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Executives

Gerard Arpey - President & Chief Executive Officer

Tom Horton - Chief Financial Officer

[Chris Ducey] - Managing Director of Investor Relations

Analysts

Michael Linenberg - Banc of America/Merrill Lynch

Hunter Keay - Stifel Nicolaus

Gary Chase - Barclays Capital

Jamie Baker - JP Morgan

Kevin Crissey - UBS

Dan McKenzie - Next Generation

Helane Becker - Jesup & Lamont

Bill Mastoris - Broadpoint Capital

Will Randow - Citi

AMR Corp. (AMR) Q4 2009 Earnings Call January 20, 2010 2:00 PM ET

Operator

Good afternoon and welcome to the AMR fourth quarter 2009 earnings conference call. At this point, we do have all of your lines in a muted or in a listen-only mode. After the executive team’s presentation today, there will be opportunities for your questions.

As of now, will be taking questions first from the members of the analyst community and then after a short break, we’ll move into our media, Q-and-A session. As a reminder, today’s call is being recorded. We’re very pleased to have on the call with us today AMR’s Chairman and Chief Executive Officer, Mr. Gerard Arpey; and Executive Vice President of Finance and Planning and Chief Financial Officer, Mr. Tom Horton.

Here with our opening remarks is AMR’s Managing Director of Investor Relations, Mr. [Chris Ducey]; please go ahead sir.

Chris Ducey

Good afternoon everyone. 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 details regarding our earnings for the fourth quarter, along with some perspective on the first quarter and the remainder of 2010. After that we’ll 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 www.aa.com.

Finally, let me note 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’ll turn the call over to Gerard.

Gerard Arpey

Thank you Chris, good afternoon everyone. As you have seen in our press release, excluding special items and unique tax item we had a net loss of $415 million in the fourth quarter which compares to a net loss of $221 million a year ago. That disappointing result marks the end of another very challenging year for our industry and for our company.

As all of you know very well, we faced a difficult revenue environment, as the global recession dampened demand for air travel in 2009. Our total revenue was down $3.8 billion year-over-year with consolidated unit revenues down by 11% on 7.5% less capacity. On a more positive note fuel prices declined about 34% saving us about $3.5 billion on our fuel bill compared to 2008.

As we embark on a New Year and a new decade fuel prices remain very high from a historical perspectives and the strength of the economic recovery remains I think it fair to say very uncertain as we sit here today. That said we have grown accustomed to big challenges and we intend to confront this years head on. What’s more I believe we are in demons ratably better shape that we were year ago.

We took some important steps last year to not only weather the current batch of storms, but more importantly to better position our airline for long term success. We bolstered our liquidity through a variety of financing activities completing transactions totaling over $5 billion. At years end we had about $4.4 billion of unrestricted cash or about 22% of trailing 12 months revenue which is higher than even our profitable years of 2006 and 2007.

Given the uncertainty that persists for this industry we think getting our cash balance higher was the right move to protect all of our stakeholders. We’re going to remain discipline when it comes to capacity because it’s clear than ever that this industry will not be healthy and certainly won’t generate sufficient returns for shareholders until there’s equilibrium between supplying demand.

As all of know, we pulled back capacity further in the back half of 2008, beyond the reductions we initiated in the fourth quarter of 2007. Our total consolidated capacity for 2009 was down by over 7% versus 2008 and nearly 11% lower versus 2007. Our industry has certainly been tested with the variety of challenges over the past decade and I think it’s fair to say that American has risen to meet these challenges certainly as well, if not better than most of our competitors.

Of course it will take more than prudent capacity management to realize our aspirations for the decade to come. Recently we’ve shared our vision for the next decade with our employees, a vision that we’ve titled FlightPlan 2020 and it will set the foundation for making the next decade one of success and not just a decade at survival.

The five tenants within that framework include invest wisely, earn customer royalty, strengthen and defend our global network in a good place or good people and fly profitably. These are the principles that will guide our company over the coming years and we have a slew of forward-looking initiatives, either in place or plan to support each of those overarching tenants.

In terms of our network, one important step we announced last year was to reduce some unprofitable flying and refocus our network around our five permanent markets, Dallas/Fort Worth, Chicago, Miami, New York and Los Angeles. These changes will be finalized in April and will provide the foundation for our network going forward.

Additionally, the DOT is reviewing our antitrust immunity application with British Airways, Iberia, Royal Jordanian and Finnair, and we are progressing through the review process with the European Union. We continue to expect approval of our application.

Our system wide capacity will be up by about 1% year-over-year and 2010 driven by the reinstatement of flying that we pulled down to the H1N1 virus and the initiations of Chicago-Beijing service that we deferred from this year. We’ll be taking 45 Boeing 737-800 aircraft this year is part of our fleet renewal plan and we had financing in place for all of our deliveries this year and into 2011 and while these new aircraft will put pressure on our ex-fuel unit cost.

They are about 35% more fuel efficient than the MD-80 aircraft that they are replacing. We continue to make enhancements to our product including adding first class seats on our CRJ700 aircraft and we expect to take 22 more of these two class aircraft starting in the middle of this year.

So in summary, we along with the entire industry continue to face a host of uncertainties regarding a boarder economy and fuel prices that we are focused on moving our airline back to class ability and more importantly, we’re taking concrete action on a number of funds to make that happen.

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

Tom Horton

Thanks Gerard and good afternoon everyone. In fourth quarter we lost $244 million or $415 million excluding special items and non-cash tax item. This compares to a loss of $221 million excluding special items in the fourth quarter of 2008. We had special items totaling about $177 million in the fourth quarter of ‘09. Our non-cash tax item of $248 million and special items of $126 million in the fourth quarter of 2008.

I would refer you to press release for the details on these items. For the remainder of the call, I’ll exclude the impact of these two more accurately reflect our performance on ongoing basis. As the results indicate, the fourth quarter proved challenging for the industry and for our company.

Weakness in the economy during 2009 has driven a sharp decline in industry revenues and fuel prices remain volatile. That said we have taken some big starts to help us weather the uncertainty that faces our industry. We completed over $5 billion in financing transactions during 2009 to help bolster our liquidity, refinanced our term loan that would have matured this year and funded our fleet renewal plan over the next couple of years.

It was a very tough year, but we’re now looking forward to a new year and a new decade and central focus of our fly plan 2020 is to return the company to profitability. Much of this will start with a network, as we announced last year, we are strengthening our network and are five corner post markets of Dallas/Fort Worth, Chicago, Miami, New York and Los Angeles. While at the same time remaining disciplined with our capacity.

Furthermore, we continue to expect approval of our application for anti-trust immunity with BA in Iberia, which will help level the playing field and bolster our competitiveness across the Atlantic. We are well into our fleet replacement plan, as we took delivery of 31 new Boeing 737-800 aircraft in 2009, and we expect to take another 45 this year. At this point, we’re committed to another eight in 2011.

We are upgrading our current fleet of 25 CRJ 700 aircraft to include two classes of service to better serve our premium customers and we expect to take delivery of 22 more of these aircraft starting mid-year. We’re keeping a lid on cost and we continue to see revenue performance that outpaces our network carrier competitors. We think all of these things demonstrate that we are leaving a difficult year clearly headed in the right direction. I’ll go into more on this in a minute, but let me first recap our revenue performance.

In the fourth quarter, mainline unit revenues declined 4.5%, on about 5% less capacity. Load factors were up nearly three points with yields down over 7.5%. Domestic and international unit revenues saw similar declines of more than 4%. With November and December performance for both entities much improved over Octobers. Furthermore, for each month from May through December, year-over-year unit revenue performance for our international flying improved and December RASM performance in positive territory albeit from a low base.

In terms of corporate travel, we’re seeing signs that business travelers are getting back out on the road. In the last two months of the quarter, corporate passengers were up versus the prior year. The only essences of year-over-year improvement during 2009, corporate revenues for November and December approached flat year-over-year performance. Our remarkable recovery of about 35 points from the low point back in May, we’ve recognized so we faced easier comparison to November and December.

Nevertheless, when we look at the comps to 2007, we see a clear positive trend thought the second half of 2009. So we’re encouraged by what we’re seeing. That said, our revenue performance were largely determined by the breadth and pace of economic recovery and so, there remains some uncertainty.

Looking forward our advanced bookings are up modestly versus last year with domestic down about two points and international up nearly five points. Importantly, we’re seeing a return in international premium travel, albeit at lower yield than we saw pre-2009, but as I said, let me to keep an eye on the economy, which continues to offer some mixed signals.

On the regional front, quarterly revenue declined about 6.5%. Our regional capacity was down about 1.5% for the quarter and regional unit revenue was down about 5% versus last year. Our cargo revenues declined over 16% versus the fourth quarter of ‘08, but a significant sequential improvement versus third quarter of ‘09 year-over-year performance.

Traffic was higher by about 3% by yield continue to see year-over-year pressure, although this is eased from the peak of yield declines in the second quarter. In other revenue we saw year-over-year improvement of about 6.5% as we saw strength in bag fees and partner mileage sales and we’ve now lapped the headwinds from the sale of American Beacon advisors, which we divested in the third quarter of ‘08.

Turing to our alliance efforts, we have made our case to the DOT regarding our application for antitrust immunity with BA, Iberia, Finnair, and Royal Jordanian. In addition we’re in discussions with EU regarding their findings. The discussions have been productive and we believe we’ve made a very strong case and although timing remains uncertain we continue to expect approval of our application.

In addition American and its oneworld partners welcome to Mexicana into our alliance, extending the alliances coverage of Latin America to almost a 150 destinations. The addition of Mexicana into oneworld further strengthens what is the premier airline alliance with superior airlines operating the best networks serving every region of the world.

In regards to our long standing alliance partner, Japan Airlines, American one-world and TPG had previously made a substantial offer to assist JAL and the Government of Japan in their efforts to secure JAL’s long term future. We recently presented enhance proposal that will deliver approximately $2 billion and commercial value over three year to JAL from relationship with oneworld members.

In addition the proposal includes and improved capital investment of $1.4 billion which would include $1.1 billion from TPG and up to $300 million from AA oneworld. Should it be welcome and deemed appropriate by JAL in the Government of Japan, JAL’s restructuring will occur through a process similar to our chapter 11 process and it appears of this point that the prospect for an external capital investment is being downplayed by the parties involved in JAL’s restructuring.

In any case we believe that our proposal offers all stakeholders with the best solution at the lowest risk to ensure JAL’s long term financial success. Shifting to cost our fourth quarter unit cost excluding fuel rose about 8.5% for the mainline and about 7.5% consolidated driven by capacity headwinds, pension expenses and investments and dependability initiatives.

Fuel price declines during the quarter continue to be significant as fuel prices came in at $2.17 per gallon consolidated, a decrease of about 16.5% versus ‘08. Consequently we paid about $290 million less for fuel for the quarter then we would have at 2008 price and these lower fuel prices drove total consolidated unit cost to be essentially flat versus the fourth quarter of ‘08.

Turning to the balance sheet we ended the quarter with $4.9 billion of cash including a restricted balance of about $460 million. We ended ‘08 with $3.6 billion cash balance and in the face of significant uncertainty we did a lot in 2009 to bolstered liquidity. We completed deals totaling over $5 billion which we think was sensible move to protect all of our stakeholders.

In the fourth quarter our principal payments on long term debt and capital leases totaled about $570 million. Our capital expenditures for the fourth quarter totaled about $400 million bring our full year 2009 CapEx total to about $1.5 billion, including about $1.2 billion of aircraft and $300 million of non-aircraft CapEx.

Our total debt as defined in the earnings release at the end of the fourth quarter was $16.1 billion, up from $15.1 billion last year reflecting our consorted efforts to tap to capital markets to build our liquidity. Our net debt, defined as total debt less unrestricted cash and short term investments at the end of the fourth quarter was $11.7 billion, versus $12 billion a year ago.

Turning to outlook, I’ll first touch on capacity. We expect to see first quarter mainline capacity down almost 3%, with domestic down nearly 2% and international down about 4.5%. For the full year of 2010, we expect mainline capacity up about 1%, with domestic down 0.5% and international capacity up about 3% on restatement of flying that we pull down related to the flu virus and the commencement of Chicago Beijing, which we deferred from 2009. To put these expectations in proper perspective versus 2007, domestic capacity is expected to be down about 15% and international down about 1%.

Turning to cost, for the full year we expect consolidated ex-fuel unit cost to be up about 1% was nearly all of this increased explained by revenue related expenses, such as credit card fees and commissions, non-cash pension expense and aircraft rent associated with the sale lease back of our new Boeing 737-800 aircraft. I’ll note that we expect to generate over 2% more mainline ASMs per galloon, than we did in 2009 in large part due to the fuel efficiency of these airplanes.

In the first quarter, we’ll be facing headwinds from lower capacity and we expect our ex-fuel mainline cost to increase about 5% year-over-year and our consolidated ex-fuel unit to increase about 4.5%. Fuel prices have been volatile in weeks and they remain significant uncertainty about the direction of the fuel prices. The day’s time the January 8 forward curve, we forecast our full year fuel price of $2.42 per galloon consolidated. Although the spot price of jet fuel has declined significantly since this date.

That said, based on the January 8 forward curve, we would expect our full year unit cost to increase about 6% versus 2009. Due to our systematic hedging program, we have build our hedging position for 2010 to about 24% of expected consumption with average floors at about $65 a barrels and caps at $93 per barrel on accrued equivalent basis, again based on the January 8 forward curve. For the first quarter of 2010, we have about 30% of our first quarter consumption hedged with force at $67 per barrel and caps at $97 per barrel on accrued equivalent basis.

In 2010, we expect to make pension payments to our defined benefit pension plans of about $525 million, while recognizing about $670 million and to find benefit pension expense on the books. We also expect 2010 principal payments on long term debt in capital leases to total about $1.1 billion, with about $260 million of this coming in the first quarter. We continued to take a measured approach to our capital spending by making sound investments that we believe will help keep American Airlines competitive for the long term.

For the full year 2010, we expect about $400 million of non-aircraft CapEx and about $1.7 billion of aircrafts CapEx. I’ll note that due to the aircraft financing arrangement we put in place last year. We expect cash inflows of approximately $2 billion related to our aircraft deliveries this year. In addition to our fleet replacement plan, we continue to invest in Admirals Clubs, winglets for our 767-300 aircraft and standardization of our 737-800 fleets.

So if you conclude, we faced on a tough year in 2009 and while there are continued to be uncertainty around fuel prices in the broader economy. We’re focused on improving the airline to return to profitability. The near term revenue environment and volatility of fuel continued present significant hurdles, but we’ve taken some important steps to position American to better weather those challenges and we believe we’re on the right track.

So 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 Michael Linenberg - Banc of America/Merrill Lynch.

Michael Linenberg - Banc of America/Merrill Lynch

Two questions are here, just on the pension, we know that the cash contribution ‘09 was zero and sales going to $525 million. Just as a comp, what was the 2009 defined benefit pension expense? What was that all in?

Tom Horton

It was right about $625 million.

Michael Linenberg - Banc of America/Merrill Lynch

Then my second question, just on the front of the press release where you highlight some of the one timers. These was a $96 million charge related to, I guess the write-down as certain route and slot authorities and it indicated that it was mainly in Latin America. Can you give us some color on that? What was the catalyst for that?

Gerard Arpey

There are certain markets in Latin America, there were open quite a longer subject to route restrictions. Got Open Skies, a place like Colombia and so when you run through the accounting rules you have to write in them.

Operator

Your next question comes from Hunter Keay - Stifel Nicolaus.

Hunter Keay - Stifel Nicolaus

Couple of questions for you, so couples of your competitors already come out and claimed that they’re going to produce a PRASM premium to the industry in 2010, but really as far as I can tell you, you’re the only one that’s really doing it, if you measured by who is less worse in terms of year-over-year decline. So in that context, do you think that this PRASM premium, if you will or maybe a premium growth rate, however, you put it can be sustained in 2010 relative to some of the other legacies?

Tom Horton

I think that remains to be seen that will certainly be our mission. We have had revenue performance that has been outperforming in recent quarters and we’re proud of that. I think some of that is to be completely fair due to the entity mix versus our competitors, but certainly not all of it and a good chunk of it. We think is due to some sensible things we’ve been doing on the revenue management side.

In particular, anticipating what has turned into more of a later booking curve and so we’ve been pretty smart about that, I think. So we’re going to try to keep doing that and I think part of it is that we’ve got a very good network and a very good franchise, buttressed by our advantage program and our presence in the corporate account.

So the repositioning we did around the network to the corner post strategy, I think really highlights the strength of the American Airlines network. We are not, as of today the biggest carrier in the world, but I think we are big, where it matters, New York, Chicago, L.A., Dallas, Miami, those are really important markets and we think some of that repositioning, in addition to the yield management things I talked about earlier, have led to some good results.

Gerard Arpey

Hunter, the only thing I would add to Tom’s comments is that I think that by our actions, they’ve been demonstrating that we’re not the leader in terms of discounting or yield managing lower inventory buckets. I think our view of elasticity, given the continued record setting load factors that the industry is putting together is that the industry can support higher prices.

So we have been a price leader and we’ve not been aggressive in terms of, or maybe I should say we have been aggressive in terms of turning off the lower inventory buckets where we think that can be productive, and certainly that’s what we’re going to be doing rolling here into 2010.

Hunter Keay - Stifel Nicolaus

Also noticed that you disclosed on the bag fee adjustment press release that 25%, I think you said 25% of domestic passengers now check a bag. Essentially, I think you’re saying they’re subject to this fee. Can you maybe help me sort of contextually, where was that level pre-bag fees? Has there been a benefit to fuel burn that’s been material or quantifiable?

Tom Horton

I don’t think we’ve seen a big change, Hunter in that. It’s not been appreciable one way or the other.

Operator

Your next question comes from Gary Chase - Barclays Capital.

Gary Chase - Barclays Capital

Two questions, the first, Tom, I think you were answering Hunter’s question there on revenue managing and you noted trying to do a better job exploiting the shorter booking curve. I’m wondering if that is the explanation for the domestic book load factor running behind where it was at this stage last year, if there’s some other color that you would provide.

If you could walk us through the similar thought on the international book loads being up, I know you noted the premium revenue started to come back, but just give us a flavor for sort of what is happening from a yield perspective in those book load factors?

Tom Horton

I’ll maybe start off with domestic. We expect to continue the improvement we’ve seen in unit revenue performance since reaching that low point I talked about earlier in June of ‘09. The advance booking data shows encouraging signs on the yield front, while the advanced bookings themselves are not overwhelming year-over-year, a little bit soft, but in recent months, as you alluded to and I pointed out earlier, we continue to see an inward shift of the booking curve, with stronger close-in demand.

I think our expectation is that to continue for the foreseeable future. So we may well wind up closing that. ABK for the remainder of January is down only slightly year-over-year, while February and March are down sort of in the 2% to 3% range. So if you believe the hypothesis that we’re in sort of a shorter booking curve environment, which certainly history seems to have borne out, then we may well close up some of that gap. That’s on the domestic side. I think maybe you asked the same question on international.

Gary Chase - Barclays Capital

Yes, I mean it’s up five points and just wondering what the dynamic is there that’s different.

Tom Horton

It’s a little different in the various regions around the world, but I’ll just take the Atlantic, which I think is kind of emblematic of the international environment. Unit revenues I think will continue to improve due to a handful of things, that a reduction in industry capacity, which has been pretty meaningful, an improvement in demand, in particular in the premium cabins, and an improvement in the pricing environment.

So you mix all that together and that’s pretty healthy combination. Although coming off of very difficult, a very difficult period. We’ve also seen that premium demand on peak days of the week is on the upswing and we think that might present some opportunities on the revenue side. So it’s a lot of different things, but bottom line, it seems that we’re seeing some return of the business traveler in the long haul markets and that’s where the money is.

Gary Chase - Barclays Capital

Just on the part of the corner post strategy is going to involve an expansion at O’Hare, when you look in the April, May timeframe, it looks like you’re going to have a little bit of company in that process. Do you have any thoughts about how that will affect I mean obviously, there’s going to be a reallocation. You’ll be pulling down St. Louis. I mean, is your view that that’s going to be RASM-positive or is that more of a strategic initiative?

Tom Horton

Well, it’s a strategic initiative and we’ll have to see what the RASM implications are, but we wouldn’t do it if we didn’t think that in the intermediate term, its profitability positive. So, it is intended to be financially positive and the corner post strategy is really pretty simple. Those are we think the biggest and most important markets in North America. They’re important jumping off points for travel around the world. They are important to our corporate customers and those are places that we are going to stand and fight.

Operator

Your next question comes from Jamie Baker - JP Morgan.

Jamie Baker - JP Morgan

Gerard, achieving labor CASM parity wasn’t specifically identified as part of FlightPlan 2020. I’m curious if that’s perhaps one of the, I don’t know unpublished tenants of that plan. I’m also curious how far off you currently consider your labor CASM to be relative to where the market is.

Gerard Arpey

Well, Jamie that’s something you and I have talked about I think in the past. The sub-headline to FlightPlan 2020 is that for our company to be successful, we need to be competitive in everything that we do. Now, by that, that doesn’t mean that we believe we have to compensate and provide benefits to our employees like our bankrupt competitors.

It does mean, however that we have to be mindful of the fact that all of our legacy competitors have gone bankrupt, some more than once and if you look at the past trailing eight quarters or even going back further than that, look at our operating results compared to many of those companies, most of that can entirely be explained by paying their people less and as somebody pointed out earlier.

We think we’ve been doing a good job on the revenue side of the equation in terms of driving revenue premiums and [Inaudible] our network to places that are going to work over the long run.

So, as we go through these contract negotiations, our challenge is to have constructive dialogue with our organized labor groups that on the one hand recognize the competitive disadvantage that was created for us through the bankruptcy of all these companies, but on the other hand does not suggest that we are pushing across the table two organized labor those bankrupt contracts and saying that’s what we need for our company to be successful, because we think that we’ve got a network, a franchise and a global partnership that can beat those other guys and we do believe that overtime there will be convergence, that those companies will not be able to sustain their bankrupt labor rates and benefits forever.

So that, yes, of course convergence is part of our calculus for our company being competitive, but it doesn’t mean we’re giving our pilots or our flight attendants or the TWU the bankrupt contracts across the industry and saying that they have to match these contracts, because I think that would be counterproductive.

Jamie Baker - JP Morgan

For my follow up, I realize the JAL situation is still very fluid, I’m curious if you could quantify what the annualized foregone revenue should be in the event that JAL does defect and also, just whether or not there’s a plan B under consideration, I mean the 787 springs to mind is that allow you to more effectively reach Hong Kong, suggesting that maybe the CAFE relationship could be taken up a notch?

Tom Horton

The revenue from the JAL relationship, I think we have not quantified precisely, but it’s over $100 million. I mean it’s meaningful. It’s maybe even more than the numbers. It’s strategically meaningful because that’s an important gateway for us into Asia, over northeast Asia. We’ve got great partners in Southeast Asia in CAFE and Qantas in Australia, but that’s an important market for us, obviously.

So it is important, which is why we’ve put so much effort into it. You’ve seen so much about this in the press. If JAL were to go the other direction and we think that, by the way, quite unwise given that we have put in front of them a proposal, which is the best commercial value, the best financial value, and represents far and away the least risk alternative for them while they undergo this highlighted restructuring.

So we think it’s kind of a no brinier, and I would add to that having them join up with an alliance that is strong in every part of the world from North America to Europe to Latin America to other partners in Asia I mentioned. Again, we think it should be an easy decision, but that said, if JAL were to choose otherwise, we would huddle with our oneworld partners and consider our alternatives there.

There are other carriers around the world who have expressed an interest in joining oneworld and we would go consider that. We would evaluate other carriers in the region, both those that are not represented by alliances and those that are. We would take a clean sheet of paper to this.

Gerard Arpey

Jamie, if I’d goes without saying, but we would of course also move aggressively to block any form of cooperation between the dominant carrier in the region and certain anticompetitive outcomes from 65% of the traffic between the United States and Japan being controlled by one partnership.

I would be astonished if such a partnership could come together and pass any form of antitrust scrutiny, let alone ATI. I think ATI is a nonstarter. It would make a mockery of the whole notion of Open Skies. It would make a farce of the whole process. The thought that the carriers that have had the duopoly in that market where other airlines, including American, have been prevented from competing in Japan for 50 years that Open Skies would lead to them having immunized partnership would be a joke. It would make an absolute farce of the open skies process.

So I don’t think that that could possibly happen and I don’t think even short of that, it can pass antitrust scrutiny. So we would of course, object vigorously through whatever means that we might have to any form of partnership there and you’ve already seen independent groups already voicing opposition to such consolidation in the market. I think last week the Business Travel Coalition came forward and said they would vigorously oppose such outcome.

Again, I agree with Tom. I think it would be a very unwise course for them. I think it would be curious to go down such a high risk path in light of the financial condition of the company. Having said all that, I think we have put in front of JAL, in front of E-tick, in front of the Japanese government a very constructive path forward to reconstitute the company and we’re eager to have more opportunity to talk to them about what’s best for JAL.

Tom Horton

Despite press reports otherwise, we continue to have an active dialogue with JAL, with the government, with the banks, with everybody who is relevant in this process.

Operator

Your next question comes from Kevin Crissey - UBS.

Kevin Crissey - UBS

I want to see if you could give an update on jet stream, if there’s any?

Gerard Arpey

Yes, Kevin. I think the best I could tell you at this point is we announced last year that we had signed a MOU with HP on that project. As we sit here today, we have not signed a definitive agreement. We have been engaged in very detailed and comprehensive and good conversations with HP. We just hadn’t pushed it over the finish line yet, but we’re still heavily engaged and expect to do so sometime in the near future.

Kevin Crissey – UBS

I am not sure, maybe you mentioned it in the commentary, and even strikes me as a certainly good revenue guidance here, but have you mentioned a terrorist incident and any booking impact you might have seen?

Tom Horton

We have not seen any appreciable impact on that, Kevin. So, I don’t think it’s there.

Operator

Your next question comes from Dan McKenzie - Next Generation

Dan McKenzie - Next Generation

I guess just a follow up here. You kind of preempted one of my questions with respect to JAL, but the media is reporting the JAL plans to shrink roughly 30%. Now I’m not sure if that will be the case, have you received any information at this point on how any slots freed up from the carriers retrenchment might potentially be reallocated?

Tom Horton

We have not, and I think it’s probably premature to speculate on what the JAL network restructuring will look like, but what we have stressed to Japan Airlines and the Government of Japan is that our objective at oneworld is to ensure a strong and vibrant Japan Airlines. It’s not to see a Japan Airlines continue to shrink, it’s to make them our exclusive gateway into Asia out of northeast Asia so that our interests are aligned with Japan Airlines to have it grow and prosper.

The competing alternative doesn’t necessarily have that same set of incentives, given the fact that they have a competing hub at Inch on and so I think that’s an important distinguishing characteristic here, but the ultimate decision on what the size and shape of JAL’s network will be, theirs and that of the government and E-tick, but in the longer term, our objective is to see JAL prosper.

Dan McKenzie - Next Generation

Then I guess for my follow up question here, I appreciate the demand commentary you guys have already given, but I’m wondering if you can provide even a little bit more perspective. I guess I’m seeing international fares up roughly 30%, so I’m wondering if you can talk about the improvements in business traffic from, say, a sequential perspective, January versus November and December, and I guess what I’m getting that is if the international bookings in January really represent another step function improvement from what we saw in the fourth quarter of last year.

Tom Horton

Well, I think it remains to be seen, but I’ll tell you what we do know and what we are seeing in terms of corporate travel. Business travelers are coming back and in the last two months of the quarter, corporate passengers were up versus the prior year and that is the only instances we saw of that during ‘09. Corporate revenues for November and December, taking into account the yield effect, approached roughly flat year-over-year performance.

That’s a pretty big move given that we were seeing corporate revenues down around 35% back in the low points or the dark days in May, June. So, clearly easier comparisons in November, December, but even when you look at versus ‘07 positive trend. So we’re encouraged by that. So it’s been corporate traffic just continues to kind of slowly climb back and that’s, if it continues, that’s an important trend for revenues this year, unit revenues particularly.

Operator

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

Helane Becker - Jesup & Lamont

Gerard, this is kind of more of a big picture question for you. I guess Oberstar; the GAO in response to one of Oberstar’s issues is asking them to look at the loss of tax revenue from ancillary items. Can you just kind of address your thoughts about that, if it goes anywhere, if they do say they’re losing tax revenues if you wind up losing ancillaries or taxing ancillaries, how are you guys thinking about an end game for that?

Gerard Arpey

Helane, I’m not sure I’m aware of what you’re talking about and I guess the way I would come at it is to suggest that if you look over the past decade or so, fees and taxes on airlines and airline passengers have increased at an astronomical rate, in my opinion. So we’re now to the point where on an average ticket, well over 20% of what we receive goes to various governmental entities, whether it is through the form of the excise tax, the security tax, the nine of 11 lump sum fee that we all pay, the payments the airport charges.

So I think that, we as an industry and certainly we as a company are going to aggressively resist and have resisted any more taxes and fees on this industry, but regrettably, I think many in government that don’t view airline passengers as voters and so in most budgets that we see and lots of bills, you see increases across the board in all these fees and taxes and best thing we can do is resist them and we spend a lot of time through ATA and the CEOs working together to do that.

Helane Becker - Jesup & Lamont

An unrelated question, Tom, is there going to be somewhere, or maybe there is and I missed it, an explanation of the tax benefit that you took in the ‘09 fourth quarter?

Tom Horton

Yes, Helane, it’s very head hurting. I’ll give you a kind of a quick rundown on it and then if you’d like, Eric or Chris can drill into it some more, but it is complex. It’s driven by an accounting rule and other airlines that use hedge accounting for derivatives will see a similar benefit, we think. During ‘09, we generated a pretax loss of $1.8 billion.

However, in the other comprehensive income category, we had income of $630 million, which is recorded, as you know, as a component of equity. That other comprehensive income in ‘09 was generated primarily due to the reversal of derivative losses recorded to OCI during 2008. So due to historical and then current projected losses, the company has recorded a valuation allowance against its tax benefits, which results in an overall tax provision of zero, which is what you normally see on the face of the financial statements.

However, in accordance with this accounting standard, the tax provision is required to be allocated between the operating loss and the other comprehensive income. So what that means is application that guidance during ‘09 resulted in a non-cash tax benefit recorded in the statement of operations of $248 million, which offsets the $248 million charged to OCI. So it’s very head hurting and I’m sure you’re glad you asked, but that’s the way the debits and credits work.

Operator

Your next question comes from Bill Mastoris - Broadpoint Capital.

Bill Mastoris - Broadpoint Capital

Tom, you indicated that there are cash outflows, or cash inflows from aircraft financings to about $2 billion related to the 2010 deliveries. These are from the recent financings. I don’t know how convoluted this may get, but if you could add a little bit more color, that would be greatly appreciated. I certainly understand it from a conceptual standpoint, if you could kind of walk me through a couple of the numbers that would be really appreciated.

Tom Horton

Sure. We have about $2 billion in financing proceeds and we have about $1.7 billion in cash going out, CapEx associated with those airplanes, so more financing than CapEx. So two reasons for that, one is that for certain of our financing transactions and I probably can’t say much more than that, the proceeds are in excess of the price at which we buy the airplane, because we buy them at very attractive prices under our Boeing deal.

The second reason is that we have pre-delivery deposits on some of these airplanes, which have been paid in the past. So there’s sort of in effect a refund of that via the financing. So those two things together create that $300 million gap, which means that our aircraft deliveries are actually basically cash positive for us in 2010.

Bill Mastoris - Broadpoint Capital

How large would be the pre-delivery deposits roughly?

Tom Horton

It’s about $100 million.

Bill Mastoris - Broadpoint Capital

Then on an unrelated question, Tom this is something that I don’t know whether it’s or how large the magnitude is, but certainly the press release indicates a large number of early pilot retirements. Certainly on a unit basis you saw that on labor costs actually spike up. I’m just wondering, what’s the cash component there and what might it do as far as lowering any type of future costs, all right, for that labor component?

Tom Horton

Those early retirements were actually at the end of ‘08 not in ‘09, which impacted ‘09 as you read in the release, so not really a meaningful effect going forward. There’s not really anything for you to…

Operator

Your final question comes from Will Randow - Citi.

Will Randow - Citi

I was hoping I could get a little bit more granularities on fuel expenses going forward, particularly your guidance for 242. Are there any uneconomic hedged positions that might be driving that cost above the economic level? Then also for 2011, do you have anything in place. I guess from a bigger picture perspective, how should we think about higher fuel costs relative to what levers can you pull on the revenue side?

Tom Horton

There really aren’t any hedge effects in there, because we’ve got a floor for the year, floor of about $65 and a cap of about $93. So we for the price that you see that we’ve reflected there, it’s basically just we pick a point in time and give you our expectations based on that certain date, where we look at the forward curve and use that forward curve. So the number I gave you is reflective of the January 8 forward curve and it’s moved down a bit from there, so let’s hope it keeps going.

Will Randow - Citi

Then for 2011, do you have anything in place?

Tom Horton

For ‘11 we do have a little bit in place, because the way we layer in our hedges. We’ve got about 4% for the full year.

Will Randow - Citi

In terms of JAL, it’s been hit a number of times, but obviously it makes sense for Delta to pursue JAL possibly without antitrust approval or immunity. In terms of when you think about that, if Delta is successful, what are the implications you believe for the oneworld alliance? Then if Delta isn’t successful and you are asked to provide a capital investment, what are kind of the hooks or tail in terms of TPG’s investment, is there any warrants or dilution impact to AMR?

Tom Horton

I’ll start with the antitrust immunity. As you probably know, the way the DOT looks at antitrust immunity is they grant it only in the case that they view the combination to be pro-competitive and given that you would be going from situation today, where U.S./Japan traffic is split roughly equal among three alliances to a situation where one alliance for that 65%, roughly a little less than that, the other alliance would have 30% something.

I think it’s very hard to argue that that is a pro-competitive outcome. So we don’t think there’s any chance that Delta and JAL would get antitrust immunity. Certainly not if historical standards would be applied to those…

Will Randow - Citi

In terms of if they do, what are the implications for the oneworld partners? Obviously it weakens your alliance, but what would be the next step?

Gerard Arpey

I’d like to jump in there and say yes, JAL is an important partner of American. They are an important oneworld member. Oneworld is built on the notion of having the highest quality brand airlines around the world in our partnership. So we have emphasized that in our recruiting efforts over the years and of course, everybody’s going to spin their alliance the way they want to, but our spin, but I think we can base it on facts.

I believe American has a domestic network here in the U.S. that is unrivaled. I don’t think anybody has a stronger domestic network than we do. We’re the largest carrier to Latin America. We, American Airlines and we have two very important oneworld members in Latin America in LAN and recently we added Mexicana and stay tuned for possible more additions in Latin America, but I think oneworld by far is the strongest global partnership in Latin America. We have the strongest network in the U.S.

I believe we arguably have the strongest partnership in Europe, once we get immunity because our alliance is anchored in London, the largest travel market in Europe, and Madrid, coupled with our other partners, Finnair and Malev and S7 in Russia soon to join oneworld. So in Eastern Europe, we’re strong as well and stay tuned for developments in India. In southern Asia, with CAFE and Qantas, we’re very strong and with JAL, I think we’re unrivaled.

So globally, I don’t think there’s any comparison between oneworld and our competitor for JAL, but you can draw your own conclusions. If this were not to go our way, other than opposing it and reacting competitively to rebutters ourselves in that region of the world, we still have a superior global partnership in oneworld, for all the reasons I just mentioned.

Will Randow - Citi

Then just in terms of if you are called to invest capital into JAL, along with TPG, are there any hooks in terms of dilution we should be thinking about for AMR?

Tom Horton

No, the terms of that would be determined at the time such investment was made. As I described earlier, we think that the prospects for that are probably dimmer at this point, but if it were done, it would be negotiated and the terms and conditions would be determined at the time and it would be only done as part of a government led restructuring that made it a sensible investment.

Operator

Ladies and gentlemen, member’s of the analysts and financial community; that does conclude your question-and-answer session for today.

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Source: AMR Corp. Q4 2009 Earnings Call Transcript
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