美國航空 (AAL) 2014 Q1 法說會逐字稿

Good day and welcome to the American Airlines first quarter 2014 earnings call.

Today's conference is being recorded.

At this time all lines are a listen only mode.

Following the presentation we will conduct a question and answer session.

(Operator Instructions)

And now I would like to turn the conference over to your moderator, Managing Director of Investor Relations, Mr. Daniel Cravens.

Please go ahead sir.

Thanks, operator.

And welcome everybody to the American Airlines Group first quarter 2014 earnings conference call.

Joining us on today's call are Doug Parker, our CEO, Scott Kirby, President, Derek Kerr, 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, and Bev Goulet, our Chief Integration Officer, and Steve Johnson, our EVP of Corporate Affairs.

Were going to start the call this morning with Doug and he'll 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 the remainder of the year.

Scott will then follow with commentary on the revenue environment and our operational performance and then after we hear from those comments we will open the call for analysts Q&A, and lastly, questions from the media.

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 that was issued this morning, our form 10-Q that was also issued this morning, and our form 10K that was issued at the end -- for December 31, 2013.

In addition we will be discussing certain non-GAAP financial measures this morning, such as net profit in CASM excluding unusual items.

A Reconciliation of those numbers to the GAAP financial measures is included in the earnings release and that can be found on our website at www.AA.com.

A webcast of this will also be archived on our website.

The information that we're giving you on the 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'll turn the call over to our CEO, Doug Parker.

Thank you, Dan, for the wonderful dramatic reading he just did.

Thanks everyone for being on.

We are really pleased to report record first quarter profits in our first full quarter post merger.

We announced today a profit for the first quarter, a record $480 million.

Excluding special items, a record first-quarter net profit of $402 million.

Last year, US Airways and American combined earned only $62 million on that same basis, so this $402 million is an increase of $340 million, or an increase of 548%.

Those results are thanks to a phenomenal effort by our over 100,000 team members.

This was the most difficult winter season any of us have ever experienced in this business, and our team managed through it in an exceptional way and did a great job of taking care of our customers.

The teams are working really well together.

We're very pleased with the progress we're making on the merger so far.

I'm quick to note that it's still very early in the process, and the hardest work lies ahead.

But so far so good.

The progress to date combined with today's results, give us confidence we're on the right track.

And then lastly in the release, we noted we ended the quarter with $10.6 billion in total cash, and that since the merger we've used $542 million of cash to reduce our diluted share count by approximately 20 million shares.

Derek will talk more about that, but I know some of your interest in the Company's plans for our cash.

We spent a good bit of time discussing that at our Board meeting this week.

The reality is we're just four and half months into our merger, but we are looking very carefully at our optimal financial and capital allocation strategies.

I'd expect to announce more details as the year progresses.

But the $542 million used toward share reduction, hopefully gives you some indication of our views.

So, with that said I will turn it over to Derek to give you more detail and then Scott will walk you through the revenue productions.

Thanks Doug and good morning everybody.

In the earnings release and 10-Q filed earlier today you will find a lot of information pertaining to our first quarter full-year results as a merged company.

Just please note that the GAAP results shown today compare our 2014 performance to that of legacy AMR Corp.

only and this makes the year-over-year comparisons not meaningful.

As such, for the first quarter 2013 we have provided our financial results on a non-GAAP combined basis, which is the sum of American airlines and US Airways.

We believe this is the best way to review our financial quarterly results.

Unless otherwise noted, all of my comments will be based on the comparisons to the 2013 non-GAAP combined results which can be found in the press release tables under the heading American Airlines Group Inc.

non-GAAP combined consolidated statement of operations.

And we will do this for the rest of the year, unfortunately, this will be the case throughout 2014.

For the first quarter the Company recorded a record GAAP net profit of $480 million this compares to a non-GAAP combined first-quarter 2013 net loss of $297 million.

Excluding net special credits we reported a record net profit of $402 million in the first quarter of 2014, this compares to a non-GAAP combined first-quarter net profit excluding special charges of $62 million in the first quarter 2013.

Using 741 million diluted shares outstanding, we reported earnings of $0.54 per diluted share in the first quarter 2014.

Our pretax margin excluding net special credits was 4.1%.

An increase of 360 basis points year-over-year.

Total capacity for the quarter of 2014 was 23.4 billion ASMs, up 2% from the same period in 2013.

Mainline capacity was 56.8 billion, up 2.7%, and regional capacity was down 3.2% to 6.6 billion ASMs.

We ended the quarter with 977 mainline aircraft in our fleet, took delivery of 19 mainline aircraft and retired 12 aircraft during the quarter.

The remainder of 2014, we expect to continue our fleet replacement program and we plan to retire 70 additional aircraft while taking delivery of 64 new mainline aircraft.

We will end the year at a fleet count of 971.

In April, the Company modified its fleet order book in two ways.

First, in order with Airbus included committed lease financing arrangements with respect to 62 Airbus A320 family aircraft.

The Company has elected to forgo those delivery lease financing commitments and purchase these 8320 aircraft without manufacture provided financing.

These aircraft are scheduled for delivery between first-quarter 2015 and third-quarter 2017.

Second, and in connection with this decision, the Company exercised its right to convert 30 Airbus A320 family neo aircraft from firm orders to options.

We believe this allows the Company to take delivery of these aircraft on the original schedule delivery dates in 2021 and 2022 at its sole discretion.

On the regional side, we ended the quarter with 560 aircraft.

First quarter we retired three ERJ-140s and one Dash 100 aircraft, and took delivery of six Embraer 175 aircraft.

For the remainder of the year the Company expects to take delivery of 15 CRJ-9 aircraft at its wholly-owned subsidiary PSA, as well as 18 Embraer 175s and ten CRJ-9 aircraft, which will be operated by certain of the Company's partner airlines.

Over the remainder of the year, we will retire another Dash 8 and 37 E140 aircraft, and expect to end the year at 565 regional aircraft.

As we have previously disclosed, inclement weather in the first quarter of 2014 created some of the most difficult operating conditions in recent history.

For the Company and the industry.

In total, American canceled more than 34,000 flights during the quarter, most of which were due to weather.

These cancellations unfavorably impacted revenue by approximately $115 million and net operating profit by approximately $60 million.

For the quarter, total operating revenues were a record $10 billion up 5.6% from the same period on a combined basis in 2013 on a 2% increase in system capacity.

Passenger revenues were $8.7 billion up 5% year-over-year with yields up 3.2%.

Cargo revenues were up 4.9% to $206 million due to higher international freight volumes, and other operating revenues were up 1.1 billion, 10%.

Versus a combined first-quarter 2013 total RASM was up 2.9% in first quarter of 2014, to a record $0.1367.

Total RASM for the first quarter was $0.1577, up 3.5%, and Scott will talk about that a little bit later.

Airlines operating expenses excluding special items for the first quarter of 2014 were $9.4 billion, up 2.4% as compared to the same combined period last year.

Mainline operating cost per ASM, excluding special items, was $0.1374, up 0.4% year-over-year due primarily to higher salaries and benefits expenses offset by lower fuel costs.

Salaries and benefits were up 12.7% due primarily to the impact of merger-related labor contract cost increases and expenses associated with variable compensation programs primarily due to a 45% increase in stock price during the first quarter.

Our average mainline fuel price including taxes and legacy American Airlines hedges for the first quarter of 2014 was $3.10 per gallon versus $3.20 per gallon last year.

Excluding special items and fuel, our mainline cost per ASM was $0.0897 in the first quarter 2014, up 3.9%.

Regional operating costs per ASM was $0.1662, up 5% from the year-earlier.

That's primarily due to 3.2% fewer ASMs in the 2014 period resulting from the weather cancellations.

Excluding special items and fuel, our consolidated CASM was up 3.7% in 2014.

We ended the quarter with $10.6 billion in total cash and investments of which $947 million was restricted.

The company also has an undrawn revolving credit facility of $1 billion.

During the quarter the quarter, the Company generated $1.3 billion in cash flow from operations and also payed down $500 million in debt.

Approximately $750 million of the Company's unrestricted cash balance was held in Venezuelan bolivares valued at the weighted average applicable exchange rate of VEF6.32 to $1.

As Doug said, since the merger closed the Company has paid $542 million in tax withholding for employees in lieu of issuing shares of common stock as compensation under the plan reorganization.

Thereby reducing the number of shares expected to be issued under the plan by approximately $20 million.

Additionally, the Company has elected to utilize approximate $175 million of cash to settle the remaining $22 million principle amount of the US Airways Group 7 1/4 convertible notes due May 15, 2014, which will further reduce shares outstanding by approximately 4 million.

Taken together, the Company now anticipates the total number of shares outstanding will be 736 million which is 20 million fewer shares than expected under the plan of reorganization.

Although not a share repurchase, we believe this is the most significant share reduction by any airline this year.

Turning now to guidance, we are reducing overall system capacity slightly versus previous guidance.

We continue to modify the network and thus have reduced some unprofitable flying like Charlotte Rio, and cut back some international seasonal service earlier than planned.

Mainline expected to be approximately 3% in 2014 of which international capacity expected to be up 7%, and domestic capacity up approximately 1%.

Mainline ASMs breakdown by the remainder of 2014 by quarter as follows: $60.9 billion in the second quarter, $62.1 billion in the third quarter, $59.1 billion in the fourth quarter.

Regional capacity breaks down by quarter at approximately $7.13 billion in the second quarter, $7.35 billion in the third quarter, and $7.31 billion in the fourth quarter.

The CASM guidance takes into account the effects of the merger on our cost structure, including the anticipated synergy benefits and the impact of higher labor costs that were agreed to in connection with the merger.

As such, we are now going to guide to CASM ex fuel and special items in order for more accurate modeling.

For the full year, 2014 we are forecasting mainline CASM ex special items and fuel to be up 1% to 3% versus 2013.

This is driven by the cost of new labor contracts, higher depreciation, higher maintenance cost due to engine overhauls, offset by forecasted synergy benefits.

By quarter, this breaks down as follows: Second quarter to be up 1% to 3%, third quarter up 1% to 3%, fourth quarter down 1% to up 1%.

And the regional CASM is forecast to be up approximately 2% to 4% in 2014.

We're forecasting mainline fuel price to be approximately $3.06 per gallon in 2014.

Using the April 22 forward curve we expect fuel price to be in the range of $3.04 to $3.09 for 2014.

Our forecast breaks down by quarter for the remainder of the year as follows: $3.03 to $3.08 in the second quarter, $3.04 to $3.09 in the third quarter, and $2.99 to $3.04 in the fourth quarter.

As of December 31, 2013 our deferred tax asset, which includes a $10.6 billion of NOL was subject to full val allowance.

Mechanical utilization of this NOL in 2014, when profitable, does not result in a provision for taxes on our P&L.

Using the midpoint of guidance, we have provided along with PRASM guidance Scott will give you, we expect our second quarter pretax margin to improved by more than 400 basis points year-over-year and a range between 10% and 12%.

Looking at CapEx, focus on remainder of 2014 on integrating the airlines, while also making important investment in our fleet product and operations.

We're forecasting total net cash CapEx to be approximately $2.1 billion.

This includes non-aircraft CapEx of $900 million and net aircraft CapEx of $1.2 billion.

In summary, while this is very early in our integration, we are pleased with the results achieved thus far.

I'd like to thank and congratulate all of our team members for their hard work and perseverance, particularly during the extremely difficult operating conditions in the first quarter.

Thanks to their efforts we have produced record financial results and have a tremendous start towards reaching our goal of restoring American to the world's greatest airline.

With that, I'll turn it over to Scott.

Thanks Derek.

I'd like to start by thanking all the people of American Airlines for the great job they did operationally during the first quarter in spite of the very difficult weather challenges.

We've seen dramatic improvement in the operation, including a number one on-time performance, and number one lowest miss handled baggage rate in January.

Those were significant improvements in maintenance reliability and the team is just running a great operation to start the second quarter.

On the revenue front, or first quarter RASM was up 2.9%.

The revenue environment was good throughout the quarter, though it was impacted by weather and the movement of Easter timing.

We saw particular strength in our domestic network.

RASM up 6% year-over-year.

Pacific RASM was up 9%.

Latin RASM was down 1%, which given industry capacity growth of 7% and the challenges in Venezuela and Argentina we view as fairly strong performance.

Atlantic RASM was down 2% as the US Airways network transitioned out of Star Alliance, but didn't join oneworld until March 31, and therefore was unable to take alliance bookings throughout the quarter.

We're still early in the integration process, but we continue to be pleased with the progress thus far.

I've already highlighted some of the operational improvements that we've seen, but in the first quarter, we also had some major milestones including a successful customer day one cut over, we implemented the largest code share in airline history.

We converted US Airways from Star to oneworld.

Began integrating our frequent flyer program.

Combined operations in an additional 32 airports.

Started winning new corporate business in sales with the combined network and we have many more initiatives underway.

All the work we're doing leaves us either more confident that we will be able to meet or exceed our prior synergy guidance.

More synergies will start to flow through in future quarters and the future cost and revenue opportunities, including tasks like remaking the Miami hub, will begin to be implemented when we publish our August schedule change.

Turning to the outlet going forward, we feel quite good about the demand environment.

Demand remains strong across all geographies, but domestic is still the strongest region in the world for us.

Demand is also strong in the international markets, but high-capacity growth rates in all regions means that RASM comps will be more difficult than they are domestically.

In spite of the high-capacity growth rates, however, we currently expect RASM to be up in all regions in the second quarter.

Given the strength we see in demand, we expect combined consolidated RASM to be up 4% to 6% year-over-year in Q2.

In conclusion, we're very encouraged with the operating results at American.

The demand environment remains robust and we're excited about the future opportunities and are moving quickly to realize those opportunities.

That's all we have operator.

We're ready for questions.

(Operator Instructions)

We will take our first questions from John Godin with Morgan Stanley.

Hey.

Thanks a lot for taking my question.

One of the -- one question I get a lot from investors is, how can we have confidence that the integration in 2015 is going to go well, because a lot of the integration activities are deferred until that point.

I'm just curious, Doug and Scott, if you could talk about what you can get ahead of, and how much clarity you have today on the integration that you need to do in 2015, just to get people comfortable with that risk.

I'll start and Scott can follow up.

Thanks, John.

First off, the point is valid.

As I said in my comments, the hard work still lies ahead, and the biggest thing, of course, is reservations migration at some point, that will occur, not in 2014, but sometime in 2015.

What I'd note, though, is we are highly cognizant of the issue.

We have teams well-designed and plans well-designed to manage the issue.

And we are going to do everything we possibly can to do ensure that it goes well.

We have the benefit of seeing -- of having done ones ourself and seeing others do it.

Know how important it is to do it well, and can learn from those experiences.

We also had the benefit of having labor and our employees behind and supportive of the process, which helps.

And we've taken some care as it relates to systems to ensure that we are, for the most part, using what we call, adopt and go, going with the larger system because the least disruption for systems integration.

All those things combined, we believe, will allow us to do all this in a way that is -- that will be managed effectively and efficiently.

But, it's fair to note that that work still lies ahead.

And we're going to do everything we can to make sure that we don't have some of the issues that have affected other airlines in the past.

We can't know for sure what will happen, and I'm certain that we will have some issues.

Doug described our process pretty well.

What I would add is, we've been through this -- many of us have been through this with the America West/US Airways once before.

Many people on the American side have been through it with TWA, and we've had a really good start.

We haven't done the hardest things yet, like the route system cutover, but we've done some really big initiatives, like the customer day one initiatives, and the integration movement of US Airways into oneworld, and the coach air implementation.

In this merger, those things were all more complicated, because there was no relationship between US Airways and American premerger, unlike the both United and Delta merger.

So, those were much more complicated than they were anywhere else.

Those were big deals.

And we did those successfully, with very minimal impacts.

That makes us feel good that the people we have working on it in the process is going to be successful when we finish everything.

That's great.

And Scott, on the 2Q PRASM, I thought I heard you say that Asia-Pacific was up in the high single digits.

If I heard that right, could you just elaborate on how you guys are approaching international differently than some of the peers are, because you're seeing phenomenal results?

Yes.

I think it's probably not an apples to oranges comparison for comparing us to the others, because they have a much bigger operations.

We've done some things to improve our slot times, for example.

And that has meaningful help, and we have as few of flights a day at Asia as we do, those can have a big effect.

One of the other things that's more structural, that it's share -- seeing some shifting of shares.

We've seen pretty big, double-digit improvement in our premium revenues, which is generally reflective of winning share.

I think we're doing a great job tactically on winning share.

But I don't think we're directly comparable to the others, just because we're so much smaller.

We're doing well, but probably not directly comparable to the others.

Thanks a lot.

And we'll take our next question from Jamie Baker with JPMorgan.

Hey, good morning.

First, a clarification for Derek.

Your 10% to 12% operating margin -- I'm sorry.

See, I made the mistake that everybody else is.

Your 10% to 12% margin guide is a pretax number, not comparable to the 14%/16% from Delta.

Please clarify.

Exactly correct.

Yes.

Thank you.

We believe (multiple speakers) margin's the right way to look at it.

Okay.

Sorry to use your call as a soapbox, guys.

Jamie, hold on.

Jamie, it's Doug.

I'll use it as a soapbox.

No, look.

This is -- I don't how this happened, but at some point in the last couple of years, the market, or analysts, or whoever, started looking at operating margin per airlines, which is something from my old CFO days.

We worked really hard to get people to stop doing, because it's not a good measure of -- in the airline business.

It's an FCC measure, of course.

But it's not a good measure for airlines, because just as you would never look at a balance sheet debt without capitalizing operating leases, you shouldn't look at operating margins at airlines and think that doesn't include ownership costs, because it does.

It includes a lot of them.

We have always -- I don't know, I shouldn't take credit for this.

You remember Larry Kellner back at Continental got everyone convinced that, stop looking at this, years ago, back when the airline made money a long time ago.

And somehow -- but in between the time he started losing money and new analysts came around, people were looking at it again.

But it's not a valid measure to look at airline performance, because -- if you want to look at operating performance.

You want to look at operating performance, look at EBITDAR margins.

Quickly, people start saying, well, I don't like to look at EBITDAR margins because it excludes too much.

We agree with that.

I think the right measure to compare it on is pretax margins.

It's not a huge deal, because I don't think there are big gaps between operating -- relatively between airlines.

We're not going to talk about operating margins, because it's not a measure to look at operating performance for airlines.

The numbers from American are going to be pretax margin numbers.

Excellent.

No pushback for me on that.

That doesn't use up my time for the question, though, does it?

No, that was my speech.

(laughter)

No, no.

It was very valuable, Doug.

I appreciate that, and I'm glad to see the market has gotten the message.

I was going to ask you why you don't formalize the buyback program, but your prepared remarks cut me off on that one, so a couple for Scott, if I may.

The Atlantic was your worst geography on a RASM basis.

I'm curious if that's UK-specific or something broader, and also any changes you might make in confronting that situation.

And second, also for Scott and maybe Derek.

Delta's move to a revenue-based frequent flyer program came after you had closed the merger.

I'm curious if advantage overhaul was part of the original synergy targets, or as your competitors potentially laid down a new precedent, should we consider any hypothetical changes you make as incremental to what you've already got it on?

Okay.

First, across the Atlantic, our weakness was more in the old US Airways network, across all geographies in the US Airways network, but more continental Europe.

And that was principally the fact that we weren't in an alliance, basically, for the first quarter.

So, we had no alliance bookings for the whole quarter, and we expect that to rectify.

It probably does mean some capacity moves around within Europe, because of moving out of Star and into oneworld.

But that's probably the biggest explanation for the Atlantic.

As to the frequent flyer program, we've started making some changes already.

We did anticipate when we merged that we would get some synergies from the frequent flyer program.

Actually, that's a big part of the synergies.

But, with regard to what Delta's done, we -- even if we wanted to change it, couldn't change it today, because we've got so much work to do just to get the programs integrated.

Our IT resources are a constraint, and an appropriate constraint.

Back to the first question of the call, we want to make sure the integration goes smoothly and goes well.

We know that IT is the biggest risk in that regard, so we're not going to add on extra changes until we've finished with that.

Any changes for us in conceptually changing the program probably are in next year sometime.

But conceptually, it certainly makes sense to reward your best customers the most.

Sure.

Okay, thanks.

And Doug, thank you again for chiming in on the margin commentary.

I appreciate it very much.

We'll take our next question from Glenn Engel with Bank of America.

Good morning.

We had Delta on their call talk about corporate revenues up about 6%, United about 2%.

Can you give us any flavor, and two, give us a flavor of just how business looks relative to leisure?

We were also up mid-single digits on corporate revenue.

We've hit the number we've disclosed sometimes in the past.

We're probably not going to disclose the specifics for the near term, just because we need to get a normalized base.

And what that really means is -- I can always make the corporate revenue number go up just by signing more corporate accounts, but that's not necessarily smart business.

And so until we get to a normalized base, which we were at at US Airways and we're comfortable disclosing it, we're going to probably not talk about it, but we were also up mid-single digits.

I'd add that we've had some nice corporate wins in the sales team.

It's anecdotal, but a lot of anecdotes of winning corporate business and being able to use the power of the new network, particularly in places like New York, where you combine our transcom product the shuttle plane, and that's just a powerful combination.

Can you help model (multiple speakers) -- I'm sorry.

Business versus leisure, both are strong.

I wouldn't classify one as stronger than the other.

Both have been pretty strong.

The first quarter, business revenues were distorted by the storms.

The storms were significant enough that there actually probably was some lost revenue net of the (technical difficulty), but there was some lost revenue, because the storms were so bad.

So that probably distorted the first quarter.

But I think they're probably equally strong.

Can you help us model income taxes for the year?

Yes.

They'll be no higher than $5 million each quarter, so what we had this quarter is probably what we'll have for the rest of the quarter for income taxes going forward for the rest of the year.

Thanks.

And we will take our next question from Hunter Keay with Wolfe Research.

Thank you.

Hey, Scott, can you talk about the benefit of some of the new initiatives you guys just recently announced lately, truing up some of the stuff on the fee side from your airline?

Initially, you talked about $1 billion in synergies, and in the last call you talked about the $400 million of incremental opportunities with re-banking.

Would you maybe care to quantify some of these new initiatives, and would they be incremental to that $1.4 billion?

This is hard for me to -- I don't think of things as, here is the synergy and here's a change to the business.

It's all improvement to the core results.

Some of this probably was in the $1.4 billion, some of it may not have been.

What I'd say is, which I said in my prepared remarks, too, is we feel increasingly confident that the $1 billion plus the $400 million, so $1.4 billion, that we were going to meet or exceed that.

The kinds of changes that we made a month or so ago just increased that level of confidence that we're going to at least hit those numbers.

But we're not increasing the level of guidance, but our confidence gets higher everyday.

Okay.

That's great.

And maybe another one for you, Scott, too.

As you were talking about re-banking Miami, DFW and O'Hare, are we going to see that.

We're presumably going to see that in margins, but are we also going to see that in PRASM, too?

And how should we think about quantifying it, first by hub, and then the total all-in contribution once everything is all done on the full run rate basis?

Thanks.

You'll see it in PRASM, and you'll see it in CASM.

It will cause our CASM to go up in each of those hubs, but the profitability will go up more.

The $400 million we talked, you talked about it as re-banking.

That's one of the elements of the $400 million, but it wasn't the only one.

The other two big elements are seat density, increasing seat density on the aircraft.

We're already in the process of doing that.

It really won't get fully done until end of next summer, actually.

It will take a while, but it will start rolling out right away.

That is RASM negative, CASM positive.

Re-banking is RASM positive, CASM negative.

And then in the final one is variable scheduling, which is RASM positive, and largely CASM neutral.

In total, all of those mean that RASM -- are worth about $400 million, so RASM goes up $400 million over CASM.

But it will be different by each one of them.

They'll really start coming in with the August schedule change.

It will be the first schedule changes.

But these won't get fully ramped up probably until next summer, it'll be pretty close to being fully ramped up on this.

Great, thanks.

We'll take our next question from Michael Linenberg from Deutsche Bank

Hey, guys.

Doug, going back to pretax versus operating.

You think about that volatility in the non-op area, and I guess you, to some extent, have been able to minimize that, given your policy on hedging.

Since the merger, I'm asking, have you entered into any new fuel hedges?

And what are your thoughts on hedging on FX?

I think American historically was a hedger in that another area.

Is that another area that you'll probably refrain from?

Your thoughts on that?

Fuel, no change on that and our views on that, and don't anticipate doing any fuel hedging going forward.

FX, on what --

American didn't hedge before, and we don't have any intent to start hedging.

In most places, we have at least some balance of cost versus the currency.

And really, the only place we have significant currency exposure is Venezuela.

Less about conversion issues and more -- or less about conversion and more about getting the money.

Okay, great.

And then, just back to talking about metrics to focus on pretax margin.

As you think about going forward, you look at what some of the other carriers have done.

They've either picked a metric, or a philosophy to get everybody on the team, working with the same playbook.

Is that something that American rolls out, an ROIC target benchmark, an EPS growth rate benchmark?

Anything along those lines?

Thoughts on that would be helpful.

Thanks, Mike.

That's part of what I talked about, or what I was getting at.

Give it a few months to come back and tell you what we think to give you a better layout of our objectives.

Again, what I believe is, we'll come back.

I have a little bit of concern about those types of benchmarks.

I think they undersell what the companies can do.

I think our job is to go maximize profitability, to maximize return on capital.

And I worry that companies that put targets in place like that hit their target, and then start spending on things instead of giving it back to the shareholders.

We want to be careful about that.

I assure you that everything we're doing is focused on maximizing value to our shareholders.

And in doing so, you need not worry that we're not looking for that metrics.

We'll come back with the way we think -- that we plan to look at our business and let you know how we plan to look at it on a going-forward basis, but it will probably be different than what you're hearing from other airlines.

Not a problem.

I would say, look, the tax withholding buyback, look, that's just great evidence that you care a lot about the shareholders.

So, thanks.

Appreciate it.

We'll take our next question from Helane Becker with Cowen.

Thanks very much, operator.

Hi, guys.

Thanks for the time.

Just two questions.

One on Venezuela, specifically, I didn't get a chance to read the 10-Q this morning, but did you make a provision for not getting any of your money back?

No, we did not.

Okay.

And the other question -- thank you for that.

And the other question I had is with respect to seasonality of the earnings, how should we think about that going forward now and doing our modeling?

My question is really, based on the fact that I think Doug last year at one point, or in a conference recently, you had said that you thought you needed to do about $1.5 billion in revenue to cover the labor cost increases that you're going to experience or are experiencing.

The first quarter, you were certainly on track to exceed that level.

And A -- I wonder if, is that right, that $1.5 billion number?

And B -- just address the seasonality part.

Thanks.

Again, the $1.5 billion, Helane, I believe is consistent with Scott -- what Scott talked about is the $1 billion and that synergy, which was about $1.5 billion in synergy to the Company, offset by this labor increase that we've largely already incurred.

But that's a synergy number, not a seasonality number.

And then again, Scott's now added $400 million to that, so now at $1.4 billion, I'm sorry.

We feel good about those numbers, as stated.

As to seasonality, I'll look to Derek and Scott, but I think what I would do if I were you, Helane, is add the two American and US Airways historical numbers.

That seasonality between the two shouldn't change dramatically.

You're going to need to figure out how to ramp in the synergies over time.

But we try to give you some direction on that, as well.

Okay, thank you.

(multiple speakers) I'm sorry --

I was just going to follow -- I think it's more a second and third quarter similar seasonality than the fourth quarter, and then goes to the first quarter.

I think that's the -- that's where you're at from seasonality and earnings for quarter purposes.

Right, okay.

All right.

Thank you.

We'll take our next question from Dan McKenzie with Buckingham Research.

Hey, thanks for the time, guys.

Good morning.

My first question is on capital expenditures.

I'm just wondering if the disclosure statement is still the best proxy we have for looking ahead one to three years.

And then also, what do we need to keep in mind?

What I mean by that, are there investments, either IT or product improvements, that you've decided that you might now need to make that were not included initially?

Is the disclosure a gross CapEx outlook?

It seems like aircraft orders are moving around.

Even any kind of directional commentary would be helpful.

Yes.

I think, Dan, I haven't looked at the disclosure statement in a while, so I'm not sure exactly where that is.

But the run rate for non-op capital expenditures, we have about $900 million this year.

I believe it will ramp to somewhere in the $750 million going forward.

That will include the $1.2 billion that we talked about to integrate the two airlines.

That will be in that number.

I would expect that $900 million to ramp down to $750 million, and then over time be down a little bit more than that.

The CapEx on aircraft, as we've talked about even on the last call, it's about $5.5 billion this year from an aircraft perspective.

And then going forward for at least the next five years, it is in that range.

What we've tried to guide to now is what we believe will be the net of financing versus cash going out the door, which is the $1.2 billion that we have in our net aircraft CapEx in PDPs.

That can vary, depending on what we want to do going forward and how we want to finance aircraft.

Most of the financings are committed to in 2014.

All the leases and the things are all committed to, so that's a pretty good number in 2014.

But 2015 and beyond, it just depends on -- we'll try to guide to that as we move forward.

But there's just decisions we'll have to make in 2015 and beyond on financing of aircraft and how we finance those planes as they come forward.

Understood.

Okay.

I appreciate that.

And then secondly, I'm wondering if you can talk about -- following up on the Venezuelan question earlier.

I'm wondering if you can talk about what steps you've taken to limit your exposure to Bolivars?

And then also, talk about capacity to Latin American in general.

It looks like it's going to be up about 10% in the second quarter.

I appreciate the commentary for PRASM to be up in all regions, so that's encouraging.

But I'm just wondering if you can talk about how you're working with LAN and TAM, and how you're managing that geographic entity?

We're pretty heavily engaged with the government on what's going to happen with the historical repatriations that we need to get.

We just don't have much disclose.

We don't have a way to hedge or change our exposure to Bolivars.

There's no mechanism for doing that.

We are exposed to Venezuela, which is about 1.4% of our revenues.

And we continue to work with the Venezuelan government on getting the money back.

And then capacity just in general to Latin America?

In general to Latin America, our capacity is up, overlapping with a lot of new service that started last year.

Our capacity is up, I think about 7% in the next quarter, and industry's up just a little bit more than that.

So there is a lot of capacity from Latin America for the year.

I got it.

But I was just wondering if you can talk about it, is there an opportunity to work with LAN and TAM on managing that dynamic?

No, we don't have a joint business with them.

So that would be illegal.

Okay.

Thank you.

We'll take our next question from David Fintzen with Berkeley.

Good morning, everyone.

Question for Scott, just on the timing of schedule changes.

For some reason, I had it in my head, Miami was getting re-banked more in the spring than post summer.

And maybe the way to ask this is, as you think about where you were post -- on deal close in terms of the changes you wanted to make, how are you tracking?

Are you finding it more comfortable in making sizable schedule changes, or is there a learning curve that's taking a little bit longer?

Just kind of curious how that's tracking?

The Miami schedule change, for example, is tracking exactly when we expected it to be.

We always targeted the mid-August schedule change.

The reason for that is, you need to get a schedule loaded 90 to 120 days in advance before -- so the customers can book it.

And then you need some time to develop it.

And particularly for such a change like this, you need time for the operations to be prepared for it to review it.

We're spending a lot of time with the folks involved in customs and border patrol in Miami to help with staffing issues there.

And help increase the throughput, because it's something that's good for Miami and South Florida, but we're going to need help.

So to get all that done and be prepared for the August schedule change, I think is the -- I'm the most optimistic and aggressive guy around with these things, and that's about as aggressive is I would've expected it to be.

In general, that's true of everything that's happening.

Things are going, decisions are being made fast, the IT has been responsive on getting us the changes in a timeframe that we can get things implemented.

We feel really good about the timing and how quickly we're moving on the synergy issues.

And then, do you need to see a bit of Miami to have some lessons off of that before you start to do the same in Chicago and Dallas, or can that be a pretty quick process?

No, we're working on the Chicago and Dallas schedule changes now.

So we finish with Miami, and the scheduling team and the ops teams that worked on Miami have now turned their attention first to Chicago, and then Dallas will come after that.

Okay, great.

We will, I'm sure, learn lessons that can be incorporated into what we do there.

But we will be building the schedules and loading the schedules, assuming that Miami is going to work and just moving forward.

Okay.

That makes sense.

Just a quick one on domestic versus international RASM in the second quarter.

You mentioned, obviously, domestic higher than internationals, complicitly what you said.

You didn't say it explicitly.

How much wider is that spread than the first quarter?

Is that gapping out pretty dramatically, or is that a more subtle change?

I don't know.

It was a decent size in the first quarter, so I guess it'll be similar in the second quarter.

It may even be a little wider, because capacity gets higher.

I don't have that sitting right in front of me, but capacity growth is a little bit more in the second quarter internationally, and so I would guess that spread will widen a little, if anything.

Okay, that helps.

Perfect.

Thank you.

Appreciate it.

And we'll take our next question from Thomas Kim from Goldman Sachs.

Thank you.

I'd like to start off with a big picture question with regard to your thoughts on the price volume mix for the domestic market.

What are your thoughts about load factor, that 84%?

Do you think this is optimal?

And related to that, to what extent do you think you can manage your revenue mix by pushing pricing a little bit further, even if it is at the expense of traffic?

Well, that's not a simple question to ask, and Steve Johnson is shaking his head at me.

We're always trying to maximize revenue, and sometimes that's lowering fares and sometimes that's raising fares.

I think we do a pretty good job of it, and we'll continue doing that.

Presumably, or another way of looking at it might be just with regard to the corporate versus leisure mix.

What sort of -- how much more upside do you potentially see with regard to the corporate share gains or corporate share growth as we look forward?

The run rate that you highlighted for Q1, is that something mid-single digits?

Is that something we could foresee going forward for Q2, Q3, just given the positive commentary out of some of the LPCs earlier today with regard to the outlet for demand?

I think the outlook for demand across the industry is bright, and it's robust, both in corporate and in leisure.

I think that specific to American Airlines, we will increase our share of both sets of businesses as a result of the merger, but more so in the corporate business.

And that is part of our synergy there.

We will carry more business traffic than we would've -- the combined airline will carry more business traffic than we would've individually, so that effectively, we will win share.

I think that is going to happen.

I think it's already starting to happen.

But as you get the network integrated, as you get to be a single airline, that will just improve over time.

And just a follow-on to that, and more specific to the Atlantic, particularly the New York/London route.

How has your share evolved over the last couple quarters?

And do you see that this might change with regard to the JV, as presumably the competitiveness could increase with Delta going forward?

Do think you need to do anything differently with regard to what you're doing today?

And do you potentially see risk to pricing as that JV ramps?

I'm somewhat new to this, so I can't give you the real historical perspective, but I can say that the UK looks strong for us.

We continue to do very well with the premium customers and markets like JFK to London.

The pricing environment has actually improved out of the UK.

We're quite optimistic.

We have a great partnership with British Airways.

It's a partnership, too, that we have attention at the highest level, both there and here, to try to maximize revenue.

And I think people that are open-minded on both sides of the Atlantic about learning from things that all the three of the airlines did -- US Airways, American, and BA -- in maximizing revenue.

I feel really optimistic about that JV and our ability over time to improve performance across the Atlantic and improve performance out of the UK, but for now, the UK looks pretty good.

Okay.

Thanks a lot.

We'll take our next question from Savi Syth with Raymond James.

Hey, good morning.

Just a couple of quick follow-up questions.

On Venezuela, how much of that 1.1% of revenue is actually in Bolivars versus US dollars?

And also, I think the government was going to treat 2013 revenue and 2014 separately.

And I was wondering if you have gotten paid for 2014?

It's about 90% sold in Venezuela, it's about 90% of the revenue is Bolivars on those routes.

We have gotten paid for January of 2014, which is the normal repatriation schedule.

We're hopeful we'll get paid for February in the near future.

And we're talking to them about the 2013 -- and actually we have some 2012, as well.

About 2012 and 2013 balances, but $700 million-something.

And just on the nonfuel costs, it looks like maybe the guidance for the year improved a bit and I was just wondering where that was coming from, despite lower overall ASM?

It's really just a change in the way we're going to give guidance to better do the modeling, so we changed it to just CASM ex fuel and special items.

So it really is -- I think it's closer to -- it's right on.

There's no real changing CASM guidance from a nonfuel cost perspective.

It's just the way we're looking at it as ex fuel and ex special versus ex fuel, ex special, and ex profit-sharing.

Understood.

All right, great.

Thank you.

And we'll take our next question from Duane Pfennigwerth with Evercore.

Hey, thanks.

Just on your order book, the 30 options, or the 30 firm that converted to options out in 2020.

How should we interpret that?

Is this like the first baby step towards a broader restructuring, or is this all you can do?

Well, it's something that we can do right now, and we could do.

So we've done that.

We're going to constantly look at the order book and look at what we have.

But that's just something we could do at this point in time.

Right now, we don't have any rights to do anything else.

We're happy with the orders that are out there, but it's something that we're going to look at going forward, as we look at the whole capital structure, as we look at the whole airline.

But as of right now, we don't plan on making any other changes to the order book.

Is it a function of -- this merger basically just closed, and obviously, you have lots of priorities and lots of opportunities to improve topline, and probably your cost structure.

Is it a function of sequence, or is a function of, really there's not as much flexibility as some of us might assume?

And function of desire.

The airplanes are good capital investments that are replacing much older airplanes.

They're NPV-positive capital commitments.

They're airplanes -- they're investments that the Company wants to make and should make to modernize this fleet.

So I don't think a major change in the order book would be in our shareholders' interests.

Whether there are ways to move some things around and fine tune it, perhaps.

But we're comfortable with the flexibility we have, because we have with this, out of the ability to stay essentially the same size as newer [curb] come in and retire older airplanes, or have some modest growth, if demand warrants.

So we actually like where we are in terms of flexibility [waste] to order book.

The issue that was disclosed is one where, per the contract, American had lined up some financing with Airbus and had the foresight to say, if we don't need this financing, which we now don't need, given this performance, that we will have the flexibility to reduce some of the aircraft.

And we availed ourselves of that flexibility, because we're not going to use the financing.

That's very helpful.

And then just lastly, you mentioned we'd get an update on capital return, or at least your thinking.

Can you give us some insight into the criteria, or what you need to see as you evaluate next steps there?

Thanks for taking the questions.

Sure.

Just a little more time, really.

We're so focused on getting the airlines together and integrated and making sure -- and want to be sure we do it right.

I think we all know directionally where we should be headed, and we're headed directionally in that area.

It's just a matter before we go make an announcement, I want to make sure we've thought out all the issues and have done it right.

We'll do it thoughtfully, but also in a way that everyone will be pleased with the results.

Thanks.

And now we will begin taking questions from any media that is on the conference.

(Operator Instructions)

We'll take our first question from Terry Maxon with the Dallas Morning News.

Good morning.

We have Virgin and America scheduling an announcement on Friday.

Could you confirm that American is divesting the two gates Love Field Two to that carrier?

No.

We cannot.

We can confirm that per the agreement with the Department of Justice, we agreed to divest those gates, but we have no other knowledge.

You have no other knowledge?

This is Steve.

We know that there are discussions going on.

There are discussions among the two airlines, among -- and Dallas, and the city of Dallas, that owns the airport.

But Southwest and Delta are still making a case that they should be entitled to this, and we'll be still a couple of weeks before we know how this is going to all settle.

(multiple speakers)

Steve, correct if I'm wrong.

Terry, the distinction, of course, is this versus the slot.

The slots are owned by the Company, and these gates are owned by the city of Dallas.

Yes, there are not actually any slots at Dallas Love Field.

They're gates.

We're involved somewhat.

We're not -- we've agreed that we won't use them, and the city is working with airlines as much as we are.

Okay.

Is some announcement then premature?

I'll say that I was surprised when I found out that they had called a press conference.

Was that Steve?

Yes.

Okay.

And I have a follow-up question.

Spirit announced another expansion, I think Kansas City and maybe Houston, this week.

Are they still small enough that they're not a real bother to American Airlines, or are they of such sufficient size that they are affecting your pricing and planning?

I would certainly never use the characterization that you used before they added growth or after.

They're a competitor, they're a real competitor.

They do well, and we care about them in competing with them and watch carefully what they do.

We did before, and we do after this, as well.

Was that Derek?

That's Scott.

Okay, sorry.

All right.

Thank you.

Thanks Terry.

We'll take our next question from Susan Carey from the Wall Street Journal.

Good morning.

I'm sorry, but I missed Derek's explanation about what the storms cost the Company in the way of revenue hit and hit to the net.

Can you just reprise those numbers, Derek, please?

Yes, sure, Susan.

Cancellations impacted revenue by $115 million.

One-one-five?

One-one-five, yes.

And then net operating profit by $60 million, six-zero.

Thank you.

We'll take our next question from Andrea Ahles with Fort Worth Star-Telegram.

Hi, how are you?

Good morning.

I was wondering if you could talk a little bit about the future of Envoy Airlines now that the pilots have rejected the contract?

Have you found another carrier that you want to use, a regional carrier you want to use for the new regionals that you have coming online this year?

Can you give any sort of color about the future of Envoy?

We are in final negotiations with a couple of providers for placing the 175s.

I'm not sure when we'll announce something, but at some point we will, I believe, announce something.

As to the future of Envoy, it's still a very important part of the airline, and we hope someday to be able to fly large regional jets at Envoy still.

And we also want that Envoy to be a place, regardless of the latest contract, that pilots can go and ultimately transition to the mainline here at American.

So when you mentioned the couple providers that you're in final negotiations with, is Envoy not one of those?

No, it's not.

Okay.

Thank you.

We'll take our next question from Linda Loyd with the Philadelphia Inquirer.

Thanks for taking my question.

What is the seasonal capacity that you will be ending early?

When will this capacity be ending?

And are any of these trans-Atlantic flights out of Philadelphia?

I'm not sure.

I don't think any of them are out of Philadelphia, but I'm not 100% sure, and it's a couple of Charlotte routes, Brussels on most of them.

And when you say ending early, you mean September instead of October, that sort of thing?

Yes.

Okay, thank you.

We'll take our next question from Karen Jacobs with Reuters.

Hi there.

Thanks for taking my question.

I hope you can hear me.

Yes, loud and clear.

I just had a question.

I was just wondering if you're concerned about pilot availability issues with your regional carriers?

There's been a lot of attention on that, as you know this year.

Karen, it's Robert Isom, the Chief Operating Officer.

I think the concerns are warranted, but we see those as being down the road quite a bit.

For now, if you take a look at our operations, certainly from a mainline perspective, and the regional carriers that we have that have some growth, they're operating and doing well and able to attract pilots.

Okay.

Thank you.

And we'll take our nest question from Henry Harteveldt with Atmosphere Research.

Thanks.

I've a question about Main Cabin Extra.

Is there any consideration about turning that into more of a true premium economy cabin on any of your longer haul flights, whether transcon or international?

Nothing imminent, but we have a fantastic transcon product already.

If you've not had the chance, you should go fly the A-321 transcon product.

So we have a fantastic transcon product.

It's not like regular MC.

And nothing imminent planned across the Atlantic, although that is one of the things that British Airways, their premium economy product, they do really well.

And they're our partner.

So to the extent there's something we can learn and put at American Airlines, we are very open to that.

That's one of the good things that we're talking to them about.

We don't have anything imminently planned.

Thank you.

And we have no further questions in queue.

I would now like to turn the call back over to our speakers for any additional or closing remarks.

Excellent.

Thank you very much for all of your interest.

Again, I want to thank the whole team for the great job they've done in producing these record profits, and we're looking forward to having similar or better results in the future.

Thank you all very much for your time.

And this does conclude today's conference call.

Thank you all for your participation.

You may now disconnect.