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Operator
Welcome to the American Airlines Group second-quarter 2016 earnings call. Today's conference is being recorded.
(Operator Instructions)
Now, I would like to turn the conference over to your moderator, Managing Director of Investor Relations, Mr. Dan Cravens. Please go ahead, sir.
Dan Cravens - Managing Director of IR
Thanks, Ashley. Good morning, everyone. Welcome to the American Airlines Group second-quarter 2016 earnings conference call. On the call with us 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 our Q&A session is: Robert Isom, our Chief Operating Officer; Bev Goulet, our Chief Integration Officer; and Maya Leibman, our Chief Information Officer; as well as Steve Johnson, our EVP of Corporate Affairs.
As is our normal practice, we are going to start the call today with Doug. 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 additional information on our guidance for the remainder of the year. Scott will then follow with commentary on the revenue environment and our operational performance. Then after we hear from these comments, we will open the call for analysts' Q&A and lastly questions from the media.
Before we begin, we must state that today's call does contain forward-looking statements, including statements concerning future revenues and costs, forecasts of capacity, traffic, load factor, fleet plans, and fuel prices. These statements represent our predictions and expectations as to future events, but numerous risks and uncertainties could cause actual results to differ from those projected. Information about some of these risks and uncertainties can be found in our earnings press release issued this morning and our Form 10-Q for the quarter ended June 30, 2016.
In addition, we will be discussing certain non-GAAP financial measures this morning, such as net profit and CASM, excluding unusual items. A reconciliation of those numbers to the GAAP financial measures is included in the earnings release. That can be found on our website. A webcast of this call will also be archived on the website. The information that we're giving you on the call is as of today's date. We undertake no obligation to update the information subsequently.
So thanks again for joining us this morning. At this point, I'll turn the call over to our Chairman and CEO, Doug Parker.
Doug Parker - Chairman & CEO
Thank you, Dan. Thanks, everyone for being on. Happy to report our earnings today.
$1.6 billion pretax earnings, excluding special charges. That's the second best in our Company's history. It's worse over the last year, which was the best. Last year, we made $1.9 billion on similar terms, not particularly happy about that, but that is revenue driven. Scott will talk more about that and the trends there. On an EPS basis though, adjusted EPS, adjusted for that fact that we are booking taxes this year and didn't last year, you will see that our earnings were actually -- EPS was -- adjusted EPS was actually up 7%, even though the pretax earnings were down. That is due to our share repurchase activity, which Derek will talk more about.
So all in all, really great results for the team. They're the result of great work by a phenomenal team. We have 100,000 hard-working people at American Airlines that are out there doing an amazing job of taking care of our customers and we're extremely appreciative.
So with that said, I will turn it over to Derek and then Scott to give you some more details.
Derek Kerr - CFO
Thanks, Doug. Good morning, everybody.
As is our normal process, we did file our 10-Q and earnings press release this morning. In that release, our second-quarter 2016 GAAP net profit was $950 million or $1.68 per diluted share. This compares to our 2015 GAAP net profit of $1.7 billion or $2.41 per diluted share. Excluding special charges, we reported a net profit of $1 billion or $1.77 per diluted share versus the second quarter of 2015 net profit of $1.9 billion or $2.62 per diluted share.
As we talked about on our last two earnings calls, the Company did reverse the val allowance on its deferred tax assets as of December 31, 2015. As a result, in 2016, the Company is recognizing a provision for income tax that is substantially non-cash due to its utilization of NOLs. On a year-over-year basis, quarterly net profit in 2016 will not be comparable to net profit in 2015. Accordingly, we believe pretax profit and pretax profit, excluding net special items, is a better measure for evaluating year-over-year performance than net income.
On that basis, our second-quarter net tax -- or pretax profit was $1.5 billion, equating to a pretax margin of 14.4% on a GAAP basis. Excluding special charges, our pretax profit was $1.6 billion, which resulted in a pretax margin of 15.4%. As Doug said, both of these measures are the second best second-quarter pretax margin in Company history. Excluding the effect of special items and the non-cash tax provision of $541 million, our second-quarter 2016 adjusted fully diluted EPS was $2.81 per share, up 7.3% as compared to second quarter 2015, reflecting a 20% reduction in our fully diluted average share count.
Total capacity for the second quarter of 2016 was 70.8 billion ASMs, up 1.9% from the second quarter, with mainline up 1.2% and regional capacity up 8%. Our second-quarter 2016 revenue was impacted by a competitive capacity growth, continued global macroeconomic softness, and foreign currency weakness. For the quarter, total operating revenues were $10.4 billion, down 4.3% year over year.
Passenger revenues were $9 billion, down 4.4%, driven by a 5.3% lower yield. Cargo revenues were down 10.4% to $174 million, due primarily to a 12.7% decline in yields on international freight. Other operating revenues were $1.2 billion, down 2.1% versus the same period last year.
On July 12, we did announce a new credit card agreement with Barclaycard US, Citi, and MasterCard. This agreement extends and deepens American's relationship with its existing credit card providers and is expected to generate $200 million in pretax income -- incremental pretax income in the second half of 2016. So about $100 million each quarter, $550 million in 2017 and $800 million in 2018, with modest increases in later years of the agreement. Most of the increases will be reflected in other revenue.
Total GAAP operating expenses were $8.6 billion, down 3.3% versus the same period last year, due primarily to a $530 million decrease in consolidated fuel expense. Our average mainline fuel price, including taxes, for the second quarter of 2016, was down 25.5% year over year to $1.41 per gallon. Second-quarter mainline CASM was $0.1132, down 4.6% year over year, due primarily to the lower fuel costs, excluding special items and fuel.
Our mainline cost per ASM was $0.0912, up 4% year over year. This increase was primarily due to contractual labor rate increases for our customer service and res agents and the introduction of our profit-sharing plan. Those rate increases were offset in part mainly by maintenance timing and lower selling expenses. Regional operating cost per ASM in the second quarter was $0.1878, down 9.8% from 2015. Excluding special items and fuel, regional CASM was decreased by 4.6%.
We ended the second quarter with approximately $9.5 billion in total available liquidity comprised of cash and investments of $7.1 billion and $2.4 billion in undrawn revolver capacity. The Company also had $460 million classified as restricted cash. This is a reduction of $51 million since the last quarter. During the second quarter, we generated $2.2 billion in cash flow from operations and paid $1.9 billion in debt.
During the quarter, the Company completed several efficient financing transactions, including the issuance of a new $1 billion seven-year term loan, secured by the Company's mainline spare parts and $844 million in JFK special facility bonds. In addition, the Company issued a $829 million 2016-2 EETC consisting of AA and A tranches, which was then augmented in early July with an additional $227 million B tranche, resulting in total deal of $1.06 billion with a blended rate of 3.5%.
In the second quarter, the Company returned more than $1.7 billion to its shareholders, including quarterly dividend payments of $58 million and the repurchase of $1.7 billion of common stock or 50.2 million shares. Since our capital return program started in mid 2014, the Company has returned approximately $8.4 billion to shareholders through share repurchases and dividends.Iincluding share repurchases, shares withheld to cover taxes associated with employee awards and shares distributions and the cash extinguishment of convertible debt, our share count has dropped 29% from 756.1 million at merger close in December of 2013, to 537.1 million shares on June 30, 2016.
At the end of the second quarter, the Company had approximately $1.2 billion remaining on its current share repurchase authorization. Our liquidity of $9.5 billion at the end of second quarter was up slightly as compared to $9.4 billion at the end of the first quarter and remains well in excess of the $6.5 billion minimum liquidity we seek to maintain for the foreseeable future. As we discussed on our first-quarter 2016 earnings conference call, we believe it is important to retain liquidity levels higher than our network peers, given our overall leverage and the fact that we have not yet completed our fleet renewal program.
In regard to our fleet renewal program, when we merged in 2013, both airlines had wide body fleet replacement plans that overlapped in 2017 and 2018. As referenced in our earnings release, in order to spread out the wide body replacement orders and our future aircraft CapEx requirements, we announced today than on July 18, we modified our purchase agreement with Airbus for 22 A350 XWB aircraft. Under this amended agreement, we will now receive our first A350 in late 2018. The deliveries are as follows: two in late 2018, and five each from 2019 to 2022.
This change reduces aircraft CapEx and PDP's by approximately $500 million in 2017 and approximately $700 million in 2018 and provides us with capacity flexibility. As we discussed on our last earnings call, in evaluating our leverage, we look at metrics such as net debt to EBITDAR. As our fleet replacement program begins to normalize and with the deferral of our A350 aircraft deliveries, going forward, our peak capital spending for aircraft will occur in 2016 and decline going forward. As we see it today, we expect our total net debt to follow the same path, peaking in 2016 and improving each year thereafter.
Turning to our 2016 guidance. We continue to monitor our capacity plans. In our IR update issued two weeks ago, we lowered full-year system capacity guidance by 0.5 point and are forecasting it to be up approximately 2%, both from a domestic and international capacity, they'll both be up around 2%. So the mainline capacity will be $64.1 billion in the third and $58 billion in the fourth, and regional capacity $8.19 billion in the third and $7.9 billion in the fourth.
Year-over-year CASM, excluding special items and fuel, will be up approximately 4% to 6%. Regional capacity is expected to be up approximately -- or down, excuse me, approximately 3% to 5%. While fuel prices have risen since the beginning of the year, we continue to expect to see significant savings on a year-over-year basis. Based on the forward curves, as of yesterday, we expect to pay between $1.39 and $1.44 per gallon in 2016. In the third quarter, we expect $1.45 to $1.50, fourth quarter $1.48 to $1.53. Regional, we expect third quarter, $1.51 to $1.56 and in the fourth quarter, $1.54 to $1.59.
Based on these prices, we expect 2016 consolidated fuel expense to decrease by approximately $1.3 billion year over year. Using the midpoints of guidance we just provided along with the revenue guidance that Scott will give, we expect our third-quarter pretax margin, excluding special items, to be between 12% and 14%. For capital expenditures, we still expect total gross aircraft CapEx to be approximately $4.4 billion in 2016 with approximately $803 million occurring in the third quarter. We still expect non-aircraft CapEx to be $1.2 billion for the year.
In conclusion, thanks to the efforts of our more than 100,000 team members, they again delivered strong quarterly results. While we still have a lot of work to do to fully complete our integration, we are excited about the commercial initiatives our team has implemented as well as those they are working on and look forward to reporting on our continued success on future calls.
Thanks again for your time this morning. I'll turn it over to Scott to talk about the revenue environment.
Scott Kirby - President
Thanks, Derek. I'll start by talking a little bit about our operational performance and then turn to the revenue environment.
American's operational performance for the first half of 2016 has been strong. On a year-over-year basis, for the first half of the year, all performance metrics improved for both mainline and regional operations, especially D0, which was up 3.3 points for mainline and 10.3 points for regional and our mishandled bag rate, which has been reduced by 24%. Of course, summer thunderstorms and high load factors bring incremental challenges for our team. But the people of American Airlines are continuing to do a great job taking care of our customers and improving the operation month in and month out.
On the revenue front, 2Q PRASM came in at the high end of our forecast. While it is still a challenging revenue environment 2Q is better or less bad than 1Q, so we've at least started to see some second derivative improvement in PRASM. Domestically, consolidated PRASM was down 5%. We saw the strongest year-over-year performance in Phoenix, followed by DFW as our second best performing year-over-year hub.
Internationally, as we're beginning to overlap the dollar strengthening last year, the impact of a stronger US dollar and declining international fuel surcharge is getting smaller and drove a 0.6% decline in PRASM. The Atlantic was once again our best performing international region, despite the high levels of capacity growth, with PRASM down 6%. Across the Pacific, PRASM was down 15% on 21% ASM growth, with continued weakness in both Japan and China, but a good PRASM result in Hong Kong and Korea. Latin PRASM was down 10%, but we saw a particular strength in Mexico and Argentina and an improving trend in Brazil.
Looking forward, we expect the third quarter to continue showing modest second derivative improvement in year-over-year PRASM. Regionally, we expect the Pacific and Atlantic to remain challenging with double-digit year-over-year PRASM declines.
But domestically and in Latin America, we expect continued improvement relative to the second quarter, which will result in low single-digit PRASM declines in both entities. We see particular strength in Mexico. It appears that capacity cuts are finally starting to catch up to the declining demand in Brazil. Also, we will begin benefiting from the new credit card deals, although most of that revenue will show up in other revenue.
With that, we expect our total RASM, not passenger, but total RASM to be down 3.5% to 5.5% year over year, with about 1 point of that coming from the new credit card deals. Going forward, we plan to continue guiding to total RASM. While we don't really have enough bookings or data to have a forecast that's any more reliable than the analyst community, as we look to 4Q and beyond, we expect to see continued second derivative improvement in the year-over-year total RASM performance. We're looking forward to getting back to growing RASM.
We're also excited with our plans to introduced basic economy towards the end of this year and premium economy at some point in 2017. We believe that product segmentation is a transformative change in how we segment the product to give all of our customers choice in what they prefer, whether it's a more inclusive product bundle or just a bare-bones low price. Also as Derek mentioned, we also lowered our capacity guidance for the back half of the year, which is really just a normal and natural reaction to a declining year-over-year PRASM and higher fuel environment.
In conclusion, we still dislike negative RASM, but we feel good about the path that we're on to get back to RASM growth. We continue making gradual improvements in our core results. Our new credit card deal will add significantly to revenues over the next few years. We have some big opportunities ahead of us with product segmentation. When you put it all together, we feel very good about the foundation that we're building for the long term, which will enable us to run the world's best operation and drive higher revenues.
Dan Cravens - Managing Director of IR
Thank you, Derek. Thank you, Scott. Operator, we are ready for questions.
Operator
(Operator Instructions)
Mike Linenberg, Deutsche Bank.
Mike Linenberg - Analyst
Actually, I think Derek, you may have called this out, just competitive capacity growth as being an issue on the revenue performance. Where did you see -- where was that most egregious? Which markets and maybe it's more domestic? Maybe this is actually more a question for Scott to answer. I know you did call it out, Derek. Which of your domestic markets maybe have seen the most egregious conditions from a competitive capacity growth perspective? Thanks.
Scott Kirby - President
Look, there's lots of capacity growth everywhere, it's not just domestically. A lot of capacity growth across the Atlantic and Pacific in particular. A lot of capacity growth actually in the Caribbean and Mexico. The one place, internationally at least, where we've finally started to see capacity start to right-size to -- well, I don't know if right-size is the right term, started to at least adjust to the demand environment is South America, where Brazil actually saw declining capacity. We continue to see declining capacity going forward.
Domestically, I mean it's mostly across the board. We still see higher growth in Dallas out of Love Field. The good news for us is that growth, as we get to September, we will overlap the last phase of Southwest growth. So at least the head-to-head competitive environment for us, relative to what it has been, will improve in September. But really there's been a lot of growth everywhere. Los Angeles has been a high-growth market. But I don't think, other than Dallas, I would single out any particular market for high growth. It's been across the board.
Mike Linenberg - Analyst
Great. Just a quick follow-up to Derek. On the NOLs now -- now, you're booking taxes, but at what point -- do have an estimate of when you believe you'll be paying cash taxes? I guess I would just presume that just based on current profitability trends, is -- are cash taxes going to become a real thing in maybe, what, 2018, 2019? Any thoughts on that?
Derek Kerr - CFO
Yes. We are thinking right now 2019 or 2020, but it just depends on also aircraft purchases and other things like that. So I think we're looking at more 2019 to 2020 for cash taxes.
Mike Linenberg - Analyst
Great, thanks a lot guys.
Doug Parker - Chairman & CEO
Thanks, Mike.
Operator
Rajeev Lalwani, Morgan Stanley.
Rajeev Lalwani - Analyst
Scott, just a question for you. We've heard a lot from other airlines as far as pressures on close-in yields and that sort of thing. What are you seeing there, just thoughts going forward? That's the first one.
Scott Kirby - President
Okay. So I guess we're seeing something a little different. All of our competitors said it. Close-in yields are still down year over year. They're still negative. But we certainly haven't seen another leg down. Actually, I would've said the opposite, that things look marginally less bad for us on close-in yields. But some of that is probably because we do, I think, have a little bit different competitive environment on a year-over-year basis. We've had some huge headwinds from a competitive perspective. Dallas Love Field was one of those big headwinds, domestically, that drove a lot of capacity growth in our market.
Now we are starting to overlap that. So we have what would be a more normal comparison with the rest of the industry, looking forward. So that probably means that we are seeing something -- perhaps it's a little different than our competitors on a year-over-year basis. Secondly, we've had on a year-over-year basis, while we still probably have the most exposure to ultra low-cost carriers of any airline, they aren't growing in our markets anymore, at least to a large degree.
So we have less of that incremental pressure. They're adding capacity in other places and when they do, that causes close-in yields to decline in those markets. But we've already had that and we're overlapping, now, on a year-over-year basis where they're effectively flat in our markets. Third, we have been less involved in some of the pricing -- I'm trying to think of the right word, pricing issues going on between airlines. We've been involved on the periphery, but some others have been more involved in lowering fares in each other's markets than we have. So we've probably benefited from not being quite as involved in that.
Rajeev Lalwani - Analyst
All right, thanks. Doug, if I can ask you a quick question. As it relates to buybacks, you've obviously been pretty aggressive. Why not be even more aggressive, where maybe taking the Company private or something like that, just given your confidence in the model?
Doug Parker - Chairman & CEO
I think we are being adequately aggressive and properly aggressive. Our view, as we've stated many times is, after we go through and make sure we are investing in all the right things, our people, the airline, our customers, paying off high cost debt, the question then becomes of the cash we continue to generate in excess of that, what should we do with it? Certainly, with -- given our view of the future that we described and where the market has its stock right now, it appears to us that the best use that cash is to buy back our shares. We're doing so, I think, in a reasonably aggressive way. But that's the current plan.
Rajeev Lalwani - Analyst
Thank you.
Operator
Helane Becker, Cowen and Company.
Helane Becker - Analyst
I just have a question about headcount. Do you think that there are extra people still on board? I guess that's a bad way to phrase it, (laughter) relative to the merger and the consolidation? Do you think that, as you look out another couple of years, that number starts to increase at a slower rate?
Derek Kerr - CFO
Yes. Helene, I would say the answer to that is yes. Our number one job is to get through the merger and complete the merger, so there are areas where we do have extra headcount to make sure that we get the operation running right, to make sure that we complete the integration. So yes, I believe over time we will pull it back and become more efficient, but I think right now, we're doing the right things to make sure that we get everything running right and get the integration done. So I think over time it will come down, but over the next few years, as we look forward.
Helane Becker - Analyst
Okay. Then just another process question, I couldn't find it in the 10-Q real quickly this morning, but the intangibles on the balance sheet declined. Did you have to make any adjustments for slots at Newark or anywhere else?
Derek Kerr - CFO
Yes, we did, but it wasn't very big. It was in the $20 million range for us, but it was very small from the Newark perspective. But we did make an adjustment and wrote those down to zero.
Helane Becker - Analyst
Okay. Great. Thank you for your help.
Doug Parker - Chairman & CEO
Thanks, Helene.
Operator
Hunter Keay, Wolfe Research.
Hunter Keay - Analyst
So I think Scott, you said in the past, that you guys expect to have the best margins in the industry amongst the legacy airline peers. It's probably looking a little bit less likely now. So if we start here and pick one financial-oriented metric that you want American to lead the pack on over the next 12 months from today, what would it be?
Scott Kirby - President
Look, I still want us to have the highest pretax margins than most network carriers. I still think we will get there. I think we are on a good path. We took a step back from, well, a few big things that disproportionately impacted American. These kinds of things are cyclical and they will eventually come back, but if you look at Venezuela first, which had RASM that was four times our system average. The country fell apart. You had Brazil, which was 80%-something above system average and the country fell apart.
Those were massive, massive headwinds that drove 3 to 4 points, just those two issues, 3 to 4 points of system PRASM and 3 to 4 points of margin decline. So the hill we had to overcome to get back on those things was bigger, because those big macro exogenous events disproportionately impacted American. That said, it feels like we're -- those things are about to be in the rearview mirror. Brazil is no longer a negative. Venezuela is still a big negative. RASM is going to be down 35% this coming quarter again, but it's coming off a much smaller base.
So it's not even something that will fall out as a system-level impact, because it's coming off a smaller base. So we've had some really big headwinds between that and Dallas Love Field growth. Those headwinds are now in the rearview mirror. We have a more normalized, at least on a year-over-year basis, comparison to the rest of the industry. I think you're starting to already see our -- as we look out, our RASM results start to reflect that.
We've also been -- had at least one hand tied behind our backs in the last few years, as you get through integration and you have all your resources, and you have systems locked down that even when you know you want to make changes, you can't because you are in the middle of converting the systems. Our hands are getting untied now. We still have some that work left to do but there's more coming. We would've had basic economy and premium economy, which I've said I think are worth -- I'll be disappointed if they are not $1 billion a year. We'd have those done by now, if we hadn't have been in the middle of integration. But we have been in the middle of integration. We've had to get through that.
So I think we're going to continue to knock those kinds of and many other smaller projects out along the way and that we are on a good path. We got our credit card deal done. Others got theirs done ahead of time. We've got ours done. So I feel really good about the path that we are on. Ultimately, our goal is to have the highest pretax margin amongst the network carriers.
Hunter Keay - Analyst
Okay. So you mentioned some of the ULCC competitive headwinds shifting, do you feel vindicated? I guess what you said here -- what we've learned is that it pays to kind of go nuclear when this stuff happens. So do you feel vindicated that this is happening now? Or do you -- now that this is sort of settling down, do you feel like, well maybe there could have been like a little bit more of a tactical way to do this without setting the house on fire, but we had to destroy the village to save it, type thing? Or is there any lessons learned that you can extrapolate going forward about how to compete maybe more tactically? Or do you have no regrets?
Scott Kirby - President
I don't agree with any of the commentary about nuclear, house on fire, any of that. (laughter)
Hunter Keay - Analyst
Fine. Whatever you want to say really.
Scott Kirby - President
Just to be clear, I think there's absolutely no choice but to compete and to match pricing of non-stop competitors. There's just absolutely no choice. It's not a matter of vindicated or any other of those words, it's what you have to do. It's what we've done. It's the right strategy.
Hunter Keay - Analyst
All right, cool. Thank you.
Doug Parker - Chairman & CEO
Thanks, Hunter.
Operator
Jamie Baker, JPMorgan.
Jamie Baker - Analyst
I'm trying to figure out a way to avoid using the term nuclear in my question now. (laughter) Bazooka versus rifle, or something like that. Listen, Scott, you avoided fuel hedging in the past, believing that fuel prices and passenger demand would broadly move in conjunction with one another. If you look at current revenue and GDP trends now, that time held relationship has decoupled for the first time since the financial crisis or the advent of the Internet. By the way, fuel and capacity have been volatile in the past, yet the revenue to GDP relationship was broadly unaffected.
So I have two questions. First, what explains the disconnect? Is it secular or self-inflicted? Two, if the relationship is decoupling and continues to do so, then your primary argument against fuel hedging is no longer valid. Thoughts?
Scott Kirby - President
Okay. So, I will try on both of those. First, I think there still is a relationship between fuel price and revenues. It comes with a lag. I've historically said four to six months, one of our competitors said nine months. It does come with a lag. I think revenues will be higher in the fourth quarter than they otherwise would've been if fuel was lower. Now, fuel prices at whatever it was yesterday, $47 a barrel? While they took a very brief spike down to $35 a barrel, I doubt capacity ever adjusted all the way down to $35 a barrel.
You saw earnings improve dramatically as a result. So I'm not sure what the right comparison is, if it was $35 a barrel or $47 a barrel where people were planning capacity from, but I think there still is a link. Second, I think there has been another structural change in the industry. That has been, in particular, the growth of ultra-low cost carriers. That was a structural change, a structural change that required a structural response.
The structural response is twofold. It's one to compete with them, which we are doing. The second one is product segmentation. It has been a structural change in the industry where, 20 years ago, we segmented customer demand based on fare roles. If you are a business traveler, you're -- the higher the fares. The low fares, which were designed for leisure customers required a Saturday night stay. You had to buy 21 days in advance. That didn't work for business travelers. That kind of segmentation doesn't work in today's world anymore. So we have to change the model.
Changing the model is going to product segmentation, which is what basic economy and premium economy are all about. Now, I wish we could've done that by snapping our fingers like we could make the change in a fare filing, and as ultra-low cost carriers grew that we could have immediately affected that change. But we couldn't. So we've had to compete first. Then we will get to segmentation, starting the basic economy later this year and premium economy next year. I think that is going to address the secular change from ultra-low cost carriers. But we have taken a leg down because of that. I think we will recover it once we get those things in effect.
As to the fuel hedging question, there's two reasons to not hedge fuel. Actually, I would've said the tie to revenue is maybe the second one. The biggest reason to not hedge fuel is because it's a rigged game that's impossible to beat. Fuel prices, most of the time, are trading at contango. So while fuel is $47 a barrel today, if we try to buy fuel for a year from now, it's well north of that. In addition, we all know and realize the risk that you take if you just do costless collars. So what most people do and the prudent view is that you should buy options.
So if you want to buy an option for fuel a year from now, you're going to pay an $8 to $10 option premium. So fuel prices have to go up, it varies from time to time depending on how big your contango is and how high volatile is, but in the 30% to 50% range, just to break even. When you're playing a game that you have to have oil go up 30% to 50% to break even, it's impossible to win in the long term. There could be days that you win, there could be months that you win, but it is impossible to win in the long term.
Jamie Baker - Analyst
Okay. I appreciate the input on both parts of the question. I will turn the mic over to somebody else. Take care, gentlemen.
Doug Parker - Chairman & CEO
Thanks, Jamie.
Jamie Baker - Analyst
Thanks, Doug. Thanks, Derek -- Scott.
Operator
Dan McKenzie, Buckingham Research.
Dan McKenzie - Analyst
Scott, British Airways cut their earnings outlook following the Brexit vote. I'm wondering if you can talk a little bit more about what Brexit might or might not mean for American as we look ahead? Then separately, I'm wondering what you can share about BA's willingness to work with you to optimize the trans-Atlantic flying as we look ahead?
Scott Kirby - President
So first on Brexit, I think in the near-term -- I'll define near-term as being until the UK actually leaves the EU, so two plus years depending on when they trigger Article 50. There's sort of, I think of it as three effects. One is a currency effect, which is a pretty clear negative. Actually, when we look at currency by currency, what has the biggest year-over-year impact, it's been the Brazilian real for a long time. It's now the UK pound because of the decline in currencies. By the way, we generate -- about 4% of our revenues are sold in British pounds. So currency decline is negative.
The second point is that it will happen over the near to medium term. The direct impact, I actually think, will be positive. When I say direct impact I mean the number of people having to fly back and forth across the North Atlantic, particularly business customers, as there's a lot more consultants, lawyers, bankers that are likely to be flying back and forth figuring out what the heck this means and what are we going to do.
The third and most concerning thing that will be -- that has the potential to be negative is, in the near to medium term, is if it creates business confidence problems. We have seen historically that when there's business confidence, one of the first things businesses do is cut the travel and entertainment budget. That's not something that would uniquely affect the UK or the EU, it would be a broader impact.
I was gratified to see that while the market fell for two days after the Brexit vote, it has bounced back. That's usually a pretty good indicator of confidence or highly correlated with confidence. So I think it's unlikely that we're going to see a big change of confidence. So all of which, means I think, for the next few years at least, there is not going to be much impact from Brexit when you sort through those three items.
We don't have tons of data. We have a month's worth of data so far and our booked revenues have improved in the month since Brexit happened, at least relative to where they were before, so it's hard to see any evidence that it's a big problem. Longer-term, the issue is going to be obviously what happens with the UK economy, what happens with the banking industry, in particular, because that is a big component of revenue across the North Atlantic, and what happens from a regulatory framework. But near-term, I don't anticipate an awful lot of issues.
Dan McKenzie - Analyst
A comprehensive answer, thanks. Derek --
Doug Parker - Chairman & CEO
He was prepared for that one. (laughter) Thanks, Dan.
Scott Kirby - President
Our board asked also. (laughter)
Dan McKenzie - Analyst
I appreciate it. Derek, the reduced CapEx and cash tax perspective addresses key investor concerns that I've been getting. Just given the net debt coming down, does that also mean gross adjusted debt will start coming down in 2017? Then as you think about the longer-term leverage target, say, three years out, what could that look like?
Derek Kerr - CFO
Well, I think that as we look at CapEx, we talked about it being at $4.4 billion this year, it goes down to $4 billion next year and then down to $2.1 billion to $2.5 billion, $2.5 billion. So the significant reduction in the CapEx will help all those leverage ratios out. So I think those will be benefited as well going out throughout the year. So I think all of our metrics from a leverage basis get better as we go through 2017, 2018, 2019, 2020 as the aircraft CapEx gets reduced over that time period.
Dan McKenzie - Analyst
Okay. Thanks, guys.
Doug Parker - Chairman & CEO
Thank you, Dan.
Operator
Duane Pfennigwerth, Evercore.
Duane Pfennigwerth - Analyst
Scott, I wonder if you can put a finer point on RASM expectations for Europe or the UK specifically? What are you expecting in terms of year-to-year change in RASM for the UK in the September quarter versus, say, in the second quarter?
Scott Kirby - President
Look, Europe is probably the only region of the world that I think is going to get sequentially worse from the second quarter to the third quarter. Pacific will be about the same on RASM. Domestic and Latin, as I said in my opening comments, are going to get better. We do expect Europe to get worse, although it's really core Europe more than it is the UK. Europe has several, almost I guess, three strikes against it looking forward.
It's one, there's more economic uncertainty. It's not just around Brexit, there's more economic uncertainty. It's a challenging economic environment in Europe, so the macro is not good. You've got accelerating capacity growth across the Atlantic, so it's a second strike for Europe. Third is currency. So the one impact of Brexit that actually is an identifiable negative is currency weakness. So those three things -- I mean, that's the one region of the world that we think is actually going to sequentially get worse in the third quarter. But it's really not a UK issue, it's actually more core Europe than it is UK from our perspective.
Duane Pfennigwerth - Analyst
I appreciate that you wouldn't care to put a finer point on it of how much you expect RASM to be down next quarter?
Scott Kirby - President
Well, I said double-digits in my opening comments. I'm not going to put a finer point on it than that.
Duane Pfennigwerth - Analyst
Okay. Then the comments on Latin are really interesting. Maybe you could help us put some context around Brazil? Could you remind us how much your capacity is down 3Q versus 2Q? What the shape of RASM you are expecting? For example, we've heard some others that maybe long haul international to Brazil went from like down 35% to down 25%, which is sequential improvement but it's still pretty weak. For you, your capacity cuts are much greater than that, so maybe revenues -- or maybe RASM's closer to flattish? Any help you can give us there would be appreciated.
Scott Kirby - President
Yes, we've cut capacity -- I don't know 3Q versus 2Q. We started cutting capacity in 2015, when we could see these results clearly deteriorating. We were surprised actually in 2015 -- I think, every carrier that flies from Brazil to the United States not only increased capacity but increased capacity by double-digits, except for American Airlines. So I think we are probably down 35% to 40% from where we were back in 2014 today. But in the second quarter for the first time, we actually saw industry capacity come down. It's going to come down even more in the third and fourth quarter.
As a result, Brazil, which was running down kind of 35% in the second quarter, RASM was down 13%. In the third quarter, we expect it to be positive. Now, we're getting a boost in the third quarter from the Olympics, so I wouldn't necessarily expect the fourth quarter to remain positive; although, our guess is right now that the fourth quarter will remain positive. There's just been an awful lot of capacity come out and you just got to such a low level. I mean, RASM will still be down, I don't know the number, 40%, 50% from where it was at the peak, even if it turns positive in the third and fourth quarter. But it certainly feels like it's not getting worse anymore. It's not really on -- it's coming off a low base, it's not really on a rapid recovery, but it does feel like it's not getting worse anymore.
Duane Pfennigwerth - Analyst
Thank you for that. So maybe RASM positive on capacity down double-digits for you?
Scott Kirby - President
I don't know what our capacity is right now. As I look at it over a longer time horizon -- over a longer time horizon, we're down probably close to 40%. But I don't know what it is, 3Q versus 2Q.
Duane Pfennigwerth - Analyst
Okay. Thank you for the detailed answers. Thank you. I appreciate it.
Doug Parker - Chairman & CEO
Thanks.
Operator
Julie Yates, Credit Suisse.
Julie Yates - Analyst
Derek, one for you on, the CapEx decline in 2017 and 2018 starts to free up some free cash flow, what are your priorities? Are there additional opportunities to prepay debt? Is this meant to help with the pension funding requirement coming in 2019?
Derek Kerr - CFO
Yes, two things. One, it will be -- we're going to use cash to complete the integration and continue to do all the projects that we've got on the list, as Scott talked about, basic economy, premium economy, cash will definitely go to that first. As we look at pension requirements, our first pension requirement payment is in 2019. We have a small requirement in 2018, but the biggest requirement is in 2019.
We do have the possibility to pre -- do that early on the pensions in 2018 if we want to get 80% funded in the 2018 timeframe. So that's a possibility to do but it's not required to do. Our requirement is in 2019 to do that. So I think the biggest uses are going to be making sure that we have enough CapEx. We have $1.2 billion this year in CapEx. We expect that to maintain, if not grow a little bit in 2017 and 2018 just due to all the projects and the backup demand that's there for everybody. So I think that's where it will more likely go than any early pension payments. The requirement in the pensions in 2019.
Julie Yates - Analyst
Okay. That's very helpful. Then, Scott, one for you, from the last year, we've seen the weakness in -- from competitive actions is rarely contained. How much do you worry about that when you observe what's going on in other markets, with the other airlines that you mentioned?
Scott Kirby - President
Look, it's a really competitive environment, and still a yield and RASM negative environment across the board. So we are impacted by that. I think we get better at completing in that environment. The more experience we get with it, we learn things that work, learn things that we can do better. But the biggest thing we can do really is the structural response. I know on these calls, we typically focus on what's going to happen in the next quarter or the next three weeks and have a pretty short-term focus on it.
But the biggest thing we can do is get the product segmentation right, not just for our investors but for our customers, where we can give customers what they are looking for, whether they want a really cheap low bump, bare bones, low-price or whether they want a product that has more amenities and is a higher quality product. It is taking its time to get that done but that's really the right structural response.
So look, we feel pretty good about where we are. We think that we are on a continuing trajectory, (technical difficulty) derivative positive trajectory to get back to positive PRASM. That happened this quarter, we expect it to happen, or in the second quarter, we expect it in the third quarter. We think we're going to continue on that trend. So we wish it was -- PRASM was positive today. We wish we had a benign competitive environment, but we have what we have. We think we're making good progress.
Derek Kerr - CFO
Julie, this is Derek. Just one follow-up to that question. From a debt -- non-aircraft debt payments, next year it's only $100 million for us. The year after that it's only $600 million. We do have an unsecured bond in 2018. We will -- if there's any opportunities to prepay any high-cost debt, which we've done a significant amount of and will do at any point we can, we will use that cash to prepay any of that. We don't have any planned in 2017 and 2018, but if we find things that we can prepay early, we will use any cash to do that in 2017 and 2018.
Julie Yates - Analyst
Okay. Great. Then Scott --
Doug Parker - Chairman & CEO
It's Doug. Only because we have a lot of our employees who listen in on these calls and you mentioned the pensions, I just want to make sure that I explain to everybody what's going on there. The issue is, you may or may not know, Julie, we are fully funded per some airline pension funding rules, and more funded in that regard than our competitors on the pensions. We at American are required because of the way these -- because of the fact frankly that American didn't file bankruptcy and Delta and Northwest did, or Delta and United did, we are required to move off that funding plan into other funding plans sooner than they are. As Derek said, I think that's 2018 or 2019 for us.
So that will require us to move up to a higher level at that time. We could do it today, if we wanted to, it's not a funding issue, it will never be a funding issue. It's just what's the right time to pay debt amortizations. This -- so we will pay that when -- we will fund that as we are required. We are fully funded now, higher than our competitors and will be funded at a rate higher than them when we do this. But we don't think -- none of us think it's in the best interest of the Company to go fund it in advance, or to be over-funded on something that doesn't have a return. So we will keep you in -- until that time -- we're are well awarethat it is not an issue whatsoever and it's fully manageable and it can be funded now.
Julie Yates - Analyst
Okay. Thanks, Doug. Then just one last one for you, Scott, on corporate, it's been a pretty big topic on some of the other calls. You guys haven't mentioned it. Can you give us an update on what trends you're seeing from a corporate perspective?
Scott Kirby - President
Well, they continue as they have been. We had corporate demand up. We continue to win share. I think corporate revenue was down 1% for us in the quarter. So obviously, it's outperforming the rest of the system but I think it's much like it has been. Corporate demand is strong, but we have got a lot of low fares in the market. So they're getting a deal right now.
Julie Yates - Analyst
Got it. Thanks so much.
Operator
Darryl Genovesi, UBS.
Darryl Genovesi - Analyst
I'd like to follow-up on Jamie's question, Scott, with regard to some of the secular trends that we're perhaps witnessing. You had called out the growth of low-cost carriers, but one of the things that I've been thinking a little bit harder about more recently is that, we've also seen a lot of frequency consolidation here over the last few years. Just wondering if maybe you thought perhaps the quality of the schedule having deteriorated a bit could have also driven some of the decoupling that we've seen in that historical relation between airline revenue and GDP? Just any thoughts around that?
Scott Kirby - President
I don't think so. One of the things that is a close analog to that probably is every airline has increased density on aircraft. So -- we've done it. But all our competitors have as well. At least with regard to RASM, that, we typically think of those extra seats as coming in at 50% of system RASM. So when we put another 12 seats on the 737-800s, that 12 seats is 6% of capacity, it means that all those flights come in, RASM is 3% lower than it otherwise would've been.
They're profit positive. But I think that is probably a change that has driven lower RASM at least across the industry. It's had a corresponding benefit on the cost side, of course, but would drive lower RASM. But we still have high quality schedules for business travelers. I don't think business travelers are flying less because maybe you have 14 flights a day in a market instead of 15 flights a day. I don't think you are really losing any business. That people are deciding to stay home because of that.
Darryl Genovesi - Analyst
Okay. Then you had also mentioned that you thought the Olympics were going to be a positive, down in Brazil. I remember two years ago, when we had the World Cup down there, you saw some very close in revenue deterioration, bookings deterioration, which I think was really the hotel availability. Do you think that's likely to be an issue again this time?
Scott Kirby - President
Well, usually, the Olympics, World Cups, conventions are a negative for revenues, because business travelers just stay away, because they can't get hotels, they're worried about the crowds. So, business travel dries up. We've seen that in all the other Olympics. We've seen that at the World Cup. In this case, Brazil is so bad that there is no business traffic, (laughter) or close to no business traffic. So this year, I think that will be a positive, just because Brazil had fallen so much before. Two years ago, I would've thought the Olympics would be a negative, and they would've been two years ago, but today because things have bottomed -- have fallen so much, they're going to actually be a positive.
Darryl Genovesi - Analyst
Great. Then if I could just get one last one, just a clarification for Derek. Derek, I think you said CapEx was coming down by $500 million in 2017 and $700 million in 2018, is that just aircraft CapEx? Or is that total CapEx? Because I think you said there was also an offset on the non-aircraft line?
Derek Kerr - CFO
That's just aircraft CapEx. Right now, we're showing $1.2 billion in 2016 for non-aircraft CapEx. We think it will go up to $1.5 billion in 2017 and then -- probably $1.5 billion, I just put $1.5 billion for both 2017 and 2018, as we finish off. Then it will drop off in 2019 and 2020. So we're trying to get done with all the basic economy, premium economy, all the interior work that we are doing and all the completion of all the merger activity, we'll have higher non-aircraft CapEx in 2017 and 2018. But then get back to that $1.2 billion, $1 billion run rate in 2019 and 2020.
Darryl Genovesi - Analyst
Would you just provide the total gross CapEx, as you see it today for those years?
Derek Kerr - CFO
Yes. I have $5.6 billion in 2016; $5.5 billion, 2017; $3.6 billion in 2018; $3.6 billion in 2019; and $3.2 billion in 2020.
Darryl Genovesi - Analyst
Thank you.
Operator
Savi Syth, Raymond James.
Savi Syth - Analyst
Actually, if I could first ask a follow-up to Julie's question on the corporate demand. Could you just talk about what the volume trend has been over the last several quarters And if that's similar or if you've seen maybe a deceleration in that trend?
Scott Kirby - President
I think they been similar, not a real change in the corporate demand environment.
Savi Syth - Analyst
All right, great. Then just to switch on to a non-fuel cost side, on a pre-approved profit-sharing basis, if I look at this full-year guide, it seems that there's a lot of pressure here in 2016. I'm just wondering what's driving that And when we might see some of the kind of the benefits from merger -- or integration-related benefits of -- benefiting the cost side? Maybe just some early thoughts on what we might see from headwinds and tailwinds in 2017?
Derek Kerr - CFO
Yes, I think what's driving it this year is primarily for a full-year effect, it's salaries and benefits and adding back into profit-sharing. So that -- of a full year, we've guided right around 5%, that's almost 4.5% of it. The third-quarter change from the second quarter is really driven by maintenance timing. I think we had a 1.7% good guide in maintenance in the first quarter, 1% in the second quarter and it's shifting almost exactly opposite in the third and fourth quarter with about a 1.6% headwind in the third and a 1.4% headwind in the fourth. So it's really a shift in the maintenance timing. Year over year our maintenance is flat.
It's up 0.1%, so it's virtually flat. But it's the timing of things moving from this year in the third and fourth quarter, more than last year being in the first and second quarter. So that's really the year-over-year timing. As we look forward, we don't -- we still have one contract to do that is not in our guidance that we're still working hard to get our mechanics and our ramp contract done. We want to get that done as soon as possible. That would be the biggest headwind going into next year from a CASM perspective. Other than that, we believe we should be in the 0% to 2% range, going forward. We don't see any major CASM headwinds looking out into 2017 or 2018.
Savi Syth - Analyst
If I may, a follow-up on that, from a gauge standpoint, what's the trend? Is there going to be -- does the 0 to 2% rely on the gauge improvement?
Derek Kerr - CFO
The gauge improvements from an aircraft perspective?
Savi Syth - Analyst
Exactly.
Derek Kerr - CFO
There's still some gauge increase. Some of that is going as we modify the aircraft so maybe 0.5% of that would be gauge driven.
Savi Syth - Analyst
Okay. Then just from -- on the regional side, there's not a lot more left then from a kind of [up-gauging] there?
Derek Kerr - CFO
Correct, there's only -- from a delivery perspective, we only have about 12 aircraft of gauge coming in 2017. So there will be some effect from the 2016. We had 42 aircraft coming in 2016, so there will be a little bit of effect of that next year. This year, we had a gauge difference of about -- from an ASM perspective of about 3.3%, next year it's probably about half of that, 1.5 to 2 points on the regional perspective.
Savi Syth - Analyst
All right, great. Thank you.
Operator
Joseph DeNardi, Stifel.
Joseph DeNardi - Analyst
Derek and Scott, I just want to talk about kind of the capacity reductions you announced I guess it was last week. One of your peers has said that it's essentially too expensive for them to pull capacity starting in fourth quarter. So I just want to understand, when you guys ran the numbers on pulling ASMs, was it dilutive to earnings and you were just willing to accept that to try and regain some pricing power? Or was it not?
Scott Kirby - President
No. We think it's the right thing to do. We think it is earnings positive in that world. Look, in a world where RASM is declining and/or fuel prices are going up, it just becomes mathematically true that everything across your system gets a little worse. So the bottom 1% has a higher probability that it's no longer profitable. It is true that you can't get 100% of the cost out in the short-term. That does drive CASM pressure for us. But we think that the capacity changes we made are both revenue and earnings positive beginning in the fourth quarter, even though we can't get 100% of the cost out.
Joseph DeNardi - Analyst
Okay. Then, Derek, you've talked in some detail about the CapEx and debt profile over the next couple of years. Can you just talk about -- just on the interest expense line, when and at what level that number peaks and then starts to come down over the next couple of years?
Derek Kerr - CFO
The interest expense line?
Joseph DeNardi - Analyst
Yes.
Derek Kerr - CFO
Let me see. Yes. Let me try to grab that for the five-year plan. Go ahead and ask another and I'll pull that question out -- I'll pull the answer out.
Doug Parker - Chairman & CEO
What else you got, Joe?
Joseph DeNardi - Analyst
I was going to try and stick to two. So, I will let somebody else get on.
Scott Kirby - President
All right. I've got you now.
Doug Parker - Chairman & CEO
We spoke long enough, he's now found his five-year plan.
Derek Kerr - CFO
It should stay pretty stable where we have it right now. So our interest expense line in 2016 is forecast to be right about at $1 billion. We've forecasted for the next -- depending on what we do, I think right now, we expect to finance a fair amount of those aircraft. So if we do that, we will reduce debt pretty much commiserate with what we bring on, so our interest expense should stay pretty flat over the next five years under that methodology.
Joseph DeNardi - Analyst
Great.
Derek Kerr - CFO
We have reduced the cost of the debt from 5% down to almost a 4% debt, which is, as we have refinanced and financed these aircraft at really attractive rates, we've reduced our overall cost to debt down to around 4%.
Joseph DeNardi - Analyst
Great. Thank you very much.
Doug Parker - Chairman & CEO
Thanks, Joseph.
Operator
Jack Atkins, Stephens.
Jack Atkins - Analyst
Just to go back to the revenue initiatives and cabin segmentation for a moment, I know the plan is to have basic economy by the end of the year. But can you give us a sense for when you would expect those initiatives to really start having some noticeable improvement on the P&L in terms of your RASM or PRASM?
Scott Kirby - President
So basic economy, I think will start to have an impact probably in March of next year, is what I would say. Then premium economy, while we'll roll it out at some point in 2017, because it will also be tied in -- we're going to treat premium economy like a separate cabin, essentially. So different than what other airlines might call premium economy today, more expansive, more what it looks like -- or more how it's treated internationally or how we're going to treat it internationally as a separate cabin. Because of that, it will have impact on the frequent flyer program. So that will probably be for 2018, really, because we'll need to tell our frequent flyers in advance, how it impacts the frequent flyer program.
Jack Atkins - Analyst
Okay. Then just a quick follow-up on that then. Is there a way to put some brackets around the value you would expect that to generate to your earnings steam over the course of the next, call it, three to five years?
Scott Kirby - President
I'm going to be disappointed if it's not $1 billion a year.
Jack Atkins - Analyst
Okay. Thank you very much.
Doug Parker - Chairman & CEO
Thank you.
Operator
(Operator Instructions)
Susan Carey, Wall Street Journal.
Susan Carey - Media
Two for, probably for Scott. I think, Scott, at the outset I understood you to say that your 3Q guidance is going to be for RASM, down 3.5% to 5.5%. I believe, I understood you to say you were abandoning PRASM and you are going to be adopting the RASM model going forward? Am I getting that right?
Scott Kirby - President
Well, I didn't say abandon, but yes that's right. It's the better metric to look at, more an increasing percentage of our revenues come in the other revenue line. The credit card deal is obviously a big component of that. But also, as we move into a world of basic economy and premium economy, there will be a higher amount of revenues, that come in other revenues and that's really the most important metric. So we're going to be guiding to RASM on a go-forward basis.
Susan Carey - Media
Okay. The other question I think an analyst asked, you said Brexit is not really going to have a big impact on you for the foreseeable future, except on the ForEx front. But I think the guy asked, what are going to do about coordinating with BA, across the pond, in case there has to be some kind of capacity adjustment? Is it premature to talk about that right now? Or is that something that's in your planning horizon?
Scott Kirby - President
Look, we have a great relationship with IAG. We talk to them all the time about what the right amount of capacity is. We'll just continue in the normal course in that process. We will react as we see things happen in the market. But there is nothing specific to talk about today.
Susan Carey - Media
Thank you.
Doug Parker - Chairman & CEO
Thanks, Susan.
Operator
Jeffrey Dastin, Reuters.
Jeffrey Dastin - Media
Perhaps I missed this, but could you specify any markets or if there's a particular region that will be impacted by the Airbus deferrals?
Scott Kirby - President
Well, we didn't specify. There really isn't because we still have to work through the plans on where we're going to fly with the existing fleet. Really, what this does is give us flexibility. All these aircraft were scheduled to be replacement aircraft for existing aircraft. So we can extend some of the leases longer to keep the existing flying and/or growth plans in place or given a weak international environment, we can keep some of those retirements in place as they were and pull back on what our growth plans otherwise would've been. So it really just gives us flexibility.
Jeffrey Dastin - Media
Great, thank you. One follow-up question -- or an unrelated question. How are bookings shaping up for cities in Cuba so far?
Scott Kirby - President
I don't know.
Jeffrey Dastin - Media
Great. Thank you.
Doug Parker - Chairman & CEO
We'll have someone get back to you, Jeffrey.
Jeffrey Dastin - Media
Great. Thank you.
Doug Parker - Chairman & CEO
Sure.
Operator
Edward Russell, Flightglobal.
Edward Russell - Media
I just wanted to understand, why you choosing to do the A350 deferrals now? You have the US Airways and American order books back in 2013, so why the decision to do this now versus a year ago or so?
Scott Kirby - President
Well, in order to defer, you can just unilaterally decide to defer aircraft and call Airbus or Boeing up and say -- hey, we're going to defer aircraft and they say --okay. You have to work it out with them. So we've just needed to find a point in time where it was in Airbus' best interest to defer the orders and ours. So the timing is really about when it works for both sets of partners.
Edward Russell - Media
Okay. I mean, one of the things that comes up, I think of -- Airbus has already started cutting metal for first half 2017 deliveries, at this point. So, do you have any color on -- were you penalized for doing a deferral now? Or (multiple speakers) like you said, it was just in the best interests.
Scott Kirby - President
No, this was something Airbus also wanted. So we were able to work out a win-win for Airbus and American.
Doug Parker - Chairman & CEO
Edward, it's Doug. Look -- anyway -- first off, as you know, we came in with two rounds of two large fleet orders. We've been trying to get them better coordinated, this helps. On the Airbus front, you should talk to them. But it's been a very popular product, as you know, they've sold a lot of them. They are trying to meet all their customer's needs. This deferral I think was consistent with that.
Scott Kirby - President
Then we did defer four 787s last year. So, we've -- (multiple speakers)
Doug Parker - Chairman & CEO
So, it worked out well for us and presumably worked out well for Airbus. But we did not -- we certainly didn't have to pay any penalties for it.
Edward Russell - Media
Got it. Thank you very much.
Operator
Mary Schlangenstein, Bloomberg News.
Mary Schlangenstein - Media
There have been some kind of dire forecasts out of Europe -- European airlines on the impact on travel demand from the terror incidents. Are you guys seeing anything? Or do you expect to see anything from that?
Scott Kirby - President
We don't have any way of knowing why bookings are lower or why revenue is weaker. Europe is the one area that is going to sequentially get worse in the third quarter than the second quarter. But whether it's that or whether it's the economic weakness or whether it's Brexit or whether it's just a currency impact or whether it's all the capacity growth, there's a lot of things that could be driving it. It's probably all of the above.
Mary Schlangenstein - Media
Thank you.
Operator
Ted Reed, The Street.
Ted Reed - Media
I have got two quick things. First of all, at first Delta said, they were going to cut to UK by 6%, then United said incremental cuts, and now you are saying no cuts to UK. So what's the difference? Is it just that traffic's doing better than everybody thought?
Scott Kirby - President
I don't think we said anything about what we're going to do in the UK.
Ted Reed - Media
Oh, what are you going to do in the UK? (laughter)
Scott Kirby - President
We haven't said anything.
Ted Reed - Media
All right. Another thing I wondered about is, I was surprised -- people were surprised when you put the 787-9 on to go to Madrid instead of to Asia. What was the thinking behind that?
Scott Kirby - President
We've got a partner in Madrid with a hub there. We just thought it was the right route to come. There's going to be 7-8's, 7-9's that will be flying to Asia, we've taken a lot of deliveries. They will be coming, but starting it off, it worked for the aircraft rotation and worked flying into one of our partner's hubs.
Ted Reed - Media
All right, thank you.
Doug Parker - Chairman & CEO
Thanks, Ted.
Operator
That does conclude our question-and-answer session. I would like to turn the conference back over to our speakers for any additional or closing remarks.
Doug Parker - Chairman & CEO
We have no additional or closing remarks, other than, thank you. Please, let us know if you have any further questions. We appreciate your time.
Operator
That concludes today's presentation. We thank you all for your participation. You may now disconnect.