fourth-quarter 2012 GAAP net profit of $262 million, or $3.46 per share.
On a non-GAAP a combined basis, as Doug said, the Company reported a fourth-quarter net profit, excluding next special items, of $436 million.
As compared to a net loss of $42 million in the fourth quarter of last year.
Using a diluted share count of was 742 million shares, this equates to fourth-quarter 2013 earnings of $0.59 per diluted share.
Total combined capacity for the quarter of 2013 was 64 billion ASMs, up 3.4% from the same period of 2012.
Combined mainline capacity for the quarter was 57 billion ASMs, up 3.6% versus the fourth quarter of 2012.
Regional capacity was up 1.6% from the fourth quarter of 2012, to 6.9 billion ASMs.
We did end the year with 965 mainline aircraft in our fleet, and we will continue our fleet replacement plan in 2014.
Over the coming year, we will retire 74 aircraft.
And we will take delivery of 83 new mainline aircraft, including 52 A320 family aircraft, 20 737-800s, 3 A330s, 6 777-300s and 2 787-800s.
By year end, all of the legacy 737-400s from the US Airways fleet will be retired.
At the year-end 2014, our mainline fleet count will be 974.
We have financing secured for 59 of the 83 new mainline deliveries.
Our current guidance assumes that 22 of the remaining 24 deliveries are debt-financed, while the 2 remaining deliveries are assumed to be purchased with cash from operations.
Our combined regional fleet ended the year with 558 aircraft.
In 2014, we expect to retire a total of 27 aircraft: 25 Embraer 140s and 2 Dash 100s.
As previously announced, the Company has signed agreements with Bombardier and Embraer to purchase 90 new 76-seat regional jets.
This order consists of 30 CRJ900 NextGen aircraft that will be flown by our wholly-owned subsidiary, PSA Airlines.
And 60 Embraer E-175-type aircraft, for which flying has not yet been allocated.
We have reached tentative agreement with our wholly-owned subsidiary Envoy on new contract terms that would place the 60 new Embraer aircraft at Envoy.
The pilots at Envoy will vote on this agreement in February 2014.
These new aircraft will provide much improved economics for the airline, as they will replace smaller, less-efficient 50-seat regional aircraft scheduled for retirement.
We expect to end the year with 574 regional aircraft.
Total combined operating revenues for the fourth quarter of 2013 were $10 billion, up 8.7% from the same period in 2012, on a 3.4% increase in system capacity.
Passenger revenues were a $8.7 billion, up 8.6% year over year, with yields up 5.3%.
Cargo revenues were up 7% to $227 million, due to higher international freight volumes.
And other operating revenues were $1 billion, up 9.9% in the fourth quarter, due primarily to higher frequent flyer revenues.
Versus fourth-quarter 2012, total combined passenger RASM was up 5% in the fourth quarter of 2013, to $0.1364.
Total RASM in the fourth-quarter 2013 was $0.1561, up 5.1% versus 2012.
Scott will talk in more detail about our revenue performance and the demand environment we are seeing in early 2014 later on this call.
The Airlines' combined operating expenses in the fourth quarter were $9.7 billion, up 7% as compared to the same period last year.
Mainline operating costs per ASM, excluding special items, was down 1.3%, primarily due to lower fuel costs.
Our average mainline fuel price, including taxes and legacy American Airlines hedges for the fourth quarter of 2013, was $3.06, versus $3.21 that we had in the fourth quarter of 2012.
Excluding special items, fuel and profit sharing, our combined mainline costs per ASM was $8.49, flat when compared to 2012.
Regional operating costs per ASM, excluding special items in fuel, for the fourth quarter was 1.8% higher.
Excluding special items, fuel and profit sharing and consolidated CASM was up only 0.02% in the fourth quarter of 2013.
We ended the year with $10.3 billion in total cash and investments, of which $1 billion was restricted.
The restricted cash will reduce by $86 million in the first quarter, due to legacy US Airways credit card hold-backs reducing to zero.
The Company also has an undrawn revolving credit facility of $1 billion.
Approximately $710 million of this unrestricted cash balance was held as Venezuelan bolivars valued at the weighted-average applicable exchange rate of 6.04 bolivars to the dollar.
The period of time to exchange those funds into dollars and repatriate them has been increasing as is presently -- and is presently more than a year.
On January 24, 2014, the Venezuelan government announced a newly implemented system will determine the exchange rate, which currently is 11.36 to the dollar, for repatriation of income from future ticket sales, and introduce new procedures for approval of repatriation of local currency.
American is working with Venezuelan authorities regarding the timing exchange rate applicable to the repatriation of funds held in local currency.
During the quarter we did complete a series of financial transactions, including two EETC transactions totaling $768 million for legacy American Airlines.
We also amended the legacy American term loan facility and revolving credit facility to lower the applicable LIBOR margin to 3% for each offering.
As part of the amendment, the LIBOR floor was reduced by 25 basis points to 0.75%.
For the legacy US Airways, we refinanced six A321s and two A320s at significantly reduced rates.
We also enhanced two spare engine deliveries using a floating rate debt facility originated in 2012 while negotiating an interest rate reduction on the entire facility.
In early January we repriced the legacy US Airways term loan facility, resulting in a 50-basis point reduction in the rate for LIBOR plus 2.75%.
And a 25-basis point reduction in the LIBOR floor to 75% for the $1 billion tranche.
We also included a 25-basis point reduction in the rate of the $600 million tranche to LIBOR plus 225 basis points, a similar 25-basis point reduction in the LIBOR floor.
We believe all these transactions have the Company solidly positioned from a liquidity standpoint as we move forward with our integration process.
During the quarter the Company elected to pay approximately $300 million in tax withholding for employees under the Plan of Reorganization in lieu of issuing shares of common stock, thereby reducing the number of shares issued under the plan by approximately 13 million.
In January the Company also elected to pay $23 million in tax withholding for employees, thereby further reducing the share count by approximately a million shares of common stock.
Our Board has recently granted management's discretion to withhold additional shares in satisfaction of tax liabilities for eligible employee groups in connection with future issuances contemplated by the Plan of Reorganization, principally at the remaining mandatory conversion base.
Currently there are approximately 400 million common shares in circulation, with most of the remaining 340 million coming in over the next approximately 75 days.
Turning now to guidance for 2014, all guidance will be on a combined basis.
We expect overall system capacity to be up approximately 3.5%.
The increase is largely a result of more active aircraft, so less aircraft in maintenance.
Taking delivery of new larger-gauge aircraft with a higher seat count that will replace smaller aircraft, and a higher assumed completion factor.
Mainline is expected to be up 3.4%, while regional capacity is up -- planned to be up 4.3% year over year.
Total domestic is forecasted to be up 1%, while international is forecasted to be up approximately 9%.
The mainline ASM breakdown in 2014 by quarter as follows: at approximately 57.2 billion in the first quarter,60.8 billion in the second quarter, 61.9 billion in the third quarter, 59.8 billion in the fourth quarter.
Regional capacity breaks down by quarter as: approximately 6.85 billion in the first quarter, 7.32 billion in the second quarter, 7.58 billion in the third quarter and 7.49 billion in the fourth quarter.
We are forecasting mainline fuel to be relatively flat in 2014.
Using the January 23 fuel curve, we expect fuel price to be in the range of $3 to $3.05 for 2014.
In the first quarter we expect $3.07 to $3.12.
Second quarter, $3 to $3.05.
Third quarter, $2.98 to $3.03.
And in the fourth quarter, $2.95 to $3.
In terms of CASM guidance for 2014, we are providing the best guidance we know of at this time.
The finance team is working to understand each legacy budget and taking a fresh look at the possible cost synergies that we can capture in 2014.
Including in the CASM guidance is the impact of the new labor contracts in 2014, offset somewhat by synergy captured during the year.
So for the full-year 2014 we are forecasting mainline CASM, ex special items, fuel and profit sharing, to be up 2% to 4% versus 2013.
This is driven by new labor contracts, higher depreciation and higher maintenance costs due to engine overhauls.
The first quarter we expect to be up 3% to 5%, second and third quarters to be up 2% to 4%, and the fourth quarter to be up 1% to 3%.
Regional CASM is forecasted to be up approximately 1% to 3%.
As of December 31 and going forward, our deferred tax asset, which includes a $10.7 billion NOL, will be subject to a full VAL allowance.
So mechanically, utilization of this NOL in 2014, when profitable, does not result in a provision for taxes on our P&L.
Using the midpoints of the guidance we have provided, along with the PRASM guidance Scott will give, we expect our first-quarter operating margin to be between 6% and 8%, and our pretax margin to be between 4% and 6%.
Looking at CapEx, we will focus 2014 on integrating the airlines while also making important investments in our fleet, product and operations.
We are forecasting total net cash CapEx to be approximately $2.1 billion.
This includes approximately $900 million in non-aircraft CapEx, and net new aircraft CapEx of $1.2 billion.
In summary, I would like to thank and congratulate our team members for their hard work and perseverance.
Thanks to their efforts, the new American has a solid foundation to achieve its goal of becoming the worlds greatest airline.
While the merger only recently closed, we are extremely excited to begin integration efforts.
And we will be reporting on those later in the year.
Thanks, and now to Scott.
Scott Kirby - President
Thanks, Derek.
Today I'm going to talk briefly about the fourth quarter, the integration process, what we see as some of the future opportunities, and then a more specific outlook for the first quarter.
I'd like to start by thanking the 100,000 people of American Airlines, who managed to run a very strong operation over what has been several very difficult weather weeks.
During the fourth quarter both US and AA had strong revenue results, with our combined consolidated PRASM up 5%.
Our original forecasts were off for November and December due to the holiday shift, with what appeared to be a weak November, followed by a very strong December.
But in reality, we saw strength across the quarter.
For some regional color, domestic RASM was up 4%, Atlantic was up 7%, Latin up 9%, and Asia was down 6%.
We are obviously early in the integration process.
As Doug said, it is proceeding well thus far.
Customer day one was on January 7. And while we had some minor issues, we worked through those quickly, and we're happy with the first piece of customer-facing integration.
We also started codesharing on hub-to-hub routes three weeks ago, and that has also gone well.
In fact, we already booked over 70,000 codeshare tickets in just the first two weeks of Phase I. We will continue to roll out more codesharing throughout February, and hope to be done with the entire system in February.
We're still on track for US Airways to exit Star at the end of March and transition the next day into Oneworld.
We've already selected Sabre as our new reservation system.
And though it is admittedly very early, we're making good progress on moving to Sabre and getting a single ops certificate in late 2015.
We expect to start realizing some revenue synergy value almost immediately.
Over a third of our projected $1 billion in revenue synergies comes from codesharing, which as I said earlier, we expect to be fully up and running later this quarter.
Though it may take a little longer to optimize the system and get 100% of those benefits.
We also remain confident that we will achieve our corporate and frequent flyer growth goals, though the time frame on those will be a little longer than the codeshare synergies.
But to date, we are exceeding our initial projections and are ahead of target on items like partner revenues.
In addition to the traditional synergies, however, we also believe there are numerous other revenue opportunities at both American and the old US Airways.
We've already made decisions on numerous items that we think will be P&L positive, and expect to announce them as soon as the technology is ready to support implementation in the coming months.
In addition to those, we also have a number of network initiatives that we believe will have meaningful upside.
We've already restructured flying at LaGuardia to focus on more profitable routes, and are completing a full network review.
Three of the biggest changes in the network that we'll be implementing include rebanking the Miami hub with the fall schedule change, with Chicago and Dallas to follow in later schedule changes; beginning to introduce variable scheduling to the AA network; and increasing the density on a number of aircraft, including 737-800s, MD-80s and the 777-200.
Collectively, we expect these initiatives, when fully implemented, to be worth over $400 million in annual earnings improvement.
Turning to our more tactical outlook going forward, I'd like to begin by discussing our plans for future RASM guidance.
We all know that there are problems with the monthly RASM based on day-a-week changes, holiday timing, et cetera.
We clearly saw that in the November-December period.
At the same time, we think being open and transparent with investors is important.
So in an effort to be more accurate, reduce the monthly volatility that comes from calendar changes, and provide better information than we have historically, our plan is to give RASM guidance for the full quarter instead of each month.
We'll then update the full-quarter guidance with each monthly traffic release.
So at the January traffic release, we will update our 1Q guidance, knowing what our January actuals were and our bookings for February-March.
Then with our February traffic release, we will note two months of actuals and one month of forecast based on bookings for March.
And with our March traffic release, we will have all three months of actuals.
With that, we currently expect to combined consolidated RASM to be up 2% to 4% year over year in the first quarter.
In conclusion, we think the demand environment is strong.
And we're excited about the future opportunities and are moving quickly to realize those opportunities.
Daniel Cravens - Managing Director, IR
Thanks, Scott.
Thanks, Derek.
All right, operator, we are ready to take questions please.
Operator
Thank you.
(Operator Instructions)
Jamie Baker with JPMorgan.
Jamie Baker - Analyst
Scott, the first question.
Just based on your estimates for industry RASM this year, do you expect that American is going to outperform?
And if so, what are some of the driving assumptions behind that?
Scott Kirby - President
Yes, I do think we are going to outperform.
And I think some of the things I talked about -- one, I think were going to -- we already are realizing synergies.
And I think that's going to accelerate as we go through the year.
In addition to the traditional synergies, there's some of the kinds of things that I talked about.
I talked about network initiatives, but there's literally a list of probably 100 items that are revenue-opportunity ideas that we have.
And so I believe we have to prove it.
I know we still have to prove it.
But I think we will outperform the industry this year on RASM.
Jamie Baker - Analyst
And I've never focused singularly on some of the synergy targets that you put out initially.
But would it be safe to assume that some of what you've learned, now that you are fully ensconced in all things American, is perhaps incremental to those targets?
Some of the stuff you identified before?
Scott Kirby - President
Yes.
We always thought that we were under promising and intended to over deliver.
Hopefully, I'm still under promising and we will over deliver from today.
But it is fair to say that our view -- some of the stuff I talked about.
The $400 million in network initiatives, for example, weren't included in our synergies when we went through the merger.
And some of the other changes that you'll see in the coming months.
Some of them are things that weren't included in our synergies.
To date, on some of the synergy stuff that was included -- partner revenue, the credit cards, for example -- we've exceeded those items.
Now, there may be some things that we miss on.
But to date, we either -- for the pieces that we included in the original work -- we either believe we are going to meet or exceed, and we've added to that list.
So we feel pretty confident that we're going to exceed our numbers.
Jamie Baker - Analyst
Okay.
And for Derek, in terms of the cost range that you gave for the full year, up 2% to 4%.
How to we get a handle around those goal posts?
What's the scenario, what needs to have to come in at the lower end versus the higher end?
Does the timing of achieving the SOC impact that outcome?
Or are you just playing it safe?
Derek Kerr - CFO
No, I think it really is -- we're really trying to understand -- as I said, from a budgeting process, because the merger happened so late in the year, the American team did the American budget, the US team did the US budget.
So nobody has really -- as we combine the two -- so the guidance is combining the two budgets.
We haven't been through and scrubbed through those.
The other thing we would like to do -- we know some of the synergies we have built into that guidance from a cost perspective.
But we'd like to go through and scrub a little bit more as we go through, and understand both of the budgets, and understand the expenses at either side.
So that is what I believe, where we're at today, as we just combined the two budgets.
But I believe as we have time to dig through where everything is and understand both expense structures, that there will be some more opportunity.
Jamie Baker - Analyst
And how should we think about potential milestones for returning cash to shareholders down the road?
By our numbers, it looks like you have almost twice the cash-to-liquidity that you actually need on a run rate basis.
And this will be my final question.
Doug Parker - CEO
That's a good one.
Look Jamie, as you know, we just closed this merger a little over a month ago.
And we've got a number of things to go address.
The cash balance -- we agree, holding more cash than the Company needs to hold is not a good use of our shareholders' capital.
We understand that.
So what we do need to do and what the team has set out to do is go figure out what the best uses of that cash are right now.
There is certainly some amount of debt that probably could and should be paid down or restructured.
And once we get to the exercise, we should figure out what are the best use behind that.
So, still to come.
It's early on.
But we understand the point, and share the view that you have that there's no reason to hold more cash than we need.
I would point out, as Derek noted and as we noted in the press release, that the Company did make the -- did elect to essentially buy back shares already.
Our employees have -- were distributed a number of shares to the employees as the result of American's restructuring.
Both as a service to employees, but also as a show of our confidence in the equity.
Ended up distributing those on a net basis to our employees (technical difficulty) to buy the shares that were necessary to cover the tax benefit, to cover the taxes on those shares.
So that, I think, is a good indication for all of you as to what we think about our cash balances, and our views about the equity today.
Jamie Baker - Analyst
That's great Doug.
Thanks for letting me be such a nuisance.
That's all I got.
Doug Parker - CEO
Not all.
It's a great question.
Thanks, Jamie.
Operator
Hunter Keay with Wolfe Research.
Hunter Keay - Analyst
Thanks.
Here we are, huh?
(laughter) Derek, question for you on CapEx.
How closely should we look at the disclosure statement that shows about $4 billion on average of annual CapEx over the next few years?
It's a two-part question.
Is that viable?
And if we assume for a second that you are going to spend all the CapEx that was in the disclosure statement, and the order book in terms of the units on order don't change, how much flexibility do you have to at least smooth it out?
Because there's some really big choppiness in terms of CapEx spend, particularly when you go from 2016 to 2017.
You're looking at something close to $5 billion of CapEx in a few years now.
How flexible are you on the actual spend amount?
And how flexible are you on the smoothness of it?
Derek Kerr - CFO
Well, as of right now, I think it is -- this year the aircraft CapEx number is about $4.8 billion.
I think, as you said, it's up in that range.
We have financing for a significant amount of those aircraft.
So the only -- the cash that will go out the door is $1.2 billion.
We are now looking at the fleet plan, looking at deliveries, understanding what commitments we do have and what we can do with that.
But as of right now, we don't plan to make any changes moving forward in that delivery.
We want to continue to replace all the older aircraft and bring on the new aircraft.
I think every aircraft that comes out is NPV- positive, so it's right thing to do.
As you said, we need to look at the CapEx going forward.
And from 2015 to 2018, it's pretty much the same as where it is today.
It doesn't dip as much out there.
But I think we will look at that.
We need to understand how much we are committed to, and how much financing is committed in those years.
Because there are -- as part of the Airbus deal, there are lesser financing that's been committed.
And we need to understand that.
So the treasury team is going through that with the aircraft guys, and more to come on that.
But as of right now, our plans are and our five-year plan is to take all of these deliveries.
Doug Parker - CEO
To be clear, to reinforce one of Derek's points there, this is an NPV-positive use of our cash.
We have older airplanes that need to be retired.
And the sooner you can get them retired and have new airplanes come in, that actually is a positive NPV, positive cash flow thing to do.
So this isn't something we're concerned about in terms of the investment.
Your question about maybe is it coming in at the right -- since were bringing two aircraft orders in at the same time, is there something we can do?
Perhaps.
But I would want you to think or expect that we're going to make major modifications to these fleet orders, because we're happy with the way they are.
We want these airplanes.
They are a good use of capital.
And one of the -- something that we're excited about, getting the aircraft in to replace the older aircraft.
Hunter Keay - Analyst
No, that wasn't my expectation at all, that those cancelling orders.
Thank you, Doug.
And while I have you, Doug, I wasn't going to ask you about your comp.
But you wrote a letter about it, so I think it's fair game.
The $2.5 billion pretax threshold that the Board has decided was going to be the level or you'd be paid out 200%.
Typically, you guys -- correct me if I'm wrong.
But I thought you were generally paid your short-term comp based on pretax margin level, not an absolute number basis.
So did that change?
And B, why $2.5 billion?
Because it that's the 200% of your comp pay-out, should that imply some sort of best-case scenario?
Okay, so how did you guys get there, is the question.
Doug Parker - CEO
Okay, I'm glad you asked.
(inaudible) We certainly don't bring anything bad.
Look, let me just go back to -- we'll answer your first question, which is what we have done historically.
And we -- meaning US Airways, not American -- did the following: our incentive comp, the financial targets in the past -- I think, I would look into them -- I think last year it started at zero and capped out at $500 million or something.
$600 million -- I'm being corrected.
So $600 million.
And the target was there for $300 million.
Something we exceeded by a good bit.
The goal here is to have -- is to pick a target that we would really tell people -- that's a target incentive.
And one that over time should average one, right?
So at any rate, don't -- you shouldn't -- we've never tied those projections to a budget or a forecast or anything like that.
We go, look -- the Board looked, the Company looks at prior years' history, what the payouts have been of late, what they're trying to accomplish.
We are trying to bring two teams together, and making sure there's some certainty of payment in the first year.
The American team, by the way, hasn't seen an incentive payment since 2001.
An annual bonus.
So without getting into a lot of detail about our forecast or anything like that, I have no problem telling you that you shouldn't look of the $2.5 billion and think that, that is our forecast, or a number that we think represents our budget, or anything like it.
It's a number based on the Board looking at the history of payouts, and wanted to be sure that there was a payout for -- again, $2.5 billion.
For this Company is going to be something still in excess of the highest profits it's ever seen.
So we think that's a good number.
But it's also not one that we set in a way that was meant to give anybody guidance as to earnings.
Hunter Keay - Analyst
Okay.
Well, thanks a lot.
Appreciate that.
Doug Parker - CEO
Sure.
Operator
Mike Linenberg with Deutsche Bank.
Mike Linenberg - Analyst
Good morning.
Two questions here.
Scott, I want to go back to -- you talked about rebanking Miami this fall, and then following, you'll do Dallas and Chicago.
What's in store for New York and LA?
You did talk briefly about some of the new service out of LaGuardia to some of the markets that are core to the US Airways network.
But correct me if I'm wrong.
My sense is that every carrier is losing money in LA, on a fully allocated basis.
What can you do to improve the profitability of those two big operations for you?
Scott Kirby - President
We don't have any big initiatives, like rebanking at Los Angeles or New York, coming up.
New York -- the biggest thing we have going on is the introduction of the new A321 transcon product.
Which has had great customer feedback so far, which we expected from such a fantastic product.
And the early returns are good.
They're very early returns, but the early returns are good in New York.
In Los Angeles -- after the merger, the new American Airlines is now the largest carrier in Los Angeles.
And we think that creates the platform.
And I think we are number one in terms of premium business in Los Angeles.
And Los Angeles is an important gateway, over the long term for us, to Asia.
A really important market.
And Los Angeles actually was profitable in the last 12 months.
Not by a lot, but Los Angeles is already profitable.
Certainly we expect it to be nicely profitable this year, just with the rising tide that American Airlines and the effect of all those synergies.
And a market that benefits more than most by going from not being the largest carrier to being the largest carrier.
So our expectation, in Los Angeles in particular, that it will be nicely profitable this year.
Mike Linenberg - Analyst
Okay, great.
And then my second question is to Steve Johnson.
Steve, there's still some loose ends with respect to labor.
And I was just -- if you could walk through maybe the timeline.
My sense is that there are some smaller unions at US Airways that I think representation has to be determined.
What are the next steps before we get to a single seniority list for all the groups?
Or maybe some of that -- maybe the bulk of that is behind us.
Can you just update us on that front?
Operator
I do apologize.
It looks like Mr. Johnson's line has disconnected.
Doug Parker - CEO
Sorry, Mike.
He's traveling.
Let me try.
Mike Linenberg - Analyst
Not a problem.
Doug Parker - CEO
Yes, sure.
You're right.
While we have and had full employee support for the merger and everybody is excited about that, we do have to go through the process.
And our employees need to go through the process of determining who the collective bargaining agents will be in each group.
So that network is -- first off, when you said seniority list, that relates almost entirely to [pos and plates].
And both of those have been determined.
Mike Linenberg - Analyst
Great.
Doug Parker - CEO
So the flight attendants just this last week announced they've come to an agreement on how they're going to be represented.
So I don't think NSA determined -- meaning they determine how they will do it.
They haven't determined the list.
Let's be clear about that.
But they've determined how they will -- the process they will go about to get to a list.
So anyway, they are working together well on those.
Other groups still need to go through the process of determining who will be their bargaining agent.
And you will see some of that as we go forward.
It's what happens after mergers.
I don't anticipate any major issues as a result of it.
But it's up to our employees [to go sides].
So that's true in our mechanic workforce and our ramp agents.
American has non-represented classes for things like gate agents and reservations agents, while US Airways does have representation in those groups.
So those employees will need to decide whether they want to be represented or not.
All that work will take place here over the coming year.
And we can't actually integrate a lot of work force until we have a single operation (inaudible) anyway.
So, part of what we expected would occur.
Mike Linenberg - Analyst
Doug, do you have a goal -- is the hope that this is done before the year is out?
Or is this something that may even linger into 2015?
I'm just trying to establish our set expectations here.
Scott Kirby - President
Just some specifics, Mike.
With the pilots, we have -- an MOU has been approved by both sides.
But that process of getting to a single seniority list will take into next year.
We can't combine operations until we get the single operation certificate, which is the back half of 2015.
So that timing is going to dictate when the single seniority list gets done.
But we have a contract done with the pilots, and the pilots will be doing their own process on the seniority list.
With the flight attendants, just in the last week we got an agreement that wrapped US Airways flight attendants into the process and makes them officially a part of the process, where we were very excited to have them in the process with APSA from American.
That process will take into next year to complete the combining of the contracts and getting to the seniority list again.
Something that everyone has agreed on -- the process and how we do it going forward.
And some of the other work groups -- it depends on when one work group or the other files for a representation election.
Those will likely take into next year.
Those typically are easier to combine, because you don't have as much of the seniority issues with mobile work forces that you have in pilots and flight attendants.
But having the pilots and flight attendants and the unions on both sides now signed onto a process, I think, puts us leagues ahead of certainly where we were in the last merger.
But even than where other mergers have been historically.
Mike Linenberg - Analyst
Great.
Thanks, guys.
Doug Parker - CEO
Thanks, Mike.
Operator
Dan McKenzie with Buckingham Research.
Dan McKenzie - Analyst
Good morning, guys.
Thanks for the time here.
Scott, I'm wondering if you can help us to reconcile the revenue outlook with corporate travel trends.
The view among investors is that American Airlines has lost corporate share.
And please correct that view -- I don't know if it's correct or not.
But how do we think about share gains and losses embedded in your outlook as we look at the first quarter, and just looking ahead in general?
Scott Kirby - President
Well, it is right that over the last few years, American did lose corporate share.
Embedded in our guidance is no explicit assumption about share gains or taking share back from someone else.
I think we will win share back by virtue of the network that we now have.
I think we will win some of American's natural share back.
But we don't have explicit assumptions about winning share back in our guidance.
Corporate demand has been and continues to be strong for us.
So we feel really good about the outlook.
In the fourth quarter, our combined corporate revenues were up 7% year over year.
And we've got a strong start to 2014.
So we have a sales team that is engaged.
I think they're a really good sales team.
We have a great product, great network to sell, and they're out doing that.
And I think you'll see us improve even beyond where we've been historically in corporate.
But there's nothing explicit in our guidance that assumes some kind of share gain.
Dan McKenzie - Analyst
Okay, very good.
And if I could come back at you with a network question here.
Given the global volatility or global stock market instability in emerging markets, how big a curve ball is the weakness in emerging markets relative to international growth plans?
Specifically, are the primary drivers -- based on what your corporate travel managers are asking for -- are they instead being driven by flat opportunities or network goals?
Again, just trying to reconcile international growth, given some of the global instability we are seeing.
Scott Kirby - President
Sure.
Well, most of the -- well, we do have some of the markets that are part of the issue.
So I'll just talk regionally.
South America, clearly of late, Venezuela and Argentina, have each been in the news.
Two longtime markets for American Airlines that do quite well and that are important to us.
To put some context around it, Venezuela is about 1.4% of our annual revenues.
Argentina has about 1.3%.
South America is obviously an important part of our network, and goes through some of these ups and downs over time.
We are committed to it for long-term.
I think it's a growth region.
So there may be some bumps in the road along the way, but the long-term trajectory is good.
Much of our growth next year is overlapping growth that happened from last year, as opposed to new growth that's starting in 2014.
In Asia, long-term, it's a place that we're behind, a region that we're behind Delta and United.
So important for us to grow.
We were very excited to get the slot times that we got for our Dallas-to-Shanghai service.
So we look forward to launching that new route, and expect it to be successful.
That's a lot of our ASM growth.
Obviously a long-haul route on a big airplane is a lot of our ASM growth.
So emerging markets per say, I don't think are going to have a huge impact, even with the recent volatility on our revenues.
Where it's more likely to have an impact is if you have some kind of effect on the global economy.
A confidence in the global economy.
We've certainly seen at airlines in the past that when there's a worry about the global economy, it's easy for corporate travel managers or for business people to cut travel.
And so if something from the emerging economies turns into a contagion that spreads to the rest of the world, that's what I would be more worried about.
As opposed to something tactically that's happening in one of those individual countries.
Dan McKenzie - Analyst
Terrific.
Thanks so much.
Doug Parker - CEO
Thanks, Dan.
Operator
Helane Becker with Cowen and Company.
Helane Becker - Analyst
Thank you very much, operator.
Hi, guys.
Thanks for the time.
My first question is, do you have flow-up agreements from your wholly-owned regional airlines to the pilot to the main airline?
Robert Isom - COO
Hi, Helene.
This is Robert Isom.
The answer to that question is yes.
We have flow-up agreements with Envoy, which was the formerly American Eagle, the mainline.
And we also have guarantee interview programs among regional to US Airways.
Helane Becker - Analyst
Okay.
And then my other question is, are you going to call out the amount of flying that was cancelled earlier this month, and actually yesterday and today, because of weather?
Derek Kerr - CFO
Elaine, this is Derek.
It was already in the guidance, because it's already happened.
So we put that in the ASM guidance.
It would've been a little bit higher, but it is less because of the fact that the storms happened.
Helane Becker - Analyst
Okay.
And so when you said that your completion factor -- you're assuming higher completion factor going forward.
That includes what you've already done?
Or that's just from here forward?
Derek Kerr - CFO
That's from here forward.
Helane Becker - Analyst
Okay.
And then my last question is, do you have a debt number we can use for the balance sheet?
Derek Kerr - CFO
The year-end debt number on the balance sheet is about $16.8 billion.
Helane Becker - Analyst
Okay.
And then, Doug, can I just ask a question about the letter you wrote yesterday to your employees with respect to your compensation?
You mentioned in the letter that you were taking less than your peer group.
And in fact, you're taking substantially less than your peers.
And given the fact that your job seems to be harder than your peer groups going forward, I was just wondering the thought behind that.
Why did you ask for less when you probably deserve more?
Doug Parker - CEO
Why, thank you, Helene.
Now, look, it's an easy answer.
We still have some of our employees working for less than their peers at Delta and United.
And given that -- that's the result of the bankruptcy and the agreements that were met with our employees about a merger.
So as long as that's the case, I think the right thing for me to do is also have mine lower than my peers at Delta, United.
It's as simple as that.
And to be fair, as I also say in that note, they're amounts that are a big expense to the Company.
So I'm not trying -- this is -- I'm not complaining for a second.
And really happy to be here, and an honor to be doing this, and looking forward to doing it.
And one day, hopefully, we will all be making the same as our peers.
But right now, it's the right thing for me to do.
Helane Becker - Analyst
Okay, great.
Thank you very much for the help.
Doug Parker - CEO
Thanks, Helane.
Operator
Duane Pfennigwerth with Evercore.
Duane Pfennigwerth - Analyst
Good morning, and congratulations on getting this closed.
Doug Parker - CEO
Thanks, Duane.
Duane Pfennigwerth - Analyst
One of the most common questions we get from new investors who have historically avoided the group is, how do we measure the difference between a restructured industry that folks are excited about and just now their up cycle in what remains a cyclical industry?
So my question for you is, how does your aircraft order book today, or as it stands today, relate to this question?
It will no doubt drive fuel efficiency and maintenance savings.
But wonder if you would comment on whether or not that $5 billion level of aircraft CapEx is consistent with the restructured industry pieces.
Doug Parker - CEO
Yes.
It's night and day different.
In the past, when the industry got a whiff of profitability, you would see airlines start going and making aircraft orders -- not for replacement, but for growth.
Under -- well, again, we can all -- it doesn't really matter why.
But my own view is, largely because industry -- because it was so fragmented and there's so much value to consumers by being able to get them all the places they want to get, every time any of us had a whiff of profitability, management would go out and put in new aircraft orders.
Thinking -- if I'm making money with 100 aircraft, I could really make money with 150.
And indeed, that didn't work, of course.
And we'd go into these terrible down cycles of having too much capacity, and then the economy would turn down and you'd go into a really bad tailspin.
That's not what's going on here, any close to it.
Our aircraft order, as well as the aircraft orders in place at our competitors', are designed to replace aging aircraft, to modernize leads that, in the case of American, has gotten to the point where it seriously needed some modernization and hadn't had the capability to do it in the past.
And those are NPV positive.
It doesn't commit us to growth.
It gives us some flexibility to grow modestly.
But they're there for replacement.
And it couldn't be further from what you seen in the past, in terms of aircraft orders that were made back in the 1980s and 1990s when (technical difficulty).
Duane Pfennigwerth - Analyst
Thanks for that.
And just to follow up on Dan's question, the 9% international growth.
What flexibility to you have in your plan if the environment does not support that?
Scott Kirby - President
We do have flexibility with aircraft.
Particularly we've got a very large fleet of 767s that all are scheduled to be retired.
We could accelerate those retirements and change that frequency if we decided to.
Duane Pfennigwerth - Analyst
Okay, thanks.
And then just lastly, it will probably in the investor update, but what do you expect full-year aircraft rent to be?
And thanks for taking the questions.
Scott Kirby - President
Full-year aircraft rent we believe to be about $1.35 billion.
Duane Pfennigwerth - Analyst
Okay, thank you.
Scott Kirby - President
Yes.
Operator
Savanthi Syth with Raymond James.
Savanthi Syth - Analyst
Good morning, everyone.
Just a follow-up on the capacity.
3.5% seems a little higher than I would've expected.
It's not much higher than your competitors that are going like 0% to 2%.
But are we starting to see a little bit of capacity creep here?
And also, to follow onto the previous question on the flexibility on not growing as much if the environment calls for it.
I recall with US Airways there was a limit to how much you could reduce flying because of some of the pilot contracts.
I wonder, is that still there?
Or how much could you -- what level could you grow, at a minimum?
Scott Kirby - President
So, the first question, the answer is no.
I don't think this is capacity creep or a change.
You've got to look at our 3.5% capacity and understand what it's coming from.
2.6 points of that 3.5% is coming from -- is having higher density aircraft.
One of the things I talked about -- one of the things that you've seen happen, at Delta in particular, is putting more seats on airplanes.
While it is capacity growth, at least for the airlines that are doing it, it's very NOL positive.
Because your cost for those extra seats is very low.
And so it's mostly incremental revenue close to the bottom line.
That's going to happen, and once that's done, it's kind of done.
The other piece of capacity growth are, one, having fewer aircraft out of service.
So fewer aircraft in maintenance lines, for example.
Again, efficient capacity growth.
And then a higher completion factor.
A lot of weather last year.
And that's just an assumption that we'll have a more normal weather year.
That hasn't started off to be the case in January.
But just a normal assumption.
And so that really explains all of our capacity growth.
This isn't capacity growth of going and buying airplanes and adding a bunch of new markets.
It's those factors that are driving the capacity growth.
On your second question, we no longer have any restrictions [or walt].
Those restrictions that were in the old US Airways agreements no longer exist.
Savanthi Syth - Analyst
Understood.
And then, just on the ancillar front.
I was wondering what your ancillary revenue was.
And is there anything in the revenue synergies from just being able to grow ancillary revenue?
Scott Kirby - President
Ancillary revenue -- total other revenue is about $4 billion.
And of that, from an ancillary side, it's approximately -- package is about $1 billion.
And then refund reissue is about $700 million.
There's some other little small of them.
So about $2 billion in ancillary.
And yes, we expect to be able to grow that.
When I talked about some of the other initiatives -- before I talked about network initiatives in my opening remarks, some of those are ancillaries.
And part of our -- we will announce some of that stuff soon.
But we're waiting on the technology to support it before we actually make the announcement.
Savanthi Syth - Analyst
Got it.
And I just had one last question on the cargo side.
It looks like some [miles] are up strong, but yields are pressured.
Is that just where you're focused on?
Or, I was curious as to why the yields are down so much.
And secondary to that is, is there opportunity on the cargo side now, with a combined system to really grow and do more with the cargo side?
Robert Isom - COO
Again, it's Robert Isom.
You're right, in terms of overall cargo.
While we've seen overall revenue maintain steady, we've seen a lot of demand out there.
But there is pressure on the pricing side.
And as we take a look to integration, we do think that there's a lot of benefit by combining the two networks.
And we look forward to putting the two systems together later on this year, and getting to a common product for our customers.
Savanthi Syth - Analyst
All right.
Thanks, guys.
Operator
David Fintzen with Barclays.
David Fintzen - Analyst
Good morning, everyone.
Maybe just something for Scott.
Just on following up on the hub rebanking.
Should we be thinking of this process as sliding around flight times and stiffening up the connectivity?
Or, particularly when you get to Dallas and Chicago, is there a re-fleeting component to this, where we should be looking for changes to the local schedules and frequencies, particularly in a market like Chicago?
Scott Kirby - President
There will be -- a lot of it will be sliding the flight times.
There will be a re-fleeting that happens.
There's a bigger re-fleeting that's going to go on.
American historically went from 140-seat MB-80s, mostly down to 50-seat regional jets, a handful of 76-seat regional jets.
So there is a lot of opportunity to re-fleet and put the right-sized aircraft on the right route.
And some of that you will see happen as part of the rebanking.
When you go from -- when you increase the number of connections available for a given flight, you have an opportunity to change gauge on that flight.
And a market like Chicago, Dallas is probably not going to be much different.
Because those are two big hubs, and there's already a lot of capacity and a lot of traffic flowing.
And you kind of hit every connection possible, because you have so much capacity between those two hubs.
But in some markets, you will see the opportunity.
It will be most dramatic probably -- actually in the smaller markets.
A Lubbock or an Abilene, Texas, that now have more connectivity.
And that's part of the reason you're going from 50 seats to 76-seat regional jets in markets like that.
Because it causes those to update.
It gives you the opportunity to take some of the larger regional jets like the mainline aircraft.
And so, it's increasing the average gauge.
One of the things we talked about where our capacity growth is coming from, will be helped and supported by rebanking the hubs.
David Fintzen - Analyst
Okay.
And then, in the net, historically, American has had a frequency disadvantage in a lot of Chicago markets to United.
Presumably that would begin to -- with the re-fleeting and the 76-seaters, that would begin to put -- you could match frequency a little more effectively?
Is that the Lubbock example, in a sense?
Scott Kirby - President
I don't think you can draw that conclusion from Chicago.
David Fintzen - Analyst
Okay, all right.
That helps a lot.
And then, just a quick one for Derek.
In terms of cash integration costs for 2014, any sense of how that billion flows in?
Derek Kerr - CFO
Yes.
I think we have about $400 million in 2014, of the integration costs.
David Fintzen - Analyst
Okay, great.
I appreciate the color.
Operator
Bob McAdoo with Imperial Capital.
Bob McAdoo - Analyst
Hi, guys.
Have you talked anything about what's going on with fuel [essentials]?
You used the word -- legacy -- American fuel hedges.
Have you announced what you're going to do with that going forward?
Doug Parker - CEO
Well, there's nothing really to announce.
We haven't entered any hedges since the merger.
And the hedges that were in place in American are still in play.
But at this time, we don't intend to enter into any additional hedging transactions.
We've been happy with our --
Bob McAdoo - Analyst
Well, your policy -- the US Air policy will move forward for the combined entities.
Doug Parker - CEO
Yes.
We have been happy with that policy to date.
And that's where we have been since the merger, and don't intend to enter into (inaudible) change that.
But we could at some point, I suppose.
But no intention to do so.
Bob McAdoo - Analyst
The other thing I wanted to ask about.
When you talked about codesharing and more complete codesharing in February.
By the time we get to that, will we be able to see codesharing for Philadelphia to Europe, things like that?
Is that going to be included by then?
Scott Kirby - President
Yes.
Bob McAdoo - Analyst
Good, all right.
That's all I had.
Thanks.
Operator
John Godyn with Morgan Stanley.
John Godyn - Analyst
Thanks for taking my question.
Scott, I appreciate a number of those capacity one timers that you highlighted inflating the growth rate in 2014.
But we've also seen some of the other legacy airlines go out with multi-year sub real GDP capacity commentary.
And I'm just curious.
Should we expect a commitment like that out of the team?
Scott Kirby - President
Well, I don't know if commitment is the right word.
I think it is the right strategy until -- certainly until the industry gets back to margins that are reasonable and consistent with other large industrial companies, that the growth rate should be sub GDP.
There is an exception, and an exception I think applies to everyone for this kind of putting more seats on airplanes.
But I think is different is that improves your profitability.
But the domestic market, in particular, is mature.
And so you certainly shouldn't have growth that exceeds GDP in the domestic market.
And international, you've got to look, I think, at the combined GDP of the US and the international markets that you're going to.
But conceptually, I agree.
John Godyn - Analyst
That's very helpful.
And I was hoping that, Scott, you or perhaps Derek could clarify what happened with the affinity card agreements here.
It seems like there has been a round of re-negotiations.
On the other hand, I'm not sure if you get another step up in economics or another bite at the apple for the negotiations in mid-2015.
Scott Kirby - President
So we have completed deals with both Barclays and Citi.
Both issuers will continue to issue cards throughout this year, either at the end of this year or sometime into early 2015.
Barclays will stop issuing cards and will convert all their existing cards to be branded American Airlines.
And we'll continue to manage that portfolio.
Citi will continue issuing cards throughout both great partners.
Those deals or co-termanents are now set to expire in 2017.
The economics for US Airways have improved in both of the -- or, for American Airlines, sorry -- have improved in both of those deals.
And I think both of those partners got a lot out of it.
On the Barclays side, given access to a lot larger expire base.
Citi got access to a much larger frequent-flier base.
Citi now also has access to the American Airlines lounges.
So a deal that I think all three parties are happy with.
And as I at least hinted in my opening remarks, a deal that by a pretty wide margin exceeds what we expected in terms of synergies and improved economics for the new American Airlines going forward.
John Godyn - Analyst
So the new economics are hitting American's results today, and we shouldn't expect any kind of step up until perhaps 2017?
Is that the right way to interpret that?
Scott Kirby - President
Some of that stuff is going to happen a little bit over time.
But they are hitting today.
They do ramp up and get better over the course of the next 12 months.
But into 2014 is basically steady-state, until 2017.
John Godyn - Analyst
Thanks a lot.
Really appreciate it.
Operator
Glenn Engel with Bank of America.
Glenn Engel - Analyst
Good morning.
A question on the guidance.
I calculate 3% operating margins last year, and you are looking for 6% to 8% this year, even though RASM up 2% to 4%, and CASM up 3% to 5% just doesn't get me there.
So what am I missing?
Scott Kirby - President
Well, first, are you -- the first quarter?
Glenn Engel - Analyst
First quarter.
Scott Kirby - President
First quarter.
What are you missing?
Glenn Engel - Analyst
If margins were 3% last year and your RASM up 2% to 4%, and CASM is up 3% to 5%, even with fuel being somewhat lower, it's hard to see how you have a 3- to 5-point improvement in margins.
Scott Kirby - President
Well, it's CASM ex fuel, for one thing.
And fuel is a large percentage of the cost.
So that is part of it.
I don't know.
We would have to go through the specific math with you.
Glenn Engel - Analyst
On the comp side, where are you right now relative to Delta, United and Southwest?
Scott Kirby - President
From a labor perspective?
Glenn Engel - Analyst
Yes, from a compensation labor cost per employee.
Scott Kirby - President
Probably about 5% to 10% below.
You're talking to pilots, flight attendants, that type of --
Glenn Engel - Analyst
That's correct.
And on the fleet side, are the configurations of the fleet the way first-class and economy comfort, or whatever the upscale is called -- is that going to be American's adopted?
Or is that still in flux, how you're actually going to configure each aircraft?
Scott Kirby - President
We are making changes to aircraft configurations.
Glenn Engel - Analyst
So that's still up in the air on what it will be.
Scott Kirby - President
Well, some of them we know.
But, yes, some of it is still up in the air.
Glenn Engel - Analyst
Thank you very much.
Doug Parker - CEO
Thanks, Glenn.
Operator
Michael Derchin with CRT Capital Group.
Michael Derchin - Analyst
Hi, guys, and congratulations.
Doug Parker - CEO
Thanks, Mike.
Michael Derchin - Analyst
Going back to Jamie's question earlier in the day, it seems, on how much cash is a normal cash on hand, relative to revenues.
Once you get into a normal situation, down the road in a few years, you de-risk the Company, things are rolling.
What's your thoughts on the percentage of cash that you really need for normal operations?
Doug Parker - CEO
That's a good question, Mike.
There is no right answer.
Because I don't know what normal means, to tell you the truth.
But there is no doubt that over the last whatever -- 10, 11 years -- we've gotten to the point where we needed to hold a lot of cash because we were so worried about what might happen.
And indeed, those of us that did were very happy that we did in 2008 and 2009.
So if we really have a transformed industry, if we really are producing profits that we believe are real and sustainable -- there will always be cyclical business, of course, as you know, Mike.
But if it's not going to have -- if the downturns are still profitable instead of downturns that have you losing billions of dollars, there's no need to carry cash, which is an insurance policy against that.
How much less do you need?
We don't know yet, Mike.
What we know is, what we held in the past, what was the industry standard of whatever -- 20%, 25% of revenues -- is too much in a world that really has been transformed.
But we prefer to make sure it's transformed before we start making those decisions.
It certainly feels like it in every single indication that we have.
But if you just let us have a little time to make sure that -- to get a little bit of time behind us here.
And also to go through the entire debt portfolio and make sure we're doing everything we can there first.
Because we clearly have -- we're still highly leveraged.
But anyway, I don't know the exact number.
But it's lower than what it is.
We know that.
Michael Derchin - Analyst
Well, as a former employee of both American and US Airways, I wish you a lot of luck going forward.
Scott Kirby - President
Well, thank you, Michael.
Doug Parker - CEO
We appreciate it.
Operator
Kevin Christine with Skyline Research.
Kevin Christine - Analyst
Hi, good morning, everybody.
Just wanted to ask two quick ones.
Most of the detail questions have been asked, I think.
But at a high level, if the industry grows the same that it would've grown otherwise, I look at you guys consolidate two large carriers, and you come up with 3.5% capacity growth.
So it's not going to be much different than I would've thought had you guys been independent.
So what I'm wondering is, what's the difference between industry that grows at the same rate but with, say, two more players or so, versus having those two players out with the same overall ASMs or seats, or however we want to look at that?
What does taking two carriers out but not taking any additional capacity out, do?
Scott Kirby - President
Well, first, as we said all along, and we said to the DOJ, this merger was about putting two complimentary networks together, and wasn't about reducing capacity.
But what this does is create a better product and a better network for customers, which I think leads to improved revenues.
And that was always the rationale for this merger.
You look at our initial results.
If you want to look at the world as simplistically as just capacity equals profitability, I don't think the world is quite that simple.
It certainly wasn't in 2013.
Capacity -- matching capacity to demand and keeping capacity in line or below GDP growth is important.
But you can also improve margins even when those things are equal, I think.
And having a better network that's more appealing to your elite flyers and can get them everywhere they want to go in the world is part of doing that.
That happened at an industry level in 2013, and I think it's going to happen in 2014.
You look at our early guidance, that's clearly happening.
So I think the view of the world that is just the only input variable to the profitability equation is capacity, is too simplistic.
Kevin Christine - Analyst
Okay, thanks.
And when I think about -- what have you learned from coming in now, having more detail about American than you guys did when you were outside?
When I think about your Los Angeles strategy, it seems different than what I would've expected.
A year before the merger, I would have thought that you would have been down scaling maybe Los Angeles.
But it sounds like that's not the strategy.
So what have you seen in American that's been different than you might have expected from more the outside?
Thanks.
Scott Kirby - President
Well, there's been a lot that's different in little details.
I mean, there's hundreds of details, and I'm not going to go over them all on this call.
But things that we do at each airline that we can learn from the other's.
I told some of the guys recently that my favorite meeting, I think, that I've had so far at the new American was with the revenue management team talking about the details of the yield management system.
And people on each side -- the American side saying -- oh, here's some great things that US Airways does.
And US Airways saying -- here's some great things that American does.
So we both learned and found opportunity from each other.
And we are moving aggressively to implement those things on both sides.
And it's not just revenue management, it's everywhere.
I think that's the reason we feel pretty confident about our results going forward.
Kevin Christine - Analyst
Thank you very much, Scott.
Scott Kirby - President
Thanks.
Operator
Hunter Keay with Wolfe Research.
Hunter Keay - Analyst
Thanks for the follow-up.
Scott, what are those things?
This is obviously not my follow-up.
But what are those things, in terms of the yield management stuff that can be done better, that you guys did so well?
Scott Kirby - President
Well, the over-booking model at US Airways is one of the things we are going to implement as quickly as possible on the American side.
And there's just a whole bunch of -- they are down-in-the-weeds mathematics.
The American data departure process is much better than we had at US Airways, something run by revenue management, as example.
So we've got a team of people -- that group, too, by the way, was the first group that we integrated.
Those guys were sitting here in Dallas on December 9, which I think is indicative of how important we think it is and how much leverage there is in that group.
And it's just going great so far.
Hunter Keay - Analyst
Okay, cool, thanks.
And let me just ask a quick follow-up on this IT-driven ancillary source here you guys talked about in the next coming months.
In the DOJ complaint, they talked about some internal documents that you guys had, about a $280 million fee harmonization revenue opportunity.
Presumably this is somewhat part of that.
And if it is, maybe to get back to the question of how you're getting to this margin guidance.
Should we maybe think about key TRASM -- total RASM -- outpacing the PRASM as a main driver of some of the margin accretion, above just the traditional PRASM-CASM spread?
Scott Kirby - President
First I want to say on the ancillaries that a lot of our ancillaries are -- ancillaries are more broad, much broader than just baggage fees.
For example, we have some products that customers really like.
Like our products that deal with -- we get to the front of the lines, and go through the preferred access kind of products.
Our seat products -- preferred, seating products.
Our ability -- products that allow customers to upgrade to first class when there are no more elite flyers.
And so much of the revenue comes from products like that, that are positive to customers.
And yes, I think part of the -- back to Glenn's question.
Part of the answer on margin guidance is our forecast for TRASM is higher than our forecast for PRASM.
Hunter Keay - Analyst
Thanks a lot.
Doug Parker - CEO
Thanks, Hunter.
Editor: This concludes the analyst portion of the call.
Operator
And at this time, if any media would like to ask a question, please press star one.
(Operator Instructions)
Terry Maxon with Dallas Morning News.
Terry Maxon - Analyst
Good morning.
Let me follow up on the question of the receding of the three aircraft tied with the (inaudible) Scott mentioned.
I think the MD-80 has what -- 140?
The 777-200 has 247.
And the 800 has been all over the place, but let's say around 150.
Where you see those going to?
And where?
And what parts will they be coming from?
Will you be reducing the premium class any?
Scott Kirby - President
Those are pretty accurate numbers you have, Terry.
The MD-80 was 135.
It's now 140.
The 737-800 is 150.
And we're looking at two options, 160 or 164.
And I believe it keeps the first-class cabin the same size.
The 777-200 is 247, as you said today.
And will likely go to something between 260 and 289.
Terry Maxon - Analyst
Will that be same seats, just adding rows, moving them a little bit closer together in coach?
Scott Kirby - President
Some of those are putting slim-line seats on.
Terry Maxon - Analyst
Okay.
And when do you expect that conversion to begin, and when do you expect it to end?
Scott Kirby - President
The 737-800 begins second half of this year, and it will take -- well, I don't know for sure how long it will take.
The 777-200 conversion begins later this year, going from to 247 to 260.
And if we go bigger than that, we'll probably be at 2015-ish.
Terry Maxon - Analyst
All right.
And was that Scott talking?
Scott Kirby - President
Yes.
Terry Maxon - Analyst
Okay, thank you.
Operator
Mary Schlangenstein with Bloomberg News.
Mary Schlangenstein - Analyst
Hi, good morning.
Scott, how many of the MD-80s are you guys going to keep longer-term now?
American was looking at one point to get rid of all of those.
How many are you going to hang onto?
Scott Kirby - President
Sorry, could you say that again?
Mary Schlangenstein - Analyst
How many of the MD-80s are you going to hang onto longer-time, versus replacing them with an 800 or some other aircraft?
Scott Kirby - President
None.
We haven't changed the retirement schedule for the MD-80s at all.
Mary Schlangenstein - Analyst
Okay.
So when will they all be gone?
Scott Kirby - President
I'm looking around, if anyone remembers.
Derek Kerr - CFO
I think it's like 2018, I think, 2018 timeframe.
Scott Kirby - President
2018.
Mary Schlangenstein - Analyst
Okay, all right, great.
Thank you.
Operator
Karen Jacobs with Reuters.
Karen Jacobs - Analyst
Hello, good morning.
I had a couple questions, if I could.
One is, can you talk about what [they're] saying is the flat divestitures you've got to make?
Derek Kerr - CFO
We've completed the process for LaGuardia.
And we are involved in the direct conversations with the airlines that are authorized to bed for DCA, and we will be able to announce that as soon as it's done.
Karen Jacobs - Analyst
Okay.
And with respect to your first quarter RASM guidance, do you see any significant affect from the Easter shift?
Scott Kirby - President
There will be some effect from Easter of moving revenue from March into April.
At the same time, the government shutdown happened last year in the back half of March.
So those two things kind of balance each other out to some degree.
Karen Jacobs - Analyst
Thanks very much.
Operator
Andrea Ahles with the Fort Worth Star-Telegram.
Andrea Ahles - Analyst
Hi.
I have two quick questions, mainly about [fees] at the airport.
With the Shanghai laps that are supposed to start in June, based on some of the comments you guys made during the analyst portion of the call, do you have now all the government clearances that you need to run those routes?
And what sort of slot times did you end up getting for the Shanghai route?
Scott Kirby - President
We do have the authority, and we got the slot times we requested.
I don't remember the exact times.
But we got the slot times we requested, which we're very happy with.
Andrea Ahles - Analyst
And the other question I had was, in terms of the re-banking initiative that your hubs [beneath] Miami going first, are you expecting [D-70s] to be re-banked this year?
Or is that a 2015 initiative for you guys?
Scott Kirby - President
That is likely a fall of 2015 -- I mean, spring of 2015, sorry.
Andrea Ahles - Analyst
Spring of 2015?
Scott Kirby - President
Yes.
Andrea Ahles - Analyst
All right, thank you.
Operator
Dawn Gilbertson with The Arizona Republic.
Dawn Gilbertson - Analyst
Good morning.
I just have a few quick questions.
Scott, on the ancillary revenue, the stuff you're talking about announcing as soon as you have the technology together.
Are we talking about new initiatives?
Are we talking about moving American stuff to US Airways, and vice versa?
Are we talking about increase in fees?
What is the mix going to look like?
Scott Kirby - President
There will be some new initiatives.
A lot of it is the kind of things I talked about on proceeding product.
And first-class seating product priority access, really making those more broadly available, introducing more comfort economy on the US Airways network, which we don't have today.
So those of the biggest items around being able to offer customers the ability to get better seats on the airplane, whether it's a more comfort economy, whether it's a seat up front, or whether it's the ability to sit in first-class.
Dawn Gilbertson - Analyst
And what's the timetable on that?
When's your passengers start to look for that?
Scott Kirby - President
It varies by item, and we'll announce them as soon as we know what the technology timeframe is.
Dawn Gilbertson - Analyst
Next few weeks, next few months do you think?
Scott Kirby - President
There will be some in the next two months.
But some of them will take longer.
Dawn Gilbertson - Analyst
Okay.
Another question I have.
Can you give us an update on combining airport operations?
Last I heard, Phoenix was going to be one of the first airports.
And I thought the target was mid-February.
Is that still the case?
Robert Isom - COO
Dawn, it's Robert.
That is the case.
Just in terms of overall airports, we have a number of airports which have already been co-located.
Phoenix is not one of them yet.
But 17 to date.
28 that are going to come in the first quarter.
And looking forward to getting our operations all together.
Dawn Gilbertson - Analyst
So do you have a target date for Phoenix?
Robert Isom - COO
It's late February, early March.
Dawn Gilbertson - Analyst
Okay.
And one more.
I think this is probably for you, Robert, but I'm not sure.
In light of the announcement on the Pittsburgh flight operations center last week, what other big decisions on that front still need to be made?
And what is the timetable for that?
In terms of maintenance and so forth?
Robert Isom - COO
So we were lost on what front?
Dawn Gilbertson - Analyst
Others centers you have to consolidate that you likely will consolidate.
You'll pick a location, whether it's Phoenix, Dallas, wherever they are in terms of other types of centers.
Robert Isom - COO
The operations control was really the big one that was out there, Dawn.
That's one where you absolutely, positively have to have one.
And the fact of the matter is, it will take some time now to move out of the Pittsburgh operation.
Obviously we are running two separate airlines, and so that operations control center, it will move over the course of the next couple of years.
But really the rest of the operations are going to remain intact, and are necessary for running the combined airline.
Doug Parker - CEO
Yes, Dawn, the ops center really was like a headquarters function.
It just happened to be in Pittsburgh [in 17].
But we need all the airplanes, all the peoples.
Anyway, we don't have anything else to announce on other facilities.
Dawn Gilbertson - Analyst
Okay, thank you.
Robert Isom - COO
Thank you.
Operator
Mary Schlangenstein with Bloomberg news.
Mary Schlangenstein - Analyst
Sorry, I just had a quick follow-up on Karen's question.
Scott, will you say how many airlines were authorized to bid on the slots?
And do you have any kind of timeframe for when we'll see the decision?
Like a month, a week, anything like that?
Scott Kirby - President
If it wasn't disclosed by the DOJ -- which it must not of been, since you are asking me -- I'm not going to disclose how many airlines were authorized to bid.
And I'm not sure the exact timeframe.
We will certainly meet the DOJ-mandated timeline, and we may be early, if we are complete.
Mary Schlangenstein - Analyst
So you are expecting the DOJ to disclose something on it?
Scott Kirby - President
I'm not sure that I understand the question.
But we and the acquiring airlines will disclose what each one of them got as soon as we are done.
Your question was how many airlines were authorized to bid.
And I'm not answering that question.
I doubt the DOJ will ever disclose that, but you could ask them.
Mary Schlangenstein - Analyst
Okay.
I misunderstood.
Doug Parker - CEO
That wasn't our decision, Mary, that was theirs.
And they gave us a list of bidders.
Mary Schlangenstein - Analyst
Okay, great.
Thank you.
Doug Parker - CEO
Thanks, Mary.
Operator
Ely Portillo with Charlotte Observer.
Ely Portillo - Analyst
Hi, guys, good morning.
You touted the international expansion of the seasonal service from Charlotte's hub.
And I was just wondering how bookings are looking for that, and if you are exploring any more options for international routes here at DLT.
Scott Kirby - President
Ely, it's too early to tell on those.
I haven't looked at those since they're for the summer.
And we're looking at the whole network.
Charlotte will be a part of that, but nothing specific to announce in Charlotte.
Ely Portillo - Analyst
Okay.
And what's the timeframe like for the full network review?
And when might other hubs start seeing changes?
Scott Kirby - President
Well, the full network review is ongoing.
So this is not like some project that you do and it's done at the end of February, and it's done.
It's an ongoing and iterative process.
So I would say for you in Charlotte there's not a lot that you could expect in terms of changes.
Other than I know we are looking at some cities that American Airlines serves today but US Airways didn't serve, to add once or twice a day service.
Those are mostly small cities, mostly in the Midwest.
But to add some new dots to the map out of Charlotte.
But not any material changes for Charlotte.
Ely Portillo - Analyst
Great.
Thank you.
Doug Parker - CEO
Thanks, Scott.
Operator
Linda Lloyd with the Philadelphia Inquirer.
Linda Lloyd - Analyst
Thanks for taking my question.
With the new government pilot rest rules that went into effect January 4, will crews time-out more often in bad and inclement weather, which would result in more flight cancellations and customers being inconvenienced?
In other words, what will be the impact of these new rules during bad weather?
Robert Isom - COO
Linda, it's Robert Isom.
With the new rest rules, we just have to be more mindful of where pilots are and how much time they've accumulated.
We don't know the total impact, but we're anticipating that we will likely have to carry more crews on a system level.
And we're monitoring the impact.
It certainly makes things more difficult in inclement weather.
But so far, we are managing through it fairly well.
Scott Kirby - President
Yes.
And what will do it is, we're changing the way we schedule.
If you didn't change anything, it would lead to more cancellations.
But we're changing the way we schedule pilots.
And this will take time to figure out.
But hopefully, not as an increased number of cancellations.
But we will have more pilots, since we will carry more pilots to fly the same schedule.
Linda Lloyd - Analyst
Okay.
Now, I know American announced in September it's going to be hiring 1,500 pilots in the next five years.
Is that due to more retirements?
The need to schedule more pilots?
Or is it a combination of reasons?
Scott Kirby - President
It's all of the above.
So it's pilots now retiring at age 65.
It's the change in the flight and duty time rules.
And it's just the nature of the airline right now.
We're all hiring.
Linda Lloyd - Analyst
Okay.
Thank you very much.
Doug Parker - CEO
Thanks, Linda.
Operator
Aaron Karp with Air Transport World.
Aaron Karp - Analyst
Hello.
Just wondering what do you think has been the biggest surprise so far?
And what you think is the biggest challenge going ahead as you integrate?
Doug Parker - CEO
Well, I don't know.
There are good questions that aren't hard to answer at this point.
So far I think it's gone as well as we could expect.
So no major surprises.
If anything, it's -- given how the transaction came together and how well everybody's working together is a pleasant surprise.
It's no secret we came about this in different directions.
But once it was determined that it was the right thing to do, the American team has just been fantastic.
And we're working -- the teams are working really well together.
So I don't know if I would call that a surprise, because it doesn't surprise me.
But it may surprise others.
That's been a very nice thing to see, is how well the teams are working together post-merger.
The biggest challenge is definitely integration, and making sure that we go do what we set out to do.
We have the right team in place.
We have the right plan in place.
It's down to execution, which is not easy to combine two airlines.
But anyway, we feel good about the plan and the people we have in place to manage it.
Aaron Karp - Analyst
Thank you.
Doug Parker - CEO
Thank you.
Operator
Ted Reed with The Street.
Ted Reed - Analyst
Thank you.
I've got a couple of questions.
First of all, in the fourth quarter, does CASM include all the contract gains for the employees at US Airways?
Scott Kirby - President
Not in the fourth quarter, because most of them went into effect in the first quarter.
The flight attendant contract that was put in place is in the fourth quarter.
But the guidance in the first quarter does include that.
But most of the things went into effect -- they did go into effect at merger, but the impact of them is very small in December.
They're all in the first quarter of 2014.
Ted Reed - Analyst
So the pilot increase is not until first quarter.
Scott Kirby - President
Well, it went into effect on December 1. I'm just saying the amount that you have in the CASM in the fourth quarter is very small.
And the full impact of it is in the first-quarter CASM.
Ted Reed - Analyst
Did you give an update increase estimate for CASM in the first quarter?
Scott Kirby - President
Yes, I did.
It's up 3% to 5%.
Ted Reed - Analyst
Okay, thank you.
And secondly, on the Alaska call, they said they were talking to you guys about working together on things.
What are you thinking about doing with Alaska?
Does that help at LAX, or Seattle, or what?
Scott Kirby - President
Well, we have a great partnership with Alaska.
And so of course we're talking to them about the partnership and how to make it better for both of us.
Particularly on the West Coast, is what they add for us.
Ted Reed - Analyst
Okay, thank you.
And when you talked about the changes at the hub, that is mainly rebanking.
That's mainly just in terms of gauge and scheduling.
Is that what you're talking about?
Not your destination for Miami and elsewhere?
Scott Kirby - President
That's correct.
Ted Reed - Analyst
Hello?
Scott Kirby - President
That's correct.
Ted Reed - Analyst
Okay.
And last thing.
After the 2005 merger, there were tremendous RASM increases.
So I thought -- I guess I expected higher RASM increases.
Did I miss something?
Or was that merger so different that, that's not going to be replicated?
Scott Kirby - President
There were differences that time around.
But I think we've started off with -- our guidance is pretty good, pretty healthy RASM increases.
And I think we're going to exceed the industry, as we did then.
In 2005, if you remember, US Airways cut a lot of capacity.
But also Northwest Delta filed bankruptcy September of 2005, and they cut a lot of capacity.
So you were coming from a real trough in industry revenues and profitability.
So the year-over-year improvement was fantastic.
Here, we're starting from a much higher plateau of industry profitability.
So we're not going to have 20%, 25% RASM increases like we had in that merger.
But I think we will be -- have better profit margins than we had following that merger.
Ted Reed - Analyst
All right.
Thank you.
I appreciate it.
Doug Parker - CEO
Thanks, Ted.
Operator
Terry Maxon with the Dallas Morning News.
Terry Maxon - Analyst
I should ask about the Dallas Love Field.
Do you have two gates that you have to give up?
Is there a lot of interest in those gates?
And if you had your choice, would you prefer Southwest get them or Delta get them?
Scott Kirby - President
We haven't started the process for those gates.
Delta has currently publicly indicated an interest in them.
If we had our choice, we'd just keep them, and we would fly out of Love Field.
Terry Maxon - Analyst
All right.
Thank you.
Doug Parker - CEO
Thanks, Terry.
Operator
Dawn Gilbertson with The Arizona Republic.
Dawn Gilbertson - Analyst
Hi.
I had just one quick, non-merger question, either for Scott or Robert.
PSA is dramatically expanding free tech this year.
And there was a lot of chatter on Flyer Talk and Twitter and so forth from elite fliers, saying they're finding the line -- saying the free tech lines are now longer than the regular lines.
I'm wondering, A, if you're hearing anything from your elite travelers?
And, B, if you're noticing anything at the airports in terms of during busy periods?
The pre-check line is supposed to be speedier.
It's slower.
Scott Kirby - President
We're looking around the table at each other.
Nothing that's risen to anyone in this room.
Dawn Gilbertson - Analyst
Okay.
Thanks.
(multiple speakers)
Doug Parker - CEO
I'll put a pie on this, Dawn.
Look, the pre-tech line was never meant to be a really short line.
It's meant to be a faster line.
This is a question for PSA, and not for us.
But indeed, the purpose in having a pre-check line -- and we're happy to see PSA getting more people qualified for pre-check.
Because that means we get more people through security faster.
Having that line be inactive at any point in time is unproductive time.
Dawn Gilbertson - Analyst
Okay.
Thanks, Doug.
Doug Parker - CEO
The more people we move through there, the better.
Dawn Gilbertson - Analyst
Okay, thank you.
Doug Parker - CEO
Okay.
Thank you all very much for your time.
If you have further questions, media contact (technical difficulty) in our Investor Relations group.
Thank you very much.
We appreciate your time and interest.
Operator
That does conclude today's conference.
We appreciate your participation.
You may now disconnect.