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Executives

Eric Briggle - Managing Director of Investor Relations

Gerard J. Arpey – President and Chief Executive Officer

Thomas Horton – Chief Financial Officer

Analysts

Kevin Crissey - UBS

Gary Chase - Barclays Capital

Michael Linenberg – Banc of America

Jamie Baker - J.P. Morgan

William Greene - Morgan Stanley

Hunter Keay - Stifel Nicolaus & Company, Inc.

Doug Runte – Piper Jaffray

Helane Becker - Jesup & Lamont Securities Corporation

Michael Derchin - FTN Equity Capital Markets

Dan McKenzie – Next Generation

AMR Corp. (AMR) Q2 2009 Earnings Call July 15, 2009 2:00 PM ET

Operator

Good afternoon and welcome to the AMR second quarter 2009 earnings conference call. (Operator Instructions) We are very pleased to have on the call with us today AMR’s Chairman and Chief Executive Officer, Gerard Arpey, and Executive Vice President of Finance and Planning and Chief Financial Officer, Tom Horton. With our opening remarks is AMR’s Managing Director of Investor Relations, Eric Briggle.

Eric Briggle

Thank you for joining us on today’s earnings call. During the call Gerard Arpey will provide an overview of our performance and outlook and then Tom Horton will provide the details regarding our earnings for the second quarter, along with some perspective on the remainder of 2009. After that we will be happy to take your questions. In the interest of time, please limit your questions to one, with a follow-up.

Our earnings release earlier today contains highlights of our financial results for the quarter. This release continues to provide additional information regarding entity performance and cost guidance which should assist you in having accurate information about our performance and outlook. In addition, the earnings release contains reconciliations of any non-GAAP financial measurements that we may discuss. This release, along with the webcast of today’s call, is available on the Investor Relations section of aa.com.

Finally, let me not that many of our comments today regarding our outlook for revenue and costs, as well as forecasts of capacity, traffic, load factor, fuel costs, fleet plans, and other matters will constitute forward-looking statements. These matters are subject to a number of factors that could cause actual results to differ from our expectations. These factors include changes in economic, business, and financial conditions, high fuel prices, and other factors referred to in our SEC filings, including our 2008 annual report on Form 10-K and the company’s current report on Form 8-K filed on April 21, 2009.

With that, I will turn the call over to Gerard.

Gerard J. Arpey

Good afternoon everyone. As you have already seen in our press release, excluding special items, we had a net loss of $319 million for the quarter, compared to a net loss of $298 million in the second quarter of 2008. These are obviously disappointing results, and they reflect the challenges that we continue to face on a variety of fronts, from a global economic downturn that is affecting demand for air travel to volatile fuel prices to challenging capital markets.

Due to the economic downturn, this year we have been faced with a significant drop in demand that has resulted in a very difficult revenue environment. The H1N1 virus added pressure to our second quarter mainline unit revenues which were down 16% versus last year. Combined with lower capacity, this resulted in mainline passenger revenues down by over 22% versus last year, and to put the magnitude of these revenue declines in perspective, we have to go back to the third and fourth quarters of 2001 to find steeper declines.

The good news is that last year’s crisis in fuel prices has somewhat abated, and fuel prices are significantly lower than last year’s levels. Our second quarter 2008 fuel price of $3.19 per gallon was the second highest quarterly price we have ever paid for fuel, while this year our second quarter fuel price was $1.90. Combined with lower capacity, this translated into a decline in fuel expense of nearly $1 billion. That said, we are not assuming that fuel price concerns are behind us as prices have crept up from their first quarter lows and they obviously remain very volatile.

In addition to these challenges, we are also facing we’re also facing capital markets that are much tighter than in years past. This is a challenge not only for American but for the entire industry and other industries as well. Even so, we were able to make some headway on this front with financing to bolster our liquidity and committed financing for 737 deliveries, which I think in part is a testament to our past track record of meeting our obligations.

Our results continue to remind us that while we can of course always hope for the best, we have to continue to anticipate a tough environment. We’re not sitting still. We have continued to take steps to put us in a position to confront the difficult climate as best we can. Over the last couple of years, I think it’s fair to say we’ve been disappointed with our capacity, and with our announcement last month, we’re doing our part to effect a more rational supply-demand equilibrium. We now expect mainline capacity in the second half of 2009 to be lower by over 12% versus the same period in 2007, comprised of a domestic reduction of about 15.5% and international pulldown of about 5.5%, and we will continue to monitor the revenue environment to see if more must be done.

At the same time, we’re making prudent investments in our fleet to better position us for the long-term, and during the second quarter we announced that we’re taking 8 additional 737-800 aircrafts, bringing our total for the 2009 through 2011 period to 84 aircraft. In the challenging credit market that I mentioned, we continue to make strides on the financing front as we lined up $66 million in vintage aircraft financing, and executed on an ETC worth $520 million. With the ETC financing in place, we have arranged financing that we expect will cover all of our committed aircraft deliveries through 2011.

We are awaiting the Department of Transportation’s ruling on our antitrust immunity application with BA, Iberia, Royal Jordanian, and FinnAir which we expect will be issued by the end of October, and we look forward to demonstrating the public benefits of our plans to European regulators as well.

In this very difficult revenue environment, fighting for every customer is critical, so I’d like to take this opportunity to thank all of our employees for their hard work and their determination in a very touch environment. While there remains a lot of uncertainty about the trajectory of the economy, fuel prices, and the capital markets, we’re doing our best to stay focused on the things within our control to better meet the challenges in front of us and better position ourselves for long-term success.

With all that said, I will turn things over to Tom to walk you through our results.

Thomas Horton

As Gerard said, in the second quarter we lost $390 million or $319 million excluding special items. This compares to a loss of $298 million excluding special items in the second quarter of last year. We had special items totaling about $70 million in the second quarter of 2009 and about $1.1 billion in the second quarter of 2008. I would refer you to the press release for the details of those items and for the remainder of the call, I will exclude the impact of special items to more accurately reflect our performance on an ongoing basis.

As our results indicated, the second quarter was very challenging for the industry and for our company. This deep recession has significantly affected demand for air travel and cargo services, and the H1N1 virus certainly had a negative impact on our results, particularly on our Mexico flying, but beyond these impacts, we are also in the midst of continued volatility of oil prices, albeit at significantly lower price levels than last year, and we continue to see a very challenging capital markets environment.

In short, there is great uncertainty on many fronts, but through our efforts over the past several years, we have better positioned ourselves to face difficult times, and we continue to take action. We’ve long recognized that this industry will not be healthy until there is a supply-demand equilibrium that can generate meaningful returns for our shareholders over the long term. Toward this end, last month we announced further capacity reductions beyond what was a very conservative plan further demonstrating our capacity discipline. We have been aggressive pulling down capacity over the last year, and while we’re mindful of the competitive landscape and the impact to our network, we will continue to monitor the revenue environment to see if more must be done.

In the most difficult credit market in memory, we recently completed some meaningful financing. We raised about $65 million in the second quarter through a transaction. We also initiated a $520 million public debt offering which closed last week. This double ETC provides financing for 16 of our new 737-800 deliveries and also provided gross proceeds of about $150 million this month by financing four existing 777 aircraft that were also pledged as collateral.

Last month, we announced that we have increased our commitments by 8 aircraft to take 84 total 737s in 2009 through 2011, inclusive of the 9 aircraft already taken through the end of the second quarter. Our narrow body fleet replacement plan represents a tangible sign of our dedication to sharpen our competitiveness over the long-term, and with the completion of the double ETC, we have now arranged committed financing that we expect will cover all of these aircraft.

We continue to find ways to wring cost out of the business and at the same time the investments we’ve made to improve our operational dependability continue to pay off through big improvements in completion factor, on-time performance, and baggage performance. I’ll go into some additional detail on these items in a minute, but let me first recap our second quarter revenue performance.

In the quarter, consolidated passenger revenues were down nearly 23%. Unit revenues declined approximately 16% on about 8% less capacity. Load factor was down by a half point, and yield was down nearly 16%. Driving these results were weakness in business travel revenue, which was down more than system average revenue, and the impacts of H1N1 which we estimate at $50-$80 million across the system, with a particularly strong impact to Mexico travel.

Second quarter unit revenue declines were significant across most of our system. International saw the largest decline with Atlantic, Latin, and Pacific operations all experiencing declines that were greater than 20%. Domestic fared better, but was still down nearly 12%. Given the weakness in business travel, trans-continental routes understandably saw the deepest unit revenue declines, down several points relative to the domestic average. Hawaii and Puerto Rico, both leisure destinations, with significant year over year capacity reductions, held up relatively well.

While these results are disappointing, it bears mentioning that the industry launched several rounds of fare increases last year during the first and second quarters as we chased skyrocketing fuel prices. Consequently, the second quarter saw challenging comparisons, and we will continue to see this effect into the third quarter.

There was, however, some positive traction towards the end of the second quarter regarding fair increases. Following a first quarter which saw no fare increase attempts, in the second quarter, we saw several successful fare increases; however, it remains to be seen whether this trend will continue as we progress through the year. As it stands now, we expect a tough ongoing revenue environment. Our mainline booked load factor the remainder of the third quarter is down about 1.5, with domestic down about a point and international down about 2 points.

On the regional front, quarterly revenue declined about 25% versus the prior year. Unlike some airlines that are replacing mainline flying with regional capacity, we’ve continued to be disciplined with our regional fleet as well. Our regional capacity was down about 11% for the quarter, and unit revenue was down about 16% versus last year.

The economic downturn also continues to affect our other lines of business. Our cargo revenues declined nearly 43% versus the second quarter of last year on traffic deterioration that well exceeds our reduction in cargo capacity which reflects industry trends in global shipping demand.

In other revenue, we see increases driven by the service charges we put in place last June, including the first bag service charge. However, these increases were partially offset by year over year declines from our divestiture of American Beacon Advisors in the third quarter of ’08 and reduced mileage sales associated with our Advantage co-branded credit card and other Advantage partners, which of course reflects the broader declines in consumer and retail spending throughout the economy. Despite these effects, other revenue increased almost $40 million, or 7% versus last year.

Turning to our alliance efforts, on April 27, 2009, we received a scheduling order from the DOT regarding our application for antitrust immunity with BA, Iberia, FinnAir, and Royal Jordanian. We’ve complied with all requests for information and responded to all comments, and while we can’t make promises about the outcome of the process, we believe we’ve made a very strong case, and we continue to expect approval by the DOT’s October 31st statutory deadline, and we look forward to continuing to demonstrate the public benefits of our plans to the EU regulators as well.

We’re also pleased to have announced a code sharing agreement with Etihad Airways, the national airline of the United Arab Emirates, and we’ve entered into a reciprocal frequent flyer program with Gol Airlines out of Brazil with plans to enter into a code sharing agreement with Gol in the future.

Shifting to costs, our second quarter unit costs, excluding fuel, rose by 5% mainline and 3.7% consolidated, driven by reduced capacity and headwinds from pension expenses and investments and dependability initiatives. As I mentioned, fuel price declines during the quarter were extraordinary. Our fuel price came in at $1.90 per gallon consolidated, a decrease of over 40% versus last year. Consequently, we paid $900 million less for fuel this year than we would have at last year’s price, driving total mainline unit costs lower by nearly 13%.

Turning to the balance sheet, we ended the quarter with $3.3 billion in cash, including about a restricted balance of $460 million. In the second quarter, our scheduled principal payments on long-term debt and capital leases totaled about $400 million including the maturity of our revolvers. Our capital expenditures totaled about $430 million. Our efforts to repair our balance sheet during profitable years provided us additional financial flexibility, and even after the double ETC, we still have unencumbered assets and other sources of liquidity that we estimate to be worth about $3.7 billion. About a quarter of this amount is made up of aircraft. Also included are Heathrow and other slots, American Eagle, and the potential value from a financing of our Advantage frequent flyer program among others.

With our other debt maturities this year, we expect to unencumber about another $500 million worth of collateral. Our total debt, as defined in the earnings release, at the end of the second quarter was $14.2 billion, down from $15.2 billion last year. Our net debt, defined as total debt less unrestricted cash and short term investments, at the end of the second quarter was $11.4 billion versus $10.1 billion a year ago, although last year we were carrying over $800 million in hedged collateral in our cash balance.

Looking forward this year, I want to first touch on capacity. We have taken a disciplined approach to capacity over the past several years, not only on the domestic front, but on the international side as well. With our announcement of further capacity reductions last month, we expect to see third quarter mainline and consolidated capacity down almost 9%. We expect full year mainline system capacity to be down about 7.5% versus 2008, and we expect mainline domestic capacity for the year to decrease about 9%, and mainline international to be down over 4%. The amount of capacity we’ve removed from the system over the last year or so has been noteworthy, somewhat masked by the magnitude of our capacity reductions in the fourth quarter of last year. So when comparing our second half 2009 capacity versus the same period in 2007, our mainline system capacity is expected to be 12% lower, with domestic capacity down over 15.5% and international down over 5.5%, so big capacity reductions.

In terms of cost, American faces headwinds that some of our competitors do not, including those from our incremental capacity reduction announcement in June, and about $400 million in additional pension expense for 2009 because we have maintained our defined benefit pension plans. We’ve made a lot of progress over the past years to extract cost from our system. Some of the progress we’ve made this year is a byproduct of less traffic and thus less variable expenses, but some also comes through cost savings initiatives such as our external hiring freeze, and a pay freeze for non-contract workers, and a lot just comes from continually grinding away on costs in every aspect of the business.

All told in the third quarter, we expect our ex-fuel mainline unit to increase about 7% year over year and consolidated unit cost to increase about 6%. We anticipate 2009 full year mainline ex-fuel unit cost to increase by about 6.5% and consolidated to increase by about 5.5%.

After a very challenging 2008, fuel has helped the cost equation. Based on the July 7th forward curve, on a consolidated basis, we forecast a third quarter fuel price of $2.05 and a full year fuel price of $1.98 per gallon. With regard to hedging, we have about a third of third quarter consumption hedged with floors at $70 per barrel and caps at $99 per barrel on a crude equivalent basis, and a full year hedge of 36% of consumption with floors at an average price of $70 per barrel and caps at $97 a barrel. I’ll note that we use hedge accounting, and we’ll therefore see the full effect of hedging impacts in the period in which the hedge is settled, but under our current assumptions, we expect that we will see hedging impacts that add about $0.15 per gallon to our second half 2009 fuel price.

Moving to cash forecast, our 2009 scheduled principal payments on long-term debt and capital leases are expected to total about $2 billion, $1.2 billion of which we made during the first half of the year. Our industry and we’re not alone is facing a challenging capital markets environment, but we continue to pursue opportunities to use our unencumbered assets to bolster liquidity. We’ve also modified our agreement with our credit card processor that we estimate will limit our maximum potential credit card holdback to be between $250 to $300 million for the remainder of the year. This is inclusive of approximately $150 million that we had posted as of the end of the second quarter.

We continue to take a measured approach to our capital spending, trying to make sound investments that will help keep American Airlines competitive for the long-term. We expect full year capital expenditures of about $1.6 billion. Includes in this total are non-aircraft capex of about $400 million, which includes investments in our Boston and London Heathrow admirals clubs, a program to add winglets to our 767 300 aircraft, and conversion of part of our 757 fleet to support international flying. Our aircraft capital expenditures are expected to total about $1.2 billion, and as I mentioned earlier, we have arranged committed financing that we expect will cover all of our 2009 through 2011 aircraft deliveries.

To wrap up, there is great uncertainty for the remainder of 2009. The near-term revenue environment, volatility of fuel, and tightness in the capital markets all present significant hurdles, but we continue to take steps to better position American to weather these challenges. With all of that, Gerard and I would be happy to take your questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Kevin Crissey - UBS.

Kevin Crissey - UBS

I wanted to see if you could give some thoughts on United’s attempt to push the credit card cost onto agencies, and I know you guys have done a nice job getting distribution costs down after September 11th. Do you think this is an opportunity for the industry as a whole and for American specifically?

Gerard J. Arpey

I think it would be inappropriate for us to comment about what we might or might not be thinking about where we’re going with credit card fees and distributions costs generally, so I’m going to no-comment that one.

Kevin Crissey - UBS

There wasn’t much discussion of labor. Where do you stand there? It’s challenging negotiations in a challenging time. Maybe you could give us little thoughts on that.

Gerard J. Arpey

Kevin, I think candidly we’ve not made much progress in our contract negotiations for a variety of reasons, but certainly the economic climate is a big factor. I think from the company’s perspective, there is no secret to the fact that we have the highest labor costs in the airline industry on average, so there are things that we want to accomplish responsibly in our negotiations with all three of our labor groups, and there are things are organized labor wants to accomplish on behalf of their members, and so I think trying to find that right formula in balance has been challenging and will continue to be challenging in this environment, but I think we continue to go at it in good faith, and we’ll stay at it in good faith.

Kevin Crissey - UBS

On the revenue front, how do your comparisons look as you look forward versus Q2? The comparisons are going to continue to get tougher, if I’m not mistaken all the way through September. Is September the worst comp? When I’m looking at the data, it kind of looks like July might be a little bit better, then August looks like it’s going to be a tough comparison and tough start so far, and where does September fit from a comp perspective?

Thomas Horton

I think your assessment is right, Kevin. September was a bit of a high water market last year before the economy really took the dip down, so I think that’s the right way to think about it.

Operator

Your next question comes from the line of Gary Chase - Barclays Capital.

Gary Chase - Barclays Capital

The credit card processor agreement that you referenced in the press release, if I’m not mistaken, that previously had a provision for August, so this is an extension from August to December? Is that accurate, or does this relate to your other agreement?

Thomas Horton

That is correct.

Gary Chase - Barclays Capital

And it’s similar terms, right? The maximum holdbacks were in that same ballpark. You just moved the deadline out by about 4 months. Is that right?

Thomas Horton

Yes, more or less.

Gary Chase - Barclays Capital

On the capacity cuts, it’s easy to get lost in the year over year comps. They’re not changing very much as you move from the third to the fourth quarter, but of course you did a huge capacity reduction last reduction that was really implemented in the fourth quarter, so the size of your system seasonally adjusted is taking a big leg down in the fourth quarter, and I’m just curious for your thoughts as to how that looks as we move into 2010. Is there any reason to believe that those cuts would not remain in effect at least for the beginning and/or first half of 2010?

Gerard J. Arpey

Tom can jump in here, but I see no evidence of that we would want to restore any of the capacity cuts we’ve made last year and the ones that we’ve announced this year. If anything, we continue to look at capacity in the other light in terms of whether we have done enough given the economic climate, but when you look at what we’ve done and you look at what the rest of the industry has done, both domestically and internationally, and some of the foreign carriers have moved pretty aggressively this summer, there has been a lot of capacity taken out of the industry, so I think if we can get any kind of economic recovery going, I think we and the industry are certainly much better positioned than we were a year ago, but I just think it remains to be seen whether we’ve done enough.

Gary Chase - Barclays Capital

But it’s not in your view anything that’s temporary. This is another step you’ve taken that you think is needed.

Gerard J. Arpey

Yes.

Operator

Your next question comes from the line of Michael Linenberg – Banc of America.

Michael Linenberg – Banc of America

It was $50 to $80 million in the June quarter the H1N1 effect, and we’re hearing out of Latin America now, at least deep South America that there is some effect down there. It is flu season down there. Are you seeing anything down there in your bookings? Is there a number that maybe we should use or some sort of impact in the third quarter? Any thoughts on that?

Thomas Horton

I think it’s too early to tell, but if you look at Latin America, our revenues in the second quarter were tough. It was down 20%, and if you look at deep south, it was down even more than that, so there is certainly some H1N1 impact in there, and I think we’re just going to have to wait and see how it shakes out going forward.

Michael Linenberg – Banc of America

Tom, you gave us the booking view for the third quarter, down 1.5 points. Correct me if I’m wrong, but I think we are seeing a much shorter booking curve or a more compressed booking curve this year versus last year, and if that is the case, what do bookings look like closer in because that may give us a better sense or maybe adjust for the fact that people even leisure passengers seem to be waiting until the last minute to make their bookings.

Thomas Horton

I think you’re absolutely right about that, Mike. We’re seeing some later booking than we have customarily seen. Unfortunately that revenue is not technically the best revenues, so we’re still suffering from a negative mix effect, but clearly there has been some late booking, which is why our actual load factors came in a little bit better than we had guided to when we talked 90 days ago.

Operator

Your next question comes from the line of Jamie Baker - J.P. Morgan.

Jamie Baker - J.P. Morgan

What would the maximum holdback have been without the implementation of the $300 million cap, and should we conservatively model that, whatever that prior cap was? Is that what you’re going to revert to next year?

Thomas Horton

I think what we’ve said in the past is it’s about a quarter of our air traffic liability, unconstrained, and we’ve obviously negotiated a new agreement with our credit card processor, and to the extent that we felt that was sensible and necessary, we would seek to keep doing that. Again, next year, this expires.

Jamie Baker - J.P. Morgan

We can back into it from that. How much progress are you making on the remaining processing agreements?

Thomas Horton

We don’t have any holdback under any other processing agreement.

Jamie Baker - J.P. Morgan

United as you’re well aware recently tapped some of their unencumbered assets at a pretty costly 17% rate. I guess I’m just surprised that you still haven’t pulled the trigger here on any sort of forward mileage sale with Citi. If for no other reason, $4 stock price, a need to prove liquidity is available at reasonable rates, and perhaps this growing chorus that is lumping you alongside US Air and United, maybe that’s the wrong view that the market should be taking. I just haven’t seen the real effort to dissuade anyone from that view. Any comment on that or timing on a mileage sale?

Gerard J. Arpey

Jamie, I’ll let Tom jump in here, but we tend to talk about things after we have accomplished them rather than ahead of time. I think that’s been our history.

Thomas Horton

I think that’s a fair point, Gerard, but I would also add that I think the market is maybe distinguishing between us and some others because we recently did a double ETC in the public markets at a coupon of a little over 10%. Obviously, that’s not an attractive financing by historical standards, but it’s a lot different than maybe some of the comparisons you’re alluding to, so I think there’s a distinction in the market place reflecting the fact that we do have considerable financial flexibility and unencumbered assets and degrees of freedom. In a more normal capital market environment, we wouldn’t even be having this discussion.

Jamie Baker - J.P. Morgan

Just to be clear, it’s not our view that we’re lumping you equally. It’s just more and more of what I read chiefly on the commute in the morning that puts you in the same camp, so we’re trying to differentiate as well.

Operator

Your next question comes from the line of Bill Greene - Morgan Stanley.

William Greene - Morgan Stanley

Tom, I know it’s early, but can you help us at all with ranges of pension funding that you might have in 2010, and maybe think about the kind of return you might need this year such that you could even get maybe to no funding required?

Thomas Horton

No. I think you should assume there will be pension funding required in 2010, and it will be substantial. I don’t know that we’ve provided any guidance on that to date.

William Greene - Morgan Stanley

Could we use the expense number as a fair baseline?

Thomas Horton

Over time, it will trend towards the expense number. There is some lumpiness in the early years, but I think you should think in terms of several hundred million dollars, and we’ll plan on trying to give you some more definitive guidance on the next earnings call.

William Greene - Morgan Stanley

Some of your peers have talked about business travel trends and how they have stabilized, and maybe even there is a little bit of a less bad trend going on. You mentioned that your trends were worse than system wide at least in the second quarter on average. Can you talk about near term have you seen any improvement? You did beat the guidance slightly. Maybe that means July is getting better versus June? Any color you could provide there?

Thomas Horton

I think I would say corporate travel has been off more than system traffic and system revenue, but it seems to have leveled off after the very sharp declines we saw at the end of ’08 and the beginning of this year, but the silver lining in the cloud. It remains sharply lower year over year, but it does seem to have leveled off a bit here in the May-June period.

Gerard J. Arpey

Bill, if I could add to that, and this is anecdotal; I can’t give you any numbers supporting this, but having lived through several down cycles in my career, I do think companies in a tough economic climate instinctively do pull the handle on travel as they have done now, but similar to what companies do in terms of their own inventory production, at a certain point, corporations recognize that people were actually traveling not for pleasure, they were traveling for a business purpose, and it takes a while for the consequence of that business purpose to manifest itself, and then when companies realize, ‘Well, your folks weren’t out there goofing off, they were actually out there traveling to generate business for our company’, they tend to restore travel levels to previous points, and whether or not this cycle will be similar in the past, I don’t know. That’s been my experience, and so I think the economy both here in the US and around the world and its recovery is an important factor in how this all evolves.

Thomas Horton

When I travel on business, I’m never goofing off.

William Greene - Morgan Stanley

Gerard, can I send one last question to you which is given all the stresses you have seen on this industry here in the last twelve months at least, do you hear anything from any of your discussions in Washington or what not, is there any move in the foot at all to try to reduce ticket taxes or perhaps have government relief at all for the industry or is there any discussion along those lines or is that just not happening?

Gerard Arpey

Bill, it’s a good question, and I think really as an industry, we have not really done a very good job of educating public policymakers on the effect all these taxes have. I did a calculation the other day, and I’m going to ask Tom to jump in here if I get this wrong, but I was just looking at the number of customers we carried in the second quarter, and looking at our loss, and my back of the envelope calculation was we needed about $17 more per one-way customer to break even in the quarter, and that doesn’t seem like a gigantic hurdle to get over, but when you step back and then recognize how much taxes and fees are placed on our tickets before we get any revenue, you see why that is more of a mountain than it would otherwise appear to be despite the economic climate, despite all the other things going on, so I think Bill, we’ve not done as good a job as we should have. I think most of our efforts are on trying to convince the government to not do anymore harm in this environment because I believe the President’s budget has a couple of increases to the security tax and maybe one of the other taxes as I recall, and that’s obviously not something that would be wise at this time for this industry.

Thomas Horton

This is probably the most heavily taxed industry on the planet. Just to put that in perspective, if you look at what this company pays in taxes including excise taxes on tickets and fuel and ticket taxes and all of that, $3.5 billion in 2008. Put that in perspective against our revenues, it is extraordinary.

Gerard Arpey

That’s just American. That’s American’s annual taxes and fees. Our market cap here right now it’s about $1.2 to 1.3 billion, so we’re doing a pretty good job of feeding the government right now.

Operator

The next question comes from the line of Hunter Keay - Stifel Nicolaus & Company.

Hunter Keay - Stifel Nicolaus & Company

Tom, do you have financing in place for the entire of your PDPs for the remainder of this year?

Thomas Horton

We do not have financing in place for all of our PDPs.

Hunter Keay - Stifel Nicolaus & Company

A portion of it?

Thomas Horton

A portion, yes.

Hunter Keay - Stifel Nicolaus & Company

Can you maybe explain then a little bit to me the rationale of a pull forward aircraft in an environment like this when arguably cash conservation is probably the most important priority? Last year, you were talking about how the balance sheet was too levered off of fleet modernization and that was when you were really sitting with close to $5.5 billion in cash, and now you’re pulling aircraft forward, cutting capacity, and if anything, I think you just implied that there might be more cuts to come in 2010, so what’s changed? I understand the long-term strategy, but more near term, what changed? I know you can’t comment much on this, but maybe is it more favorable terms from the OEM? What are some of the moving parts there to change the strategy so starkly from last year to this time right now?

Thomas Horton

Well, I don’t think we’ve changed the strategy starkly. We’ve said all along that we’re going to continue with our fleet modernization program, and to keep it in perspective, these are replacement aircraft. This is not growth, but the planes that we most recently also had financing associated with them, so there was a financing element there which made it attractive from our perspective to do, not just from a fleet renewal perspective but from a liquidity perspective as well, but I think at 30,000 feet, the answer to your question is we are committed to building this company for the future and making it competitive for the future and making it competitive for the future, and to do that, we need to have a modern and fuel-efficient fleet, and so that’s what we’re trying to do. Our MDADs are good airplanes, but we need to be in the process of replacing them because it’s going to take several years to replace a fleet of 260 airplanes.

Hunter Keay - Stifel Nicolaus & Company

Is there any kind of terms and conditions in this financing that might be a little bit different from say historical maybe industry legally standard type stuff, or is there anything in here maybe that had some sort of liquidity thresholds or covenants associated? Was there anything like that or is this just kind of the industry standard stuff?

Thomas Horton

What financing in particular are you referring to?

Hunter Keay - Stifel Nicolaus & Company

When you reference all the 737 orders through 2011 are subject to certain terms and conditions covered by committed financing arrangements, so I guess it could be any number—the sale leaseback, the ETC, anything—is there anything in those any of those financing vehicles that might be a terming condition that might be say a little more stringent than historically has been the case?

Thomas Horton

No. It’s a fair question. It’s a whole range of financing as you can imagine, everything from sale leaseback to mortgages to backstop financing, so they’re all a little bit different, but I would say there’s nothing unusual or nonstandard in there.

Operator

Your next question comes from the line of Doug Runte – Piper Jaffray.

Doug Runte – Piper Jaffray

A few quarters ago, you mentioned the prospect of looking at the 737 900ER I guess maybe you were fighting with Rolls at the time. I’m wondering if that aircraft type is still under consideration given than all of your recent announcements have been for 800s.

Gerard J. Arpey

Doug, it’s fair to say that we are maybe disappointed would be the right word, but we’re struggling with the economics on the 757 fleet in light of some of the contractual issues that we have with our suppliers, and so we’re trying to figure out the best plan forward in terms of our narrow body footprint under our long-term fleet plan and trying to figure out exactly where the 757 is going to land and is it important to us, and I don’t think we can add much more color to what we said before except that that is something that we’re spending a lot of time looking at in the context of our long-term fleet plan, and I don’t know where we will end up, and I’m not sure we’ll have any definitive conclusions right away, but the cost per seat mile on that fleet is troubling to us right now.

Doug Runte – Piper Jaffray

Just from the public disclosures you raised about $23 million for each of the new 737 800s, which leaves the balance of say $15 to $20 million just looking at the appraised values. How is that gap being filled? Do you have some ability to call upon your previous backstop financing to say take a subordinate position as they’ve done at time in the past?

Thomas Horton

Yes. In a more stable financing climate, we could sell another tranche of that double ETC, so I think that’s probably the way to think about it.

Doug Runte – Piper Jaffray

So theirs is no expectation that the previous backstop commitment would potentially take that subordinate tranche, if they’ve not done so to date?

Thomas Horton

No. We can’t really talk about the backstop financing anymore than we already have.

Operator

Your next question comes from the line of Helane Becker - Jesup & Lamont.

Helane Becker - Jesup & Lamont Securities Corporation

Gerard, I’m confused a little bit, because I think about maybe two months or so, maybe one month ago, you were quoted as saying that you thought the credit markets were lightening up a little and enabling you to get some deals done, including probably the $550 million ETC you are referring to. So are your comments today kind of reflective of the fact that maybe something in the credit markets have changed and it’s harder to get deals done now?

Gerard J. Arpey

No, I don’t think so, and I don’t know what you’re referring to, Helane. In fact, I’m not sure I said anything about the capital markets today other than they are challenging. I think when I was at the Merrill conference, I described the capital markets as nonfunctioning, and so if anything I think I have been more liberal comments because we have managed to get some important transactions done, so I think in my employee letter today I used the word erratic, for lack of a better word, but I think we’ve demonstrated that we’ve gotten some important things done in a tough climate, and quite frankly I’m encouraged by that.

Helane Becker - Jesup & Lamont Securities Corporation

You might have already answered in your comments to Mike’s question, but my question is related to traffic and the outlook for maybe after Labor Day, I don’t think you made too many comments about that, but can you talk a little bit about whether you’re seeing any signs of improvement in that area, or when you matched the Southwest fares last week in markets where you had to match, did you see any pushback from clients or did those fares sell out rather quickly?

Thomas Horton

I guess I would say it is too early tell out there, particularly given what I said earlier about the late booking that we’ve been seeing, but as we sit here today, our advanced book load factor is down by about 1.5 points for the remainder of this quarter, and that on obviously a whole lot less capacity, so a very tough environment, and we’re just going to have to wait and see how it shapes up beyond this summer.

Helane Becker - Jesup & Lamont Securities Corporation

Can you say if on the fares that you matched you sold out your allocation of inventory?

Thomas Horton

No, we wouldn’t comment on that.

Operator

Your next question comes from the line of William Greene - Morgan Stanley.

William Greene - Morgan Stanley

Gerard, you mentioned the ATI and you expect government approval and what not. What do you do if you don’t get government approval?

Gerard J. Arpey

Persevere. Bill, the facts are on our side, and the fact that Continental just got approved is more evidence that the facts are on our side, so I don’t want to be overly optimistic here, but I do believe the weight of the evidence suggests there is absolutely no reason for us to not be put on a level playing field with our competitors. Were that to happen, I think we will simply regroup and figure out how could that possibly be and make another run at it.

Operator

Your next question comes from the line of Michael Derchin - FTN Equity Capital Markets.

Michael Derchin - FTN Equity Capital Markets

Going back to the ATI question, could you give us a little bit more on the timetable and the various parties involved other than the DOT on the EU side? Are the individual countries involved? I asked that because I think part of the reason for the open skies agreement between the US and the EU was based on more cooperation, an ATI kind of agreement, so I just wondered who else is going to participate in the decision making.

Gerard J. Arpey

Michael, Tom might be able to give more precise answer to this, but I think the way this works is that the DOT has jurisdiction over granting antitrust immunity with advice from the Justice Department. They’ve got some advice recently on the STAR application, and they did whatever they chose to do with that, and they moved forward and permitted Continental to enter that partnership. In terms of our decision, based on their timeline and process, I believe based on when they put the scheduling order in place, meaning that they had responded to comments by others about our application, by their timeframe, they would unless something outside of their normal process would change things, I think by the end of October, we would expect to be hearing from the DOT on our application. As far as the EU is concerned, I think you’re quite right that the notion of these immunity approvals had been in the context of open skies agreements in Europe which have taken place, so I do think there is a linkage between how the EU and certainly the UK would view the future of that aviation agreement between the US if there were not a level playing field granted to American, British Airways, and Iberia, so how that will all play out? I don’t know because I think the EU continues to not only look at the AA, BA, Iberia, Royal Jordanian application, it’s also continuing to scrutinize the other alliances, and where that may lead? I don’t know. I think the most immediate significant hurdle is the DOT.

Operator

Your next question comes from the line of Dan McKenzie with Next Generation.

Dan McKenzie – Next Generation

Following up on the Citibank question earlier, I’m not sure if you shared in the past when the AA Advantage program with Citibank expires, but would you consider or perhaps even a better way to ask is what flexibility do you have to move that program to another bank, say within the next year or two if you wanted?

Thomas Horton

That’s confidential, Dan. Unfortunately, I can’t comment on that.

Dan McKenzie – Next Generation

I believe at the end of the first quarter, AMR had about $650 million in purchase deposits, and I was just wondering, worst case, is a refund of some of those deposits a potential source of cash?

Thomas Horton

Dan, I’m not sure what you’re referring to.

Dan McKenzie – Next Generation

The purchase deposits for aircraft on order.

Thomas Horton

No, I don’t sure of that number in particular, but I don’t think you would expect to see a refund of purchase deposits. We’re proceeding with our fleet renewal.

Dan McKenzie – Next Generation

Does AMR have the ability to pose unencumbered assets in lieu of cash for credit card holdbacks if needed?

Gerard J. Arpey

I think the right way to answer that is we have the right to negotiate with people whatever we can negotiate.

Operator

That does conclude your Q&A session for today.

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Source: AMR Corp. Q2 2009 Earnings Call Transcript
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