美國航空 (AAL) 2015 Q3 法說會逐字稿

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

Today's conference is being recorded.

(Operator Instructions)

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

Please go ahead.

Thanks, Tina, and good morning everyone, and welcome to the American Airlines third-quarter 2015 earnings conference call.

In the room with us today is Doug Parker, our Chairman and CEO; Scott Kirby, our President; Derek Kerr, our Chief Financial Officer; and also in the room for the Q&A session is Robert Isom, our Chief Operating Officer; Elise Eberwein, our EVP of People and Communication; 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're going to start the call with Doug, and he will provide an overview of our third-quarter financial results.

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

And 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 then 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 cost, forecast of capacity, traffic, load factor, fleet plans and fuel prices.

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

Information about some of these risks and uncertainties can be found in our earnings press release issued this morning, and our Form 10-Q for the quarter ended September 30, 2015.

In addition, we will be discussing certain non-GAAP financial measures included 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.

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

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

So thanks again for joining us this morning, and at this point, we'll turn the call over to our Chairman and CEO, Doug Parker.

Thank you, Dan.

Thanks for everyone for being on here.

We this morning reported the highest quarterly profit in American Airlines' long, proud history, $1.9 billion, excluding net charges for the quarter.

Obviously very pleased with those results.

Particularly proud of the fact that over the last six or seven days, our team has migrated all of our reservations onto one system, something that is a key milestone for our customers, and the fact that we now have one -- we are now selling under one brand, but a really key milestone for our team.

This is an issue that other airlines have stumbled at in the past in their migration.

Our team did it flawlessly.

This was by far the largest and most complex one of these integration initiatives that has had to take place, so we couldn't be happier.

Just further evidence of what this team is doing to build the greatest airline in the world.

Maya Leibman is here, as is Robert Isom, the two people whose teams had the most to do with this.

They'd be the first to tell you it wasn't them, however, but their teams.

So I just want to take this opportunity to thank everyone that was involved in this project and the entire 100,000 people of American Airlines who are working to build the greatest airline in the world, and they're showing every day that we are well on our way to do that.

The result of all that, the financial results, the phenomenal integration work, everything else that's going on, including great operations the team are now running, are evidence of the fact that we are well on our way to building the greatest airline in the world, and we know we he have a lot of work to do, but we are very bullish on our future.

That bullishness is evidenced in the fact that we repurchased $1.56 billion of common stock in the quarter, 38.4 million shares, and we are happy to return that value to our shareholders through share repurchases, because we think that's the right thing to do as we generate profits.

The first thing we do is make sure we invest it in the airline.

We are doing that, producing very nice returns with that capital, making sure we reduce the debt at the same time, but then to the extent there's cash left over, and certainly at a time when we think the market isn't recognizing the value we produce, we use it to repurchase shares.

So that's what happened this quarter.

Those are the highlights.

I will turn it over now to Derek who will give you a lot more detail, followed by Scott.

Thanks.

Thanks, Doug, and good morning, everybody.

As Doug said, we filed our third-quarter 2015, 10-Q along with our earnings press release this morning, and in that earnings release we reported the highest quarterly profit in the Company's history, beating the previous record set just last quarter.

Excluding net special charges, our third-quarter net profit was $1.9 billion or $2.77 per diluted share.

This represents a $662 million improvement versus our third-quarter 2014 net profit, excluding net special charges of $1.2 billion or $1.77 per diluted share.

Third-quarter 2015 pretax margin, excluding net special charges, was a record 17.7%, up 6.7 points year over year.

We currently have the youngest fleet of any in the US network airlines.

In the third quarter of 2015, we took delivery of 16 new mainline aircraft and retired 36 mainline aircraft, older 75's, 76's and MD-80's.

On the regional side, we took delivery of 15 aircraft, and we removed from service and parked 9 aircraft.

We also continue to modernize our fleet over the next several years.

Our fleet will get even younger and the differential in fleet age will continue to expand relative to our network peers.

Total capacity for the third quarter of 2015 was 71.1 billion ASMs, up 2.9% from the same period in 2014.

Mainline capacity for the quarter was 63.5 billion ASMs, up 2.6%.

Regional capacity for the quarter was up 5% to 7.63 billion ASMs, due primarily to larger gauge aircraft and longer-stage length flying.

Our third-quarter 2015 revenue was negatively impacted by a large capacity increases in certain domestic segments, as well as weaker yields in international markets, due principally to foreign currency devaluation, lower fuel surcharges, and continued economic softness in Latin America.

For the quarter, total operating revenues were $10.7 billion, down 3.9% year over year.

Passenger revenues were $9.4 billion, down 4.2%, driven by yields 9.2% lower on a 2.9% increases in system capacity.

Cargo revenues were down 16.3% to $180 million, due primarily to lower yields and other revenue, operating revenues were $1.2 billion, up 0.6%.

Total RASM in the third quarter of 2015 was $0.1506, down 6.6%, driven principally by the decline in passenger RASM, which was $0.1316, down 6.8%, and Scott will talk -- give a little bit more detail after my remarks.

The Airline's operating expenses excluding net special charges for the third quarter of 2015 were $8.5 billion, down 11.5% year over year, primarily due to a 43.5% decrease in consolidated fuel expense.

As we have seen now for the first nine months of 2015, our financial results reflect a material benefit from the significant year-over-year drop in crude oil prices, as we remain unhedged.

Our average mainline fuel price, including taxes, for the third quarter of 2015 was $1.67 per gallon, a 43.8% decline versus $2.97 per gallon last year.

Lower fuel prices drove a 14.3% decline in mainline operating cost per ASM excluding net special charges to $0.1107.

Excluding net special charges and fuel, our mainline cost per ASM was $0.0856 in the third quarter of 2015, up 2.6%.

This increase is due primarily to higher salaries and benefits, costs associated with our new labor contracts that were signed at the beginning of this year.

These wage increases increased our third-quarter CASM, mainline CASM, excluding special charges and fuel by approximately 3.4 percentage points.

Regional operating cost per ASM excluding net special charges and fuel was $0.1578 for the third quarter, an increase of 1.7%.

Excluding net special charges and fuel, our consolidated third-quarter 2015 CASM was up 2.6%, principally due to increased flying under our capacity purchase agreements.

We ended the third quarter with $9.6 billion in total cash and investments.

Of this, $710 million was restricted and $609 million was held in Venezuela bolivars.

We currently have $1.8 billion of revolving credit capacity, none of which has been drawn, which we consider to be one of the least expensive forms of liquidity in our capital structure.

We have been working to upsize our existing revolving credit capacity by approximately $600 million, and expect to accomplish that by the end of this month.

Attractive debt markets have allowed us to complete new financings at favorable rates.

In the third quarter, the Company issued $1.1 billion in enhanced equipment trust certificates, at a blended rate of 3.8%.

In addition, the Company remarketed $365 million of the New York JFK Airport special facility revenue bonds, at a one-year rate of 2%.

We also raised another $845 million of aircraft financings in the private debt market.

During the third quarter of 2015, we generated $1.2 billion in cash flow from operations, and paid down $714 million in debt.

The Company returned $1.63 billion to its shareholders through the payment of $67 million in quarterly dividends and the repurchase of $1.56 billion of common stock, or 38.4 million shares, at an average price of $40.56 per share.

In the first nine months of 2015, the Company has returned approximately $2.7 billion to its shareholders in dividends and share repurchases, and since the merger closed, we have reduced the Company's shares outstanding by approximately 100 million shares, or 14% through share repurchases and share withholdings, in satisfaction of tax obligations on employee share issuances.

As our program to return capital to shareholders continues, we recognize the need to be prudent about our leverage.

We closely watch our minimum cash levels, and routinely stress test our credit metrics.

As we have said, before our minimum cash will continue to be higher than our competitors, but lower than it is today.

Now that our passenger service system integration is complete, we will re-evaluate our leverage and minimum cash levels.

When complete, we will communicate guidelines that clarify our strategy going forward.

In our Board of Directors meeting held yesterday, the Board authorized an additional $2 billion share repurchase program to be completed by December 31, 2016.

This brings the total amount of share repurchase program authorized in 2015 to $6 billion.

The Company's Board of Directors has also declared a $0.10 per share dividend to be paid on November 19, 2015 to shareholders of record as of November 5, 2015.

Turning now to our guidance, we are forecasting overall system capacity growth 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 flat to up 1%.

For the fourth quarter of 2015, mainline capacity in ASM is expected to be 58.3 billion and regional capacity is expected to be 7.37 billion in the fourth quarter.

We're still in the process of developing our 2016 operating plan.

So as usual, the formal ASM guidance for 2016 will come when we report fourth-quarter 2014 earnings.

At this time, we expect year-over-year system capacity to be up approximately 2% to 3% in 2016.

Approximately 1 point of the increase is due to our growth of the Pacific entity, while another point is due to leap year and aircraft reconfigurations that increased the gauge of our aircraft.

Domestic capacity is expected to be up approximately 1% to 2%, while international capacity is expected to be up approximately 4% to 6%.

For the full-year 2015, we are forecasting year-over-year total CASM ex special items and fuel to be up approximately 3% to 5%.

As we have seen throughout this year, this increase is driven primarily by labor contracts covering our pilots and flight attendants and investment we have made to improve 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%.

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

Using the October 21 forward curve, we are forecasting our 2015 consolidated fuel price to be in the range of $1.70 to $1.75 per gallon.

Based on these prices, we expect our 2015 consolidated fuel expense to improve by approximately $5 billion year over year.

Our fourth-quarter forecast is between $1.48 and $1.53 per gallon for mainline, and regional $1.51 to $1.56.

Using the midpoints of the guidance we have provided along with PRASM guidance that Scott will give, we expect to continue our string of strong margin performance with the fourth-quarter pretax margin, excluding special items, of between 12% and 14%.

As we conclude 2015, and complete our plans for 2016, we will continue to focus on completing our remaining integration items, investing in the Airline by renewing our fleet, improving our operational performance, and returning excess cash to our shareholders.

In terms of capital expenditures, we expect total gross aircraft CapEx to be approximately $5.3 billion in 2015, of which approximately $1.3 billion will occur in the fourth quarter.

In addition, for the full-year 2015, we expect to invest $900 million in non-aircraft CapEx, which includes many investments to improve our product, and we also expect to make $2.2 billion in debt payments.

In conclusion, I'd also like to thank and congratulate our more than 100,000 team members for again producing the highest quarterly profits in the Company's history.

We knew that 2015 was going to be a big year for integration, and given the results achieved thus far, our team has performed exceptionally well.

So thanks again for your time this morning, and I'll turn it over to Scott.

Thanks, Derek.

I'd like to start by also adding my thanks to all the people of American Airlines for the you truly fantastic job they've been doing operationally, and for the great work that everyone did to make the cutover to a new reservation system such a success, that was largely seamless for our customers.

As most of you know, moving to a single res system is probably the biggest technical training system and process hurdle that airlines face after a merger, and our teams, led by Maya Leibman, our CIO, and Robert Isom, our Chief Operating Officer, just did a fantastic job.

In fact, in the first day, five days since the cutover happened, we've run an 89.4% on-time performance and a 99.95% completion factor.

While we're proud of the job the team did on the cutover, we're also quite proud of the strong operational results that American Airlines was producing prior to cutover, and continue producing since then.

Our system on-time arrival rate and completion factor in September and October are the best that we have in our records, which go back to 2000.

At our largest hub, DFW, we've made significant strides in running a reliable operation since we rebanked the hub, including a 10 point improvement in our departures within zero minutes of scheduled time, a 9 point improvement on-time performance and a 99.9% completion factor, so a big thanks to the team at DFW for the great result.

I could go on and on, but I'll just close this section by saying thanks to all the people of American Airlines.

You've done such a great job in completing the reservation systems cutover, at the same time, they're running a fantastic operation.

On the revenue front our third-quarter PRASM was down 6.8%.

Domestically, PRASM was down 7.6% and we saw the strongest performance in New York and Charlotte and the weakest performance in hubs that have a greater share of international connected traffic into the domestic system.

Internationally, the stronger US dollar and declining international fuel surcharges made up 2.7 points of our total system PRASM decline, but we saw additional weakness beyond currencies in Asia and Latin America.

The Atlantic was our strongest region, where PRASM was down 5.6%, and this decline was mostly explained by the stronger US dollar.

Across the Pacific, PRASM was down 11.3%, with weakness in both Japan and China, but flat year-over-year PRASM in South Korea and Hong Kong.

Latin PRASM was down 10.4%, but as it's been for a while now, that weakness is concentrated in Brazil and Venezuela, where PRASM was down 25% and 46% respectively.

Looking forward, we expect the fourth quarter to look similar to the third quarter with the same factors that drove the decline in Q3, continuing into Q4.

We project that currency and surcharge declines will impact system PRASM by 2.1 points in Q4 which is down from 2.7 points in Q3, as we're beginning to overlap the time when the dollar started strengthening last year.

We continue to see significant year-over-year competitive growth in Dallas as Southwest completed their final expansion at Love Field.

And in South America, we don't see any improvement yet on the horizon.

The revenue environment doesn't seem to have gotten any worse but there aren't yet any signs of improvement.

We don't realistically expect any improvement in South America until the Brazilian economy turns around.

Given all this, we expect our system PRASM to decline 5% to 7% year over year in Q4.

In conclusion, we passed a significant milestone in the integration this quarter.

We're very proud of the job that the entire team at American Airlines has done in getting the res system integrated, and beginning to produce record operational results.

There's still a lot of work, hard work left to do to finish the integration of the remaining systems and processes, but passing this milestone is a huge achievement, and lets us begin to turn our energy, time and resources to innovating, and continuing to make American Airlines a better airline for our employees, our customers and our shareholders.

Thanks, Scott.

And then I have one last thing before we get to questions.

It turns out today is a big day in commercial aviation history, which people may not know.

It's Scott's 20-year anniversary with our Company today.

October 23, 1995, Scott Kirby joined America West Airlines as Senior Director of Scheduling (laughter).

I know.

So anyway, I had joined America West like five months before that, so I've been working with Scott now for 20 years, and he's a young guy.

He's got 20 years left.

I'll use this opportunity to point out we're happy he joined 20 years ago.

He's the best in the business, he's the driver of change, and has been a driver of change in a business that's needed it dearly, and we wouldn't be here without him.

The result is the people of America West, US Airways and American Airlines are all in much better shape than they would have been, had Scott chosen to do something else 20 years ago.

So we're glad he did.

Thanks, Scott, congratulations.

Thank you.

Embarrassing but thank you.

That was the point.

All right.

Operator, we are ready to take questions.

(Operator Instructions)

We'll go to Rajeev Lalwani with Morgan Stanley.

Thanks for the time.

I guess first question, just on the capacity guide for next year, it seems like you're going to be growing a bit more versus 2015, but the economy doesn't seem to be picking up, and GDP isn't looking great.

So just some more color on the thinking there.

It's really, as Derek said, it's really driven by two things.

One is adding service into Australia, which is a big chunk of it, and the other one is gauge on aircraft.

We are behind -- we intended to have more aircraft regauged for 2015 than 2016 -- in 2015, and one of our seat manufacturers got way behind on producing seats.

Some of that slipped, and so upgauging that we originally expected to occur in 2015 is now going to occur in 2016, or is going to occur for 2016.

That's really what's driving it, as opposed to the macroeconomic needs.

It's really just a delay in getting the gauge changed on some of the aircraft.

Thanks.

Then just switching gears, on buybacks you guys were clearly aggressive this past quarter.

I guess I'd just like to get more color on how you think about it just quarter to quarter, how do you arrive at the right level, just to help us figure out how to think about it over time?

Okay.

Look, this is Doug, I'll start.

Again, as we told you in the last quarter, we look, particularly in times when it feels to us -- we do not do this on a systematic basis, as some companies I know do.

We came into the merger with more cash than certainly our peers, and arguably excess cash.

We, however, knew we needed to get through a complex organization -- complex integration, and therefore wanted to hold a good bit of cash to make sure that we were confident that all was going well.

We clearly have passed that threshold.

At this point, what we do is, as the Company can use it to earn cash and produce cash, we first invest in the business.

We are doing that on a pretty large scale, and doing so in a way our investors would be proud because we're producing nice returns on what we are investing your capital in.

Having done that, we look to pay down any high-cost debt.

We have done that.

And now are actually borrowing at rates that we simply can't ignore, and believe are rates that we should borrow at.

On aircraft, for example, I think as Derek noted, we closed the EETC this past quarter at $1 billion, at something around 3.8%.

So we don't think it makes sense to use our cash to purchase the airplanes, but rather we should borrow at those rates, because we can produce higher returns for you at those rates -- than those rates.

That leaves us with cash on hand that still is in excess of what we need, and we don't think the right thing to do with it for you is to leave it in our bank account, but rather to return it to you, and we try to do that really efficiently.

So what that means is, in times like last quarter when we went through and we may go again, and there are people wondering if the industry has changed or not, and such things and whether or not these type of results can continue, and our view may be different than the market.

We like to use these opportunities to purchase our shares, at levels that are less than we believe they're worth.

So you put all that together and you get to numbers like this.

Therefore, it's really hard to tell you what it's going to be like in the future, because it's not systemic.

It's based on what we have left to do, what we have in excess remaining, and what we feel about the relative value of the times.

So a really long way of me telling you it's going to may perhaps hard for you to project in the future.

I can tell you this, we're committed to returning value to our shareholders, and to the extent we have excess cash, to the extent we believe the market isn't giving us full value for what we plan to do, we will repurchase shares.

Very helpful.

Thank you, gentlemen.

We'll go to Julie Yates with Credit Suisse.

Thanks for taking my question and consistent congrats on the successful reservation system cutover.

Now that's complete, what the biggest focus from an operational standpoint, and are there levers that the system combination alone unlocks, or do you still need to get the flight operating system combination and the seniority list integration?

Well, when you say operations, I'm going to take it more broadly.

It is great to have this milestone behind us.

The team, as we've both said, just did a fantastic job on getting it done.

That's really the foundation that lets us start doing a whole backlog of projects and things that we want to do.

Specifically on the operations front, Robert and his team are already off and running, and the numbers of late are quite strong.

But on improving our core reliability, innovating on more customer self-service options, a whole suite of things that we haven't been able to get done, because all of those resources were working on the systems integration to make it easier for customers to deal with us, easier for our employees to have the information that they need and the tools that they need, to provide a great service to our customers.

On the commercial side, we have a huge backlog of projects in terms of all kinds of areas, but two big areas are the Frequent Flier Program and doing more innovation within the Frequent Flier Program.

And secondly, doing more to further disaggregate the product, and really move to a world where we can offer fares that compete with low-cost carriers, and have a suite of attributes that are appropriate for those prices, and then fares that have a greater suite of attributes, and give our customers choice.

It's all about giving our customers choice.

And so there really are just hundreds of projects.

I hope that the IT team took a few days to rest and recover, because we want them and are hoping that they're going to be running just as hard as they have for the last two years on the big backlog of stuff that we have left to go.

We're also glad to -- we got two of our big labor contracts done, another big thing is finishing the remaining labor contracts.

As those groups have gotten through the NMB process and had certification for the bargaining unit, our customer service workers have a contract, a tentative agreement that's in place right now.

We look forward to having that one behind us.

And then the remaining work groups we're in negotiating with all of them and hope to have deals done with them soon.

So it really is a great milestone for us to accomplish, and to be able to look forward to moving forward really on all fronts of the business.

Okay.

Great.

Then maybe a quick one for Derek.

I know it's a little early to talk about 2016 non-fuel unit costs, but in light of the capacity guidance that you gave today, is there any directional color you can offer?

I think ex any of the labor deals, because we don't know where those are going to come out, I would expect right around flat to 2% range from CASM, ex-fuel next year.

But that would exclude any new labor deals that would be put into place.

Okay.

Thank you very much.

Thanks Julie.

We'll go to Jamie Baker with JPMorgan.

Hey Jamie.

Doug, I think it's only appropriate that you dedicate Mariah Carey's hit single, Fantasy, to Scott as it was the billboard number one on this date in 2005.

Thank you for that fine research.

Very good with the Google.

No doubt it was on Scott's Walkman at the time.

Thank you, Jamie.

Scott, a question.

You're guiding in the fourth quarter to somewhere around $1 billion of year-on-year fuel savings, probably a little bit more than that.

But the margin guidance implies an EBIT improvement of around $150 million or so, maybe it's $200 million.

We'll digest the full 8-K in a little bit.

In a simplistic measure, this implies that the vast majority of your fuel savings are not being retained, that you're only hanging onto somewhere around 15% of the benefit, maybe 20% of the benefit.

Delta and United also guided for the fourth quarter.

They think they're going to hang onto about half of their fuel benefit.

Indeed, that's what you retained in the third quarter.

So what is it about Q4 that's making you slip, slip relative to the third quarter and causing you to underperform the competition?

Thanks for the question, Jamie.

Sure.

It is, as I think you know, a little bit of a simplistic analysis when you just try to tie fuel savings to what's flowing straight to the bottom line because it's ignoring everything else that is happening, but it's a fair point for you to make.

Although it really comes down to the relationship of RASM to the fuel price, and what's happening with relative RASM performance.

And on that front, our relative RASM, we're forecasting is going to be down compared to what Delta and United have in the fourth quarter.

One of the reasons for that, of course, is credit card deals.

All three of our big major competitors have credit card deals on a year-over-year basis that have RASM flowing through to the bottom line.

We don't have a new credit card deal.

Good point.

And the other ones are -- probably the two big ones at least are Brazil and Love Field, which are disproportionately affecting us.

One other point I'd make, it's not -- doesn't matter from the sequential third quarter to the fourth quarter, but on a year-over-year basis, we did sign the new five-year labor contracts with pilots and flight attendants.

Again, something that's impacting us.

It impacts the third quarter as well as the fourth quarter.

All that said, we feel really excited that we're now through the integration.

It's hard to pinpoint a number, and it's hard to tell you exactly what is going to change, but the reality is that we had a lot of constraints embedded in the revenue management systems, and our distribution systems.

A lot of things -- and even just resource constraints of people spending eight hours a day working on the res system integration, and then trying to do their day job after they finished all their work on res system integration.

So I can't put specific numbers on it, but I feel pretty optimistic that we've been held back a little bit, we've done it to ourselves, as we tried to get -- as we focused really on having a successful reservation systems integration, and now being able to turn our full attention in those groups to optimizing revenue, I believe will lead to relative outperformance.

Now, we still are going to have the kind of headwinds of credit card deal and Brazil and Love Field to deal with, but at least relative to where we are right now, I certainly hope that we're going to start outperforming even more.

Okay.

Very thorough response.

I appreciate that.

Quick follow-up.

I am trying to assess how the impact of low-cost carriers in your hubs differs from how revenue is holding up in markets, O&Ds where discounters don't publish fares.

How would you compare the overall revenue dynamic in each type of those two markets?

Is it your view that we're also seeing too much pricing aggression, particularly close in, in those markets where discounters are not a factor?

So revenue performance in markets where low-cost or ultra-low-cost carriers are growing are clearly performing worse than in markets that don't have that.

But a similar story is true in markets if there's a lot of legacy carrier ASM growth, we also have lower RASM performance.

Of course, the low-cost carriers have been growing more, so there's more markets that are subject to that.

There has, however, I think -- this is a trend that's been going on for 15 years at least.

As there are more and more markets that are subject to -- that have low-cost carriers flying in them, there are just more and more markets that are impacted, even beyond that.

So we have thousands of markets that we consider drive markets.

Greensboro, North Carolina, that the pricing in Greensboro, even though it doesn't have low-cost carrier service, is impacted by Raleigh-Durham, which the airports are, I think, 55 miles apart.

Customers have indicated willingness to drive.

I think that the vast majority of pricing, probably north of 85% of domestic pricing, is really either directly or indirectly influenced by low-cost carrier pricing.

Which means as they're growing, it's affecting not just the 2% or 3% of revenue that they're -- in markets that they're in, but it's affecting a much -- it does affect a much bigger piece of the pie.

Okay, makes sense.

Thanks for the clarity.

Appreciate it, gentlemen.

Thanks Jamie.

Thanks Doug.

We'll go to Hunter Keay with Wolfe Research.

So a little bit of a follow-up on Jamie's question.

And I want to -- I'd love for you to synthesize some of the stuff you've been alluding to throughout your prepared remarks.

Obviously, you want to talk about this, I can tell, about some of the IT stuff.

So let's do that.

So okay.

It's clear that you guys have concluded that ULCCs are a long-term threat in your market, and they need to be dealt with, and fine.

That's your decision to make.

How do we know that you guys aren't totally blowing up yourself in the process of defending them, causing long-term damage on the pricing side, while you're doing what you think you need to do to match them on the fares?

So effectively, what you've done is, feel free to disagree with the premise, but you're competing against yourself.

You're selling $41 walk-up fares to business travelers that were never going to be on the ULCC to begin with.

Is there a more tactical way to going about keeping the pressure on the ULCCs vis-a-vis they're competing in your market, while being a little bit more surgical about how you don't impact your own close-in demands by inverting the yield curve, inverting the booking curve for example?

And that in itself might be an IT question.

It's not an IT question, but thank you for the question, Hunter.

And I don't agree with all the premises of what at least you're representing our view in the question.

Tell me where I'm wrong, if you would.

More broadly, I'll talk about -- because I get this question a lot.

I do get this question a lot from investors about, summarize it as, why are you matching low cost, ultra-low-cost carriers' pricing?

And for what it's worth, we're doing -- to start, we're doing what's best for American Airlines, for American Airlines' shareholders, for our customers, and that's the premise that we do everything from.

I have started asking investors when they ask me that question if they own shares of Spirit Airlines, and so far 100% of them have been honest enough to acknowledge that yes, they do.

And so, we're not trying to do things that help Spirit.

We're trying to do thing that are better for American Airlines.

This however is not something that's just about Spirit.

Most people ask it about it in that context, because they happen to own shares in Spirit.

But we're competing the same against Frontier and Volaris and Norwegian Air Shuttle and carriers around the world.

Essentially what we're doing is, any time that we are competing with a non-stop carrier, non-stop to non-stop, we're going to compete and match their prices.

And the reason is because those carriers are relevant and we have many customers who are willing to fly them.

A statistic that, when I have told people, they find somewhat amazing, is that 87% of the people that have flown American Airlines in the last year flew us only one time.

87% of our unique customers fly us one time per year or less, and they represent over 50% of our revenue.

While there are a lot of our customers who want to have a life flight seat to fly in the transcon market, or who want a life flight seat to fly when they go overseas, and are willing to pay a premium for a better product, we have that 50% of customers who are very infrequent travelers, who fly us once per year, 50% of our revenue, who fly us once per year or less, for whom air travel is largely a commodity, and I wish it wasn't that way, but it is.

And you can see it, I'll give you some more stats in a minute how much Spirit and Frontier and others have grown, and how successful they can be at getting those customers to move off of us, if we -- if we don't match their prices.

And so when 50% of our customers are up for grabs, we have to compete for them.

We can't just walk away from that size of the business.

50% of revenue, sorry.

If you look at what's happened, it gives you some clarity on how those customers have moved to low-cost carriers.

In Dallas, for example, before American filed bankruptcy, Spirit served three markets out of Dallas.

Today they serve -- they have over 50 flights a day in 25 markets.

In Chicago, they've grown to 24 markets with over 60 flights per day.

In Dallas, Spirit at DFW is our number-two competitor.

They're larger than either Delta or United.

In Chicago, they're the number-three competitor.

They're larger than Delta in Chicago.

In those 25 routes in Dallas that Spirit flies, they have 20% market share.

Huge market share.

What you have to understand is when Spirit flies a flight, they carry all local passengers.

So one Spirit flight is the equivalent of about three American Airlines flights, because we carry so many connecting flights.

If they fly a market twice a day, that's the equivalent of American Airlines flying six times a day, in terms of the amount of passengers that they carry.

Also, we have larger overlap.

If you measure our overlap as our domestic ASMs that have non-stop competition from someone, 28% of our domestic ASMs have non-stop competition with Spirit.

That is much larger than our domestic overlap with Delta and United.

Frontier, similar.

Frontier, before American filed bankruptcy, had 1% overlap with the American Airlines' network, and they've grown that by 1,000%.

They now have 11% overlap.

Similar statistics, they're not as large, because of the markets, but in some of the international markets, where Volaris has grown into many markets.

Given that 50% of our revenue is up for grabs in these markets, and that these carriers have had so much success when they weren't matched, we know that we have to match their fares.

This isn't something that's unique to ultra-low-cost carriers.

We match Delta.

We match United.

We match Air France.

We match every carrier that we compete with around the globe.

But if we're going to fly head to head, and compete non-stop to non-stop with any carrier around the globe, we are going to be competitive and match their prices.

That's all well and good.

This is my last question, it's a true follow-up.

Is there a way -- what we don't know as an investment community is how many seats you're selling on a plane that match that.

Are you selling three seats?

Are you selling a row?

Are you selling 25% of your seats?

That's what some your competitors, I think, do better, and that's maybe where you haven't had resources from an IT perspective to get more surgical on your inventory.

So I'm not saying you should come in here and let ULCCs take your share or whatever.

Is there a way to be more precise, and to have a certain product that's more tailored to that type of customer, so you're not imploding, like I said, the booking curve, so I as a business traveler am buying a $46 walk-up?

Thanks for the follow-up, because there are good points that I didn't make.

One, so we are trying to be precise about where we have seats available, and what we've seen so far, and I'm sure we can fine-tune it, but we're pretty happy with our results so far.

In markets where we have matched ultra-low-cost carriers, our RASM performance has been the same as it has been in markets -- in the rest of our domestic system, so we perform just as well.

What we've done, is we're running much higher load factors, particularly on formerly off-peak flights.

We've done a really good job so far of directing that traffic to formerly off-peak flights, running higher load factors, running lower yields.

Our RASM performance, even in the short term, has been equivalent to the RASM performance we've had in the rest of the system, and there probably are opportunities to fine-tune it, but that's normal course of business stuff that we do, and it's not going to be a meaningful change, in terms of the number of seats.

One thing longer term that we would like to do, I talked earlier about further disaggregating the product is, and we haven't been able to do this yet, because we've been getting through integration, but we are going to go to a product that has different attributes.

And so that the attributes that you get if you buy an ultra-low-cost carrier competitive fare are going to be different.

I'm not going to give you all of the attributes that will be different today, because we'll wait until we're ready to announce it, but that's something that we hope to have in place in 2016, which will have two benefits for us: One, it will allow us to compete with the ultra-low-cost carriers and for that 50% of revenue and 87% of customers that are up for grabs, it will allow us to offer them a product that's competitive on price with ultra-low-cost carriers.

But also for our customers that want a better product and are frequent fliers, and that want better seats on the airplane, we can give them the choice of having -- of not paying that fare, and getting a better product.

We're not going to have that in place until sometime in 2016, and in the interim, we can't just walk away from competing with Delta or United or Air France or WestJet or Frontier, any of those carriers, and so we're going to keep competing and knowing that we have upside later to come sometime in 2016.

Great, Scott.

Thank you very much.

Helane Becker with Cowen and Company.

Hi, John and Maya, thanks for the time.

So I notice that you announced that you're going back into Venezuela, I think, from New York.

And I'm just wondering, is that market showing signs of improvement that you would go back into that market?

Well, it's still profitable, but it's not improving.

But it's enough that we thought it was -- it would be incrementally profitable to serve New York, even though RASM is down 46%.

It's still a profitable market, however.

Just one point of clarification on your response to Hunter.

The 80% some-odd of your passengers that are unique, is that system-wide?

It is.

And --

It was 87%.

87%.

Okay.

So if you looked at Dallas or something like that, are the numbers lower where you could be more -- because one of your strengths, actually, I think, Scott, it was you who developed that whole plan when you were at America West that closed your lowest buckets sooner rather than later.

And at America West, you guys were outperforming the industry in terms of RASM and yield, well before the rest of the industry caught on to what you were doing.

I'm just wondering why you wouldn't be that clever in your current role?

I think we are that clever.

And look, we're doing the exact same kind of stuff.

The big things that we did, that I think you're referencing at America West, was we stopped matching connecting fares that were really low.

The example I used to use with Wall Street was that -- looked at a pricing display and saw Orlando to Seattle for $79 in the summer, and I looked out at our August -- our July FPS from the previous year, and we'd run a 96% load factor between Orlando and Phoenix and a 97% load factor between Phoenix and Seattle, and said, why would we ever want to sell a $79 fare between Orlando and Seattle, so that's where it started, but we've never done that in our non-stop markets.

It's really -- it's one of the great things about running a hub-and-spoke Airline, is you can be willing to not be price competitive in a connecting market that doesn't make sense for you, and pick the connecting markets where fares are okay, and continue to be competitive in the local markets.

But you can't walk away from competition in a local market, because it's just -- it's too important to -- it's always the largest segment of O&D traffic flows in the market.

And secondly, you walk away from a long-term relationship with the customer to be in the Advantage program, even people that are flying once a day right now, getting them on American, experiencing our fantastic product, experiencing the new aircraft that we have, because some day, that might be a customer that's an Executive-Platinum customer.

And so we're not going to ever walk away in the local market, but we are willing to walk away in connecting markets.

Helane, this is Doug, how are you?

Look, only because Scott's going to get angry eventually if people keep suggesting we don't know what we're doing.

I don't want to do that.

No, no Helane.

You were very kind about it.

Let me just try and -- let me just from my perspective tell you that what I think Scott said in detail, but I'll say it at a global level.

The 20 years of experience Scott brings is going into this analysis as well, and we are not constrained by systems.

We are not constrained by intellect.

And indeed, we know what we're doing and we're extremely comfortable with what we're doing.

We had to be careful when we talk about pricing in the future, but we're perfectly comfortable telling you that the same people that have gotten us this far, who are the best pricing yield management people in the business, are managing pricing yield management at American right now, and are not constrained by systems and have not suddenly changed the way they look at analyses.

But the reality is all the things Scott said, which are, this is non-stop service.

We will and need to compete on price on non-stop service.

To the extent any of our competitors are suggesting that maybe we hadn't -- that we've lost sight of this, they're incorrect.

And you guys know enough to know that so long as we're focused on it we're going to be doing it better than anybody else, and we are.

So you guys can keep asking these questions, but we really know what we're doing, and Scott and his team know what they're doing, and we are going to continue doing what we're doing.

That's awesome, and that's good that you continue to do what you're doing, because obviously it's been very successful.

So thanks very much for all that clarification.

I appreciate it.

We'll go to Duane Pfennigwerth with Evercore ISI.

Thanks very much for taking the questions guys.

Listen, I just wanted to check -- everybody looks at this business or this industry on a CASM basis.

If I just take a step back, by our math, your mainline cost per passenger is in the $180 range in the third quarter, and that's with really cheap fuel.

Do you think that's a fair assessment?

I haven't done the math.

I don't know.

Okay.

I think it's in that range.

And I just -- in that vein, with respect to some of this walk-up fare pricing that we're seeing, I guess the decision is, we're just going to lose money until something changes.

So I guess how are you measuring the success of this very aggressive walk-up fare program that we're really not seeing from other airlines, here in the US?

How will we measure the success of it?

We are not deciding to lose money.

We aren't losing money.

And I suspect in your Econ 101 class, they taught you that, you don't sell everything at the average cost.

We sell a lot of tickets below our average cost, that are quite profitable on the Airline.

It all adds up to profitability, but our variable costs are not the same as our average costs.

As the statistics I already gave you, in these markets, once we've gone to matching their prices we've actually had performance that's been either in line or better than the rest of the system.

And so we feel really good about it.

Every single market that we are matching, any low-cost carrier is profitable.

They're nicely profitable.

They're some of our most profitable markets in our system, and you can see that adds up to 17%-plus margins in this quarter.

So it's working really well.

Appreciate that commentary.

And certainly don't want to beat a dead horse here, but it seems like a very favorable environment right now, with fuel as low as it is, and I guess the question would be, and it's one you can't comment on because it speaks to the future, but the question is, how quickly can you get that pricing back, and are you diluting your brand with some of this pricing?

So the question on fuel actually -- I think if fuel prices went up, our ability to compete is improved, because fuel as a percentage of cost is much bigger for low-cost carriers, and so their average-cost advantage declines as fuel price goes up.

So our ability to compete gets better in a higher fuel price environment.

And as to the longer-term question, I tried answering it once before, but we will do more to disaggregate the product, and really have a product that has less frills because of the really cheap price, and we're going to do more to have products for the brand for that less than half of customers who fly us more than -- less than half of revenue from customers who are more frequent travelers, who want the premium product, who want to pay for the brand, and who want a better experience.

We're going to be able to give them the choice of having that.

But it will be sometime in 2016 before we can do that.

Okay.

And then just lastly by our math, and I wonder if you agree, if I just look at ASMs, Dallas Metro, I see you guys at 70% of domestic and Southwest at about 16%, and Spirit at about 4%, and Spirit's not really growing right now.

So I guess the question is, if they're not growing, Southwest is growing a lot, I guess I would just question again what the long-term game plan here, and again, thank you for taking the questions.

Our long-term game plan is to compete with every airline that flies that we need to compete with, which includes every airline that we are competing head-to-head non-stop with, is the long-term plan.

And as to the Spirit 4% point, it's completely -- it's a bad statistic, because included in your statistic is the amount of customers that are flying from Dallas to Abilene, a market that Spirit is not in.

The relevant statistic is the 25 markets that Spirit flies, they have 20% market share.

And any other statistic is irrelevant.

Thanks, Scott.

And then Duane, you didn't specifically ask this, but your comments about fuel prices being so low give me the opportunity to make a comment, to make some points I had wanted to make, referenced in my opening comments, about how we, on the last call, went through the points about how the -- whether the industry is indeed different.

I want to point out this on fuel.

The reality is, Brent oil prices this year are going to average something around $55 a barrel.

In 2005, Brent averaged $55 a barrel.

The economic cycle for 2005, and you guys decide, it was a pretty good year in the economic cycle.

So the two things that we as airlines that really affect our profitability that are outside our control, the economic cycle and fuel prices, were the same in 2005, or very similar in 2005 as they are in 2015.

In 2005 this industry lost $28 billion.

In 2015, we're going to make something close to $20 billion.

This business is not the same.

It's dramatically different.

People that are worried that, oh, my gosh, now that fuel prices have fallen, here go fares falling and what are the airlines -- it's the old business again, are missing the point, and are missing what has happened.

This business has dramatically transformed.

Fuel prices fall indeed, it does make sense for some capacity to come in that does result in prices falling.

But if you think this is the old business you're not paying attention.

I know you didn't say that, Duane, so I'm not saying it to you directly, but anyone that suggests that just isn't paying attention.

Just go look at what's happened over 10 years, and what's happened over 10 years is there have been five big mergers, and as a result, we got a business now that's still intensely competitive but actually can produce returns for investors, and we're doing that.

Anyway, that was just gratuitous commentary from me, thanks.

Thank you very much for the time.

We'll go to Mike Linenberg with Deutsche Bank.

Scott, you're getting a workout here.

Apologize.

Look, now that you're a single Airline from a distribution and marketing perspective, I mean, some of the opportunities, but I wanted to ask you about some of the opportunities.

But within the context, just some of the recent news, I saw that Sabre now is going to be using this new distribution capability to connect right into some of your ancillary product.

And one of the things that I actually thought was interesting, I didn't realize that your agency point of sale, that, that was at -- that the direct connect was 15%, or that represented 15%, which sounds like that, that's right up there with some of your GDS volumes from agencies.

How does that evolve?

Because it sounds like you can really put the foot on the accelerator on the distribution front, and I realize you touched on some of this in multiple answers about really creating this bespoke product, but where do we go on the distribution front here?

We'll see how it evolves.

Where we are today is, we're happy with -- look, I'll start with, the GDSs have a network that works all the links built, and so to the extent we're paying a reasonable price, we are happy to go through the GDSs and work with GDSs.

All of the debate is about price.

And our frustration, not shared just at American, but I think a lot of airlines' frustration is, it's one of the few places in technology where prices have gone up a lot over the last 20 years, because they've got monopoly market power in some cases.

That said, we'd like to work with the GDSs on doing things like selling our ancillary products.

And we want them to sell it.

It's good for our customers.

It's good for their customers, the travel agencies and then the customers that are flying that they represent, and so we're trying to do that.

I think we're still all jointly figuring out how the GDS and distribution model evolves, but at least where we are today I'll thank Sabre for getting this product out there.

It's good for their customers, it's good for our customers.

And it's nice that we've been a able to find some common ground and work on something that's good for both of our respective customers.

Scott, do you think there's a scenario where you could create, I don't know if it's just a product, whether it's internally, or something that's attractive to maybe bring the travel-management companies to go by way of the direct connect process or is that -- ?

I don't think I can answer that question today.

Okay.

Okay.

Well, very good.

Thank you.

(Operator Instructions)

We'll go to Savi Syth with Raymond James.

Slightly different line of questioning, but on the ancillary revenue side, just I was wondering if you could help clarify a little bit of how much of the other revenue pressure came from the reduction in change fees that you called out, and maybe what the trend was excluding that pressure?

I'm just trying to get a sense of kind of what the underlying strength is.

I'm looking to Derek.

We'll have to get back to you on that.

I can tell you conceptually though, we've had a little bit of decline.

Some of those lines have declined a little bit as we've done things like made the credit card program, both credit card programs free first bag.

So if there's anything driving the decline it's been a change as we've integrated, to have the same set of benefits for all of our customers.

Great.

Then to follow up on the domestic-unit revenue color that you provided, just wondering how much of that is being impacted by the international fee?

I know that you mentioned that it was a lot of the domestic hubs that have international fee are the ones that under pressure.

I'm wondering how much of that PRASM decline might be from the international component of the ticket, or the domestic component of international ticket?

I don't remember the exact number but it's over 2 points of the domestic decline is the domestic portion of international journeys.

All right.

Great.

Thank you.

We'll go to Dan McKenzie with Buckingham Research.

Derek, the $900 million improvement to the product, what are those improvements exactly?

And just tied to that how would you characterize the return profile of these investments?

The $900 million is the number of non-aircraft CapEx that we're spending, and part of that is with the product, and we've already announced the $2 billion improvement to the product with lay-flat seats and those kind of amenities in the clubs and other things.

The $900 million wasn't intended to be spent on improvement of the product.

That's how much we're spending in capital for this year.

That is non-aircraft CapEx.

Appreciate the clarification.

Then Scott, not to kick a dead horse here, I actually will talk about something a little different.

So just keeping fuel prices constant, margin compression on the international entities, but there are some margin expansion initiatives that I think that you have underway to help offset and blend some of those.

And one of those, if I'm not mistaken, is just the RJ fleet restructuring.

It's not something you have talked a lot about in the past, but I'm just wondering how material is the swap of the smaller RJs with the larger RJs to your overall margins?

It is a meaningful number.

We haven't disclosed any specific margin or dollars associated with it.

But we are rapidly swapping out the 50-seat and smaller regional jets and going to the larger regional jets, which the economics are great.

In a world where we're running high load factors, we can feed more traffic onto our mainline network, feed more traffic onto our international flights, and really helps the whole network get much better.

It is one of the big contributors, and will continue to be going forward, as we continue that refleeting exercise.

What percent of the departures are those that are being affected, of the system departures?

What do you mean?

The RJ departures, as a percent of total, that would be helping to drive this improvement.

I don't know the number exactly off the top of my head.

That's it.

That will do it for me.

Thanks.

We'll go to Tom Kim with Goldman Sachs.

I had a couple questions on the international side.

I wanted to start out with Brazil, first of all.

Just with regard to that market, do you feel like you're right sized for it?

And I guess I'm just wondering, earlier I think a comment was made that the market will recover when effectively the macro does.

And I'm wondering what do you need to see to potentially get more aggressive on capacity?

Thanks.

We cut 30% of our capacity in Brazil, and so we continue to look at the market, but don't have any imminent plans to cut.

We have cut 30%, but total capacity in the market is still up quite a bit, and I think we're just at the moment hanging in there with what we have.

And Tom, it's an extremely important part of the world for American Airlines.

We're the largest carrier to Brazil in South America.

We've cut back, as Scott said 30%.

That is not a market we're going to abandon, because it's so important strategically to us.

Fair enough.

It's obviously the third largest domestic market in the world, and so you certainly want great connectivity there.

I guess just on the Atlantic side, can you give us an update in terms of the competitive landscape?

More specifically to JFK Heathrow, and I'm wondering with that sort of commentary if you could update us on how your share has been progressing, relative to your domestic peers?

Thanks.

We have the best partner across the Atlantic in IAG, specifically in JFK-Heathrow, the partnership that we have with British Airways, we're doing quite well.

We've increased share in that market and are holding our -- more than holding our own against all competitors in that market.

Great.

Thanks very much.

Go to Joseph DeNardi with Stifel.

I'll ask two.

Scott, just on the -- if I look at load-factor trends the past couple of quarters compared to this one, there's a pretty noticeable increase in loads with some softening in yields.

So just wondering if there was a change in the RM system this quarter that drove some of that?

It's not so much a system change.

The increase in load -- you saw it across the whole industry.

We all get better at squeezing people onto off-peak flights every year.

As much as anything for American, this was about getting more customers on off-peak flights, and the biggest increase in load factor on those off-peak flights was in markets where we're matching ultra-low-cost carriers.

Domestically, can the load factor go beyond 88%?

And then if you could just talk about how the revenue synergies start to phase in, now that you have a single res system.

I don't know how far they can go.

Every year that I get asked this, you think it's the highest it can realistically be, and then the next year it's higher.

I'm going to stop predicting when it will peak, in terms of load factor.

In terms of synergies, the two biggest ones yet to come are full connectivity across the network, prior to getting to a single reservation system.

If you went to America West or USAirways.com and AA.com, you would see different prices oftentimes.

That's a whole bunch of reasons in the yield management systems, why that was different.

That is now gone, and we have effectively -- we do have seamless availability between the two networks.

And then the other one is moving aircraft around, and putting the right-sized aircraft on the right route.

Again, prior to being on a single reservation system, we were limited in our ability to do that.

We now have full reign to do that.

That will take us a while to get done, because there's also operational considerations that go along with that, and so we'll start that next year, but we won't finish that piece of the integration really, probably for 18 to 24 months.

Okay.

Thank you.

We'll go to Andrew Didora with Bank of America.

Just had one question, I guess it's for Derek.

Certainly appreciate your commentary, just in terms of addressing the cash balance and balance sheet coming up here, but your debt has been picking up this year, obviously particularly in Q3, as you bought back a lot of stock.

Do you feel comfortable with leverage levels higher than today, particularly as your earnings grow, or would you like to see this come down over the next, call it, 18 to 24 months?

No, we'd like to see it come down.

We're comfortable where we are today, but we'd like to see it come down over time.

That's why we're going to look at -- re-look at everything from the leverage levels to the minimum cash, and try to figure out where we're going forward.

But our plan is to bring it down over time.

Got it.

Thank you.

We'll go to Darryl Genovesi with UBS.

Derek, any initial thoughts on 2016 CapEx at this point?

We think it will be around -- we've said it's around $1 billion.

We were at $900 million this year, some of those reconfigurations that Scott had talked about, that didn't get done this year, are going to push into next year.

So we'll be around the -- probably about $1.2 billion range for CapEx next year, just due to some of the spending that we expected this year pushing into next year.

Would the gross number be about 5 times that?

Oh, no, that would just be the -- sorry, that would just be the CapEx for non-aircraft.

Aircraft CapEx is are right around probably about $4.4 billion for aircraft CapEx.

Great.

Combined, $5.6 billion, in that range.

Great.

Thanks for that.

And then Doug, I've heard you say a few times this year that you don't think margins have peaked yet, and I guess I'd like it if you could put a little more meat on the bones there.

Because the airline stocks, yours included, trading at single-digit [PE] multiples do seem to imply margin deterioration from here.

Just within the context of an industry that's earning probably above what most would consider to be at cost of capital, and within that industry your own margin seems to already be very competitive, at the high end of your peer group, and a premium that Delta and United which holds even if adjusted for the fuel losses away from you.

I guess I wonder if your comment there regarding the forward margin progression was meant to be taken in an absolute sense, or in a relative sense, and just generally speaking, why you think margins can not just hold from here but actually move higher.

Thanks very much, and apologies for the long-winded question.

No problem, Darryl.

I'll apologize in advance for hopefully what's not a really a long-winded answer, but here's what I believe, which is the traditional, at least the way I think of when someone says peak margins, is this is the best they're going to get, and you should expect declines from this point on.

This is just not what this feels like, at all.

I do believe that the 2015 margins probably were higher than this economic cycle should warrant, given fuel prices fell so quickly.

And when fuel prices fell that quickly, capacity, which rightfully, when your largest cost of production falls by 50%, one should expect capacity to come in, and if demand stays the same and capacity comes in, then by definition, prices fall.

And that happened, but that didn't happen in the first part of the year.

So we probably had some artificially high margins for this point in the economic cycle at the start.

So if that's clear, and so therefore we'll leave it to you guys to project next year's margins, but I certainly wouldn't be surprised if anyone was suggesting 2016 would be lower than 2015 margins, with the exception of carriers that had large fuel-hedges losses this year, which you should obviously adjust for.

There's apples-to-apples paying the same amount for fuel year over year and not losing a lot on hedges, I would expect you'd see most all airlines have margins lower in 2015 and 2016 because of what I described.

Doesn't mean to me that the business has gotten worse.

It just means fuel prices fell so fast they didn't respond in time.

Then what it feels like to me is beyond 2016, you see margin increases.

So do they get back to where 2015 was, and when does that happen?

I don't know.

Of course they could be higher than they were 2015.

What I definitely don't believe is whatever they are in 2016, that they would be lower than that in 2017.

It doesn't feel like that at all.

Is that clear?

Okay.

Great.

Well, thanks very much for that.

We'll now take media questions.

All right.

We're done.

We'll go to Mary Schlangenstein from Bloomberg News.

Scott, on this low-fare product that you're talking about that you're developing with different benefits or bundling, I know you said that's still under development, but can you talk at all about just in general terms what you would see in that fare?

I'm sorry, Mary, but not yet.

Okay.

And I guess that's it from me.

Thank you.

Andrea Ahles with Fort Worth Star-Telegram.

Ignore the loud thunder if you hear it when asking the question because it's pouring.

We're hearing the same thunder.

Doug, I know I saw Elise [Assee's] letter yesterday about the new headquarters.

I was wondering if you could comment at all about, for you as the CEO, why you think it's important to do a new headquarters at this point for the Company, and what you hope to see in the new location?

Thanks, Andrea.

It's exciting news for us.

Not something we take lightly, because indeed, as we've said from the start, we're in a building that we're producing the results like this, while managing from this building.

But the fact of the matter is, it is an old facility and as we look forward and know that we're here to build an Airline for the long term, this building isn't going to be here for the long term.

So it's a matter of when we decide to move, and that was what we were really wrestling with.

Should we do something now?

And again, by now, announcing today means we move three years from now.

But do we announce something now and get started on it, or should we defer that?

And we just came to the conclusion that now is the right time, primarily because of the ability to acquire the land that we were able to get, thanks to a lot of support from the City of Fort Worth, but we were able to acquire some property that is over next to our learning center, next to our new IOC, next to our operations training center, next to flight operations.

That's where we think Management belongs, and we're here to support the line, not to look down on the line from a mile away, which is what it feels like now.

And we all just got really excited about the prospect of being over there, where we can be near the people that we're supposed to support.

I add to that, this facility, which I know you've been in a number of times, Andrea, was not built for collaboration.

It literally is silos, and that's not how we like to operate.

So this gives us the opportunity to go build a facility that's a lot more collaborative, a lot more open space, a lot more ability to see more people.

And seeing the new IOC, the last time I saw you when we opened that, just I think really hit home for a lot of us, that facility is so much nicer in terms of just the way people can communicate with each other than this one, that this is the right time.

All that came together, and made us decide that we should get started now, not wait any longer, and we probably could have gotten a few more years out of this building, but it wasn't going to be much longer than that, and the right thing to do was to go get this started as soon as we can.

We're really, really excited about it.

It's going to do a lot for the culture we're trying to build in terms of Management itself, and really send Management the message we want to send to Management, which is, we are here to support the people that are out there taking care of customers, not vice versa.

Can you talk at all about how much it's going to cost?

We haven't disclosed that yet, mainly because we don't know.

We're still -- again, what we've announced is that we're planning to do it.

We still have a lot of work to do on exactly what we're planning to build, but it's an investment.

Again, like I said, it's not one that we take lightly, but also one that we knew we were going to make at some point, so we're choosing to make it now.

Great, thank you.

David Koenig with Associated Press.

Scott mentioned also the Frequent Flier Program, and I wonder, what are you going to do there.

Are you going to go to more of a spend-based program than you have now?

That's another one, I'm sorry, David, I'm going to give you the same answer as I gave Mary.

I can't tell you until we're ready to announce it.

We didn't have a 20 minute analyst discussion on that.

That's true.

Thank you.

All right.

Thanks.

Jeffrey Dastin with Reuters.

Thank you very much for taking the call.

Actually a follow-up on David's question.

Does American consider the way it rewards customers now as a strategic advantage over the other legacy carriers?

We think we have the best loyalty program in the world, and we look forward to making it better.

Great, thank you.

I guess if I may just quickly change topics, after statements that a glut in the market for used wide-body airplanes may be approaching, what can American say about the value of planes that American's already ordered, and has on the books?

Is the glut going to impact that any way?

Okay.

We're not confirming that comment, not sure we agree.

But happy to talk about the American Airlines fleet plan and where we are.

We are -- we have -- Derek can give you details, but still hundreds of aircraft on order, brand new airplanes that are coming in, replacing older airplanes.

The biggest modernization in the history -- fleet modernization in the history of commercial aviation.

It's having a profound impact on our product.

We are very happy with the fact, and we believe our investors should be happy with the fact that we are investing in the Company, the result is the average age of our fleet is the lowest of now all the major airlines, and it's falling.

I don't have the numbers in front of me, but we've actually dropped our average age over the last few years, and it will continue to drop, while others are not doing that, and we've now created a gap versus our competition that is unlike anything I think anybody's seen in this business, that we think -- for a while.

Some of our other competitors have aircraft ages in the 16 range, 16 years, and ours is going to be soon below 10.

That's a huge advantage.

That's a big competitive advantage, and one that we're really excited about our prospects going forward.

It's not just fuel savings and maintenance savings, it's a much, much better product.

When we take a super 80 out of the system here at American Airlines and put in place a brand new 737 it is a dramatically different product for our customers, and we plan to leverage that.

So we're excited about our fleet plan.

We're excited we have it locked up.

And that we did so at very nice pricing.

And we're excited to see that our competitors don't seem to be trying to catch us.

Thank you, Doug.

And just to make sure I heard correctly.

So do you -- would you say that the belief that a glut is approaching in the used wide-body market is exaggerated, or you can't comment?

I'm not commenting on that.

Great.

Thank you very much.

Thanks.

Due to time restraints, this does conclude today's question-and-answer session.

At this time I'd like to turn the conference back over to Management for any additional or closing remarks.

Great.

Thank you everyone.

Thanks for your questions.

They were great questions.

We appreciate your interest in American Airlines, and we are committed to taking care of our shareholders, our customers, and our employees, and we're very proud of what we've accomplished so far, and excited about what we plan to do in the future.

Thanks again.

This does conclude today's conference.

Thank you for your participation.