美國航空 (AAL) 2014 Q3 法說會逐字稿

Good day and welcome to the American Airlines Group third-quarter 2014 earnings call.

Today's conference call is being recorded.

(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, Melissa, and welcome, everybody, to the American Airlines Group third-quarter 2014 earnings conference call.

Joining us on the call today is Doug Parker, our Chairman and CEO; Scott Kirby, our President; and Derek Kerr, our Chief Financial Officer.

Also in the room for the Q&A session is Robert Isom, our Chief Operating Operator; Elise Eberwein, our EVP of People and Communications; Bev Goulet, our Chief Integration Officer; Maya Leibman, our Chief Information Officer; and Steve Johnson, our EVP of Corporate Affairs.

We are going to start today's call 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 analyst questions 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 or 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 could be found in our earnings press release issued this morning and our Form 10-Q for the quarter ended September 30.

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 also be found on our website at AA.com under the Investor Relations section.

A webcast of the call will be archived on our website.

The information that we are giving you today 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 and at this time I will turn the call over to our Chairman and CEO.

Thanks, Dan, and thank you all for being on.

We are excited at American Airlines to report record results for our third quarter, $1.2 billion excluding special items, up 59% over the same quarter last year.

It has now been -- since we merged US Airways and America West last December it has now been three quarters that we have reported and each has been a record.

We expect the fourth quarter this year will also be the best in the history of American and therefore obviously expect full-year 2014 will be our best year ever.

All this is due to the great work of the over 100,000 members of the American team.

They're doing a wonderful job taking care of our customers and integrating our airlines.

And importantly, they're coming together as one team to realize our collective goal of building the best airline in the world.

On the integration front we've made great progress so far and Scott will give you an update.

But we still have much to do and bigger items like single operating certificate and reservations migration will occur in 2015.

But the great work by our teams thus far gives us confidence that we are on the right track.

So in summary, we are excited about these results and even more excited about the future.

Thanks to our excellent and hard-working teams American is well positioned for success in 2015 and beyond.

I will turn it over to Derek and then Scott and then we will get to questions.

Thanks, Doug, and good afternoon, everyone.

In our earnings release and the 10-Q filed earlier today you will find information pertaining to our third-quarter results.

And as I talked about in the last few quarters, please note that the GAAP results for our 2014 third-quarter compare are post-merger performance to that of legacy AMR on a standalone basis, which makes the year-over-year comparisons not meaningful.

Accordingly, for the third quarter of 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 quarterly financial results.

Unless otherwise noted all my comments will be based on the comparisons to the 2013 non-GAAP combined results.

For the third quarter 2014 the Company recorded a record GAAP net profit of $942 million, this compares to a non-GAAP combined third-quarter 2013 net profit of $505 million.

Excluding net special charges, as Doug said, we reported a record net profit of $1.2 billion in the third quarter of 2014 representing a 59% improvement over our combined non-GAAP net profit of $771 million excluding special charges for the same period in 2013.

With 735.2 million diluted shares outstanding we reported earnings, excluding special charges, of $1.60 per diluted share in the third quarter of 2014.

Our pretax margin, excluding net special charges for the 2014 third-quarter, improved by 260 basis point year over year to 11%.

Total capacity for the third quarter of 2014 was 69.1 billion ASMs, up 2% for the same period in 2013.

Mainline capacity for the quarter was 61.9 billion ASMs, up 2.1%.

Regional capacity for the third quarter was up 1% to 7.3 billion ASMs.

In the third quarter we did take delivery of 22 mainline aircraft and we retired 28 older aircraft, a combination of older 737s, 7-5s, 7-6s and MD80s as we continue our fleet renewal program.

In the fourth quarter of 2014 we plan to take delivery of 22 new mainline aircraft while retiring an additional 14 aircraft.

On the regional side we retired 12 aircraft, all older ERJ-140s, and took delivery of 16 aircraft, larger RJ, CRJ-900s and Embraer 175s.

For the remainder of 2014 the Company expects to take delivery of 10 CRJ-900 aircraft as well as six Embraer 175 aircraft which -- and we also expect to retire another eight Embraer 140 aircraft.

So continuing our up gauge from 50 seat regional jets to larger 76 seat regional jets.

Third-quarter total operating revenues were a record $11.1 billion from 2014, up 4.4% for the same period last year on a 2% increase in system capacity.

Passenger revenues for the third quarter of 2014 were $9.8 billion, up 3% year over year with yields up 2.6%.

Cargo revenues were up 7% in the third quarter of 2014 to $215 million due primarily to higher freight revenues.

And as side note, on Monday we announced a significant integration milestone as US Airways and American Airlines have officially combined operations under a single cargo airway bill.

Other operating revenues were $1.2 billion, up 18%, primarily due to higher frequent-flier revenue driven by our affinity card deal with Citibank announced in late 2013.

[First] the third quarter of 2013 total passenger RASM was up 1% to a record $0.1412.

Total RASM in the third quarter of 2014 was also a record for the third quarter at $0.1612, up 2.4% versus 2013.

And Scott will go into more detail in his commentary.

The airline's operating expenses excluding special items for the third quarter of 2014 were up $9.7 billion -- were $9.7 billion, up 1.6%.

Mainline operating cost per ASM excluding special items was $0.1292, down 0.8% year over year driven by a 2.1% increase in mainline ASMs.

Salaries and benefit costs were up 4.8% due primarily to the impact of merger-related labor contract cost increases.

And our average mainline fuel price including taxes for the third quarter was 2.97 -- $2.97 versus $3.03 in 2013.

Excluding special items and fuel our mainline cost per ASM was $0.0835, up 0.7% when compared to 2013.

Regional operating cost per ASM excluding special items and fuel was $0.1552 which was 3.7% higher than 2013 primarily due to contractual rate increases under certain capacity purchase agreement.

Excluding special items and fuel our consolidated CASM was up 1.1% in the third quarter.

We ended the quarter with $8.8 billion in total cash and investments of which $875 million was restricted.

The Company also had an undrawn revolving credit facility of $1 billion.

As of September 30, $725 million of our unrestricted cash balance was held in Venezuelan Bolivars valued at the weighted average applicable exchange rate of 6.41 Bolivars to the dollar.

Our cash balance held in Venezuela Bolivars decreased $70 million from the last quarter balance due primarily to $48 million in repatriations in the third quarter of 2014.

During the quarter the Company returned $185 million to shareholders through the repurchase of $113 million of common stock or 2.9 million shares through its shareholder purchase program and the payment of $72 million in quarterly dividends in August 2014.

We also purchased 432,000 shares from its disputed claims reserve to satisfy certain tax obligations resulting from a bankruptcy-related distribution.

Our treasury team has been busy lately completing approximately $3.3 billion in financing transactions.

Third-quarter transactions include the issuance of $957 million principal amount of an enhanced trust certificate at a blended interest rate of 3.8% and the issuance of $750 million principal amount of a 7.5% senior unsecured note that is due in 2019.

In early October, not included in our September 30 liquidity position, the Company entered into a new credit facility consisting of a fully drawn $750 million term loan that matures in October 2021, and an undrawn $400 million revolving credit facility that matures in October 2019.

Collateral for this new credit facility consists of certain slots, gates and route authorities.

Also in early October the Company increased its existing $1 billion revolving credit facility by $400 million and extended the associated maturity date from June 2018 to October 2019.

So we now currently have $1.8 billion in a revolving credit facility.

These transactions came in at a blended rate of 4.1% which has further reduced our overall cost of capital.

Now turning to guidance.

Since our last call we have reduced our international capacity plans for the fourth quarter of 2014 and now expect full-year overall system capacity to be up approximately 2.2%.

Mainline is expected to be up approximately 2.4% in 2014, of which international capacity is expected to be up approximately 5% and domestic capacity up approximately 1%.

Regional capacity in 2014 is planned to be up 0.6% year over year, so fourth-quarter mainline ASMs are expected to be approximately 57.7 billion ASMs and regional capacity expected to be approximately 7.3 billion ASMs, consistent with our last guidance.

We are still in the process of developing over 2015 budget, so formal ASM guidance for 2015 will come in the first quarter next year.

At this time we expect year-over-year scheduled capacity to be up approximately 2% to 3% and 1.5 points of that growth is due to increasing gauge on our aircraft.

While increasing gauge drives incremental capacity, we believe it is highly earnings accretive as the additional seats on each aircraft come at low variable cost.

Additionally, we have greater visibility and certainty about demand this winter than we do for the full year 2015.

In this demand environment we expect our first-quarter 2015 scheduled capacity to be flat year-over-year despite the increase in gauge.

First-quarter actual capacity growth could be higher due to weather cancellations in 2014.

As we moved into the peak second and third quarters we have flexibility to make for the capacity adjustments if the demand conditions warrant.

For the full year 2014 we are still forecasting CASM ex-special items and fuel to be up 2% to 4% versus 2013.

This is driven by the cost of new labor contracts, higher depreciation due to more owned versus leased aircraft and higher maintenance costs due to engine overhauls offset by lower aircraft rent and selling expenses.

For the fourth quarter of 2014 we expect our CASM to be up 2% to 4% -- mainline CASM to be up 2% to 4%.

Regional CASM is forecast to be flat to up approximately 2% in the fourth quarter 2014.

On our last call we gave preliminary 2015 mainline CASM excluding fuel and special items guidance in the plus 1% to minus 1% range.

Excluding the impact of any new labor deals, we are still forecasting 2015 mainline CASM, excluding fuel and special items, to be in the range of minus 1% to plus 1%.

We will update this guidance if and when any new labor deals are ratified.

Using the October 21 fuel curve we are forecasting mainline fuel price to be in the range of $2.90 to $2.95 per gallon for the full year 2014.

That translates into a fourth quarter in the range of $2.56 to $2.61 per gallon.

Using the midpoints of the guidance we have provided we expect our fourth-quarter pretax margin to be between 10% and 12%.

Looking at CapEx, our focus continues to be 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 $3 billion in 2014.

This includes non-aircraft CapEx of $725 million and net aircraft CapEx of $2.2 billion.

So in summary, while we are still very early in our effort to integrate the airline, we continue to be extremely pleased with our record financial results achieved thus far.

Of course this exceptional financial performance wouldn't be possible without the outstanding efforts of our 100,000 team members.

We have established a solid foundation and are building momentum as we progress toward our goal of restoring American to the world's greatest airline.

And with that I will turn it over to Scott.

Thanks, Derek.

I would like to start by thanking all the people of American airlines for the great job they continue to do operationally during the second quarter in spite of some difficult challenges.

This quarter had its fair share of curveballs including the Chicago ATC incident, but the team did a great job of keeping the airline and our customers running reliably.

On the revenue front our third-quarter PRASM was up 1%.

The revenue environment remained mostly strong throughout the quarter.

We saw particular strength in our domestic network with RASM up 6% year over year.

Pacific RASM was up 5% even in the face of significant capacity growth including starting two new routes during the quarter at American Airlines.

Atlantic RASM was down 2% as industry capacity growth continued to exceed still growing demand.

Excluding Venezuela, Latin RASM was down 5% as South America continued, in the near-term at least, to be challenged with both supply and demand issues.

We're still making solid progress on our integration efforts and are pleased with the progress thus far.

Some of the recent integration highlights include reaching a tentative agreement with our flight attendants.

We've welcomed 690 new pilots and over 2,200 flight attendants so far this year to the American Airlines team, rebanked the Miami hub in August and the operating results have been great so far with both year-over-year and sequential improvement in our operating metrics like [D0] and [A14].

We continue co-location rebranding and multiple product alignment projects.

We launched today a departure reciprocal upgrade program for advantage and dividend miles members.

We reconfigured the first of our 777-200s with updated interiors including lie flat seats and Wi-Fi.

And we successfully completed three large projects with significant IT components.

Fare class alignment, which sets the stage for a full res system migration next year.

We completed the move to a single revenue accounting system and our cargo migration that Derek mentioned earlier was successfully completed, so we are now a single airline from a customer's perspective for cargo.

I am proud of the great job the AA team did on all these efforts, but I'd like to highlight cargo because it is an area that was challenging in some other mergers, but this integration went smoothly for our customers.

We delivered on time and the cargo IT and facilities teams did this at the same time they grew revenue 7% year over year.

We also continue to be excited about our progress with important corporate accounts.

We have seen particular strength in New York from combining the two networks and that helped us generate double-digit PRASM increases in New York during the third quarter.

Consistent with what we have said previously, all of the work we are doing leaves us confident that we will be able to meet or exceed our prior revenue -- our prior synergy guidance.

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

During the third quarter we saw supply driven weakness in the international arena.

We began to take action to reduce our international capacity.

In Latin America we have cut 14% of our planned capacity in 4Q going from a 12% planned growth rate to a year-over-year reduction in capacity.

And across the Atlantic we have reduced capacity by over 6% from prior plans going from an almost 5% planned growth rate to a 2% year-over-year reduction in capacity.

Those changes help set the stage we believe for improving PRASM performance, though we do have a couple of known headwinds, namely Venezuela and the elimination of the Wright Amendment.

As already discussed, Venezuela will have a 2 point negative impact on our system RASM this quarter.

We continue to get questions about the Wright Amendment and since it is topical I will go ahead and address it up front.

While we can't disclose a precise estimate for the impact of the Wright Amendment, we feel that our great frequent flyer program, great product including first-class, better frequency advantages in the important business market and the best employees in the airline business position us to compete and win.

And while it is early, from October 13 when the Wright Amendment went away through the end of October, we expect PRASM in the markets that have new nonstop competition from Love Field to be up 3%.

So even though it is early we are off to a good start in that competition.

Even with the fourth-quarter headwinds we still expect nice growth in RASM domestically, essentially flat RASM across the Atlantic, and flat RASM in Latin America excluding Venezuela.

We currently expect a small year-over-year decline in Pacific RASM during the off-peak fourth quarter where we have 23% capacity growth.

For the system, excluding Venezuela and assuming no meaningful impact offset from Ebola we expect PRASM to be up 2% to 4%, but subtracting the 2 point Venezuela impact gets us to a system PRASM up an estimated 0% to 2%.

In conclusion, we are very encouraged with the operating and integration results so far at American Airlines and the demand environment remains strong.

Thanks, Derek.

Thanks, Scott.

One thing before questions.

I just want to make a comment about a friend who's been on these calls with us for a very long time.

I have been doing these calls, these quarterly calls with airline investors since I was CFO of America West in 1995, and so that is almost 20 years or almost 80 calls.

And I think Ray Neidl was on every one of them.

And today that is not the case because we lost Ray this quarter.

That is not necessarily bad news, I am sure Ray is in a better place.

But I do want to take a second and remember him.

Before he was a sell side analyst he worked here at American.

He loved the business and he cared a lot about those of us that worked in it.

And mostly he was just a really good guy.

So here is to Ray, a really good example to all of us.

We will miss him and we were really glad to know him.

So with that said we are ready for questions, operator.

(Operator Instructions).

Hunter Keay, Wolfe Research.

Hey, Scott, as you sit here about a year into the merger here, let's compare the American network with the US Airways network for a second.

And you can tell me from a revenue and network perspective what is easier for you to manage here now given the size and scale of the network and what is harder given the complexity of the network?

Well, the networks are complementary and so they really are stronger together than they were apart.

A difference is at American, American had much more capacity in competitive markets, in places like New York, Chicago and Los Angeles.

And so, for me it is has also been educational to learn how important product considerations are in some of those markets and that is why you see -- saw American historically and see American today continuing to invest so much in our product into markets like that, things like the A321 trans-con.

They have been quite successful for us, but there is really probably more similarities.

I think the best thing that happened really in the merger is -- or one of the best things that happened is the ability to put two teams together and truly learn from the best of both.

And one of the things that I think we have going for us is a culture throughout the airline, but including here at headquarters, where people are genuine about trying to be part of one team.

We are all part of the new American Airlines and people have learned from each other.

And there is just tons of examples in the commercial area, in the operating areas where we have taken a practice that was at American Airlines and applied it to US Airways or vice versa and our results are improving.

It is not always a straight line.

Sometimes when you make some of those changes you take a little bit of a step back, but then you can catch up.

But it has been just a fantastic environment and it is nice to be part of a Company where you have got for the most part 100,000 people working together.

And you are seeing it in our results and I think you will continue to see us accelerating as we move through 2015.

Okay, thanks.

And as we think about next year, with regard to some of the incremental cost headwinds you are facing from the labor contracts, which is clearly (inaudible) PRASM up at least a point or two.

But you also have revenue synergies spooling up here.

It looks like the margin gap between you and Delta is almost going to be de minimis.

In the fourth quarter already it was a really, really strong pretax margin guide.

You said meet or exceed the original revenue synergy expectations in your prepared remarks.

I mean giving consideration to some ineffable cost creep in the revenue synergies, do you see yourself with industry leading pretax margins amongst a reasonable competitor set, we will call them the big four airlines here in the US?

Do you see yourself with industry-leading pretax margins by the time you get to the end of next year?

Well, we have got some good competition in that group.

And quite a few of them are doing a really good job right now.

But, yes, I think we are going to lead the industry.

We have a lot of work left to do to do it and to prove it and we have got some big tests next year, as Doug alluded to, with single operating certificate and getting to a single reservation system.

But my personal view is that we are going to be successful and that we are going to have industry-leading margins before too much longer.

That is certainly the goal, Hunter.

I mean we said out-of-the-box that if we are going to be the largest airline in the world we should be the most profitable.

That doesn't mean just -- that also means profit margins not just absolute profit.

Thanks a lot, guys.

Michael Linenberg, Deutsche Bank.

A couple here.

I guess maybe I will just throw it at Scott.

In the past I mean, Scott, you have laid out a real good reason how you think about fuel hedging and sort of the inverse -- or not the inverse but the correlation between GDP and movement in fuel and ways to offset it and not pay the premiums.

Where have you come out on currency hedging?

I mean, I realize it is sort of a year into a much bigger platform, you preside over the global network.

I mean does it make sense for American to ultimately become more involved as a currency hedge or not and why?

I don't think I at least have a terribly strong view on this.

The exposure is much, much smaller on currency.

For one thing we have expenses in almost all the currencies that we have exposure to, though our revenue exposure generally exceeds our expense exposure.

And the volatility of currencies is just not nearly the same as it is in oil and fuel.

So -- but it is also cheaper to hedge.

I mean it is a lot less expensive if you in a much more straightforward way hedge without having the same kind of friction cost.

So I don't know that we've spent a lot of time thinking about it.

It's probably not a big idea for us either up or down and so we just haven't spent a lot of time debating the issue internally.

Thanks.

And then just sort of a second that is somewhat related.

The decline in the exposure or I should say the dollars that were stuck in Venezuela.

The repatriation, what -- the $71 million that came back.

What periods does that reflect?

Is that just a few months, is that 2013?

It looked like there was an exchange rate for a more recent period.

Can you just give a little bit more color on that?

I believe that was January of 2013.

I am looking at Derek.

I think it was 2014.

2014?

It was January 2014 was the return.

Okay.

Just one month, is that with that represents?

It was two -- we got a little bit in January, a little bit in February.

Perfect.

All right, very good, thank you.

Julie Yates, Credit Suisse.

I just wanted to ask on labor, can you guys walk us through the timeline for the negotiations with the flight attendants and the timing to ratification on the tentative agreement?

And then when you might expect to provide the pilots a proposal?

Steve.

Well, the negotiations with the flight attendants is (inaudible).

We agreed that -- a tentative agreement a few weeks ago.

That agreement is out for ratification now, the flight attendants are voting now and we are advised that we will get -- there will be a result on November 9 or 10.

We expect to begin negotiations in earnest with the pilots right after that.

We have discussed making a counter proposal to the pilots on November 10 or 11.

And we have extended the deadline for that negotiation -- the arbitration provisions of that negotiation out into November at this point.

Okay.

And then just to clarify, is there anything at all for the higher contracts included in the negative 1% to 1%?

I think there was a little confusion on what was included and what was not included in that.

No, Julie, this is Derek.

It is not included at all.

There is no -- neither the flight attendant or the pilot increase would be included in that number.

And once they get ratified we will adjust the numbers to reflect the contracts if they get ratified.

Okay.

Is there any range you can provide us of potential outcomes?

Not at this point in time.

Okay, thank you very much.

Jamie Baker, JPMorgan.

Scott, as we think about the future of supply discipline can you remind us -- I am fairly certain of the answer, but have the minimum fleet counts been entirely stripped from today's pilot contract?

And has there been any discussion about potentially putting something like that back into the next contract?

Yes, there are -- well, no, there are no more minimum fleet restrictions and, no, there had been no discussions about putting that in.

And I assume management would resist mightily if any such effort was undertaken?

I know you don't like to negotiate in public, but --?

No one has asked, Jamie, so --.

Okay, all right, fair enough.

Second question, when your predecessor Company, Doug, reached its landmark aircraft order, I guess that was Paris 2011, so about the time Hunter Keay was still driving with a permit -- oil was at $106 a barrel and jet fuel was about $0.75 a gallon higher than where it is today.

And look, I know all of this can change, but it does call into question whether you inherited purchase economics through the merger that are simply inconsistent with the pricing that we might be seeing for aircraft today.

Any thought on that?

Well, one, if it is true it is irrelevant because we have the contracts and we need to meet them.

I don't think it is true, however.

I haven't bothered to go back and look at the economics because, as I sat, the airplanes are coming and I am happy they are coming.

But my guess is -- I mean look, the airplanes that are leaving this fleet are very fuel inefficient, one, so I think again -- we can maybe do this for you, Jamie, if it would make you feel any better.

But, so I think the economics will still bear out that it is the right economic decision.

on a pure operating cost basis.

But on top of that, those airplanes are not customer friendly and the airplanes that are coming in are customer friendly.

And it makes a dramatic difference in our product.

And we are happy that they are coming in, we think it is a good use of our capital.

And we think it is positive NPV and good for our investors.

Okay, excellent.

Strong guide, thank you very much.

Take care.

John Godyn, Morgan Stanley.

Doug, I wanted to ask a bit of a bigger picture question.

Years ago you were one of the few people that envisioned the structure of the industry today.

Now as we look out going forward, and I am really not getting at anything in the near term or anything of that nature.

But as we look out forward in the years to come do you think there is more consolidation in front of us?

I mean it has been very obviously successful.

Could there be more deals?

Oh, man, we are working on integrating this one.

But look -- as posed I am happy to just speculate as to what may lie years ahead.

I do believe th3 US industry is largely mature and is settling into a highly competitive but more mature structure where I don't see a tremendous amount of consolidation in the US if any.

Abroad I think there is all sorts of possibilities.

And certainly if indeed foreign ownership laws change over time I think there is all sorts of possibilities to do the kind of things that have been done in the United States and create more utility for people.

But again, I want to be careful to caveat all that in the way the question was asked, which is years ahead and we are not working on anything like that.

And I don't know that anyone else is -- but it is -- certainly what we have seen happen here proves that customers value airlines that can take them all over the globe.

And there are certain -- just due to foreign ownership laws there are parts of the globe that none of us can take each other.

We get around it through alliances but it is not as efficient as having one airline can do all those things.

Got it.

And I wanted to just on a different topic ask two quick clarifications.

Scott, on the PRASM, you sort of gave PRASM guidance ex-Venezuela.

Could you just remind us what the Venezuela impact looks like into 2015 in the first and second quarter?

Okay.

Well, just to be clear, I gave PRASM guidance both ex-Venezuela and then including Venezuela.

So it was 2 to 4 at a system level ex-Venezuela, flat to up 2 including Venezuela impact.

And for the first quarter of next year I think we think the number is about 0.4 points and it is about 0.3 points in next year's second quarter.

So, much smaller impact compared to where we are today.

And that is what I was getting at.

Very helpful.

And then just the last clarification on the questions about labor.

In the past I think the team has made some statements about profit-sharing not being on the table.

I just wanted to make sure that that is still the case or has that changed?

Well, the contract we had -- the tentative agreement that our flight attendants are voting on has in it higher rates of pay than our other large -- the other large airlines, Delta, United, we compete against.

Which we are very proud to have on the table that doesn't have profit-sharing.

But again, we think that is a better way to efficiently pay our people who are out there doing a fantastic job is to give them higher rates of pay and not have them have variable compensation.

That will come up in each of our contracts I am sure, so we will see.

But certainly what we think is a much better way to compensate people than to go back to essentially what was the concessionary way of having contracts for employees that was we can't afford to pay you what we would like to pay so if we happen to make profits we will pay you more.

We are in a position now where we believe the right way that we can do better than that and that we can give our team higher rates of pay and not leave them wondering whether or not they are going to receive that pay based on the Company's profits or not.

Great, thanks.

Helane Becker, Cowen and Company.

By the way, Doug, that was a nice thing to say about Ray.

Thanks, Helane.

You have also I think been on all 80 of those calls, so --.

Yes, we -- I don't know how that is possible when I keep telling my 26-year-old son I am only 31.

I didn't mean to out you, but I know you and I have been doing it a long time.

It's all right.

So this is my question -- as I look at that leverage you have with respect to jet fuel and think about your comment that you are replacing inefficient aircraft with more efficient aircraft, how should we think about the relationship between fuel consumption and capacity growth or fuel cost increases, or decreases probably more likely, going forward?

Well, we don't plan to grow capacity because fuel price has declined and we have been in this industry long enough to know that that can turn in a hurry.

And so going and buying 20 year life assets based on today's fuel price is probably not the best decision to make.

So we don't plan to do anything about increasing capacity just because fuel prices declined.

In the near term I think that will all just go to the bottom line.

And in the longer term who knows where fuel is, but in the near term it will just go straight to the bottom line.

Just as a follow up to that, do you have the ability to increase the share repurchase program with the free cash flow generated by -- or with the cost savings or free cash flow generated by that saving?

Well, Helane we still have the program we've announced in place and to expand that would simply require going and asking our Board for the approval to do that.

But we would announce that if indeed that happened.

We need to get through this first one first though.

Got you.

Okay.

Thanks very much for your help.

Have a nice day.

Duane Pfennigwerth, Evercore.

I wanted to ask you a question on a very tiny, tiny, tiny piece of your business which is Venezuela.

So I think if I backtrack what you have said previously it was roughly 4 times your system unit revenue and you have got capacity there 80% and you have switched to 100% USD sales.

So my question is, based on that capacity cut and the switch to USD sales, how much is unit revenue down in Venezuela now?

It was more than that, it was more like 6 to 8 times system capacity.

But in the third quarter Venezuela RASM was down 37% on an 81% reduction in capacity.

And we are estimating in the fourth quarter it will be down 49% on an 82% reduction in capacity.

Let me ask you, when do you think about -- and I think there have been some press reports suggesting maybe you brought back a flight or two.

But even on a down 50 if it was 6 to 8X as large it's probably a fairly profitable market or/very profitable market.

So why not bring capacity back and how do you see this playing out ultimately?

And thanks for taking the questions.

Our capacity and there is dependent on how much demand is really available.

And so we will adjust capacity over time as demand adjusts.

But -- and last year 91% of our sales were in Venezuela Bolivars.

And so we have been pleased with the shifts to US dollars, but when you think about that, we have had an 82% reduction in capacity and a 50% reduction in demand.

So basically we have accommodated the demand that used to be sold in Venezuelan -- or in US dollars and maybe a little bit more -- a little of the Venezuelan demand has shifted to US dollars.

But mostly at the moment we are flying at an amount that can be accommodated by sales in US dollars.

And we will adjust it if there is opportunity to adjust it going forward.

But right now we think we are either -- we're at or near the same level.

Even today while the RASM numbers are good the RASM on that airplane -- I think in the fourth quarter 40% of that is really going to be Venezuelan dollars because it is tickets that were sold a year ago.

So the actual RASM performance is not necessarily reflective of the real sales that are going on right now because we are still burning off the tickets that were sold in Venezuelan dollars over a year ago.

Thanks very much.

Savi Syth, Raymond James.

Just on the regional front, what -- have you kind of changed your thinking on the regional [feat] now that you're been able to look at both size and all the different players?

And I think you have quite a bit left in your scope to increase larger regional jets.

And I'm just kind of wondering where your thinking was on that front.

Sure.

Like the rest of the industry we are migrating our regionals to higher gauge aircraft.

The real purpose of the regional flying is to feed the mainline.

It is pretty -- the statistics are actually somewhat remarkable, it is about 50% of our departures but it is only 11% of our ASMs.

Two-thirds of the customers on those planes are connecting onto our other aircraft and really supporting the growth of the mainline.

So we are in an evolution that is going to take years to finish of getting rid of [left] on smaller sized aircraft and moving towards larger aircraft.

But we are in the midst of that.

We have got aircraft orders for 90 large regional jets, some of which are already starting to come and which come over the next year or two, the majority of those.

But we are in the that kind of long-term migration.

It is similar to what is happening in Delta and United as we all move up the curve on size.

On regional jets, for what it's worth, we are also moving up the curve on size on mainline aircraft where you see us taking delivery of almost all A321s for example.

And as airfares have declined in the United States, it is important to be able to fly big airplanes with us many customers as possible on them.

So we are flying the largest aircraft -- in almost all cases, the largest aircraft in each class.

How much of it has benefited kind of margins this year?

I am trying to figure out just from a year-over-year contribution.

Is that still a lot of the yet to help margins going forward or -- I mean are we halfway through that?

I think that will continue -- I don't have a number to give you, but I think it has improved margins and it will continue to improve margins.

Replacing three 50 seat regional jets with two large regional jets flying 76 to 80 seats is much better economics.

And so, we are probably in the third or fourth inning of that at American airlines, a little behind where Delta -- Delta in particular is.

All right, great, thank you very much.

Dan McKenzie, Buckingham Research.

Thanks for the commentary on meeting or exceeding merger synergies.

But setting those aside I wonder if you can talk about hub structure optimization.

And specifically following up on the gate swap that United and American did earlier this year at Chicago and Los Angeles, I wonder why it wouldn't make sense to do a gate swap perhaps on a much larger scale.

And I guess what I am -- what was intriguing about the May transaction, just looking at DOT revenue data, the extent to which American yield at Chicago are underperforming the system, ditto for United at Los Angeles.

So it seemed like a win-win for both airlines and I'm just wondering what is the flaw to that logic or potential impediments to pursuing that kind of an asset swap?

Well, in the near term I certainly don't think you should expect -- well, actually not even in the near term or longer-term.

We are happy with all the hubs that we have, they are complementary to each other.

And they are all going to be profitable this year.

And the hubs that are doing the best in terms of performance improvement are actually the hubs with the most competitive overlap, so Chicago, New York and Los Angeles.

Where really putting the two networks together and creating more scope and scale has been the most beneficial in those hubs.

And in Chicago in particular we are looking forward to rebanking the hub in March of next year which we think will create even more benefits there.

Okay, thanks, Scott, that will do it for me.

Joe DeNardi, Stifel.

Just on the Atlantic side, I'm just wondering if you could maybe remind us what your plans are for capacity there over the winter and if there is anything you can do to kind of improve the performance there or is it just a function of excess capacity?

I believe our plans from memory are down about 2% for capacity for the fourth and first quarter across the Atlantic.

So we have taken a really proactive approach to really what was a supply issue as opposed to a demand issue, demand still remains pretty strong there.

We have an awful lot of tactical initiatives going on with our partners across the Atlantic, British Airways, Iberia and Finnair.

And we are starting to see improved results I think we will continue to see improved results.

But from a capacity perspective I think we are pretty set on what we are going to fly this winter.

Okay.

And then just the breakdown -- I think you talked about system capacity next year.

Could you just break that out between domestic and international?

I may have missed it.

2% to 3% was the total system, domestic is -- they are both -- let's see here.

Domestic is about 1% to 2%, international 1% to 2%, regional -- so domestic is 2% to 3% and regional and international is about -- sorry I'm just pulling it up -- 2% to 3%.

So they are both about in the same category.

So I would say international up 2% to 3%, domestic 2% to 3%, system 2% to 3%.

And remember that 1.5 points of that is driven by increasing gauge on aircraft, in particular the 737 800s going from 150 to 160 seats and the 777-200 ultimately going to from 247 to 289 seats.

Okay, thanks.

David Fintzen, Barclays.

Just a quick follow up.

On the 2% to 3%, just to be clear, is that the scheduled growth or is that inclusive of overlapping all the weather impact from 2014?

Scheduled.

The scheduled.

That is scheduled, okay.

And just with the some of the international changes to the plan, is that at all feeding into some of your domestic priorities or into some of your domestic hubs in terms of how you are moving things around?

Or are those two sort of separate issues?

Well, I mean it's one network -- we manage them as if it is one network.

But I don't think any of that is causing material changes to the domestic line that we are doing.

Okay.

And then obviously a lot of the international is around the entities where you are a large [Pacific] one where you are much smaller than your peers.

And with all the capacity in Pacific at an industry level getting worse through the rest of the year, how is the thought press around strategic investments in that entity looking versus a year ago or so?

Well, it is strategic and it is doing really well for us.

We have outperformed the industry every quarter this year across the Pacific, that is in spite of the fact that we are growing capacity faster than everyone else.

So we are really pleased with the trajectory that we are on.

We know we have a long way to go.

But the kinds of things we have been doing are working well from our perspective.

And the Pacific in particular will benefit from the reconfiguration of the 777s.

So we feel really good about where we are.

We are starting way behind so while we have a high percentage growth rate compared to all the capacity across the Pacific it is still relatively small.

And when we add service to a place like Hong Kong, which we added this summer, that is effectively all new customers for us.

Unlike when you are flying to -- if we added service to Sao Paulo or to Kansas City where we are already carrying some of that traffic and so some of that is cannibalizing off of ourselves onto our new flights.

We are flying to Asia; almost all of those passengers are incremental to American Airlines.

So we have been pleased with how we are doing in the Pacific.

We know we have got a long way to go to get where we want to be, but we are on a very good trajectory there.

Okay, that is helpful.

Thanks for the time.

We will now take questions from the media.

(Operator Instructions).

Ely Portillo, Charlotte Observer.

I was wondering if you could get some perspective about how you are looking at allocating transatlantic capacity between your East Coast hubs moving forward.

And of course with the Charlotte focus, whether the four new seasonal flights that you started this year are expected to continue?

Well, conceptually we look at it purely based on profitability.

If it is profitable we will continue to fly it, if we think there is a profitable opportunity we will give it a shot.

And while we haven't finalized our plan for next year, Charlotte did underperform -- some of the new Charlotte routes did underperform our expectations.

So we start with that framework as we look at adding the capacity for next summer.

And can you give any specifics yet about whether you expect to definitely cut some of those new routes or whether allocating more capacity to new places like Miami, Frankfurt could have an effect of reducing some of the existing service here?

No.

We don't have any specifics to announce today.

But to be clear, I mean it is not -- adding Miami, Frankfurt doesn't preclude us from doing something out of Charlotte.

All right, thank you, I appreciate it.

(Operator Instructions).

Jeffrey Dastin, Thomson Reuters.

Have you reconsidered a spinoff of Envoy Air?

That is not under consideration at this time, no.

Thank you.

Mary Schlangenstein, Bloomberg News.

Hey, Scott, can you talk just a little bit more about the international capacity situation and what you are seeing from others in the market?

I mean you guys -- this is your second trim on capacity.

Are you seeing anybody else contribute to that or just kind of lay out what is happening, what has been happening?

We manage our capacity independent of what the others do and do what is right for American Airlines.

And this by the way is only -- the numbers I told you today are the same numbers that we announced the last time we talked about this, although we may not have had specifics at the time, but we haven't done two cuts at it.

But it is one cut.

We did what we thought was right across the Atlantic and Latin America.

I think if you look at the results that we are going to put up this winter compared to other airlines it is going to turn out to have been a good decision for us.

We haven't seen much capacity cuts from other carriers, in Latin America, the Pacific and the Atlantic, close to 10% capacity growth across the winter and demand is just not growing 10%.

And so results for most airlines are going to continue to be pressured compared to what they otherwise would be just because supply is growing in excess of demand.

But we are comfortable with what we have done and doing the right thing for American Airlines.

Okay.

And what is the status of the talks with the Envoy pilots?

Are you having talks at all?

No, not now.

We had three highly publicized set of talks with the Envoy pilots.

Those ended a couple of months ago, Mary, I can't remember the exact date.

But we haven't started new talks with them at this point.

Okay, thank you.

David Koenig, The Associated Press.

I am going to direct this to Scott, whoever feels like answering please do.

And, Scott, if I heard you correctly you said to Helane Becker that you were not going to increase capacity because of lower fuel prices because those prices could turn around, right?

And that the savings from -- I think you said the savings from the lower fuel prices would go straight to the bottom line.

My question is, does that mean that you also will not reduce fares to pass along some of the fuel savings that you are seeing?

Air fares remain a great bargain and fares are very low -- down significantly in real terms in the last 20 to 30 years, down significantly as a percentage of GDP in the United States.

And a great bargain compared to almost any other good that you consider.

When I get on a flight and go to New York I think half the people on the airplane pay less for the round-trip ticket than I pay for my hotel room when I get to New York.

So air travel remains a great bargain and we will continue to keep it a great bargain for customers, but in a strong demand environment we don't have plans to go off and just proactively cut fares.

All right, thank you for the answer.

Dawn Gilbertson, Arizona Republic.

Doug, at the top of the call you mentioned the big merger hurdles that are coming next year.

Can you give us an update on when you plan to combine the frequent flyer programs and the res systems?

And if you or Scott would let us know what if anything could change that timetable?

Yes, I'm going to turn it over to Bev Goulet, our Chief Integration Officer, to give you what our timelines are and then we will come back on what might change it.

But we don't --.

Thanks, Doug.

The frequent flyer merger is intended in the second quarter of 2015.

Res system will follow in the back half of the year, probably towards the back of the year.

Any specific -- in terms of the second quarter, any month you are targeting on the frequent flyer merger?

No, we don't have a firm date on that yet.

And, Dawn, as to what might cause that to push if we feel we are not ready.

The last we want to do is push forward just because we have -- and not do it right.

We are being very careful to make sure we are doing everything we can to make sure we do it as well as possible.

So if we are not ready we won't go.

But we think the dates Bev just gave you are when we believe we will be ready.

Can I ask one follow-up question unrelated.

I haven't talked to you since you guys decided against renewing the (inaudible) for the US Airways (inaudible).

They have until -- you have to pay until October 15 unless they find a new sponsor.

Are you guys thinking you are going to have to pay that through October of 2015 or what percent of where they are on that?

We don't know, I mean you'd have to ask I guess the funds that.

So we don't know where they are, Dawn.

We are happy to if that is where it ends up.

The situation there of course is just one where American Airlines already has two arenas and that one was expiring.

So it was easiest one to let go.

And we are working really -- it is a great relationship that we have had for a long time with the organization.

So wanted to give them all the time they could to go find someone else.

It is a great asset.

My guess is they will find someone and they won't have any trouble whatsoever doing so.

And -- but as to whether we end up paying the remaining term or not is -- it is up to whether or not they decide they want to put someone else's name on there sooner than that.

Okay, thanks, Doug.

(Operator Instructions).

Andrea Ahles, Fort Worth Star-Telegram.

So I was listening to another call before I hopped to this one.

If you have already talked about this I apologize, but my editors are asking me to ask the obligatory Ebola question.

If you are seeing any impact at all on bookings from Ebola out of -- particularly out of your DFW hub?

You didn't miss anything, we have not been asked that one yet.

I thought we were going to get off without that.

We have not seen a meaningful impact.

If you've followed us in the airline industry over the years, we sometimes have very short-term impact from the headlines.

And so on the day after the congressional hearings last week when there was a media frenzy around it, we saw I think a measurable impact for one day and then bookings have snapped back to normal.

So really no impact.

And I hope that there are no more cases in the United States or really anywhere and that this gets resolved quickly and that we continue to have no impact.

So then I'm going to ask my actually more official airline question now that I got the Ebola one out of the way.

Can you talk a little bit about the rebanking process for DFW?

And now that you have already done the Miami hub, how do you see that working out for you and how do you sort of see that being implemented at DFW?

Are you going to have to hire more staff to accommodate the rebanking process, things like that?

Well, it has gone great in Miami so far.

You may not have been on, but in my prepared remarks I talked about Miami and the team in Miami has done a -- has set a very high bar for our teams in Dallas and Chicago to get over and I think that they will succeed.

But our operating results have actually improved on both a year-over-year basis and a sequential basis, so from before to after putting the rebanking in.

We do have to hire more people to accommodate it, but we generate higher revenues as a result of that and I'm really proud of the job that the team has done in Miami already and the teams in Dallas and Chicago are working hard on it and I am confident they are going to do equally well when their turn at the plate comes in March.

All right, thank you so much.

That concludes today's question-and-answer session.

I'd like to turn the conference back to today's speakers for any closing or additional remarks.

Thank you all very much for your time, we really appreciate it.

If you have any further questions just reach out and let us know.

Thanks a lot, bye.

This concludes today's conference.

Thank you for your participation.