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US Airways Group, Inc. (LCC)

March 04, 2013 12:05 pm ET

Executives

William Douglas Parker - Executive Chairman, Chief Executive Officer, Chairman of Labor Committee, Chairman of US Airways and Chairman of AWA

Derek J. Kerr - Chief Financial Officer, Principal Accounting Officer, Executive Vice President and Chief Financial officer of America West Airlines Inc

Analysts

Jamie N. Baker - JP Morgan Chase & Co, Research Division

Mark Streeter - JP Morgan Chase & Co, Research Division

Jon Ellis

Barry George Haimes - Sage Asset Management, LLC

John Debs

Steven Alevy

Gerry Madigan

James Barr - Loomis, Sayles & Company L.P.

Jamie N. Baker - JP Morgan Chase & Co, Research Division

[Audio Gap]

Or request rather. There is a filing requirement for today's presentation associated with the merger so if you could, when you ask questions, just give your name and affiliation the way that you would on a public conference call, that would significantly help.

There's only one CEO that I deal with in my day-to-day capacity who has been seated in that position consistently, since the morning of 9/11, and it's Doug Parker. In 9/11's aftermath and through the Chapter 11 cycle that ensued, all of the remaining CEOs either chose to punch out or were punched out along the way, with the exception of Doug Parker. Now, Doug, I know that I'm a pain in the a** --

William Douglas Parker

No, you're not.

Jamie N. Baker - JP Morgan Chase & Co, Research Division

And I know that people don't like me.

William Douglas Parker

That's not true.

Jamie N. Baker - JP Morgan Chase & Co, Research Division

And I get that. But I really do feel, you've dug in in 9/11's aftermath. You kickstarted the industry consolidation cycle. You created shareholder value along the way, and now you have penned what I consider and what I think most people consider to be the final act of consolidation. So as an analyst who truly does love the sector that he follows, I just wanted to thank you personally for that. And I would suggest that some of your competing management teams owe you that same debt of gratitude. You probably won't get it from them...

William Douglas Parker

I've not heard from them.

Jamie N. Baker - JP Morgan Chase & Co, Research Division

But you'll get it from me. It is truly an honor to be able to introduce Doug Parker, CEO and Chairman of the US Airways Group and CEO-elect of the new American Airlines. Doug, thanks so much.

William Douglas Parker

Thank you, Jamie. That was very kind, and I appreciate that. And I've never considered you a pain in the a**. You do your job and you do it well, and that's what you're supposed to do. Anyway, thank you, all, for being here. I will -- I want to take some time and walk you through the slides we have prepared. Yes?

Unknown Executive

[indiscernible]

William Douglas Parker

These are my slides, I guess. You guys talk amongst yourselves. Exactly. All right. Thanks. Let's see if this works. No.

Unknown Executive

You're using my -- use the arrows. Here we go.

William Douglas Parker

All right. Here we go. Okay. I want to take the time and walk you through some slides we put together to talk about the merger, and -- but more importantly, get to your questions. So without further ado, now I have my slides. There's those.

Anyway, the New American Airlines, as we are now talking about the merger because the new company will be called American Airlines, of course, we believe, is going to create the premier global airline. This is a great opportunity that works for all stakeholders. It's great for U.S. Financial stakeholders as I'll discuss, over $1 billion in synergies that accrue to the stakeholders of both airlines. It's great for consumers. It offers consumers more choices, better service, and that's because we expect -- because the routes we work are so complementary we expect to maintain existing COGS and service to all destinations. And then lastly, it's great for the employees of both companies because when you build a stronger airline and it's good for employees, and we're using this opportunity to create some value for our employees as well. So this is one of those transactions that nicely works for everyone involved and it's the primary reason we want to get it done, because it's just so compelling in the end that everyone came to the conclusion that this was the right thing to do and the time to do it is now.

So just some details, most of which you now all know because we announced this a couple of weeks ago. It will be an all-stock transaction. Combined airlines have nearly $40 billion of revenues; the ownership: 72% to AMR creditors; 28% to the US Airways shareholders. Company's name will be American Airlines, headquartered in Dallas-Fort Worth. But we'll maintain a significant corporate and operational presence in Phoenix, most importantly at the hub in Phoenix, will remain, as will the other hubs.

And as to management Tom Horton will be our Chairman for a period of time, and I will be the CEO upon the -- at the time of the merger. We are working now to build -- to put together the management team that will be in place at the time we announced the merger. And what I know is, from knowing both sets of teams, we're going to have the best team in the business because we have great people on both sides. So we'll see the -- we need to get that work done. In the meantime, what we're doing is -- the teams are working very well together already on transition planning. Of course, we're 2 separate companies today. We will be until this closes, but we can work on -- so that means we can't -- actually there's some things we can't work on. We can't actually do any integration work, any integrating. But we can do integration planning and that's what we're doing. The teams have kicked of that work and they're already off to a great start and working very well together. And by the time we do -- by the time we do close this, I'm confident we will have a fantastic team of people who are excited and working very hard to hit the ground running the day we close.

This airline, of course, when you combine US Airways and American creates what is the largest airline in the world. It's just slightly larger than either United or Delta. What it really does is it creates a third competitor to those 2 very large airlines, which we believe is good for consumers and good for the industry because it creates just a third option to those 2.

You can see here what the global network looks like. You take these 2 airlines, what you see is American's very strong Latin American network and their strong flights to Europe complemented by the US Airways system, which actually nearly doubles the number of destinations to Europe, also complemented by the US Airways' route network to the Caribbean and to Mexico. There are on this chart some nearly 300 routes and not one of them overlaps. This is entirely complementary. You just put the 2 together you have no overlap whatsoever, which is good for all of our customers.

Looking at the domestic network, what you see is all the blue there is the US Airways' network, all the red is American. You can see visually here how complementary the 2 networks are. American's network not very -- a very large network in the domestic United States, but not very large in east coast where US Airways is the strongest. So combined, we have a network that can fly pretty much anywhere anybody wants to get to inside the continental United States and then onto the rest of the world. The other thing worth noting on this chart is, of all the routes on here, there's 700 -- nearly 700 routes -- only 12 of them overlap. So very little overlap in the United States, almost all of that hub-to-hub stuff, where there's already other competition. So very little overlap between the 2 networks, highly complementary and that's what makes this transaction so compelling.

Another way to look at this is as follows: If you took this chart, just takes the market shares in the United States of both US Airways and AMR today on a stand-alone basis, and what you see is American #4, #4, #5 on the East Coast. US Airways, #6 in the West, #5 on the Middle the country, #3 on the East Coast. So we complement each other where each other is weakest. We called this project, by the way -- as we started it at US Airways we called it project Tetris. For those of you who do better things with your time than play video games, Tetris is a video game. It's a game where the goal is to take falling pieces of puzzles and make them fit together to create something that is whole, and that's what this does. These are 2 pieces of the puzzle that work reasonably well on their own. But when you put them together, they create something that's much better in whole. You see that here. You take these 2 networks, put them together, what once had the nothing higher than a #3 share on the East Coast for US Airways, otherwise a bunch of 4s, 5s and 6s on the map, you get first in -- #1 in the East Coast, #1 in the middle country, #3, behind only Southwest and United, on the West Coast. So stronger than Delta on the West. This is a combination that works extremely well. This is why we called it Tetris. You put the 2 pieces together you create something in the whole that is much greater than either of us could do for customers individually, and that's where the value of the transaction is created.

It works also for our Alliance Partners. I know Willie Walsh is on after me. I haven't talked to Willie recently but I am certain, having not even having talked to him, that he would tell you this is good for oneworld because it is. This is -- this, as you can see on the pie chart on the right as the share -- as the world ASM share exists today, Star is nearly 45% of the ASM share. Simply taking US Airways out of the Star and moving some of the oneworld, you see a much more balanced pie. Everyone will there be in their 30s. So it creates balance within the alliances and shifts that balance to -- from Star to oneworld which we think is great. And also in terms of where oneworld flies we think, it's not [indiscernible] share is. And we think oneworld, given the destinations where oneworld is the strongest, that we will have an alliance that is as strong or stronger than any other alliance in the world. It also has the nice effect of creating the strongest loyalty program in the world. Just simply combining the 2 airlines' existing loyalty programs would get you to a frequent-flier program with over 100 million customers. That was a stunning number to me, when I heard it, 100 million members of the advantage program when we put this together. And that of course, we believe can grow and will grow, once we combined the networks and have more people that want to fly in the combined network than flew in the 2 networks independently. So this is a huge asset, one that we will use to leverage well. We're very happy when the aircraft position. The -- this fleet combined today has, including the regional fleet, some 1,500 aircraft in it. We have in both airlines orders in place that will modernize the fleet. The orders that are coming in can be used virtually entirely for replacement and -- but also provide flexibility should we need it or should we desire it to grow. And some of the order does a very nice job of replacing -- economically replacing older airplanes that need to be retired over the upcoming -- in the next few years. But also does provide us a platform for some growth to the extent we need that growth.

And while I'm happy about everything I've talked about and I'm going to keep talking about, the thing that makes me happy with this transaction is what it does for the employees in both companies. Speaking primarily for the US Airways' employees, who I represent, they have heard from me for a number of years now about how -- what a great airline we have and what a great job they're doing and how they're making a use difference, but unfortunately how we can't pay them the same that Delta and United make because we don't have the route network that generates the same revenues that they make. Because we don't have the same revenue per ASM, we can't have the same cost per ASM. This is a speech they could give you as easily as I could. Some of them are here today and they're just as tired of hearing it as I am of saying it. What's nice about this transaction is we don't say it anymore or we won't have to say it anymore, once we get close. We now have a network that is as strong as Delta and United, so we can pay people the same as Delta and United pay. And that's what this plan calls for. That's why we got the got the support of the employees on both sides because they know that a strong airline is good for employees and they wanted to support the chance to have a stronger airline.

I'm happy that some of our pilots are down here. Deborah Volpe with USAFA, the US Airways union. And from APA: We have both Gary, President of USAPA; and Keith, President of APA here, so thanks for being here, gentlemen. That's -- that is much appreciated. We have not just a pilot support of course, but the support of a lot of others in the company. And this is again -- I'm happy for all of you guys as investors, that's our job to take care of, but I'm really happy for what we're able to do for the people that work for these 2 companies that I care a tremendous amount about. And I had been working really hard to figure out a way to get people what they have worked hard to earn and deserve. So this allows us to do that and that makes me extremely happy. It is, I think, by no means by the way, is this done. We've got a lot of work to do together, but we're up for it. And we have, I think, we had a team that is ready to do it and a group of employees that want to do it.

So we've work to put contracts in place that will help us with the integration that is a first for our business, having pilot and flight attendant contracts already lined up as we head into this process, which will make integration that much easier. And anyway, I could go on and on about this. But this is, as important as anything we've accomplished to this point, which is getting to the point where we now have the employees working together with management to make this work and management is dedicated to keeping that relationship in place and appreciate the support we've received to date.

Here are a bunch of quotes from labor leaders that you need not read nor am I going to read to you. But just trust me, they say really good things about this transaction because the way the leaders all think of things they include. Jim Little, who's the Head of the TWU with American; Keith Wilson, who is here from APA; Gary Hummel, who's here from USAPA; Laura Gladding, who is currently at her International Annual Meeting down in Fort Lauderdale from APFA; and Deborah Volpe and Roger Holmin from the AFA, who just -- who are basking in getting a contract approved this week. That's as the US Airways flight attendants actually, last Friday, approved -- or last Thursday approved by 80% their new contract. So we feel very good about where we are on that front.

Of course, you all care more about what this means in terms of value to you which we appreciate. And happy to report that we have done, I think, a very nice job as we are paid to do to make sure that you receive nice returns on your investment. This transaction will generate, we think, over $1 billion per year in terms of net synergies. That's a net of the improvements in labor cost that I talked about, and you see on this chart there's about $400 million in taking up -- in increasing compensation and wages between the 2 Airlines as we merge the 2 companies. But those are more than offset by over $900 million in network revenue synergies, $550 million in cost synergies. These numbers by the way, we believe, are conservative, but we like to put out numbers that we feel good about our ability to reach and hopefully exceed. If you look at that number as a percentage of revenues versus some other transactions, it does indeed look conservative. This chart just shows compared to Delta/Northwest what they announced, the American/US Airways, what we experienced, Continental and United, what they've announced in both revenues and expenses. This number, as a percentage of revenues, looks conservative compared to those. We certainly hope that's the case. We're happy to sign up for the $1 billion and are going to do anything we can to exceed that for you and do even more.

So what's next? We again are currently -- we've announced and signed merger agreements but we need to have it approved. There are a number of things that require approval: Bankruptcy Court, et cetera. The long pole in the tent, however, is the second bullet on here, which is regulatory approvals primarily -- the long pole in the tent we believe will be getting approval from the Department of Justice, [indiscernible] approval from the Department of Justice. We don't anticipate any issue there, particularly given all that I've shown already about how complementary the 2 networks are, but we, of course -- they need to do their work and we need to help them do that work, we welcome that work, but that work takes time. We anticipate that should be done however, just based on our experience, as well as the experience of others. We think it's fair to assume it should be done some time in the third quarter of this year. And at that point, we would close the merger. And again, after we get all of our shareholder consent, et cetera, we will close the merger in 2013. Importantly, there's no financing condition, no consensus or approvals required from any outside parties, so that's good. Or any additional outside parties other than the ones I mentioned.

The -- so in summary, this is one of those transactions again that offers substantial benefits to all stakeholders. Our shareholders, you in this room, get the benefits of $1 billion a year in synergy value which we feel highly confident about our ability to deliver. And we take that responsibility seriously as I know you know. Those of you that have worked with us understand that we take those commitments seriously. We feel very good that we can deliver that. It's good for our employees, as I discussed at length. It's good for our customers because it creates a network that can take more people to more places. It can -- it can compete with Delta and United on an equal basis, so it's good for the communities we serve because we’re not intending to close any hubs, but rather enhance service to the existing communities by combining the 2 networks.

So that concludes my slides. And at this point, I would like to take any questions. Yes?

Question-and-Answer Session

Jamie N. Baker - JP Morgan Chase & Co, Research Division

Doug, let me kick this off.

William Douglas Parker

Well, I got to tell you the Jamie's rule. But this is actually not Jamie's, it's US Airways rule, which I can't even articulate as to why we have to do it. But apparently you need to tell us who you are and where you're from. Why are we doing this, Derek?

It's for the transcript and the transcripts -- we have to file a transcript of this and the transcript will go a lot better if we know who you are when you ask your question.

Mark Streeter - JP Morgan Chase & Co, Research Division

Sure. Mark Streeter with JPMorgan.

William Douglas Parker

Thank you, Mark.

Mark Streeter - JP Morgan Chase & Co, Research Division

United management was up here before you Doug, and they showed a video of their employees apologizing for the way they treated customers and the operation of the airline last year when they went through their systems integration and they, certainly, are and were, viewed as one of the better management teams. How is this going to be different? How are you going to make it different?

William Douglas Parker

Well, it's a good example for all of us of things to be careful about as you move forward. We've been through one, the US Airways-America West merger. It's smaller scale, but same exact concepts, of course. And we learned some things through that process. I think probably the biggest thing that I would tell you that we learned in that process is the importance of -- I'm complete plagiary here, I'm stealing this from Richard Anderson who said it to me, adopt and go is -- were Richard's words that he said they used. And what that means is taking in general the larger airline systems and processes and overlaying those under the smaller airline tends to work better than trying to take in the smaller airlines and overlay on the big ones. Seems logical, of course, yet, we made that mistake and US Airways and America West for us. We had largely the America West management team and we had some systems that were better than the US Airways ones and when we put those in place. And everybody the right thing is training people right, the right amount of systems. The systems actually worked. It's just -- airlines are these very complicated beasts. And no matter how much training you do, the day you turn it on, it's really relying with customers. There were things that were attached to -- that had become part of the infrastructure of the airline over 20 years. And all of a sudden, weren't the same processes and people didn't know what to do. So while the systems processing time worked, in the -- and while the employees were turning that system, the real processing time slowed down dramatically. We're all about throughput in the business, processing people as fast as you can. So my guess is we might even saw some of the same thing and we will do our best to avoid that. We've learned that lesson and where we will come at this is -- for the most part, unless there's a compelling reason otherwise to go with the smaller system, we'll just -- we will learn from those who came before us, and go with adopt and go as our mindset and not go and try and deviate from that unless there's something really compelling. So I think that will help a lot. And not to mention again the fact that we have the labor integration largely set up will help us a lot.

Mark Streeter - JP Morgan Chase & Co, Research Division

And then just a follow-up on your revenue synergy number, your management team, and Scott has talked a lot about this in the past, has had to price the airline for the network that you have. And there was some destructive pricing or some territorial pricing or whatever you want to call it because of the limitations of the old US Airways Network. I'm sort of wondering in that revenue number, how much of that revenue synergy is turning that machine off and pricing the airline like the way Delta and United price tickets on the airline and travel versus sort of regaining market share or gaining market share? what's the dynamic between those 2 in that revenue number?

William Douglas Parker

Yes. I don't think there's anything we're going to change on the pricing structure at all. So that's upside and I don't know that there is and I'm not saying that there is. But there's nothing in our numbers that has anything to do with pricing, it's all about put the networks together. But it's more than just network connecting, of course. There's -- when you connect the networks, there are other things you can do such as -- there are really 3 components of that: there's this connecting piece; there is the ability to put the right aircraft on the right routes, which we can do even better now that we have the 2 routes and 2 fleets to put together; and then lastly, because you put those together, and you don't just get the connections, you actually do a much better job with corporate clients by being able to sell to them the world. And that's -- there's some share shift back to American/US Airways that we've lost to Delta/Northwest. But those are the components to the revenues -- the revenue synergies. So there's nothing in there about changing pricing structures.

Jamie N. Baker - JP Morgan Chase & Co, Research Division

Doug, it's Jamie Baker again at JPMorgan. It was on January 31, if I recall correctly, that you applied for regulatory approval with Justice. I guess slightly more than 30 days have now elapsed. Was a -- did a request come back for additional information? What sort of color can you give us in terms of the timing there?

William Douglas Parker

Yes, we haven't heard back, unless it's happened today while I've been here, which it may have. Yes, exactly it might. So now, anyway, but the process is, indeed, the Department of Justice has some period of time which may actually expire today. I'm certain that -- and so today, we'll get a request. We expect -- anyway, they either will give us a request or won't give us a request for more information. I wouldn't read anything into it either way, to tell you the truth. If they don't ask for more information that just means they have enough already, that we provided enough for them to do their work. But I don't think that means it will go any faster. This just means they determined they have enough. If they ask us for more, that's exactly what happened and we actually did get a second request, in US Airways/America West, but every other merger has got a second request to my knowledge. So -- and they're all approved. So again I wouldn't read anything into it either way. I would -- between us -- between all of us, I would expect from a transaction this size, they'd ask for more information. But if they don't, I'm not going to read anything more into that than the fact that they think they have enough already. Jamie just asked me if we disclose either way, I don't know the answer to that. But we're happy and we're not trying to keep a secret. But that's a legal question, though. We're not -- we're transparent about this stuff.

Jon Ellis

Jon Ellis, from Axiom International Investors. Quick question for you in terms of the revenue synergy, you talked one subcomponent of that being targeting the corporate customer. Maybe if you could speak a little bit to how you would sort of approach that in terms of how far you want to get into the integration process before you target or revisit the corporate customer in the interest of ensuring an appropriate service level to keep those customers happy?

William Douglas Parker

Yes, good question. I think we'd be going really quickly to corporate customers. We need to assure them that they're going to get the level of service that they desire and expect, but I think we can make those assurances [indiscernible] make those assurances. But the reality is we'll be able to put these networks together right away and that corporate customers will be able to benefit from that right away. So we're not going to be shy about showing up and telling people, "Look, this is a new airline now that can do things that neither of us can do before, gives you things others can't do and we can give you a better entire proposition than anyone else. And we should do that in that way." So I think we'll be out there really early.

Unknown Analyst

And just a follow-up question is in terms of the 3 subcomponents you mentioned for revenue synergy, would you say they're equally weighted or would you say it's overweighted to the network consolidation factor?

William Douglas Parker

I think they were fairly equally weighted. Weren't they, Derek?

Derek J. Kerr

Yes. That's probably a little bit more...

William Douglas Parker

Derek said a little stronger on the network, but it's...

Barry George Haimes - Sage Asset Management, LLC

Barry Haimes, Sage Asset Management. Assuming the integration goes smoothly and you get the cost synergies you projected, where will that put the cost cap, you guys versus the other 2 large competitors versus where it is now? Some feel for that.

William Douglas Parker

Yes. Rounded numbers, I think, our costs, certainly, over time, will be pretty similar to theirs. Our revenues will be pretty similar as well. Again, I would hope we can do better on both fronts and come up with better margins than either of them. But just for -- again, for this level of detail, this is not an airline that's going to be built on a cost advantage versus United, Delta. That's not where we create the value. The value is in running a better airline and in doing better on the revenue front than they can. But the costs, I would assume, are largely similar. I know the labor costs are really very similar, and everything else is pretty hard to have an advantage on. Anyone else? All right, Mark? Mark Streeter?

Mark Streeter - JP Morgan Chase & Co, Research Division

Mark Streeter, JP Morgan. We'll keep this going. We're not going to let you off that podium, even if you want to. One of the things, just looking back over the dialogue of the last year or so from the American side, when they were in fight mode rather than embrace mode, was that you didn't bring anything to the table in Asia and you showed the chart on where you stand right now from a Pacific perspective. So can you talk about that in terms of what's the game plan going forward for Asia? How important is it for you to be able to win those corporate contracts and get to the point where you can generate the margins of those competitors with the same costs?

William Douglas Parker

Yes. Well, it is very important. There's great expansion opportunities there with the -- again, when you look at that domestic route network and how much its enhanced by putting the 2 companies together, you, all of a sudden, have a lot of opportunities to fly more flights to Asia, so you will see that from us over time, out of any number of hubs. Having said that, to suggest that we're going to grow the Asian route network, the standalone Asian route network, to be something like what United and Delta now have, is not something we're suggesting nor should we suggest. They -- those networks, of course, for you aviation buffs, those are like 1952 post-World War II routes that were awarded to the old Northwest Orient and Pan Am, if I remember. Anyway, and that's how that became created, and you can't go back and reverse history from 1952. So that gives them an advantage there, but America has a similar advantage with Latin America, which is a route network that is much stronger than either of them can do there. So the way we -- so we like that advantage there, and they have to figure out ways to offset that disadvantage. We have -- again, I don't want to minimize the amount of growth we can add to Asia. I'm just pointing out that I'm not trying to convince you that we'll ever have -- that we have the assets that will be as strong as they will have to Asia. So you need to offset that, but just the real issue there is doing what you said. We just make sure we can sell to corporations the ability to get where they want to go, and oneworld does that, very fantastic partners across the Pacific in JAL, in Qantas, in Cathay, that provides a level of service that others or we can't -- are going to have trouble competing with. So we don't view that as an issue at all for their ability to attract corporate customers, which it will be -- in some cases, some of that travel will be on other airlines and all, but that's fine for attracting corporate clients. And again, we offset this disadvantage with a lot of advantages elsewhere.

Mark Streeter - JP Morgan Chase & Co, Research Division

Great. And then, just one more from me. You had mentioned you are creating shareholder value or stakeholder value, and sort of the million- or maybe the billion-dollar question here is how to get this sector re-rated, how to get that multiple up, whether it's EPS or EV to EBITDA or whatever it is? What do you think, from your perspective, are the steps that need to happen? What do you think will convince investors that they should value this sector differently?

William Douglas Parker

I think we've got to prove it. You guys have had enough people telling you, "This is the time to get in," over the last 20 years. So some people may believe it's time and good for them. I happen to think they're right. But to really get expansion of multiples, we've got to prove that this has changed and get the new investors in that really appreciate that. And again, you guys tell me. But my view is we've got to go prove that it's changed. I think we're a long way there. I would note US Airways may have had, last year, the best earnings in the company's history, and we did that in a year where it certainly isn't peak earnings in the rest of the industry. So -- and airlines don't generally lead out. We usually lag out, so I don't think we are -- we're nowhere near peak because the economy is not at peak. But we're at peak earnings levels even when the economy is not at a peak. Anyway, it sounds convoluted. But you get where I'm going at, which is we -- what is now -- when we do hit our peak, it's going to be a lot higher now than it used to be. And I also believe when -- peak values are going to be much higher than they used to be, but we've got to prove that. I fully believe it, and I'm surprised everyone hasn't figured it out. But that's okay, we'll prove it.

John Owens

John Owens, US Airline Pilots Association. Jeff Smisek was up earlier, and he spoke of the merger. And over the synergy period that both Delta and United realized, about 3 years, their fleet rationalization and capacity discipline was pretty tight. But overall, the concern was the fleet has pretty much remained flat, maybe 1%, 1.5% change over time. Could you talk to both what you think the synergy period looks like for us and you? And also, what -- any issues with the fleets there?

William Douglas Parker

Yes, again, we have a lot of flexibility, so -- which is nice to have. What I think about, and it sounds consistent with what Jeff was saying about where they are, I think the U.S. domestic industry is fairly mature now. And that doesn't mean there's no growth, but it means that the growth should grow kind of with GDP so that's what I would expect you to see in the U.S. industry and therefore, I expect to see kind of domestically from the new American Airlines. That's not a small number, by the way. It's nice modest growth. Pick your own U.S. GDP forecast, but they're positive and I would expect we would -- you'd see supply grow at the same rate as demand grows in the U.S. Internationally, there's a lot more growth than that. We're not -- the industry is not mature internationally, and there should be more than that. Certainly, when you do things like we're doing here, which is taking 2 networks that are independent and putting them together. That gives you the ability to do a lot more even domestically, but moreso internationally. So I don't have hard numbers to give you, and we'll come up with those as we work through this more. But I think what you'd see is relatively modest growth early on as we get our legs underneath this. And then, as we move forward, we'll see. We do have a flexibility, if we need to, to grow. But we also have the flexibility to stay about the same size, if that's what conditions warrant as well.

John Debs

John Debs, Bodri Capital Management, San Francisco. Two questions. First on hedging, can you say what your fuel cost experience are this quarter? Once you merge, I assume, you're going to use the U.S. air policy. Are there hedges that American has on that will affect that? And then, second question, when do you think you'll be free cash flow positive, if you hit your target savings and so on?

William Douglas Parker

Okay. Well, the second one I'll answer it and say we haven't gone far enough to tell you that. I don't think -- well, anyway, I feel compelled to answer it because I think it'll be pretty [indiscernible] but we haven't actually given projections. We should wait until we do that. Do you want to answer that question? You're looking at me like you do. The free cash flow question?

Derek J. Kerr

No, I think we have to wait [indiscernible].

William Douglas Parker

Yes, we're going to wait until we file projections, which will happen at the time the plan realization is filed. On the hedging question, Derek can give more details as to where exactly we are. But in general, the not hedging proposition is working extremely well for us over time. We think it's the right answer. Certainly, it's been the right answer for US Airways. I think it's the right answer for the industry. So therefore, it may be safe to assume that's what happens at the new America, but it's not completely safe because it's one of those details we need to work through as we integrate the teams and see indeed -- maybe, there's some reason that they do it, that we haven't figured out. So we'll work through that. I don't know for certain that's where we'll end up. But if indeed we did and there were already hedging vehicles in place, again, I don't know because we haven't looked at them. But in general, it doesn't make sense to go unwind transactions like that. It makes a lot more sense to just let them play out, unwinding is another form of speculation that -- so theory there, my guess is we'd let them play out, if we chose not to continue hedging. But again, that's some speculation on my part.

Steven Alevy

Steven Alevy, Bankers Capital. In addition to DCA, do you see any other areas, hubs, where the consolidation and concentration of routes might cause problems with the Department of Justice? And what would you speculate would be the result at DCA?

William Douglas Parker

Well, to be clear, I didn't say there was a problem at DCA, and I don't think there is. In terms of the market share of the combined entities, there's nothing close to the kinds of things that should raise alarms at the Department of Justice. I think close to what other airlines have done mergers have in certain of their hubs. So anyway, I don't -- my view is there's not going to be any issue whatsoever, but we'll see.

Gerry Madigan

Gerry Madigan, JP Morgan. My questions have been asked, but you have that beautiful American flag to your right, so I have to ask the livery question. What's your comments on the livery?

William Douglas Parker

There's a little more details we're working out. We're taking 2 airlines and putting them together. And one of the things -- one of the details we've been working out is what the combined livery looks like. American, of course, just rolled one out, and that's why we're getting this question, though I don't think we'd be getting it a lot. So I don't know the answer yet. We'll go look at it and see what makes sense for the combined company. It may be very, very well be the exact same livery, it may not. I just don't know. The only thing I'll add is what I do know is this is not one of these issues that rises to the level of whether or not we're going to be able to give you a return on capital or not. Most of our customers don't care what the outside of the airplane their flying on looks like. It doesn't affect their purchase decision. It needs to be professional and consistent with the brand, of course, and we recognize that. But this isn't a make-or-break issue for the airline. What it is really important to is the employees, who care a lot about it, and so -- and I care about that. So anyway, we'll take time to figure out what makes sense for the new combined airline. We weren't involved in that process nor should we have been of creating the new livery that American rolled out. So we'll take some time and talk to people and put that on a list of number of things we've got to figure out.

James Barr - Loomis, Sayles & Company L.P.

This is Jim Barr from Loomis, Sayles. Could you talk a little bit kind of bigger picture, longer term, once you get through integration on the priorities for free cash flow integration or free cash flow allocation?

William Douglas Parker

Well, yes, again, we'll have a lot more to give once we give projections. But let me try this. We told you -- we've said there's make your own standalone projections for the airlines. We mentioned that we think there's over $1 billion in synergies. My slide, I guess, I kind of blew through it but there's, $1.2 billion in transition costs that we expect. Those will come in more quickly, of course, than the synergies in terms of -- but they come in over a couple of years, so transition costs over a couple of years of $1.2 billion, synergies of $1 billion by 2015. I guess, you're asking me, "When does that -- when do they cross over, so when are those net free positive?" I think they're net free positive immediately. Even first year, I think, the net synergies is greater than the net transition.

Unknown Analyst

I guess, what I'm -- I'm not really asking about projections on free cash flow. I'm asking you if that number is going to be big at some point, if this is successful. And you could focus on debt reduction the way Delta has done. United had talked about earlier this morning how they had kind of a CapEx catch-up that needed to happen when -- given the lack of investment at United. How do you see where you would stand with the combined carrier?

William Douglas Parker

I look forward to having that problem. And when we do, we'll address it then. What I tell you is, conceptually, what we think, which is once we've run our business and collected revenue for running our business and paid everybody that we need to pay for doing it, there's still cash left. And we've invested in the capital we need to keep running the business or do what we need in the business, that's your money, and our job is to give it back to you. So we're not -- we need to have enough cash on hand to make sure that we don't get ourselves into issues. I'm confident, again, consider my prior comments, that this industry has changed, so I'm hopeful that we'll all come to that realization and come to the conclusion we don't need to hold as much cash relative to our size, as we're all holding today. But we're not far enough along yet, I think, to be comfortable with that as an industry but we'll get there if, indeed, what I'm thinking about the future is right. And if you're right, there's going to be thrown a whole lot of cash. We'll get much more comfortable with having less cash. So it's highly inefficient, of course, for us to hold on to it, just keep it in the banks. So we don't like doing that. We'd like to get it back to you. And then, just a matter of who you is, if it's more -- if we think it's better for our shareholders to be paying down debt than get it back to the shareholders directly, that's stuff we will do our best to make sure we're doing in a way that's best for you all. But free cash flow is yours. What else?

Jamie N. Baker - JP Morgan Chase & Co, Research Division

Jamie Baker again. When you think about fuel hedging, which you addressed, return on invested capital, targeted leverage, liquidity ratios, I mean, U.S. Airways standalone and American standalone have not necessarily marched to the same drum, and I think the simplifying assumption that most have is that many to most to all of the U.S. air policies will probably apply to the new organization. My question is during the review process when you -- after signing the nondisclosure agreement, as you really drilled down and got to understand American more intimately, for lack of a better term, did you uncover anything that they do that's just patently better than the US Airways means of -- way of doing things? Is there any "aha" moment, "Hey, that makes a lot of sense, maybe that's something that should prevail?"

William Douglas Parker

Look, we -- first off, we haven't done as much work together as you might think. We were, for a while there, not working really together that much, and since we've announced, we've been doing a lot of work together so that's really just begun. Prior to that, while we were working together, it wasn't so much on learning what each other does. It was more about, "Does this make sense or not?" So anyway, that's the first qualifier. But what I will tell you and what I already knew is that American does -- is a fantastic airline with great people, fantastic management team. They're doing a lot of stuff better than we're doing, so we're going to find all sorts of things like that. That's part of the synergies. That's not in the numbers, but we know it's going to happen. Those things, when you go -- because we saw it at US Airways/AmericaWest; you put 2 companies together, and you find, as you really get into details, there are all sorts of things where there's some better ideas or better contracts or better all sorts of things that will happen. So I know it'll happen, I just don't have any examples. to give you right at the moment.

Mark Streeter - JP Morgan Chase & Co, Research Division

Doug, one more for me. Mark Streeter. Just following up on Jim's question and some of the other questions on CapEx and free cash flow. We had Delta up here, this morning, mention that they're $2 billion give or take in terms of CapEx. United mentioned $2.5 billion, but $2.3 billion maybe being a little bit high and that'll come down over time. The question for you is, is there any reason to think you are all very similar now in terms of revenue and size that your ongoing CapEx need -- is it any different from that, number one? And specific to that, has American ordered too many aircraft?

William Douglas Parker

Okay, let me answer the second one first. Certainly, not too many aircraft. Again, they can all be used to replace existing aircraft and do so economically. The airplanes are old enough and fuel-efficient enough that the new airplanes at their higher ownership costs actually are positives to the cash flow just as replacements, so that's good news. Now as to the CapEx spending, again, without giving estimates and numbers, I didn't hear Delta, United's presentation. But so long as they said what I expect they said, which is in those numbers they don't have a lot of growth airplanes. I would agree, that's where we think the industry is and should be. The previous answer I gave John, where there's -- the industry is mature, domestically -- there's not need for a lot of growth. I don't think you're going to hear what you heard from -- I hope you don't hear it from airlines, what we used to do when we started making money, when asked the question, "Where do you use free cash flow?" The answer was, go buy more airplanes, so we can do more of what we just did and show you how good we could do it at a bigger airline. Only to find out, all of a sudden, you've lived through it, Mark, you have too many airplanes and you're not making money anymore. So that's what we're not going to do. We're certainly not going to do that at US Airways, the new American won't do that, and I don't think that's what you heard from our colleagues. So that's really good news, I think, for airline investors and for airline employees because we're going to have -- we're going to get to a world where it's a more mature business, and we make decisions like mature businesses do. We can go intensely competitive, doing everything we can to invest capital where we can get returns, making sure we're taking care of our customers, doing all those things with the cash we produced, but also having a lot left over for return on investment.

Mark Streeter - JP Morgan Chase & Co, Research Division

And then, just one more on the fleet, which is when you're size of the new American, we've heard in the past about fleet simplification, the added cost of too many fleet types and so forth. Are you so big that there really isn't a need for simplification? Can you basically keep the combined fleet sort of as it is and not look to rationalize that over time? Or is there something to gain from that?

William Douglas Parker

We've long been of the view that once that your sub-fleets are large enough, simplification doesn't add much. I mean, look, it makes all the sense in the world if you have a sub-fleet of 30, 40 airplanes to try and get out of that sub-fleet because you carry all sorts of parts, you've got to have a separate pilot group and all these things. But once you get where you have a couple of hundred airplanes, that type of value creation, which I know is kind of lore, that "Oh, that get your costs down in this industry," it doesn't really work. So you need to have -- it absolutely works if you have small subsets that's really inefficient. But if you have large subsets of fleets, combining those 2 large subsets into 1 big set doesn't save you much. And indeed, the ability to have 2 separate ones that you can use to at least have something resembling a competition, where there are only 2 suppliers, at least you have that competition so that helps a lot in getting your costs down and more -- and way overwhelms the -- what you save by having one large fleet. I know Barry is here somewhere, sorry about that.

Unknown Analyst

Robert Pollack [ph] with Anchor Ball Capital [ph] . This past year, you made the gate transfer with Delta to get stronger in DC from New York. Can you just comment if that's met or exceeded your expectations? And as you look at the combined network now with American, do you see further opportunities to enter into similar perhaps gate transfers?

William Douglas Parker

To your first point, we're really happy with that transaction. It has met -- I think somewhat exceeded our expectations as to what it would add, and my guess is Ed told you earlier their happy with it, so again it's consistent, much like this transaction, with one where you see airlines focusing on where they actually have a competitive advantage and doing what makes sense for them. And you can get -- that simple swap took some assets we have in LaGuardia that we couldn't utilize as well as Delta could and getting some slots in DC that they couldn't utilize as well as we could and creating value for everyone. So that has done that for both of us, I believe. I know it's done for us. Are there more of those? I don't know. That was a fairly unique situation, but there may be others. We'll see, but nothing that I -- nothing to announce, that's for sure.

Gerry Madigan

Gerry Madigan. One other question. Can you talk about your regional strategy? I know that you saw something that amazed you guys, just increased your -- some more planes that you're going to have with Mesa? And how does it all kind of dovetail with Eagle and the Eagle fleet?

William Douglas Parker

Yes, our strategy for the regionals is to make sure we have the best partners we can that are as efficient as they can be. I mean -- and I think that's what you guys should want, that's what our own mainline employees should want. We need to have regional feed, but we need to make sure we have regional feed that is -- provides the level of service we want, but as cost-efficiently as possible. And that's what we've always done at US Airways, that's what we'll do going forward. What that exactly means as it relates to Eagle and the others, we're not sure yet. But we certainly have enough relationships now. We're going to -- we think we're going to need even more regional lift than we have combined right now, so we may work on something there, still going forward. But where those airplanes end up is going to be about where it's most efficient place to put them. This is -- the regionals are doing a nice job of being -- are doing a really good job, having good operators that do a good job of providing service to mainline airlines. And there's a lot of competition for that service.

Jamie N. Baker - JP Morgan Chase & Co, Research Division

Okay, we're out of time.

William Douglas Parker

I'm out of time, all right. Thank you, all, very much. I really appreciate your support through all of this, and look forward to working with you going forward. Thanks.

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