美國航空 (AAL) 2015 Q2 法說會逐字稿

Good day, everyone, and welcome to the American Airlines second quarter 2015 earnings conference call.

Today's 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. Dan Cravens.

Thanks, Jenny, and good morning, everybody, and welcome to the American Airlines Group second quarter 2015 earnings conference call.

Joining us on the call this morning 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 Officer, 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.

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

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

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, that we must state that today's call does contain forward-looking statements, including statements including concerning future revenues and costs, forecasts of capacity, traffic, load factors, 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 the earnings press release issued this morning, as well as our Form 10-Q for the quarter ended June 30, 2015.

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

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

The webcast of this call will also be archived on our website.

The information that we are giving you on the call is as of today's date, and we undertake no obligation to update the information subsequently.

So thanks again, for joining us this morning.

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

Thank you, Dan.

Thank you everyone for being on.

We at American Airlines today reported record earnings of $1.9 billion, excluding special charges for the second quarter.

It's a record, not just for the second quarter at American, but actually the highest earnings American has ever had in one quarter, in its history.

While we are not the keepers of all industry data, we think, since was the highest earnings of any airline this quarter, we think it's the highest quarterly earnings that any commercial airlines ever reported in a quarter.

So, we are quite proud of that, given the fact that this Company was in bankruptcy about 18 months ago.

To be producing the highest earnings any airlines ever produced, it's a testament to the amazing team we have and their great work.

100,000 hard working people at American Airlines have come together, doing a great job of integrating our airlines, and taking care of our customers.

We are -- our confidence in our team, gives us confidence in our future.

We've repurchased over $750 million of our equity in the second quarter as Derek will talk about.

And today we announced we've authorized an additional $2 billion share repurchase over and above the $2 billion that we announced just in January.

So very pleased with the results, and excited about our future.

With that, I will turn it over to Derek, to give you more detail on the financials, and Scott will talk about revenue and performance.

Great.

Thanks, Doug, and good morning, everyone.

We did file our second quarter 2015 10-Q, along with the press release this morning.

And in that earnings release as Doug said, we reported the highest quarterly profit in the Company's history.

The second quarter was a net profit excluding net special charges of $1.9 billion or $2.62 per diluted share, and this represents $398 million improvement versus our second quarter of 2014.

Net profit excluding net special charges of a $1.5 billion or $1.98 per diluted share.

Our second quarter of 2015 pre-tax margin excluding net special charges was a record 17.2%, up 4.4 points year-over-year.

On a GAAP basis, we reported a record second quarter net profit of $1.7 billion or $2.41 per diluted share, and this compares to a net profit of $864 million or $1.17 per diluted share in the same period last year.

In the second quarter of 2015, we continued to invest in the airline by taking delivery of 24 mainline aircraft, and retiring 34 mainline aircraft.

On the regional side we took delivery of nine aircraft, and we removed from service and parked eight aircraft.

Throughout the next few years, we will continue our extensive fleet renewal program that has made American's fleet the youngest of any of the US network airlines.

During the remainder of the year, we expect to take delivery of 31 mainline aircraft and 29 regional aircraft, while retiring or parking 53 mainline aircraft and 22 regional aircraft.

The total capacity for the second quarter was 69.4 billion ASMs, up 1.9% for the same period in 2014.

Mainline capacity for the quarter was 61.9 billion ASMs, up 1.5%, while regional for the quarter was up 5.5% to 7.48 billion ASMs, due primarily to larger gauge aircraft, longer stage length offset by fewer departures.

Second quarter 2015 revenue was negatively impacted by large capacity increases in certain domestic and international segments, a strong US dollar, and continued economic softness in Latin America.

For the quarter, total operating revenues were $10.8 billion, down 4.6% from the same period last year.

Passenger revenues were $9.4 billion, down 5.1%.

Yields were down 6.1%, on a 1.9% increase in system capacity.

Cargoes revenue were down 12.3% to $194 million, due primarily to lower international yields, and other operating revenues were $1.2 billion, up 0.4% year-over-year.

Total RASM in the second quarter of 2015 was $0.156, down 6.4% for the same period last year.

This decrease was driven principally by a decline in passenger RASM which was $0.1357, down 6.9%, and Scott will give more details on that in his talk.

The airlines operating expenses excluding net special charges for the second quarter of 2015 were $8.8 billion, down 9.8% year-over-year, primarily due to a 37% decrease in consolidated fuel expense.

We remain unhedged, and our financial results continue to see a material financial benefit from the significant year-over-year decline in crude oil prices.

Our average mainline fuel price including taxes for the second quarter was 1.9 -- or a $1.90 per gallon, a 37% decline versus $3.02 per gallon in the second quarter of last year.

Lower fuel prices drove 11.8% decline in mainline operating costs per ASM, excluding net special charges to $0.1164 Excluding net special charges in fuel, our mainline cost per ASM was $0.877 in the second quarter, up 2.5% year-over-year.

This increase is due primarily to higher salaries and benefit costs associated with our recent labor contracts, which increased our second quarter mainline CASM excluding special charges and fuel by approximately 3.5 percentage points.

These higher labor costs are reflected in our guidance for the remainder of the year.

Regional operating cost per ASM excluding net special charges was $0.1602 for the second quarter of 2015, an increase of 1.4%.

So excluding net special charges and fuel, our consolidated second quarter CASM was up 2.6% year-over-year.

We ended the second quarter with $9.7 billion in total cash and investments.

Of this $747 million was restricted, and $629 million was held in Venezuela bolivars.

The Company also has an undrawn credit facility of $1.8 billion, bringing our total unrestricted liquidity to $10.7 billion.

During the second quarter, the Company refinanced each of its secured term loan facilities at lower interest rates while improving collateral terms.

In addition, the Company also extended the maturity of its $1.9 billion term loan facility by one year to June 2020.

Subsequently, both credit facilities received a 25 point basis point reduction in interest rate due to the Company's improved credit ratings from S&P and Moody's.

During the second quarter of 2015, we generated $2.3 billion in cash flow from operations, and paid down $361 million in debt.

The Company returned $823 million to its shareholders through the payment of $70 million in quarterly dividends, and the repurchase of $753 million of common stock or 17.3 million shares at an average price of $43.53 per share.

When combined with the dividends and shares repurchased during the first quarter, the Company has returned approximately $1.1 billion to its shareholders in the first half of 2015.

And since the merger closed, we have returned approximately $3 billion to our shareholders.

Based on the Company's strong financial performance, its projected cash flow, and the repurchase activity to date, the American Airlines Group Board of Directors has authorized an additional $2 billion share repurchase program to be completed by December 31, 2016.

This brings the total amount of share repurchase programs authorized in 2015 to $4 billion.

The Company's Board of Directors has also declared a $0.10 per share dividend to be paid on August 24, 2015 to shareholders of record as of August 10, 2015.

Turning now to our guidance for the remainder of the year, in our last IRI update provided on July 10, we lowered our full year overall system capacity growth, and are now forecasting it to be up approximately 1%, resulting in full year domestic capacity growth of approximately 1% to 2% in 2015, while international capacity is expected to be up approximately 1%.

For the back half of 2015, mainline capacity and ASMs break down in the quarters as follows, 63.6 billion in the third, 58.1 billion in the fourth.

Regional capacity is 7.66 billion in the third, and 7.70 billion in the fourth.

For the full year 2015, we are forecasting year-over-year total CASM ex special items and fuel to be up approximately 4% to 6%.

The increase is driven primarily by the new labor contracts covering our pilots and flight attendants, and costs dedicated to improving the reliability of our operation.

Mainline CASM excluding special items and fuel is projected to be up approximately 4% to 6%, while regional CASM excluding special items and fuel is projected to be approximately flat to up 2%.

Mainline CASM in the third quarter is projected to be up 3% to 5%, and in the fourth quarter, up 6% to 8%.

And on the regional side, the third quarter 2% to 4%, and the fourth quarter approximately flat.

As I mentioned in my earlier comments, we continue to see a substantial financial benefit as a result of lower crude oil prices.

Using the July 20, 2015 fuel curve, we are forecasting our consolidated fuel price to be in the range of $1.78 to $1.83 per gallon.

Based on these prices, we expect our 2015 consolidated fuel expense to improve by approximately $4.8 billion year over year.

Mainline fuel in the third quarter expected to be $1.73 to $1.78, and in the fourth quarter, $1.71 to $1.76.

Our regional fuel price in the third quarter, $1.75 to $1.80, and in the fourth, $1.73 to $1.78.

Using the midpoints of the guidance we have provided, along with the PRASM guidance that Scott will give, we expect to continue the momentum with a record third quarter pre-tax margin excluding special items of between16% to 18%.

For the remainder of 2015, we continue to expect a large increase in operating cash flow versus 2014.

As the second half of 2015 progresses, our focus will continue to be toward completing our integration, investing in the airline by renewing our fleet, improving our operational performance, and returning excess cash to shareholders.

In terms of capital expenditures, we are now forecasting total gross aircraft CapEx to be approximately $5.4 billion in 2015, of which approximately $2.5 billion will occur in the second half of the year.

In addition, we continue to expect to invest $1 billion for non-air [CapEx] which includes many investments to improve our product, and we also will make $1.8 billion in debt repayments throughout the year.

In conclusion, we are very pleased to report the highest quarterly profit in the Company's history, and I would like to thank our more than 100,000 team members for making these results possible.

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 all the great job they continue doing operationally.

April and May continued to be difficult weather months, particularly here in Dallas.

But as we moved into summer, we have seen a return to more normal weather patterns, and the team has been running a very good operations in both June and July.

On the revenue front, our second quarter RASM was down 7%.

The stronger US dollar and declining international fuel charges made up about 2 points of that decline.

Venezuela was another 0.5 point and Brazil had about one-half -- almost a 0.5 point impact on system PRASM as well.

Domestically, PRASM was down 5%, so the strongest performance in New York where PRASM was actually up year-over-year.

At DFW, our largest hub, PRASM was down 5%, which was right in line with the rest of the domestic system.

Obviously, the Dallas headwinds are more challenging than the rest of the system.

And we attribute the relatively strong performance -- and I emphasize relative because we never like to see PRASM down 5%, to the re-banking of DFW and to the improved performance we have seen in LCC competitive markets, as we continue to match more and more of their prices.

In the Atlantic, PRASM was down 9%, as total capacity across the Atlantic jumped in Q2 relative to the first quarter.

Across the Pacific, PRASM was down 13% on 33% capacity growth.

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

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

Latin America, PRASM was down 13%, but it really is the tale of Brazil and Venezuela, versus the rest of Latin America.

Brazil PRASM was down 24%, on a 20% cut in capacity in American Airlines, and Venezuela PRASM was down over 40%, despite a 59% cut in capacity.

The rest of our Latin America network had a modest decline in PRASM, which given the level of capacity growth in those markets indicates fairly healthy Latin demand outside of Brazil and Venezuela.

On the integration reform front, we continue to remain on progress and remain on schedule with integration plans.

In the past week we passed a significant milestone in locking down the date for our reservation system cut-over in October, and we started the 90 day drain-down process.

We feel confident about the plan.

The trainings are in place to successfully complete the res system migration.

And we look forward to getting over that hurdle, because it will allot some of the remaining synergies, and also allow our IT and business teams to turn their attention towards making improvements in all of our processes and systems, instead of being focused almost exclusively on getting through integration.

Turning to the outlook going forward, the same factors that drove a 7% PRASM decline in Q2 continue into Q3.

Currency and surcharge declines will impact system PRASM by approximately 2.5 points.

We continue to see significant year-over-year competitive growth, capacity growth, particularly capacity growth here in Dallas.

In South America, Brazil remains challenged, and we don't anticipate any material changes compared to the Q2 performance.

Likewise in Venezuela, we expect the revenue environment to continue roughly as it was in 2Q, though we now overlapped our significant drawdown in capacity from last year, so the overall impact on system PRASM is smaller.

Given all this, we expect our system PRASM to decline 6% to 8% in the third quarter.

In conclusion, we are very encouraged with the operation, integration and financial results at American Airlines.

The revenue environment faces number of challenges, but we think we are managing well in this environment, and continuing to produce record financial results in spite of those challenges.

Operator, we are ready for questions.

Actually, I'm sorry, we are not ready for questions.

Sorry, I have a -- pause for a note from our lawyers.

So before we start questions, as you all know, American and some of our competitors have received a civil investigative demand from the Department of Justice.

We at American sent a letter to our team a few weeks ago on this topic that includes our views, and that letter is now public.

We are not going to restate all that here.

In short, we are complying with the investigation, and are confident it will result in no findings against American.

So this is now a legal process, and we are not going to be able to respond to your specific questions on that.

So we thank you for understanding.

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

Sorry about that.

Thanks.

Thank you.

(Operator Instructions)

At this time, we will go to questions from our analysts.

We will hear first from Julie Yates, Credit Suisse.

Thanks for taking my question.

Sure.

Scott, you mentioned unlocking remaining synergies following the reservation system integration.

What are the key opportunities to continue to optimize the airline and capture the remaining revenue and cost synergies?

And can you just remind us, where you think that remaining synergy number is?

So there is two big ones.

One is just improved connectivity between the network and [selling] it as a single code for -- if you go out and look at America -- or usairways.com and american.com, just as a simple example, you will often find different prices.

That is because of the inherent challenges with running a [co-chair] as opposed to having a seamless single system.

And so, all that goes away, once we are on a single reservation system.

And the second one is, being able to essentially optimize the fleet, put the right-size aircraft in the right market.

At the time of the merger, we said each of those was worth about $300 million.

The first one, the connectivity, we've probably gotten half of it, and there is another half yet to come, and the optimizing the fleet, we haven't really done anything on yet.

It won't happen right away when we do the transition to a single res system.

But we will be able to start that process, and it will probably take us 12 months to 18 months just to get through the first big wave of that, and then continue to optimize over time.

The other thing that I think we are looking -- I know we are looking forward to is, while they aren't synergies per se, there are all kinds of things that we want to do that will drive better revenue performance, they will drive better operations performance, they will drive better customer service.

And we have been really limited in being able to do that, because all of our business teams and IT resources have been focused on getting the integration done.

And also, we couldn't work on those -- interfere with those systems while we're in the middle of the integration.

So we will be able to start a whole long backlog of projects that we haven't been able to do.

That is not technically synergy, but is incremental value that will also be created once we are through the res migration.

So we're as a company really looking forward to it.

We're really quite confident.

I'm sure it won't be perfect, but our teams have done a fantastic job so far on every piece of the integration.

So we're confident we'll get through this, and be able to really hit the accelerator on moving things forward.

And does the seniority list integration, is that a gating factor at all to capture any of those, and just what is the timing on that?

It's not, and we still expect that to be done, end of this year or early next year.

We can't combine those work forces until we get to a fleet -- single flight operating system, which happens later in 2016.

And in any event, and so we expect to have the seniority list done well in advance of that.

But it is not a big issue in terms of -- we can move fleets around for example, even before we got to a single seniority list.

Okay.

Very helpful.

Thank you.

And we'll go to our next question from Duane Pfennigwerth of Evercore ISI.

Hey, good morning.

Good morning.

Maybe I missed it, but can you give us any regional commentary in your 3Q unit revenue guidance?

And specifically, I wonder if you detect any improvement sequentially in the domestic market?

No.

I'd say the short answer to that is no, we don't detect improvement in the domestic market.

I don't think it is getting any worse.

I mean, for us specifically, there is another big slug of capacity that's coming at Love Field with eight new markets opening up in August.

So that will put incremental pressure on Dallas, but the basic trends domestically I think are largely unchanged.

And that makes sense, if you look at the capacity situation, the numbers are very similar in 3Q as they were in 2Q.

They are similar in 4Q, as well.

And so, as to a large change in the macro economy, I think that the numbers, kind of broadly speaking will be similar.

So, just a follow-up, in domestic, down in kind of the 5% range, similar to what you saw in 2Q feels about right?

Well, I am not going to give a specific forecast on it, but I think it is -- we don't see a real change in the trends.

I don't know for sure if that means exactly down 5%, but we really don't see a change in the trends.

Costs change a little bit year-over-year.

There are some things that get better, some things that get worse.

But I was just answering the trend question, without giving a precise forecast.

Thank you.

And then, just on Latin America or even the Pacific, can you talk about how much of a priority, pursuing partnerships, closer partnerships, perhaps joint ventures, how far away are we from getting -- are we away from getting some of the international regions a little bit more rational?

Well, I don't know what you mean by -- I am not going to comment on whether they are rational or not.

But we have had some great partnerships that yield real benefits for our customers.

We have two JVs today, actually three, the new one that is coming online is Qantas.

We continue to believe that opens up new markets for us, opens up new markets for our customers, creates growth opportunities for us.

The Qantas JV is a great example of creating growth opportunities for American Airlines that we couldn't not pursue on our own, but we can with a strong partner.

And for Qantas, who is being able to put back new service they would not have been able to do on their own.

So we look to joint ventures as a way to improve our results, expand our out-map, and create growth opportunities and we will continue to look for opportunities to do that going forward.

Thank you very much.

Moving on, we will go to a question from Michael Linenberg of Deutsche Bank.

Hey, Mike.

Good morning, everyone.

Hey, just to touch on Duane bringing, what Duane brought up on the JVs.

I believe, October of this year, the US-Brazil Open the Skies as fully phased in.

I am not sure, but have you guys filed with the regulators an ATI JV with your Latin counterparts?

We have not.

Okay.

Next question is for Derek.

Can you just update us on where you are with respect to your pension, the under funding piece?

I mean, we started to see discount rates come off the bottom.

What is the latest on that, Derek?

I think, we are under the Airline Relief Act at this point in time, so we are fully funded under the Airline Relief Act.

We are about 62% funded overall, but under the Airline Relief Act, we do not have any payments that we have to do until around 2019.

So our forecast would show at this point in time -- we look at it every quarter, that we don't have any payments for pension funding through 2019, because we are fully funded under the Airline Relief Act for every one of our groups.

Derek, do you have a sense on what the PBO is relative to the plan assets?

What that difference is at this point?

Or you haven't done a calculation recently?

We haven't done the calculation recently, but I can get that to you.

Not a problem.

Okay, great.

Thank you.

And we will hear next up from Hunter Keay of Wolfe Research.

Good morning, guys.

Hi, Hunter.

So, Scott, have you been taking market share with your rebanks, mainly at DFW?

And if so, have you seen any, we'll call it, unintended consequences from that, maybe in markets unrelated to DFW?

I am not sure -- I am not entirely sure what that question means -- but what I can say is we have been quite pleased with the results of the rebanking at all three of our hubs, and Dallas in particular.

I mean, if you look at Dallas performing inline with the system average with the huge increase in capacity in the Dallas market, is a pretty clear indicator that rebanking has been successful.

And we are really pleased with it, and continue to work to refine it operationally, but it is going great.

Okay.

I guess, sort of tangentially related to that, maybe this provides some clarity of what I was driving at.

But, Doug, you -- a letter to the employees a couple weeks ago, you said that you have maintained and expanded the maverick pricing philosophies, which were a reference to the Advantage fares that US Airways used to employ.

What did you mean when you use the word, expanded?

Does that mean you are putting the advantage fare concept on American metal, you are expanding it through various co-chair mechanisms?

What did you mean specifically, when you said you expanded the use of the advantage fares?

That is exactly what it means, Hunter.

This is one of the -- I think, at least presumably surprising to the folks at the DOJ, although I understood -- I understand why they had the perspective they had at the time.

They are worried that American, or the US Air Advantage fares would go away.

In fact, what has happened is, we expanded advantage fares, not only to the US Airway system, but put them in the entire American network.

And actually another step beyond that is, that Delta and United have actually put them in a lot of their networks as well.

So advantage fare pricing has gone from being something that was exclusively on the US Airways network, to something that is now on the entire American network, and on big parts of the United and Delta networks as well.

Okay.

Thanks a lot for the time.

Thanks, Hunter.

And we will hear next from Savi Syth of Raymond James & Associates, Inc.

Hey, good morning.

It is investments that are being made to improve operational performance, I wonder if you can provide a little bit more clarity on that.

Just how much of the cost pressure is that?

And is there going to be any of that continuing into 2016?

Clearly, is a good project, and a timeline on when you can expect to see that flowing through operations and earnings?

Yes.

This is Derek, then Robert can touch on it.

We've looked at a lot of what we were going to do in the back half of the year to reduce head count and do other things, but we've decided to leave that in, and leave it in place, so that we can get through the integration.

It's about a 1 point a CASM, I would say in the fourth quarter that we've added.

We've added staffing in areas like reservations and maintenance and the airports, to make sure that as we go through this in the fall, and get through the operations, or get through the PSS migration and other things into the fall, that we have enough staff to be able get through all of those.

I do believe most of that will come out, and it will come out part in the middle of 2016.

I do think, and Robert can touch on where the operations is now, but I think our July is just running really well.

So, Robert, why don't you touch on Ops?

Sure.

Like Derek said, July operations are where we want them to be.

Our completion factors are in the mid -- 99%-plus.

Our on-time performance is 80%-plus, and we are executing day in and day out.

We are near, in terms of departing exactly on time.

The kind of investments we made so far, have been in a number of areas, maintenance by putting personnel in places that quite frankly we didn't have them before.

So increasing maintenance opportunities for ourselves.

We invested a lot in renewal of equipment.

Our capital plan had almost $100 million, or over $100 million in terms of resources, additional and for replacement purposes.

And then, we have done things in the airports too, to ensure to make sure we get our baggage performance where we want it, and that we are meeting in -- taking care of aircraft like we want them.

So looking forward, the investments are really about making sure, when we do get into inclement weather, and when we do have irregular operations that we are ready to handle them.

So a lot of investments is coming, and put into place to make sure we are ready for the fall and winter season.

That is very helpful.

So that investment should be done by the middle of 2016?

Yes.

Okay, great.

And just one last question on ancillary revenue.

I was just wondering if you can you talk about what you are seeing there, and perhaps what the opportunity is following the system integration in October?

We continue to see growth in our ancillary revenues, as we've expanded some of the product lines, and also learn from best practices of each of the two airlines.

Earlier I alluded to, talked about post integration, we have a lot of projects and plans.

And so, a lot of our ideas, which we are not ready to announce -- we can't talk about specifics yet today -- but a lot of them fall into the ancillary category of new ways to merchandise the product in a way that is good for our customers is something we are looking forward to doing, once we get through integration.

Very helpful.

Thank you.

Thank you.

And we will go next to Jamie Baker of JPMorgan.

Hey, Jamie.

Hey, good morning, everybody.

Scott, when I look at your pretax margins, relative to the industry, they are actually no better today than when the merger first closed, and admittedly this is back of the envelope.

I haven't made any adjustments for fuel.

But the simple reality is that, based on this observation, you don't seem to be demonstrating really any synergies.

In fact, six quarters into the new Company, and the word synergy only appeared once in today's release, and it was in the forward-looking statements disclosure that nobody ever reads.

I know other issues have taken center stage as of late, but I mean integration is incomplete.

You addressed an earlier question on that.

But shouldn't a merged entity this far into its existence, already be showing some improvement, relative to the industry?

Well, I guess I would disagree with your analysis.

First, I am not sure how you could look at pretax margins before and after, and come to conclusion that delta hasn't changed.

We have the best pretax margins in -- of the network carriers right now.

I don't remember the exact number, but I am pretty sure that American and US Airways did not the have the best margins in the industry previously.

So I first thing, the analysis, I would question it.

Second, some of the -- we have at least two really big things that I would argue affected essentially the base line for American that we had to overcome.

American was going to under perform, because of what was going to happen at Love Field and Venezuela, that is unique to American, has absolutely nothing do with the merger or with integration or with synergies.

And you'd have to make that adjustment.

So I guess, at a high level, I look at it and say American has the best margins in the industry, and did not have them before.

And particularly, when you take Venezuela and Love Field into account, I guess, I would reach a different conclusion.

Hey, Jamie, this is Doug.

We just, by happenstance, just had a Board meeting this week, and we did a full review with some outside help on the synergies, and I am happy to report the analysis shows just what Scott said.

We are exceeding our estimates for the synergies by our analysis.

They are indeed hard to see on a macro basis, because of what just Scott described, because there are things specific to American that aren't specific to other airlines.

So you need to adjust for that.

But if you make that adjustment, what you'll see is, we are extremely happy with the results of the merger, and the synergies we created, and they continue to grow through time.

So, we are doing more than we thought we would be able to accomplish, as a result of the merger and the synergies we have created.

Okay.

I appreciate that.

And just to be clear I wasn't comparing this to the pre-merger company, I was comparing the pretax margin premium, to sort of the first three quarters of the newly merged Company, and where you have fleshed out recently, and it's been about 200 bps fairly constant.

So I can share that analysis with you later.

Second question, Scott, you didn't articulate a path to PRASM growth, and costs are going to rise over time.

That is inevitable.

So in the absence of a path to positive RASM, at some point, profits are eventually going to shrink, unless just oil keeps declining in perpetuity, and that can't happen.

So, is this what management anticipates?

And if not, where is that path to RASM growth?

So first I would start by saying, we are producing records results today.

I know there is an obsession in the market with PRASM, but we are producing the most profitable, as Doug said the most profitable quarter, not only in American Airlines history, but as far as far as we can determine in the history of aviation, in an environment where PRASM declined 7%.

That said, I know a lot of investors do focus almost exclusively on PRASM, and I don't know when PRASM is going to turn positive.

It is being driven right now by really the same -- the three factors that we've talked about.

Capacity is growing faster than demand.

Currency is having an effect, and there are some places around the world where the macro economies are weak.

So I think to get to positive PRASM, you have to have some or all of those three variables have to change.

That is just the math.

If we look out through the balance of this year, we know that capacity in the third quarter and fourth quarter is going to be roughly the same as it was in the second quarter.

Currency get a little bit easier in the fourth quarter, but not nearly enough to overcome a [7 point] negative PRASM.

I don't anticipate a massive recovery in Brazil and Venezuela enough.

So, almost certainly the fourth quarter will be negative.

If you look out onto the first half of next year, it looks like the capacity is going to be trending similar to what it is right now, and currency does ease, the currency pressures ease, and maybe the economies start to recover.

But it looks to me like the first time you can really have a reasonable expectation for positive PRASM is the second half of next year.

That said, American does have some things that is going to uniquely help us as we get through the integration, and we can start to do some of the synergy things that we've talked about.

But when you are trying to overcome a [7 point] negative PRASM decline, it is not going to be enough to overcome that.

So, I think we are looking at the second half of next year.

Okay.

Thanks very much, everybody.

Take care.

Hey, Jamie.

It's Doug.

Yes, Doug.

I'll just chime in on all this, because -- and I think it is a big deal that we do keep hearing about.

So just to add on Scott's comments, on from a very high level, look, two things.

One, we are really bullish.

We would not have purchased $753 million of our stock in the quarter at an average price of $43.53, if we thought the stock wasn't worth more $43.53.

We, and we're bullish, in spite of what you said and what Scott said.

So what I am getting at, the focus on -- the intense focus on unit revenues is -- look, I think it is important, but I would encourage everybody to look at valuation, which I know is your job, not ours.

But look past -- I will say this.

Look, there is no doubt, that if supply exceeds demand, unit revenues go down.

And there is no doubt, that if unit revenue goes down more than cost per ASM goes down, margins decline.

That is simple math, and no one is disputing that.

So and, we are not suggesting that may not be the case.

What I am suggesting is, that we know all that, and we are really bullish.

Because I -- for some reason, it feels like the market has taken those two sets of facts and decided that means bad things for value, when we are trading on multiples that are well below what I think, if anybody really would fight through all this, would do.

So look, the market will do what the market will do.

If it continues to be -- to have this view, that will just allow us the opportunity to purchase more stock.

So, we are going to keep running the Company, do it right.

We are really happy with where we are.

We are really bullish on the future, and we're bullish on the stock at this point.

Excellent.

I appreciate it, Doug.

Thanks, gentlemen.

And moving on, we will hear next from Tom Kim of Goldman Sachs.

Good morning, and thanks for your time here.

I wanted to ask with regard to jet fuel.

The consensus view is clearly that is oil is going to be lower for longer, and given that don't hedge, that could certainly prove to be a fantastic strategy, and obviously you are a great beneficiary of that today.

But if we play devil's advocate, how do you mange that earnings risk if jet fuel unexpectedly does spike?

Well, I think we feel really good about our ability to manage in a world where oil prices gone up -- go up.

We have done that historically.

We have all the traditional levers to pull to do that.

If you are getting at the point of, should we hedge or not?

The problem with that is, it is really expensive to buy that insurance.

I mean, you look at how much our competitors have lost this year on that so-called safe insurance policy.

It is a really expensive thing to do.

There is no free lunch.

You can't go off and protect against the downside, and pretend it doesn't cost you a lot of money.

And so, we are still in the no-hedging category because we think it is the best answer for American Airlines.

So, does that mean -- how responsive do you think you can either be with regard to just pulling down the capacity to reduce the costs to adjust to that kind of environment, or do you think there is enough flex in the system to be working on the other side of the angle where you have pricing flexibility?

If you look back at history, it seems that airline revenues have a pretty good correlation with fuel prices, when fuel prices have gone up, revenues have gone up.

As we have seen fuel prices come down this year, airline revenues have also followed that down, and consumers have benefited.

And I expect that correlation will stay in place.

Fair enough.

If I could just ask a bigger picture question.

Generally from your experience, how long does it typically take for the market to respond to oversupply, which seems to be the case here in the US?

And more specifically, we have seen LCCs now growing at a large multiple of the GDP, and as you -- we all know, I mean the last time this happened was back in the 2000s.

I am wondering, what we are seeing today, is it any different from that time?

Thank you.

Look, I am going to not endorse the words you used, that responding to oversupply, because frankly, we don't think that is what's happening.

Airlines are making independent decisions.

Everybody is reporting the best in their history profitability, and so I guess, I quibble with the start of the question.

Well, if we look at the RPM growth relative to ASMs broadly across the domestic, I think it is factual that we've seen load factors just come dow, so that is an answer to the question We certainly don't dispute the fact that the industry is very competitive and will always be so.

I am just wondering with regard to what we are seeing, I mean, how does the industry respond to this sort of environment?

I can't answer an industry question.

I do think that you -- that RPMs have actually grown faster than ASMs.

Load factors are up, but I can't give an industry response question, because there is no such thing as a industry response.

Okay.

Not, that is fair enough.

Thanks a lot.

Look, I will try and help you.

This is Doug again.

What I think everyone acknowledges is ASMs have grown faster than demand of late, which does puts pressure on revenue per ASM.

That's -- I don't think that is news to anybody.

So but, again, just like we -- in response to the first part of your question, as we have often said, if the -- what we believe happens in a world where fuel prices go up a lot, I think you would see -- we think you would see certainly at American, and you would see capacity adjust to higher costs.

I think what you are seeing is fuel prices have fallen a good amount, and capacity has adjusted to those costs.

That's, I think that is an important point to make.

Much of this, the capacity growing in excess of demand, is because we [have] seen a huge change in the cost structure of the business.

I don't think that should be unexpected.

I appreciate that color.

Thanks very much.

Yes.

And we will hear next from Joe DeNardi of Stifel.

Hey, thanks.

Good morning.

Scott, I think you mentioned in your prepared remarks you are seeing a PRASM benefit from some of your LCC markets.

I am just wondering if you can provide some more color on that, and are you seeing a behavior from -- a behavior change from some of your competitors?

And then, in terms of what is left to match pricing on, if you can just maybe quantify some of that?

Okay.

Well, as we've -- this has been a gradual evolution as we have matched ultra low cost carriers in particular, in more and more markets.

To your third question, I think we are probably all-in now, in matching everywhere.

And what we saw as we matched is that the relative RASM performance of those markets, the local market plus the connecting traffic flows on those segments actually got a little better.

And that is in a world where the rest of the system was declining a little bit at a system level.

So those markets have outperformed.

It only makes sense.

Our customers care about price, and we are a price-taker in those markets.

But our customers care about that, and we've won back some market share that we had lost by not being price competitive.

Okay.

Thank you.

And moving on, we will go to Helane Becker of Cowen.

Thanks very much, operator, hi, guys.

Thanks for the time.

Doug, I actually have a question for you, with respect to something you said last quarter or maybe the quarter before.

When we were talking about paying down debt versus buying back stock, I think you mentioned that because money was so cheap, you would rather buy back stock, which I don't disagree with that at all.

I like that as a plan.

But when you think about interest rates rising, does it make sense to maybe look at the balance sheet more aggressively, and do more debt paydown?

Yes, Helane.

Here is what we think.

I mean, the first -- generating cash through profits, having already a large cash balance on hand, the first thing we do is look to where we can invest in the business.

We are doing that in a big way, and the product is improving accordingly, as Derek and Robert have already talked about.

The next thing we look to do is pay down high cost debt.

We have done a lot of that, as Derek has talked about that, and everything we can.

Then we are left with, here come new airplanes, and do you pay cash for those, or do you finance them?

And in our case, irrespective of whatever the credit ratings may be, the rates we -- that the markets are allowing us to raise, to finance aircraft at, just seems like a -- it would be not in our shareholders' interest to not use.

When was the last financing, the last -- (multiple speakers)?

Under [4%].

[3% or 4%].

So at those levels, we think we can do a better job for our shareholders by borrowing long-term on aircraft at well below 4%, and using that cash on hand actually to return to our shareholders, because it is, indeed, their cash.

So that is what we believe.

That could, of course, change over time, Helane, if those markets change, and we don't see any indication of that.

The math I just went through, doesn't change if there is a 25 basis point increase in interest rates or something like that so.

But it could change over time, and that is what we continue to assess.

But certainly where the market is today, and what we have to finance which are high quality aircraft that are coming in, I would expect you would continue see us, continue to finance aircraft when they come in, pay down high cost debt as it comes -- to the extent it matures.

But we don't have much of that left either, and make sure we maintain a healthy cash balance, but also make sure that to the extent we have what we would deem as, any cash in excess of that, return it to our shareholders.

That is great.

Thank you.

And then, my other question was with respect to capacity, is I noticed in the last quarter, the second quarter, you guys had -- I don't know what the right word is, canceled options or returned options and postponed deferred deliveries.

So as we look out the rest of this year and into next year, are there other times we should be mindful of, when you would have options to exercise again?

Helane, this is Derek.

What we actually did is took firm deliveries and moved firm deliveries.

And what we did is moved them out later in the delivery stream.

So we just pushed them out.

At this point in time, we don't have any other opportunities, but we will continue to look at that.

But there are -- there is no options that are out there that we plan on exercising any time soon.

All of the deliveries that we have are firm deliveries, and those modifications are to the firm delivery schedule.

And if we have others, we will let everybody know when that happens.

Okay.

Great.

Thank you.

Thanks, Helane.

And moving on, we will go to Dan McKenzie of Buckingham Research.

Hey, good morning, guys.

Doug, I would like to just kind of follow-up on Jamie's question, just with taking a little bit different tack.

But just kind of going back over the past two decades, legacy airlines don't really have a great track record competing against low cost carriers.

American has consistently [capitulated] over a decade.

That is not happening today, and you guys are reporting record profits.

So the question here is, at what point would you feel it would be necessary to take more aggressive steps to defend the core business?

In other words, how far would you permit EBITDAR pretax margins to fall before you step into defend profits?

The worry here is, that the end game is losses at some point, of course.

Yes, Dan, look, we don't look at it like that at all, in terms of what it -- we, first off, I also reject the premise here.

What we built is an airline that can compete with anybody.

And certainly, with our route network and hub structure, we have a competitive advantage.

Even where we have -- even where we may have a competitive disadvantage on cost, we have a competitive advantage, in terms of product primarily.

Maybe first and foremost, the ability to connect traffic to compete against point to point carriers,.

But then all sorts of other things such as premium traffic, and international flows, and all those things that they can't do.

So we have a real competitive advantage, and we have historically done really well with that advantage versus a cost disadvantage.

So I expect that will be the case in the future, and we always compete on price.

I don't understand the question, frankly, because that's what we also do, and that's what we -- because we have to.

It's a very competitive business.

Customers care a lot about the price of the ticket, and we have to compete on price, so we will continue to.

So, I guess, just to clarify the question, there are -- obviously there are investors that take longer term views on a stock, say three to five years.

Should we think about core margins as say, 14% to 16% that would you be willing to defend over a multi-year period?

At this point is it not -- because that said, frankly some of your competitors are putting out sort of longer term profit objectives.

Investors are really thinking about this space, and whether or not it deserves to be a high quality industrial valuation multiple is merited.

I guess, I am just trying to think of your business over the course of the cycle?

Yes, fair enough.

Look, and again I don't -- well, here is what I think.

We bought in $750 million of our shares this quarter at $43, and we view that as a long-term investment that we are really happy about.

So and that takes into account all the issues you are describing, that we are cognitive of and highly confident of our ability to compete with anybody, and we'll compete with anybody.

And we've got a great airline that can compete with anything out there.

We don't base our competition based on trying to maintain a certain margin.

Our goal is to maximize our margins, and to do it better than others.

We are doing that now.

We expect to continue to do that in the future.

Okay.

Thanks, Doug.

And next we will hear from David Fintzen of Barclays.

Hey, good morning, everyone.

Not to sort of belabor this point and follow up on both Jamie and Dan's question.

But Doug, if I go back to your response to Jamie, is your point kind of realistically that we've maybe achieved for American peak margins this cycle?

That is fine, they're exceptionally high, and there is a lot you can do with it?

Or is there -- trying to square this with some of Scott's comments -- is there an ambition to drive margins higher from here in these initiatives.

I want to make sure I just fully understand what you are saying.

Sure didn't say anything about peak margins.

That is not what I think.

And again, we are trying really hard to not give you projections that we simply don't know what they are going to be.

All I said was, if indeed, there is revenue per ASM falls more than cost per ASM, margins will decline.

You guys can go do analysis on that based on your own views about demand growth and capacity growth and fuel prices.

So but I am not -- all I was saying is that, that is math.

That could indeed happen, certainly if you look at the trends that are there today.

That doesn't mean it continues to happen over time or anything close to it.

I think a rational, if indeed that happens, a rational way to view what happened, was there was a major change in the cost structure of this business, that is something that is by far the largest expense in the business fell by I am not saying it is going to stay there, but that's -- you can't ignore that.

And when that happens, you get the full benefit once the prices fall as quickly as they do, and the revenue environment takes longer to adjust.

So, that may be what happened here and what you see -- if that is true -- what you would expect to see is the cost stay about where they are, and the revenues fall for some period of time, but then it picks back up.

So at any rate that's -- I'm now, again, I am not giving projections.

I am just talking math to an analyst.

So, you guys that know as well as I do.

But we're not here -- by no means, do I -- does this feel to me like a peak, because I don't think it is a peak in the economy, and we're a cyclical business.

But so, and it certainly doesn't feel like the beginning of a continued decline in margins.

I sure don't feel that way.

If we thought that, we would not be buying in $750 million of equity at this price.

Okay, that -- no, I appreciate that.

That helps.

More maybe tactically, you guys mentioned obviously Brazil.

When I look at sort of the forward schedule, some of the cuts seem to moderate, how should we think about Brazil capacity into the winter?

For American, we were down 20%.

We are going to still be down in the third quarter and fourth quarter, but the numbers are much less.

We are now overlapping when we made the cuts last year.

And a total level, I think capacity is growing something like 10% still.

Right.

I mean, does that kind of reflect, you have gone as far as you can go with some of your cuts, or are there -- I guess, as macro deteriorates, it can quickly get ahead of these things.

I'm just kind -- is that -- how do you view that pacing?

Or is there a level where you -- schedule integrity gives you a bottom line, and you can't go beyond that?

We don't have any announcements to make on additional changes to Brazil capacity today.

Okay.

All right.

Appreciate all the color.

Thanks.

Thank you.

And we will hear at this time from Rajeev Lalwani of Morgan Stanley.

Hi, thanks for taking my question.

I just want to come back to buybacks.

You guys did a great job this quarter of purchasing your stock.

Is there any reason to believe that's not going to continue going forward, just in case you have to build more cash associated with the integration and that sort of thing?

Okay, this is Doug.

Again, we have, if you look at the balance sheet, we have an ample amount of cash to deal with the integration and deal with any future needs.

So you shouldn't be concerned that we couldn't continue to purchase stock because of cash balances.

But there is also no guarantee we will.

We don't -- we, one, we can't talk about how we decide to purchase stock, but you shouldn't worry about the fact we don't have [specific] cash.

We do.

Okay, in terms of pulling down that cash, at what point would you do it?

Is it multi-year process, or is it post 4Q this year when you have that?

We try not to do this systematically.

We try to do it opportunistically.

So anyway, I think you should -- I don't know the answer to that.

We have enough cash on hand, we have ample cash on hand today.

We have projections of future cash generation, and we will purchase stock based on our view of the value of the stock versus the market's perception of the value.

Very helpful.

Thank you.

(Operator Instructions)

At this time, we will hear from Terry Maxon of Dallas Morning News.

Good mornings, guys.

I would like you to elaborate on your reaction to the low fare and ultra low fare carriers out of Dallas/Fort Worth.

Is it correct to say that you've stepped up your matching of low fares in recent months, or have you done it rather consistently since the Wright Amendment went away last October?

Well, there has been a lot more press about it of late, a lot more conversations, but I think it just has been a consistent evolution.

Have you increased the level of matching, or has that, your pricing philosophy been rather consistent as markets came into the fray?

Well, it has evolved, and so more markets have, there are more markets where we're matching than we would have been matching 18 months ago.

But it is not like there was a magic moment where that happened, because there is more markets.

The other thing that happened is in a world, where supply is larger than demand, you have more seats available.

So one of the other things that happens is with old management, you will manage it for a flight that is projected to go out full, will only have a limited number of seats available at the lowest fares in the market.

But when there is more supply than there is demand, you have more seats available.

And so, it is true that there are probably more seats available right now, but that is really a response of the macro, the balance of supply and demand.

All right.

I've got one other question, what are your plan on the MD-80s?

Have you stepped up plans to retire them, and basically when do you expect to get them out of the fleet?

It's Derek.

The MD-80s are going to be out of the fleet by the end of 2017.

That is consistent with where we have been.

We haven't stepped up plans to move them out.

Thank you.

Thanks, Terry.

And we will go next to Jack Nicas of The Wall Street Journal.

Hi, guys.

So I appreciate a lot the color you gave on some of these answers.

And I got to go back to PRASM topic, because it's such a hot topic right now.

I think there is an interesting juxtaposition of record results with PRASM decline.

And naturally analysts and we journalists will want to keep a critical eye on things.

So there is intense focus, as you said, Doug, on unit revenue trend.

But to the layman, I think this is all confusing.

You see American doubling profits, but all I hear about is weak revenue performance.

So, Doug, can you speak to the layman for a moment, and just give us your take on how important these PRASM trends really are?

Is this a chink in your armor?

Yes.

Thanks, Jack.

The -- I view the change in American's revenue per ASM -- again, we have specific markets we can talk about -- but in general, what we see is the result of there being more capacity put into the market, than demand has grown, which is simple.

I don't believe that is -- should be unexpected, because our largest cost has fallen 50% year-over-year.

So I think that is an expected reaction and to lower cost.

Lower costs of production result in more production, and that is what we are seeing here.

And what is nice to see is that the revenues haven't fallen nearly as much as the costs have fallen, and as a result earnings are growing.

So, that is what is happening, and I think it is as simple as that.

That is a positive thing, not a negative.

Okay.

Great.

Thank you.

And finally, can you guys clarify, has there been any change to capacity plans for 2015 in this announcement today?

No.

Okay.

So what is the current plan, and that is obviously standing pat?

Capacity for the -- let me get that number.

Capacity for the quarter is to be up approximately 1%.

Domestically up 1% to 2%, and international up approximately 1%.

Okay.

Thanks very much, guys.

So that is full year.

I'm sorry, that's what?

That is full year.

That's full year, thanks.

That's for the full year.

Got it.

Thanks, Jack.

And we will move on to Jeffrey Dastin of Reuters.

Thank you so much for taking the call.

I guess, to rephrase Jack's question, so should investors stop focusing myopically on PRASM?

Investors should do, whatever investors think the right thing to do is (laughter).

Look, again our view is that -- and the best way I can point it out, is to point out that we purchased $750 million of our shares at $43.53 this quarter, that is a undervalued stock.

So we bought a lot of it.

So -- and we were well aware of the revenue per ASM trends, and are not remotely surprised by what we are seeing.

So we, with full knowledge and full expectation of these kind of revenue per ASM trends, bought a lot of AAL at $43.53, and we are happy with that purchase.

Great.

Thank you.

And then, also to clarify comments earlier this morning.

So American is not considering seriously taking a fuel hedge position any time soon?

I'm not sure that's what we said.

We haven't taken one for several years, and we don't have one to announce right now.

But is it -- considering bringing the matter up to the Board?

And if so, would it be a very large position, or what is up in the air?

What is a possibility?

That is not a question we can answer.

We don't disclose what we might be doing in the future as it relates to fuel hedging.

But again, the track record I think is fairly clear.

Okay.

Thank you very much.

Thank you, Jeff.

And we will hear next from Andrea Ahles of Fort Worth Star-Telegram.

Hey, good morning.

I was wondering, Scott, could you give a little more commentary on the rebanking at DFW?

Have you been able to change the mix to more connecting passengers, particularly given the pressures that you are seeing on the [O&D] market out of the new markets coming out on Love Field?

Well, actually, within the Love Field markets, we are actually carrying more local passengers now than we were before.

We are carrying them at lower yields, but that is what happens when the price goes down.

The demand goes up, and having lower fares, we are carrying more local passengers.

Overall, we are probably -- we are carrying more connecting traffic than we otherwise would have.

But it is really not a Love Field issue per se.

But as part of the rebanking was to -- is to bring more connecting passengers through DFW.

Are you seeing that now that you are sort of three months into the rebanking process there?

Yes.

I'm sorry, did you say yes?

I did say yes.

Okay.

All right.

Thank you.

And we will move on to a question from Linda Loyd of Philadelphia Inquirer.

You said how very serious you are about growing service in Asia and you are now dedicating some of your newest airplanes to flying there from Dallas, Fort Worth, Chicago and Los Angeles.

As you get more fuel efficient Boeing 787s and Airbus A350s, will Philadelphia finally get its first direct flight to the Asia Pacific?

I don't know what the long term answer is, but for the foreseeable future, our Asia growth is going to be focused on growing our Los Angeles gateway to Asia.

As you know, because you were executives of US Airway, in 2006 US Airways did announce an intent to fly to China.

Then the recession hit, and the route was scrapped.

Later US Airways said, it didn't have the right aircraft to fly there.

But now American is getting the right aircraft, in fact quite a few of them in the next five or so years, and is a larger and stronger company.

Is there -- would there be a time frame for Philadelphia to get one of these Asia flights?

I don't know, and a lot has changed since 2006 in the aviation market.

And again, as I said, for the foreseeable future, our Asia growth is going to be focused on growing out our Los Angeles gateway.

That is a question that we will re-address and evaluate at some point in the future.

And Linda, it's Doug, and I was there, of course, too.

All I would add is, as Scott said, a lot has changed in the industry, a lot has changed at US Airways, and of course, at that point, and now as part of American.

So at that point, Philadelphia was the international gateway for US Airways.

The merger gives us others, but it makes Philadelphia as a hub, a much, much stronger hub.

And so, the merger I think has been great for Philadelphia in a number of ways as a part of a much stronger, more global airline than it was just part of US Airways.

So we will continue to look at it over time, but clearly the decision gets impacted by changes, both in the environment and in our airline.

But let me just ask you, why is it a worse situation now for there to be a flight to Asia from Philadelphia on the East Coast, than there was ever?

Because we serve the market from other spots still.

At that point, there was no other spot for US airways to serve it from, and now we serve Asia.

For our customers in Philadelphia, there are connections to -- a number of them, to Asian markets.

So again, not saying that it won't make sense at some point in time, Linda, but just pointing out that decision that we want -- the fact we wanted to fly there as US Airways standalone several years ago, doesn't necessarily mean that American Airlines several years later, has the same sort of economics on that route.

So but again, we are not by any means trying to dampen anyone's expectations, other than to point out that a lot changed from that point in time.

But the good news is, the changes have all been good for Philadelphia.

We have a much, much stronger airline, and Philadelphia is a huge part of what is now the largest airline in the world.

And next we will move on to David Koenig of the Associated Press.

Hey, David.

Hi, Doug, and all you folks.

You guys have sent the message today, don't worry too much, don't get excited about PRASM.

And Scott has indicated you have got nothing to announce on fuel hedging.

Those are kind of the boogeyman that have been discussed for a while now.

So what keeps you guys awake at night?

What could end this run of great profits that you are in?

We sleep pretty well.

Look, I feel -- it is a good way for me to say what I really -- what I think about what is going on right now.

We are -- I can't just speak highly enough about how well our team is working together to combine these airlines.

We have a lot of work ahead, and we all know that.

But we are really proud of what our team has done.

One, to come together as a team, and two, to work through really difficult circumstances when you are two separate airlines, but still produce really good operating performance for our customers.

We are excited about the future, as we get to be more and more like one airline.

But that is what we are focused on right now, we are focused on the integration of these two carriers into one.

The team is doing a phenomenal job of that, and we are excited about it.

So we -- we are fortunate that it happens also to be a really good economic time.

So we are spending our time working on integration, and we are really pleased with the results.

But does that mean short of a real big macro economic shock, the economy is really slowing down, that you should be doing pretty well?

Yes.

We are very bullish on the future.

We feel very good about our future results, and, of course, could change.

But demand remains strong for air travel, and we think we are doing all the right things to meet that demand.

Okay.

Thanks.

And we will hear next from Ted Reed of The Street.

Thank you.

On the other calls, they mentioned a couple of cities where they are having a little more competition and difficulties.

One group was Orlando, Dallas and Chicago, and United mentioned Houston.

So I wondered if outside of Dallas, if you seeing any cities that are difficult, particularly Chicago?

Thank you.

No, I wouldn't of -- if I was actually creating the list, I wouldn't of had that as a list.

I haven't created a list like that.

But Chicago yields actually did better in the quarter, than our domestic average so.

Where we have seen the most weakness is the international connecting flows, which really isn't domestic.

So what, Miami, our domestic Miami network is the weakest, but it really nothing do with the Miami domestic network.

It's all to do with all those Brazilian and Venezuelan connecting revenues that have left the system.

So we would not have had the same list.

And in fact, we are given the competitive pressures in those markets, we are quite pleased with Chicago and Dallas performance.

All right.

And also, I should ask, is Charlotte is doing well?

Charlotte is actually doing quite well.

It is behind New York.

New York was our best hub year-over-year, and Charlotte was number two.

Okay.

Thank you.

Thanks, Ted.

And that does conclude the question-and-answer session.

At this time, I would like to turn the call back over to Doug Parker for any additional or closing remarks.

Yes, thanks.

And look, before we go, the first journalist to ask a question was Mr. Terry Maxon, and Terry has also announced recently that he is going to be retiring from the Dallas Morning News.

That is a big loss for our industry.

Terry is the consummate professional.

We really didn't like what he reported, because it -- but it was always because we don't like the facts that we produced, and it wasn't what we wanted to read.

But that is the point, I mean, Terry always did a great job of reporting the facts.

He worked hard to know what the facts were.

He knew the industry so well, that he was able to separate the noise, the substance from the noise, and he always had the best sources.

So I guess, the best way I can say this is, when I want to know what is going on in our industry, I read Terry's blog.

I learn as much from that as anything else externally that I can find, because it is always true, and it is always well-informed.

So, look, I am going to -- one of the things I like reading of Terry's is something he calls, three idle thoughts for Friday.

So in honor of Terry, I am going to close with three idle thoughts for Friday.

Number one, is change in RASM does not equal change in value.

Number two is, this idle thoughts thing is a lot harder than Terry makes it look.

And number three, is congratulations to Terry Maxon, on a well-deserved retirement and a great career, a phenomenal career.

And he will be missed by all of us.

So thanks, Terry.

All right.

We're done.

Thanks, everybody.

And again, that does conclude the call.

We would like to thank everyone for their participation today.