美國航空 (AAL) 2015 Q1 法說會逐字稿

Good day and welcome to the American Airlines Group first-quarter 2015 earnings conference call.

This call is being recorded.

(Operator Instructions)

Now I'd like to turn the call over to your moderator, Managing Director of Investor Relations, Mr. Dan Cravens.

Please go ahead.

Thank you, Jake, and good morning, everybody.

Welcome to the American Airlines first-quarter 2015 earnings conference call.

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

And also in the room for our question-and-answer session is Robert Isom, our Chief Operating Officer; Elise Eberwein, our EVP of People and Communications; Bev Goulet, our Chief Integration Officer; Maya Leibman, Chief Information Officer; and Steve Johnson, our EVP of Corporate Affairs.

As is our normal practice, we are going to start the call today with Doug, and he will provide an overview of our financial results.

Derek will then walk us through the details on the quarter and provide some color on our guidance for the remainder of 2015.

Scott will then follow with a 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 of capacity, traffic and load factor, fleet plans and fuel prices.

These statements represent our predictions and expectations as to future events, but numerous risks and uncertainties could cause actual results to differ from those projected.

Information about some of these risks and uncertainties can be found in our earnings press release issued this morning in our Form 10-Q for the quarter ended March 31.

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

A reconciliation to those numbers to the GAAP financial measures is included in the earnings release and that can be found on our website at AA.com under the More About American Investor Relations section.

A webcast of this call will be archived on the 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.

Thanks again for joining us this morning.

At this point, I would like to turn the call over to our Chairman and CEO, Doug Parker.

Thanks, Dan.

Thanks, everybody, for being on.

We announced this morning record results for the first quarter of $1.2 billion in earnings, including special charges, which is over three times the prior record of $400 million, which we just set last year's first quarter.

Obviously pleased with those results, pleased with the improvement year over year.

The credit belongs to the 100,000 hard-working team members of American Airlines.

They are coming together exceptionally well to take care of our customers and to restore America to the greatest airline in the world.

That's evidenced by the great work that's been done by the team on integration, most notably of late combining our frequent flyer programs into one single frequent flyer programs, rebanking our DFW and Chicago hubs, getting to a single operating certificate from the FAA.

So we have a lot of work ahead, but the results today give us confidence we're on the right track and we're looking forward to the remainder of 2015 and beyond.

Without said, as a Dan said, I'll turn it over to Derek then to Scott and then we will open it to questions.

Derek?

Thanks, Doug.

Good morning, everyone.

As is our custom, we filed our first-quarter 2015 10-Q along with our press release this morning.

As Doug said, in our earnings release we reported a record net profit, excluding special charges, of $1.24 billion or $1.73 per diluted share.

This represents an $841 million improvement versus our first-quarter 2014 net profit, excluding special credits of $402 million or $0.54 per diluted share.

Our first-quarter 2015 pretax margin, excluding special charges, was 12.4%, up 8.6 points year over year.

On a GAAP basis, we reported a first-quarter net profit of $932 million or $1.30 per diluted share.

This compares to a net profit of $480 million or $0.65 per diluted share at the same period last year.

In the first quarter we did take delivery of 20 mainline aircraft and retired 30 mainline aircraft.

On the regional side we took delivery of 16 aircraft and we removed from service in part five Embraer-140 aircraft.

We will continue our fleet replacement program throughout the year by taking delivery of 55 mainline aircraft and 38 regional aircraft, and retiring 73 mainline aircraft and 17 regional aircraft.

We have worked with our partners at Boeing in restructuring our 787 delivery schedule.

Under the new revised agreement, we'll reduce the number of aircraft delivered in 2016 by five aircraft.

Four 787 aircraft that were scheduled for delivery in 2016 will now be delivered in 2017 and one aircraft will be deferred until 2018.

We expect this revision to reduce our 2016 wide-body capacity by approximately 2.5% and our system capacity by approximately 0.6%.

And it will also reduce our estimated 2016 gross aircraft CapEx.

Total capacity for the quarter of 2015 was 62.8 billion ASMs, down 0.9% from the same period in 2014.

Mainline capacity for the quarter was 55.9 billion ASMs, down 1.7%.

Regional capacity was up 5.7% to 6.94 billion ASMs, due to a larger gauge aircraft, a longer stage length flying offset in part by fewer departures.

While core demand remains healthy, first-quarter 2015 revenue was negatively impacted by industry capacity growth in some of our core markets, a stronger US dollar and an economy softness in Latin America.

Total operating revenues were $9.8 billion in the first quarter of 2015, down 1.7% from the same period last year.

Passenger revenues for the quarter were $8.4 billion, down 2.6% year over year, with yields down 1.2% on a 0.9% decrease in system capacity.

Cover revenues were down 5.9% in the first quarter of 2015 to $194 million, due primarily to the impact of the strengthening US dollar, weaker overall Latin demand and a decline in cargo capacity.

Other operating revenues were $1.2 billion in the first quarter, up 6% year over year, primarily associated with our affinity card program, which had a higher volume of new card acquisitions and increased average spend by existing cardholders.

Total RASM for the quarter of 2015 was $0.1565, down 0.7%, driven principally by a decline in passenger revenue, which was $0.1344, down 1.7% as compared to the first quarter of 2014.

And Scott will go into a lot more detail in his comments after I finish.

Helped by substantially lower fuel prices, the airline's operating expenses, excluding net special charges for the first quarter of 2015, were $8.3 billion, down 11.7% year over year.

We continue to see a material financial benefit resulting from the steep year-over-year decline in crude oil prices, as we remain unhedged.

Our average mainline fuel price, including taxes, for the first quarter of 2015 was $1.83 per gallon, a 41% decline versus $3.10 per gallon in the first quarter of 2014.

Driven primarily by the lower fuel price, mainline operating CASM per ASM, excluding net special charges, was down 10.8% year over year to $0.1226 on the 1.7% decrease in mainline ASMs.

We recently announced that we had reached new five-year joint collective bargaining agreements with our flight attendants and pilots.

The costs associated with these agreements are reflected in our first-quarter results and in our guidance for the remainder of the year.

Excluding net special charges in fuel, our mainline cost per ASM was $0.0949 in the first quarter, up 5.8%.

This increase is due primarily to higher salaries and benefits costs resulting from these contracts, which increased our first-quarter mainline CASM, excluding special charges in fuel, by approximately 3.6 percentage points.

Regional operating cost per ASM, excluding net special charges and fuel, was $0.1647 cents for the first quarter of 2015, which was 0.9% lower than 2014.

And excluding net special charges and fuel, our consolidated CASM was up 5.2%.

We ended the first quarter with $9.9 billion in total cash and investments, of which $757 million was restricted.

The Company also has an undrawn revolving credit facility of $1.8 billion, bringing our total unrestricted liquidity to $11 billion, $644 million of which was held in Venezuelan bolivars.

As we talked about on our last call, we took advantage of historically attractive financing rates to fund a portion of our aircraft deliveries.

During the first quarter of 2015 we completed two transactions, including the issuance of $500 million of unsecured bonds priced at 4.625% and a $1.2 billion EETC at a blended fixed rate of 3.425%.

In addition, in early April, we refinanced our $750 million 2014 flat gate and route term loan, reducing the margin by 50 basis points to LIBOR plus 300.

This refinancing also reduced the collateral required under the loan and improved our future collateral flexibility.

We are pleased with the economics associated with these transactions and continue to look for attractive opportunities in the market.

During the first quarter we generated $2.5 billion in cash flow from operations and $1.1 billion in free cash flow.

We also paid down $746 million in debt, including prepaying $416 million in high-cost debt.

Looking forward, we will continue to give priority to prepaying high-cost debt when the opportunity arises.

The Company also returned $260 million to shareholders through the payment of $70 million in quarterly dividends and the repurchase of $190 million of common stock, or 3.8 million shares.

This brings our shares purchased since the merger up to 27.2 million shares.

The Company's first-quarter weighted-average fully diluted share count reduced by a net 7.8 million shares as compared to the fourth quarter 2014, primarily due to the effects of our share repurchase program.

In addition, the Company's Board of Directors has declared a $0.10 per share dividend to shareholders of record as of May 4, 2015.

Turning now to 2015 guidance, in our last hire update two weeks ago, we lowered full-year overall system capacity guidance by 0.5 point and are now forecasting it to up approximately 2%.

This growth is primarily driven by, one, an increase of gauge from aircraft deliveries, higher seat density through aircraft reconfigurations and increased stage length.

As of today, we are currently working on our fourth-quarter schedules and will update second-half 2015 guidance in early April with a bias to continue to reduce capacity.

Domestic capacity expected to be up approximately 2% to 3% in 2015, while international capacity is expected be up approximately 1%.

By quarter, mainline capacity in ASMs breaks down as follows: 61.9 billion in the second, 63.7 billion in the third and 58.9 billion in the fourth.

Regional capacity breaks down as 7.6 billion in the second, 8 billion in the third and 8.1 billion in the fourth.

For the full-year 2015 we're forecasting total CASM excluding special items and fuel, to be up approximately 4% versus 2014.

The increase is driven primarily by three items: the cost of the new labor contracts for both flight attendants and pilots, investment in new aircraft and costs dedicated to improving the reliability of our operation.

Mainline CASM, excluding special items and fuel, is projected to be up approximately 3% to 5% in 2015.

While regional CASM, excluding special items and fuel, is projected to be down approximately 1% to 3%.

By quarters, for mainline CASM, second and third up 2% to 4%, and in the fourth quarter up between 4% to 6%.

Regional CASM in the second quarter will be flat to up 2%, third quarter flat to down 2%, and the fourth quarter down 3% to 5%.

As I mentioned in my earlier comments, we have seen a substantial financial benefit as a result of significant drop in crude oil prices.

Using the April 21 fuel curve, we are forecasting our 2015 consolidated fuel price to be in the range of $1.89 to $1.94 per gallon, which we believe will be the lowest economic price in the industry.

Based on these prices, we expect our 2015 consolidated fuel expense to improve by approximately $4.35 billion year over year.

By quarter, the second quarter we believe will be $1.84 to $1.89; third quarter, $1.93 to $1.98; and the fourth quarter, $1.95 to $2.

Regional fuel price, we'll have the second quarter $1.86 to $1.91; third quarter, $1.96 to $2.01 ; and the fourth quarter, $1.98 to $2.03.

Using the midpoints of the guidance we have provided, along with the PRASM guidance that Scott will give, we expect a record second-quarter pretax margin, excluding special items, of between 18% and 20%, up by more than 600 basis points as compared to the second quarter of 2014.

For the remainder of 2015 we continue to expect a large increase in operating cash flow, driven by lower fuel prices.

Going forward, we will remain disciplined in our capital allocation process, with a continued bias toward completing the integration, investing in the airline, paying down high-cost debt and returning excess cash to our shareholders.

In terms of capital expenditures, we are forecasting total gross aircraft CapEx to be approximately $5.4 billion, of which approximately $1.4 billion will occur in the second quarter.

In addition, we expect to invest $1 billion for non-aircraft CapEx and make $2.1 billion in debt repayments in 2015.

In conclusion, thanks to the efforts of our more than 100,000 team members, we're very pleased to report another record quarter with our financial results.

We were also able to complete several key milestones in our merger integration.

While a lot of hard work remains as we complete our integration, we continue to make tremendous progress and look forward to reporting strong financial results in the second quarter.

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

Thanks, Derek.

I'd like to start by thanking all of the people of American Airlines for the great job they continued doing operationally during the difficult first quarter.

And effectively managing all of the change we had, like rebanking two hubs during the middle of some challenging weather events.

On the revenue front, our first-quarter PRASM was down 1.7%.

The stronger US dollar had over a 1 point impact on system PRASM.

Declining international surcharges had a 0.4 point impact on system PRASM.

And Venezuela was approximately a 0.5 point drag on system PRASM.

Domestically, PRASM was down 1%, which, given the significant competitive capacity growth we've seen in Dallas and some of our other markets, a small decline in Q1 PRASM is indicative of healthy underlying domestic demand.

Across the Pacific, PRASM was down 7% on 36% capacity growth.

Currency and surcharge changes have had a particularly large impact in this region.

And given our level of capacity growth combined with the currency effect, we continue to be pleased with absolute demand to Asia.

Latin was down 6%, but it really is the tale of Brazil and Venezuela versus the rest of Latin America.

Despite double-digit industry growth, Mexico and the Caribbean were essentially flat on RASM, meaning that demand grew rapidly to keep pace with the large capacity increase.

Argentina appears to be recovering, leading to positive year-over-year PRASM, but we experienced large PRASM declines in Brazil and Venezuela.

And finally, the Atlantic was our strongest region, with PRASM up 3% year over year.

In the Atlantic, we were also pleased with the absolute demand, given the currency and capacity headwinds.

We've made some significant progress this year on integration.

And some of the recent integration highlights, which Doug talked about as well, included our pilots ratified a new five-year contract.

We received our single operating certificate from the FAA on the very day and schedule that we originally planned a year and a half ago.

We successfully completed one of the most technically difficult integration projects that we had to do when we combined into a single frequent flyer program.

And we rebanked both the DFW and Chicago hubs, and our teams are doing a great job operationally so far with the new schedule.

We have a lot more hard work left in 2015, including combining to a single reservation system in the fourth quarter.

So we can't rest on our laurels, but we're very proud of all that the AA-team has done so far.

And the first few months of 2015 saw us achieve some significant integration milestones.

Turning to the outlook going forward, the comps are more difficult in the second quarter than in any other quarter this year.

We also have some big headwinds, including an expected 2 point system PRASM impact from currency, a 0.7 point impact from the continuing decline in international surcharges, and a 0.5 point impact from Venezuela.

And of course, the continuing pressure from industry capacity growth in all regions.

At American, we saw the supply-demand imbalance beginning to build last year, and have now reduced our international capacity versus prior guidance for four quarters in a row.

While our proactive approach to international capacity is helping our PRASM result, it's not enough to overcome the currency and capacity headwinds.

Given all of this, we expect PRASM to be down in all regions of the world, with the largest declines occurring in the Pacific and Latin America.

And we forecast that our overall system PRASM will be down 4% to 6% year over year in the second quarter.

As we move beyond 2Q, the comps do get easier and will overlap the Venezuela draw-down.

So all else equal, we'd expect the year-over-year PRASM comparisons to improve as well.

While we never like to see negative PRASM, we do believe that demand remains fundamentally strong in almost all areas of the world, with the exceptions of Brazil and Venezuela.

Currency and surcharge changes unfortunately mask some of that core demand strength.

And high single-digit capacity growth in all regions pressures otherwise growing demand that, while healthy, is not growing as fast as capacity.

In conclusion, we're very encouraged with the operating integration and financial results at American Airlines.

And while there are some near-term capacity and currency headwinds, demand environment remains strong and we remain positive about the long-term demand trends.

Thanks, Scott.

Thanks, Derek.

Operator, we are ready for questions.

(Operator Instructions)

William Greene, Morgan Stanley.

Good morning.

Derek, can I ask for some commentary on the cash side?

I realize you've got still some big milestones to come on integration.

But can you talk about your appetite to return more to shareholders going forward?

It feels like there's going to be a pretty big build here that could still drive some pretty big buybacks.

But how are you thinking about that?

I think as we go through this, as I said earlier, as you said too, is make sure we get done with the integration.

We have set aside a certain amount of cash to get through the integration.

We do have a lot of aircraft coming in, so we do want to have cash to pay for that aircraft.

And then past that, as you saw in the first quarter and you've seen what we have done over the last -- since the merger, buying back in over 20 million shares, we do plan on returning cash to the shareholders.

We did do $190 million in the first quarter and we do have the $2 billion program that is out there.

We plan to do that over the next two years.

That is our plan.

How fast we do that is a question.

But as of right now, we want to keep more cash than we need to get through the integration and get through the merger, then begin doing that.

You've seen we have done a significant amount, over $2 billion worth of share repurchases going back, including all of the other things that we've done.

We plan on doing it and we plan on continuing to return throughout the year.

Yes, okay.

And then one follow-up here on then, fleet.

You mentioned you got a lot of aircraft coming in.

Can you also talk a little bit about your thoughts on some of your peers trying out a used aircraft strategy?

Is that something that intrigues you at all?

Or is that no, we have got our fleet plan and we're going to stick with it?

We have our fleet plan and we're going to stick with it.

We have a lot of aircraft on order to replace all of our older MD-80s, 75s and 76s.

That plan is in place and we plan on going down that path.

We have enough aircraft on order for our replacement and that's the method we are going to go down for the next three or four years.

That's great.

I appreciate the time.

Jamie Baker, JPMorgan.

Good morning, everybody.

First question for Scott.

Can the A321 in your low-density configuration operate trans cons from LaGuardia without taking a seat block?

And what are your views on potentially lifting the perimeter rule?

Yes we could operate out of LaGuardia.

Our views on the LaGuardia perimeter rule are that -- the facility we have a challenge handling all the customers we have in the facility today.

And if the perimeter rule were lifted we would have a lot of large aircraft with long-haul flying out of LaGuardia, of course.

So we need the facility to be prepared to handle those customers before you really even consider.

So I think our issue is mostly focused on the logistics of having the facility able to handle that number of people before you consider changing the perimeter rule and having a much higher volume of customers.

But you are not taking a position against the possibility with the port.

No, but our view would be that we need to get the facility work done first.

Yes, got it.

And a follow-up for Doug.

Doug, good morning.

Your closest international partner is on the exact opposite side of you as it relates to the issue of Middle Eastern competition and illegal subsidies.

How contentious are your discussions of these days with Willie Walsh on this topic?

Are you reluctantly holding hands with Delta and United on this issue?

Or from a modeling perspective, I'm sure we don't need to model for an outright divorce from British Air, but might this disagreement nonetheless represent a spat that could potentially strain profitability?

To your last question, no, you should not model anything inward.

We're working even more closely with British Airways on ways to improve the profitability of the joint venture.

We do have a disagreement as to this issue, but it has no effect on our relationship or certainly on the joint venture.

As to whether or not American's reluctantly holding hands, no, we're all in on this.

We think the situation in the Middle East is serious and needs to be addressed.

And if it is not addressed, it could have material consequences to our industry over time.

We believe it will be addressed.

So, all those things.

BA just has a different perspective for differing reasons.

But the other European carriers are seeing severe impact to their profitability because of the growth of these subsidized airlines.

And we don't care to see that happen in the United States.

So that is our position, we're all in on it.

But has no impact whatsoever on our business relationship with British Airways.

Okay, thanks a lot for the color.

I appreciate it, Scott and Doug.

Take care.

Hunter Keay, Wolfe Research.

Thanks, good morning, everybody.

Scott, we haven't talked about synergies in a while.

I wonder if you can give us an update as to where we are on that.

If you've captured really any on the revenue side and wondering if at this point you want to revise the target higher or even lower?

Is it too soon to think that revenue synergies might manifest themselves in some PRASM outperformance as early as the third quarter?

I think there are a lot of synergies and I know that there are a lot of synergies in our numbers today.

Although some of the big ones won't come until after we get to a single reservation system.

Some of the biggest things are the connectivity of the network, moving aircraft around, re-gauging the airline and putting the right sized aircraft in the optimal market.

Those kinds of revenue synergies can't occur until after you get to a single operating certificate -- or a single reservation system in the fourth quarter.

Those things are yet to come, but they probably won't be third-quarter effects, they'll be 2016 impacts.

Okay, good.

And that's a good segue into the next question.

As we think about 2016, how many of the deferred 787 deliveries relate directly to the issue with the seat manufacturer versus you guys actually saying there's a little bit too much supply that is mismatched with demand in international markets?

And how do the aircraft deferrals translate into how you're thinking about overall 2016 capacity growth?

Thanks.

So the deferrals have absolutely nothing to do with the seat manufacturer.

We think we'll be back on time on long before these aircraft are delivered.

And so this is all about trying to do more to match supply to demand.

And while we haven't given 2016 capacity guidance, clearly we've done -- this is the fourth quarter in a row that we've been ahead of the view of supply and demand being imbalanced.

I think that philosophy will continue to guide us as we move into 2016.

The only thing we've done that is concrete so far is this pushing back aircraft deliveries.

We've actually accelerated retirements of some of our other aircraft, MD-80s and 767s, which will impact 2016 capacity.

And we'll have more to come on 2016 capacity, but as long as we're looking at a world where supply and demand are out of balance and you're having negative PRASM, our bias will certainly be to the downside.

Things a lot, Scott.

Thanks, Hunter.

Julie Yates, Credit Suisse.

Good morning.

With the competitive capacity additions on the transatlantic this summer and with the currency headwinds, do you expect that you can return to positive unit revenues in the transatlantic in Q3?

I don't have a forecast for Q3, so can't really specifically comment on that.

But transatlantic, even in 2Q, which has the big bump in the competitive capacity out of Heathrow in particular, and also has headwinds from the currency, we expect to be neck and neck for being the best region in the world, tied with domestic for us.

And so it's certainly not inconceivable that we'd be positive in 3Q, but we just don't have a forecast that's very accurate that far out.

Understood.

And then in your Q4 schedule review, are you also considering cutting any domestic capacity in response to the competitive pressures that you're seeing?

We look everywhere and look at every market that we serve.

But when you look at the competitive markets for competitive capacity -- or capacity is up -- they're probably not the kind of markets we're going to cut, because they're highly profitable markets and they are places that when you have lower fares, actually demand is higher.

So what you find happens in the normal schedule review processes in some of those markets, while we don't add flights we have a tendency to up-gauge flights.

So a 737 becomes an A321.

So those markets typically, in the normal course process, become higher capacity markets.

That's capacity that moves from some other market into those markets, because absolute demand in terms of number of customers is higher.

We haven't done that.

We don't have specifics yet for a domestic market.

But I'd be surprised if we had a material change in the domestic markets.

We're much more focused on the international.

Okay, understood.

Thank you.

Mike Linenberg, Deutsche Bank.

Hey good morning, everybody.

Derek, when you were going over the aircraft deferrals, I think I missed this.

What was the -- you talked about a reduction in gross CapEx.

What is the rough number you may have said?

We didn't say a number because then you know what the amount we paid for the aircraft is.

(laughter)

That's right, five airplanes, okay.

(laughter)

[Zoe] doesn't like that.

Not a problem.

Mike, just so you know, obviously it just moves to 2017 and 2018.

That is right, very good.

And my next question, then.

Looking at your regional cost reduction, you can see the restructuring of Envoy, it looks like it's really starting to take hold.

I wanted to know, have you now fully allocated all of the regional aircraft that you're looking to deploy over the next couple of years?

Are we done with Envoy and the regional fleet restructuring?

Or is there more to come?

Because I feel like there's been significant -- the opportunity to generate some real savings from this out over the next couple of years.

Because I do think you're probably going to have some of the lowest regional cost lift of any carrier out there.

The restructuring will continue in terms of going from 50-seaters to 76-seat aircraft.

That still has room to run and will continue over the next at least 12 months to 24 months.

Okay, very good.

Thanks, Scott.

Thanks, Mike.

Helane Becker, Cowen and Company.

Thanks, operator.

Hi guys, thank you very much for the time.

Doug, I'm very impressed that you decided to get all your compensation in equity instead of in cash and equity.

So how are you thinking about that?

Thanks, Helane, that is nice of you.

The thoughts are, one, it seems to me that my compensation should be paid in the same currency as we ask our shareholders to accept, because we should have interests that are highly aligned.

And the other thing I think, though, to the extent you are looking for what this means, I think it is just one more piece of evidence that it's really different this time.

Investors keep asking, is it really different this time?

You guys have said in the past that every time you get profitable, this is going to be the time you remain profitable.

I wouldn't be doing this if I thought it was still the same old airline business, because it is not.

I don't think anybody, any executive, over the last 15, 20 years would have been willing to take all their compensation in equity because we all knew the equity had enormous risk.

I'm not suggesting there's not still risk in airline stocks, but we're really bullish on what the outlook is for years to come.

So I'm more than happy to be compensated the same way you are.

Thank you for your response.

I just feel like, listening to you and all of you competitors talk about competitive capacity growth, it's hard to get over the it's not the same old airline industry, because you're still seeing a lot of capacity going into markets that probably shouldn't be there.

So I applaud your decision.

I just wonder about the competitive market and how good it's going to be.

About the conclusion?

(laughter) Now you got me scared.

That wasn't the intention.

I'm just kidding.

It's not the same.

It's nothing like what we saw in the past, when airlines got first whiff of profitability and then used that to say -- gee, if I could be profitable with 100 airplanes, just think how profitable I could be with 150.

What is going on now, again, we can all look at it and say look, supply is growing faster than demand.

And in some cases it is.

But the rates of growth we're talking about are nothing like we've seen in the past.

Where the growth comes from is nothing like what we saw in the past.

People aren't looking to start up new hubs in different parts of the country.

People are growing out of their strength into markets that, again, may be in excess of the near-term demand.

But that is nothing like what we saw in the past, Helane, where you just saw these wild changes in year-over-year profitability.

We'll find out when we get to the next down cycle.

But I'm really confident that what we'll see is, yes, it's still a cyclical business, but the peaks are much, much higher than they were before and therefore the troughs are going to be much, much higher.

And I think the swings are going to be much less.

That's great, I hope you're right, I really do.

I appreciate that, thank you very much.

Have a nice day.

Duane Pfennigwerth, Evercore.

Thanks for taking the questions.

I wanted to ask some follow-up on your Venezuela commentary.

Obviously you're comping against some capacity cuts when RASM was really high there.

Was your comment about Venezuela specific to a comps issue?

Or are you seeing incremental demand weakness there?

I don't know, it's hard to sort out.

It's such a big decline that I'm not sure if it's incremental demand weakness or just the year-over-year effect.

But it's clearly got some challenges right now.

I guess the point is, it feels like you get beyond those year-to-year cuts by the third-quarter, and at minimum it should be less of a headwind in the second half of the year.

It's certainly less of a headwind.

The capacity issue and the selling in bolivars issue is less of a headwind.

By the time you get to the third quarter there will be the organic question you're asking of what is happening to demand.

And I suspect that Venezuela will still be down on a RASM basis because it has gotten incrementally weaker.

But the impact at our system will be a whole lot smaller than it's been for the last 12 months.

The year-over-year impact will be much smaller.

Even though it may be down a lot, it'll be on a much smaller capacity base.

And it will be down less than it was in the first and second quarter because you won't have the bolivar-dollar ticket selling issue.

Got it, thanks.

And then following up on the pace of capital return, can you provide any detail on -- obviously you had a huge statement in the fourth quarter which may have gotten people's expectations pretty high in terms of the run rate there, and then a much more modest level in the first quarter.

Can you quantify or give us some thought process details on how you thought about the level into the first quarter?

This is Doug.

We would just encourage you not to make strong conclusions based on the quarterly reports of our share repurchases.

The facts are, we have announced a very large share repurchase program.

We've demonstrated over time our commitment to return excess cash to our shareholders.

But for obvious reasons, we got to be careful about what we disclose about the program and what our intent is on the program.

What we will disclose is how much we actually purchase each quarter.

And that is what we can do.

But know this, we're not going to be systematic or ratable in our purchases quarter by quarter.

But we're absolutely committed to returning access cash to shareholders, because it is your cash.

But really we ask that you not try and make strong conclusions based on quarterly reports on the program.

Okay, very fair.

Thank you.

Dan McKenzie, Buckingham Research.

Hey, good morning, guys, thanks.

With respect to the buyback, can you talk about the longer-term balance sheet goals?

On the one hand, the cost of debt lowers the cost of capital so it makes sense to keep more of it, which suggests a potential larger share buyback than investors perhaps appreciate.

I'm wondering what is the right level of debt looking ahead?

Okay, this is my turn again.

I have reasonably strong views on this.

So our view is that the best thing for our shareholders is not to go try and target any particular debt-to-equity ratio or target rating.

That is not to suggest to the rating agencies or to our debt holders that we're not concerned about such things.

What we know is, though, that in our business, certainly at American, it seems at this point in time, that the right time thing is to be -- given that we can borrow at the rates we are borrowing, which don't seem to reflect the credit rating that we have today, we think the right thing to do is to borrow, certainly on aircraft, which is the debt we have coming, borrow as much as we can.

Because the rates we are getting are sub 4%.

And borrow at those rates and continue to lever, if you will, to the extent we -- because we can generate higher returns than that for our shareholders.

With the cash is that we aren't generating returns, we should return to our shareholders because you can generate higher returns than that.

That is our view on this, that this focus on delevering could be contrary to our shareholders' best interest.

So our goal is to make sure that we're actually doing this intelligently and making sure that to the extent we have the ability to borrow at rates below that we can earn, or that we can return to you, we should continue to borrow, irrespective of what that may do to some ratio.

So that's a long way of me trying to answer your question, Daniel, but we're not heavily focused, nor are we going to give targets to you on credit ratios.

Understood, thanks Doug.

And then, Derek, what percent of the aircraft are you financing this year exactly?

And is that a fair run rate going forward as we think about 2016 and beyond?

I the early one is the [WTC] transactions is around 80% of the aircraft, so I think I would use that number as you move forward.

What we have in the cash flow guidance today is only transactions that have been completed versus transactions that are contemplated, so you have the right numbers in there.

The run rate that we did in the first quarter on those deliveries is probably a pretty good run rate going forward.

Fantastic, thanks, guys.

Savi Syth, Raymond James.

Good morning.

I wonder if you could provide a little bit more color on what you're seeing from a corporate demand perspective, and maybe particularly out of Dallas.

Corporate demand is strong.

Revenue results are down out of Dallas because of the capacity situation.

Fares are down and there's a lot more competitive capacity, so revenue is down.

But corporate demand in total is strong, and given the capacity situation in Dallas, I think we view demand in Dallas is strong as well.

I got it.

And then to follow up, on the Latin front, given the weakness that you're seeing in the market, in specifically two countries, is there anything that you're doing on the capacity front to address that?

Or is it something you're just going to have to absorb?

We've cut capacity to Venezuela by over 70%.

We've cut capacity to Brazil about 20%.

We've done that.

And there's probably not more left to come from American Airlines.

Got it.

And following up on the US dollars front, how much of a benefit is there on the cost side that offsets the revenue pressure?

There was about, in this quarter, there was about $36 million of benefit on the expense side.

All right, great, thank you.

Joe DeNardi, Stifel.

Thanks, good morning.

Derek, a quick one on the 787.

Did any of that deferral have to do with the economics of that airplane, given lower fuel?

Or was it strictly a capacity decision?

Strictly a capacity decision.

Okay.

Then on some of the rebankings you guys have gone through, you only have a few weeks of data, but has the revenue improvement met your expectations at this point?

And what are the costs impact as well?

It's too early for us to try to measure a revenue impact, particularly when the first two weeks of it are overlapping last year with a change in Easter.

So it's too early to measure the revenue impact.

It's probably too early to really measure the cost impacts.

Operationally, I'll let Robert talk.

Operationally it's been a tremendous success on all of the important metrics, whether it's starting the day at or departing and arriving on time throughout the day, connecting customers and baggage.

We've been very pleased with the results, certainly in Dallas and especially in Chicago.

Joe, this is Derek from a cost standpoint we added costs into those areas which is built on to our CASM guidance that you have out there.

It is probably about a quarter of a point of CASM with the headcount and other things that we put out at those airports.

That is already built into all of the guidance that you have on our CASM numbers.

Okay.

And Scott, I think you spoke recently at a conference about some of the competitive pressures you are seeing from ultra-low-cost carriers.

Has that changed the way that you are planning on competing against them going forward, given some of the share that they have in certain of your markets?

I guess it depends on how you define change.

We're competing using a lot more of the tactics, I think, that perhaps we'd used at US Airways, where we had a bigger overlap of low-cost carriers than American did.

So that probably is a level that is more aggressive, perhaps, in terms of competition.

But we are really using a similar play book that we used there.

But when we were at US Airways, we had a whole lot more low-cost carrier competition than American had had historically.

And now our network at American looks a lot more like the level of competition that US Airways used to have, particularly because of the changes here at Love Field.

Okay, thank you.

Darryl Genovesi, UBS

Good morning, guys, thanks for taking my question.

I guess this one is for Scott.

Some of the US airlines are taking the domestic upgauging strategy a little bit further than just adding slimline seats replacing 50-seaters with 76-seaters.

You've had the 717s coming in at Delta and then United now bringing in 757s and in particular, the 777s into the domestic market.

At what point do we start to worry that domestic upgauging is going too far?

And are you contemplating any similar moves to perhaps bring more wide-bodies into the domestic market?

I think upgauging within a class makes all the economic sense in the world for an individual airline.

So that means going from 50 to 76 seats, going from an A320 to an A321, upgauging in terms of wide-body size, 787-8 to a -9 because the marginal cost of those is much lower.

When you talk about going between classes, we certainly aren't going to bring wide-bodies back domestically.

It's lower-cost to fly two narrow-bodies than it is to fly a single wide-body for the same amount of seats.

That is not something that we are planning to do.

But we are doing the same thing as others on -- I think it's a trend that -- and it's leading to higher profitability.

It is pressuring RASM across the system, but you look at every airline is supporting record profitability in the first quarter, and the second quarter, for the full year.

And one of the things that is helping everyone report record profitability is upgauging and getting more seats on aircraft.

It's also one of the important ways that we can compete more effectively with ultra low-cost carriers, whose real advantage is cramming as many seats as possible on an airplane.

We fly bigger airplanes and spread the cost of flying the aircraft out over more seats, that makes us that much more competitive with the ultra-low-cost carriers.

Great, thanks for that.

And, Derek, if you wouldn't mind, can you provide an update on the current view on when -- if you even have a current view -- on when you might think about reversing the valuation allowance on the NOL?

Yes, I think we're going to take a view and look at that at the end of the year.

So I think that is probably the timeframe.

We want to get through the integration and get through the res migration, which happens in the fourth quarter.

And then I think for modeling purposes, I believe the VAL allowance will probably be reversed at the end of the year.

And then have book taxes in 2016, but no cash taxes until the NOL of about $10 billion runs off.

Okay.

And then on the fuel guidance, fuel has been pretty volatile here.

I was expecting it to move up a little bit more than it did.

Can we think of this fuel market as being as of today?

Or is this already stale just because of some of the volatility we've had in recent days?

No, that is pegged as of April 21.

I think it was pegged as of a couple days ago.

Great, thanks a lot.

Appreciate it, guys.

Thank you.

Tom Kim, Goldman Sachs.

Thanks.

Scott, I have a follow-up to a comment you made earlier about maintaining an elevated cash level during the integration.

So given your operating cash flow outlook, which is very bullish, and your $10 billion in cash, can you help us understand why you wish to maintain an elevated level during the integration?

What are some of the things that you are concerned about that drives this?

This is Derek.

We put aside cash to integrate the airline.

We said it was going to be $1.2 billion, $1.25 billion to integrate the airline.

We still got a lot of work to do.

We still got a lot of integration to complete, a lot of capital to deploy as we redo the hubs and things that we've talked about earlier.

A lot of that cash is earmarked for those kind of things as we move forward, and is built into our long-range plan, which would have us elevated levels this year and maybe a little bit into next year.

This is Doug.

To be clear, haven't said that the existing level is the right level.

All Derek said was simply that we think we -- which is accurate -- we believe as we go through integration, we should hold more than other airlines our size, or relative to similar size as us.

We're not trying to suggest that the existing level is the proper level.

I just want to be clear on that.

That's not the point we're trying to make.

Simply that we should be holding more than others as we go through integration and they aren't.

That's fair enough.

Would you be able to give us a sense of what you think the right cash to revenue figures should be long-term?

Obviously you're at north of 20% now.

It's hard to say long-term when we are so focused on the near-term and getting through integration.

Other airlines -- you can look at where other airlines, again, of similar size to us, what their ratios are.

My guess is they are being prudent.

You could view that perhaps as a prudent level.

But we haven't come to such a conclusion yet.

We're focused right now on getting through the integration.

Okay.

And with regard to pricing, can you frame out how much international PRASM decline in the first quarter was due to FX translation?

And how much might've been related to international fuel surcharges?

Yes.

It was a little over 1 point for currency and about 0.5 point -- I think 4 points in the first quarter for surcharges.

Can you frame that for your 2Q guide as well?

Yes, it is 2 points for currency and 0.7 for surcharge.

Thanks a lot.

Michael Derchin, Sterne Agee

Hi, It is Sterne Agee - CRT.

We just merged here.

Congratulations, Michael.

Good talking with you.

I want to go back to Helane's questions, Doug.

As a large shareholder, I am sure one of the things in mind was your current valuation being as low as it is.

And certainly your confidence in management and executing its business plan that you might have some inside information about.

I'm curious, though, about the comment about we really won't know it is different until the next recession.

I'm not so sure that is correct.

And I just want to explore that one with you.

Certainly one could do a sensitivity analysis and say that the Fed goes crazy and all of a sudden we have a recession next year.

It would take an incredibly large drop in RASM next year for you guys to go into the red.

I think you would agree with that.

And obviously a lot of other things have happened, changes your business model that are permanent changes.

They are not going to go away in the next recession.

They are actually going to buffer things.

So I'm just wondering if you, particularly as a shareholder looking at valuations which are really being negatively affected by this perception that you guys are going to lose billions of dollars again in the next recession, if you can add some color to that.

Michael, I couldn't agree with you more, and you said a better than I did.

I'm sure I said what you said I said, which is we won't know until next recession.

What I believe is we will prove it in the next downturn, rather.

What I believe is what you just said, which is if anyone doesn't believe it yet, we'll prove in the next downturn, is what I was trying to communicate.

I believe exactly what you just said, which is anybody that really takes the time to study the industry and where it is now versus where it's been in the past, knows that it is different.

I certainly know that it's different, therefore I'm confident doing what I've done.

I think, again, not to suggest that people that are saying I'm not sure yet, haven't studied it properly.

But I just find it hard to look at what is happening today versus what's happened in the past and not come to the conclusion that it is different.

The level of earnings is much higher than it's been in the past.

And it's unclear, I don't think this is peak.

So the peaks are certainly higher and the volatility is less.

And the things that we worry about are much less dramatic than the kinds of things we worried about in the past, in terms of supply versus demand growth.

So I'm with you completely.

And like I said, you said it better than I did.

I wasn't trying to suggest that this is an open question in our mind and we'll find out in the downturn.

What I meant to say, what I should have said, was it has changed and if you don't believe it yet, I guess we have to wait until there's a downturn to prove it to you, but we will prove it to you then.

But those who have figured it out now will reap the benefits of that instead of having to wait.

Thanks, Doug, well said.

Thank you for helping me say it better.

(laughter)

That is what I'm here for.

All right, thanks, Michael.

At this time we would like to invite the members of the media an opportunity to ask questions.

(Operator Instructions)

Mary Schlangenstein, Bloomberg News.

Scott, can you clarify for me?

Did you say that American has revised capacity downward four quarters in a row?

Or were you just talking about international capacity?

It would be both.

It has been on international side, but our overall capacity has come down four quarters in a row from our prior guidance.

Okay.

And if you can clarify for me a little bit, a couple of times you've referred to demand being strong but capacity additions outstripping demand.

So when you do something like defer the Dreamliners, is it on -- because you don't want to add capacity to a market that already has too much?

Or is it that the demand itself is slowing, so you're seeing lower demand as well?

No, really it is more the former, that while demand is still growing, it's not growing as fast as supply.

Okay.

And is that worldwide?

It is mostly worldwide, yes.

Okay, great, thank you.

David Koenig, Associated Press.

Hi, good morning, folks.

I guess this is a follow-up, or maybe rephrasing Michael Derchin's question.

Are you going to be able to keep growing profits when you start lapping the collapse in fuel prices?

And if so, how?

Well, we certainly hope so.

We will have to get there.

And when we start getting to a point in time where fuel prices are up year over year, all that really means is that we'll have to have RASM growing, because that is just the way the math works.

We'll have to get to a world where RASM is growing and I hope that will be the case.

But how do you do that, beyond just scaling back your planned increases in capacity?

There's all kinds of things we do to try to manage the business and have always historically done to try to increase revenues.

And we will continue to do all of those things.

It's not just about capacity.

We'll continue to -- we'll get synergies from the merger.

We'll continue to have -- win new customers from the great product that we are putting out there.

And there's a lot of things we can do that are independent of the macroeconomic environment to make American Airlines a better airline, the preferred airline of our customers, and that can lead to higher revenues, even when we have some macroeconomic challenges.

Okay, thank you.

Andrea Ahles, Fort Worth Star-Telegram.

Hi, good morning.

I wanted to ask a very parochial question about Dallas Love Field.

Can you talk a little bit more the competitive pressures you're getting from Southwest and their continuing growth at Love Field?

They're not even done yet adding all of the routes yet that they've announced.

And if you are considering any capacity cuts then domestically at DFW because of the competition you are seeing and the capacity increases you seen just in our local market here?

I may have answered this question less directly for one of the analysts I thought was referring to DFW, but didn't say DFW.

The short answer is no.

We are not planning to cut capacity in any of the DFW markets.

What actually winds up happening is when fares go down, one, these are all important markets for us, profitable markets, markets that are critical to the DFW hub, that connect customers from all the other destinations we fly.

So there's no chance that you'd pull any of these routes out of the network.

So what winds up happening then is you have lower fares and so you have absolute levels of demand that are higher.

So at lower prices, economics 101, you have more customers that want to buy the ticket at those prices.

And so you have more people showing up.

So what typically will happen is, in many of these routes we will wind up actually having more capacity.

Not by adding more frequencies or adding more flights, but by simply upgauging to larger aircraft.

That's easier for us to do as we are taking more large aircraft like A321s.

And as we do that, we have the opportunity to put them in routes that serve a larger segment of the customers in those markets.

No plans to reduce capacity in those markets.

So with the softness that you are seeing on the fare side, because you are lowering fares to compete, in the softness [upward].

Is it still on that promotional softness side?

Or are you starting to see at least some stabilization on the side of this market?

I don't know if it's promotional or if it's permanent.

I tend to be more in the camp of this is the new equilibrium point.

When the supply curve moves that much, economics 101, the clearing price changes.

I tend to think that we're near the clearing price.

I don't know for sure if we are or not, but we're pricing to the demand and supply as it exists in the market today.

All right, thank you.

Jeffrey Dastin, Thomson Reuters

Thank you very much.

Could you break out any capacity change to Japan and clarify the timeline for Brazil and Venezuela capacity cuts?

No change to Japan that we have.

And Venezuela capacity cuts were last year, in the third quarter of last year.

And Brazil has been coming online beginning in the third quarter, really the fourth quarter of last year through today.

Okay.

But might there be capacity cuts to Japan in the coming quarters?

If there was, we wouldn't be able to tell you in advance.

But there's nothing loaded or planned.

Got it.

And if I may, one completely separate question.

How is American preparing for Fed rate hikes?

For what?

For Federal Reserve rate hikes.

We aren't doing anything specific for the Federal Reserve rate hike.

Okay, great.

Thank you very much.

Thank you.

Edward Russell, Flightglobal.

Hi, yes, I've been looking at loads on your new flights from Dallas-Fort Worth to Hong Kong and Shanghai last year.

And I noticed that they are significantly below where Seoul was when you launched that in 2013.

Do you have any view on how those routes are performing and whether you potentially plan to down-gauge Hong Kong as you have done in Shanghai?

Those routes are doing really well and we're happy with them.

That's, at best, a very imperfect way to judge a route performance.

It depends on what the fares are in the market, and in particular, how much premium business.

You look at a market like Hong Kong actually, and it's our best premium market across the Pacific.

So those routes are performing above expectations, and we're happy with how they are doing.

Okay, thank you.

Ladies and gentlemen this does complete your question and answer session.

I'll be happy to turn the call back over to your host for closing remarks.

All right, thank you all very much for your interest.

We appreciate it.

And thanks again.

Bye.

Ladies and gentlemen, with that, that will conclude your conference for today.

Thank you for your participation.