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Executives

Chris Ducey - Managing Director of Investor Relations

Gerard Arpey - President & Chief Executive Officer

Tom Horton - Chief Financial Officer

Analysts

Hunter Keay - Stifel Nicolaus

Jamie Baker - JP Morgan

Gary Chase - Barclays Capital

Bill Green – Morgan Stanley

Helane Becker - Jesup & Lamont

Kevin Crissey - UBS

Will Randow - Citi

Bill Mastoris - Broadpoint Capital

Dan McKenzie – Hudson Securities

AMR Corp. (AMR) Q1 2010 Earnings Call April 21, 2010 2:00 PM ET

Operator

Welcome to the AMR first quarter 2010 earnings conference call. (Operator Instructions) As a note, will be taking questions first from the members of the analyst community and then after a short break, move into our media Q-and-A session. As a reminder, today’s call is being recorded. We are 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, Tom Horton.

Here with our opening remarks is AMR’s Managing Director of Investor Relations, Chris Ducey. Please go ahead sir.

Chris Ducey

Good afternoon everyone. Thank you for joining us on today’s AMR 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 first quarter along with some perspective on the second quarter and the remainder of 2010. 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 www.aa.com.

Finally, let me note that many of our comments today including statements regarding our outlook for revenue and costs, forecasts of capacity, traffic load factor, fuel costs, fleet plans and statements regarding our plans and expectations 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 2009 Annual Report on Form 10-K.

With that I will 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 we had a net loss of $452 million for the first quarter which compares to a net loss of $362 million a year ago. It was obviously a disappointing result as higher fuel prices largely outpaced the progress we made in generating nearly $230 million of additional revenue.

In spite of the short-term challenges we faced in the first quarter which Tom will walk you through in a few moments, we did make some important long-term progress on a number of fronts. On our last earnings call we shared our framework for the next decade which we call internally Flight Plan 2020 and it is intended to set the foundation of making this decade one of success and not just of survival. Its five tenets are; Invest wisely, earn customer loyalty, strengthen and defend our global network, be a good place for good people and fly profitably. These are the principles that will guide our company over the coming years.

The revenue generating power of our network is critical to our future and in the first three months of this year we were able to strengthen our global network as JAL reaffirmed its commitment to American and oneworld and together we are moving forward with our application for antitrust immunity. At the same time, we think government regulators on both sides of the ocean are poised to finally approve our joint business agreement with British Airways and Iberia.

Also we announced plans to significantly strengthen our presence in New York through a number of steps including an innovative partnership with JetBlue. In addition, this month we have started implementing our cornerstone strategy bolstering our flying in New York, Los Angeles, Chicago, and Dallas/Fort Worth, the four largest business markets in the United States and in Miami, the hub of the Americas. We believe these network initiatives build the revenue generating power of the best network in the airline industry and position us well for the future all without jeopardizing our long track record of capacity discipline.

As Tom will discuss while there are signs of a recovery in demand the last thing we can afford to do is get ahead of ourselves with supply and our capacity plans for this year remain modest. Our 1% mainline capacity increase in 2010 is driven by the launch of service to Beijing, China and the reinstatement of flying cancelled during last year due to the H1N1 virus. While we are keeping a lid on capacity at the same time our fleet renewal program is picking up speed. We are taking delivery of a lot of 737-800’s which are a lot more fuel efficient than the MD-80’s they are replacing. We are also adding more CRJ-700’s with first class seats and installing first class on our existing CRJs.

We ended the first quarter with a strong cash balance of just over $5 billion. That is $1.7 billion more than our total cash balance at this time last year and that increase reflects both the financing transactions we executed last year to bolster our liquidity as well as an improving revenue environment this year. Even though we are seeing some positive signs we along with the entire industry continue to face a host of uncertainties regarding the broader economy and fuel prices but macro uncertainty is certainly nothing new and we remain committed to working hard to return our company to profitability.

Today’s results certainly indicate we have a lot of work to do but in terms of our long-term future it was an important quarter with a lot of progress on several fronts. With that said I will turn things over to Tom.

Tom Horton

Thanks Gerard. Good afternoon everyone. In the first quarter we lost $505 million or $452 million excluding special items. That compares to a loss of $361 million excluding special items in the first quarter of 2009. We had special items totaling $53 million in the first quarter of this year and $13 million in the first quarter of last year. You can refer to the press release for details of these items.

So 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 the results show the first quarter proved to be quite challenging for our company. Lingering weakness in the economy, rising fuel prices and cost pressures mainly resulting from capacity cuts combined to produce a disappointing result. While we are seeing positive signs that corporate travelers are back on the road and our unit revenues have nearly returned to early 2008 levels, high fuel prices and increasing costs overshadowed our progress.

That said, during the first quarter we made significant progress towards securing our company’s future as we are on track to implement our joint business agreements with British Airways and Iberia as well as Japan Airlines and we announced plans to bolster our presence in New York. All of these steps are consistent with our cornerstone strategy which focuses on five key markets; New York, Los Angeles, Chicago, Dallas and Miami. I should note although we announced our cornerstone strategy last year it is only this month we actually began making schedule changes to implement it.

So as we wrap up a difficult first quarter we remain optimistic about the future of our company. We are building a solid foundation under Flight Plan 2020 and taking steps to return to profitability. Our future depends on the revenue generating power of our network. This quarter we made significant progress to strengthen our global network, one of the key tenets of Flight Plan 2020.

First, JAL announced it will continue and expand its relationship with American and oneworld. We believe that JAL has made the right choice and our companies are already working on our joint application for antitrust immunity as well as working together with our oneworld partners to support JAL’s restructuring.

Across the Atlantic our efforts to strengthen our alliances and level the playing field moved much closer to reality when the DOT tentatively approved our application for antitrust immunity with British Airways, Iberia, Royal Jordanian and Fin Air as well as our plans to operate a trans-Atlantic joint business with BA and Iberia. We anticipate DOT approval of our joint business proposal by the end of the second quarter with EU approval following in mid-summer.

More recently we announced a series of steps to bolster our commitment to New York including starting service on 13 new routes, adding 31 new American and American Eagle flights, enhancing our facilities and launching an innovative arrangement with JetBlue to feed our international flights. All told, after our relationship with JetBlue is implemented by the end of this year our customers will have access to 81 unique, nonstop destinations from New York. This is a great deal for both American and JetBlue.

On top of these steps we are also working to implement previously announced plans through 2010 and beyond that further strengthen the revenue generating power of our network including taking delivery of 45 737-800’s this year including 10 that arrived in the first quarter, representing further execution of our fleet replacement plan and adding first class seating to our existing CRJ-700 fleet by the middle of this year and taking delivery of 22 new CRJ-700’s all with first class sections beginning later this year.

Later this month we will be launching our second flight to China with service to Beijing from Chicago. We believe all of these steps will significantly enhance the power of our network as well our business results over the long-term. At the same time, the best network in the industry isn’t enough by itself to ensure our long-term success. We must have competitive costs. So we are also focused on making sure our expenses remain in check and we have many cost savings initiatives underway throughout our company.

Turning to our first quarter results, let’s first recap our revenue performance. In the first quarter mainline unit revenues increased almost 7% on 2.5% less capacity. Load factors were up over two points with yields up over 3.5%. Our consolidated passenger unit revenue increased by 7.3% for the quarter. To put this number in context it is important to note we have outperformed the industry on year-over-year consolidated RASM change for seven consecutive quarters leading up to the first quarter of 2010.

In fact, in the first quarter of 2009 our year-over-year performance was 2.5 points better than the industry. So it makes sense that as early disclosures indicate our increase this year would be moderated versus the industry as we are starting from a position of relative strength.

Domestic unit revenues improved by almost 6% while international unit revenues increased by almost 8.5% versus last year. Furthermore, for each month during the quarter our year-over-year unit revenue performance improved both domestically and internationally. Domestically business markets such as New York and Los Angeles were particularly strong while the Atlantic entity led the pack with the strongest revenue improvement internationally.

In terms of corporate travel we are seeing signs that business travel demand is accelerating. For the quarter our corporate revenues increased by over 17% with 2/3 of the increase driven by traffic and the rest resulting from higher yields. Importantly, March showed even more improvement as domestic corporate revenue increased close to 30% year-over-year. We are seeing companies loosening restrictive travel policies and increasing travel spending to stimulate their own business activity.

We are also seeing fewer fare sales. At the same time the industry is having more success in raising fares. In the first quarter last year there were no successful far increase attempts while this year approximately 2/3 of industry fare increases were at least partially successful. As we have said before our revenue performance will largely be determined by the pace of economic recovery and so some uncertainty remains. Looking forward our advanced bookings are up slightly versus last year with domestic down about ¾ of a point and international up almost 2 points.

Importantly, yields are trending up significantly versus last year and we are seeing more close-in bookings. For example, at the beginning of the first quarter we were seeing flat advanced bookings but we ended the quarter with our mainline load factor up over 2 points. So while we are seeing some hopeful signs we will need to keep an eye on the economy as we move through the rest of 2010.

I should also point out we are closely monitoring the impact of the trans-Atlantic flight cancellations we have experienced due to volcanic ash. Through Tuesday, April 20th, we have cancelled approximately 350 flights. We anticipate this disruption will have negative impact on our second quarter results and we have estimated the cancellations so far have resulted in a loss of approximately $15 million with reduced revenue partially offset by lower fuel and operating expenses. Of course it is too soon to estimate the total financial impact of this event but suffice it to say it was a very unwelcome development in the midst of a fragile recovery.

On the regional front, quarterly revenue increased 9% versus last year. Our regional capacity was down about 1.5% for the quarter and regional unit revenue was up almost 11% versus last year. Our cargo revenues increased over 6.5% versus the first quarter of last year. Cargo traffic was higher by over 20% but yields continue to see some year-over-year pressure. In other revenue we saw a year-over-year improvement of almost 5% as we saw continued strength in baggage and advantage partner revenues.

Shifting to costs our first quarter unit costs excluding fuel rose just over 5.5% for both the mainline and consolidated driven by headwinds related to capacity reductions, airport and facility cost increases, costs associated with maintenance events that were completed earlier than planned and of course revenue related expenses. Fuel prices increased during the quarter to $2.23 per gallon consolidated, up about 16.5% versus last year. Consequently we paid about $210 million more for fuel in the quarter than we would have at least year’s prices. These higher fuel prices drove consolidated unit costs to be 8.5% higher versus last year.

Turning to the balance sheet, we ended the quarter with just over $5 billion of cash and short-term investments including a restricted balance of about $460 million. Our cash balance represents almost 25% of trailing 12-month revenue. A year ago we ended the first quarter with $3.3 billion of cash and short-term investments also including a restricted balance of about $460 million. Our current cash position is a result of our efforts to bolster liquidity in 2009 through financing activities as well as improving travel demand so far this year.

In the first quarter our principle payments on long-term debt and capital leases totaled about $290 million. Our capital expenditures for the first quarter totaled about $315 million including less than $50 million of non-aircraft CapEx. Our total debt as defined in the earnings release at the end of the first quarter was $15.9 billion versus $14.4 billion last year. Our net debt defined as total debt less unrestricted cash and short-term investments at the end of the first quarter was $11.4 billion, down a bit from $11.5 billion a year ago.

Turning to the second quarter and full-year outlook I will first touch on capacity. We expect to see second quarter mainline capacity up slightly about ¾ of a percent with domestic down less than half a percent and international up about 2.5%. For the full-year 2010 we expect mainline capacity to be up about 1% with domestic down slightly ad international capacity up about 3% on the reinstatement of flying we pulled down related to the H1N1 flu virus and the commencement of Chicago-Beijing that we deferred from 2009 to this year.

Turning to costs, for the full-year we expect consolidated X fuel unit costs to be up about 1.5% with much of this increase explained by revenue related expenses such as credit card fees and commissions, airport related expenses and financing costs related to our new Boeing 737-800 aircraft. In the second quarter we will be facing headwinds from these issues as well as materials and repairs expenses and we expect our X fuel mainline unit costs to increase about 3.5% and consolidated X fuel unit cost to increase slightly less than 3.5%.

I should point out our capacity and cost guidance doesn’t yet include the impact of the disruption of trans-Atlantic flights we have seen over the last week. However, as it looks like we will be able to restore a full schedule soon we believe the impact on our guidance will be relatively small.

Fuel prices have been volatile and moving upwards in recent weeks and there remains significant uncertainty about the direction and volatility of fuel prices. Based on the April 9th forward curve we forecast a full-year fuel price of $2.40 per gallon consolidated. Based on this forward curve we would expect full-year unit costs to increase a bit under 6% versus 2009.

Due to our systematic hedging program we have built our hedging position for 2010 to about 1/3 of expected consumption with average floors at about $67 and caps at about $93 per barrel on a crude equivalent basis, again based on the April 9th forward curve. For the second quarter of 2010 we have about 39% of second quarter consumption hedged with floors at $70 per barrel and caps at $95 per barrel on a crude equivalent basis.

We also expect 2010 principle payments on long-term debt and capital leases to total about $1.1 billion with about $160 million of this amount coming in the second quarter. We continue to take a measured approach to our capital spending by making sound investments we believe will help keep American strong and competitive for the long-term. For the full-year 2010 we continue to expect about $400 million of non-aircraft CapEx and about $1.7 billion of aircraft CapEx.

In addition to our fleet replacement plan we continue to invest in Admirals Clubs including recent upgrades and one at Heathrow and Boston, winglets for our 767-300 aircraft and the standardization of our 737-800 fleet.

So in conclusion this quarter was very challenging but we are focused on returning the airline to profitability. The economic environment and volatility of fuel continue to present plenty of uncertainty but with the progress we have made on the alliance front and implementing our cornerstone strategy this month we have taken important steps to grow the revenue generating power of our network and we believe we are on the right track.

So with that Gerard and I would be happy to take your questions.

Question and Answer Session

Operator

(Operator Instructions) The first question comes from the line of Hunter Keay - Stifel Nicolaus.

Hunter Keay - Stifel Nicolaus

Do you think there is a risk your network would be marginalized by a merger between two of your network carrier competitors?

Gerard Arpey

I was asked that question in Los Angeles a couple of weeks ago at a oneworld meeting we had and I guess I would express the same view as I did then which is I think we have a strong network today. I am confident in our corner post strategy because I think our footprint is in the most important business markets in the United States already and so we are not necessarily threatened by talk of consolidation in the industry.

In fact, I think Tom and I have both commented publically about the fact that consolidation could be good for the industry. But having said that, that is not to say we are not focused on strengthening those corner posts. If you look at this quarter’s announcements and what we are doing in New York and what we are doing with our oneworld partnership around the world I think we have to be mindful of how our network evolves. Not just here in the U.S. but around the world. Obviously we have had a lot of focus outside of the United States in recent months and I think that will continue to be the case.

Hunter Keay - Stifel Nicolaus

On Pacific, I would like to flesh out a little bit more color there. It was a little bit softer than I think I was looking for personally. The ATA data last night showed about 10.5% growth out of the Pacific. You reported about a 90 basis point decline. How is JAL or is it impacting that at all? I think we initially thought maybe there was some opportunity there for you to pick up some of the traffic that JAL would be losing as they are restructuring but is it actually having a negative impact in the sense some of their domestic restructuring is impacting a lot of the fees into Narita?

Gerard Arpey

I don’t think so. I think it is more a matter that if you look at our Pacific presence it is more heavily weighted to Japan as opposed to other Asia. If you dissect the results for the quarter what you will see is other Asia was a bit stronger than Japan in general. I think it is more of an entity mix question for us.

Hunter Keay - Stifel Nicolaus

There is really no relative impact from a fee perspective with JAL restructuring?

Gerard Arpey

No I don’t think so.

Operator

The next question comes from the line of Jamie Baker - JP Morgan.

Jamie Baker - JP Morgan

I don’t want to beat around the bush here. You have the highest costs. You have the lowest margins. You are the only major airline expected to lose money this year. Your year-to-date equity performance has trailed that of your peers. In other businesses I can think of when there is a company standing out like this you sort of expect a major overhaul and it isn’t clear to me that Flight Plan 2020 is that plan. I am trying myself to find a reasonably intelligent question here. I guess it has to be is this really all you have got?

Gerard Arpey

I think that the pressure that all of the airlines are facing profitability pressure no secret to you or anybody that by the fact we are the one network carrier that did not file for bankruptcy we have a pretty significant labor cost disadvantage versus all of our network peers which tends to obviously depress our operating margin relative to those companies.

As I have said for quite some time I don’t think that is long-term, sustainable competitive advantage for those airlines and I would expect now that all of the contracts are amendable virtually across the industry there is going to be a lot of convergence in the cost structures across the network carriers. In fact, there are something like 19 major contracts either being negotiated or mediated across the industry. So I think the gap you are describing on the cost side is going to be mitigated and there is going to be convergence.

On the revenue side as Tom has indicted we are outperforming our network competitors. We feel good about the footprint of our network. We feel good about our relative revenue performance and of course we feel good about the partners we have chosen around the world. I would acknowledge we do have a cost challenge relative to the industry that is both rate, productivity, legacy, pensions and medical benefits but I don’t think that creates long-term competitive advantage for all of those bankrupt companies. I think over time that will not be a sustainable competitive advantage for them. Maybe they will prove me wrong or you will prove me wrong.

Jamie Baker - JP Morgan

Maybe it is just a lack of urgency. Maybe it is just me but I think a lot of your owners don’t really detect all that much extreme urgency there that we would hope you would be feeling. I guess you just don’t sound all that fired up. I do realize the conference call may not be the easiest place to convey that emotion. I do appreciate your comments.

Tom Horton

I would just add one point to that. That is we have also been a little bit disadvantaged in recent years on the alliance front because we haven’t had antitrust immunity with our Atlantic partner and now we are in a position where we are going to have antitrust immunity and a joint business agreement with two big trans-Atlantic partners and now a Pacific partner. We view that as a big step forward on the revenue side where we already have unit revenue premium to the industry and we think we can make it that much better. So that in addition to the labor cost convergence Gerard talked to a minute ago I think those two things together are quite significant from a margin perspective over the next couple of years.

Jamie Baker - JP Morgan

Would you care to guide on just how much relative margin improvement that might drive? What sort of relative margin disadvantage, the lack of ATI and immunized alliance has driven in the past?

Tom Horton

It is premature to say because we will need to be able to sit down with our partner and talk about how we structure the flying and how we coordinate our sales activities and those things we cannot do until we have antitrust immunity. If you look at what some of the other airlines have offered up as disclosure to the benefit of their trans-Atlantic deals it is measured in the multiple hundreds of millions.

Operator

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

Gary Chase - Barclays Capital

I wanted to just ask a quick one on Latin America and then move to sort of a broader network question. Latin America was a bit light at least relative to what we were thinking in March. We saw the ATA data a couple of days ago. I wonder if you have any perspective on what was driving that and whether we expect that to continue as we move into the second quarter. Delta had mentioned Venezuela as a place that was soft yesterday. I am curious for your perspective on how that is going to play out.

Tom Horton

Latin America had been stronger in the prior year period than had the Atlantic and the Pacific. As you look at the year-over-year our unit revenues were up 6% in Latin and almost 7% in the Atlantic. Part of the reason is you just have a stronger base year. As we look forward into the second quarter we have seen an improving fuel surcharge and fare environment in Latin America and particularly strong premium demand in Argentina and Brazil. Looking into the second quarter we would expect much stronger sort of double digit RASM growth that would be more consistent with what we have been seeing in the Atlantic.

Gary Chase - Barclays Capital

If you read the release there is a lot of talk about investing in the network, bolstering your position, defending the network. It kind of reads like underperformance. I am wondering what is your thought? Are you making investments you think we ought to consider as you are taking a hit in the near-term for longer term gains? Do you expect to underperform the industry because of some of these decisions you are making? Or do you think you can keep pace and enhance the network at the same time?

Tom Horton

Quite to the contrary we think the things we are doing are going to improve our relative performance. Everything from replacing the fuel inefficient airplanes with much more fuel efficient airplanes which have immediate margin impact to the network efforts we are making with respect to the cornerstone strategy which we also expect to be unit revenue positive. We announced that last year but we have only been implementing the scheduled changes just starting this month. We are right at the beginning of that curve as well. All of those things we expect to be accretive, not dilutive.

Gary Chase - Barclays Capital

To clarify, you mean accretive from the get go, not that you have a period underperformance followed by payback later?

Tom Horton

That is absolutely correct.

Operator

The next question comes from the line of Bill Green – Morgan Stanley.

Bill Green – Morgan Stanley

Can I follow-up on your comments on labor costs? I think we all agree with you that you do have a bit of a disadvantage but your labor groups don’t seem to agree with that sentiment. I am not sure how we can bridge the gap. Is the strategy to just wait for the other groups to catch up over time or is there actually really and truly a possibility we could see your labor costs fall?

Gerard Arpey

I think of course we are in mediated discussions with all three of our organized groups today as are a number of other carriers. I think the dialogue we are having with organized labor is one in which we are suggesting that it is very important as we try to negotiate new agreements we balance the competitiveness of the company and our employees’ long-term job security against everybody’s desire for us to do better in the short-term.

The fact that we start from a position of having the highest labor costs in the industry means that we have to be mindful of where we are going to end up once all of these contracts are settled. So our objective is to protect all of our employees’ long-term interest and job security by making sure we don’t end up pricing ourselves out of the market. My expectation is that through the process of all of these contracts that are going through mediation and eventual settlement is that gap that today ranges anywhere from $300-400 million a year all the way up to $1 billion a year in comparison if you take some of the bankrupt companies and put their contracts on American that gap is going to close.

I don’t expect that to happen this summer but I do think it will happen in the course of all of the contracts being renegotiated.

Tom Horton

In fact it is already happening. If you look at the contracts signed at Delta in Alaska and Hawaii those are rate increases that bring some of the pilot contracts in line with ours. Of course they have more flexible contracts which will lead to better efficiency and that is something we are going to have to address as we work through our new contracts. But convergence is no longer a theory. We are already seeing it play out around the industry. That would benefit us from a relative standpoint.

Bill Green – Morgan Stanley

Can I ask a little bit of a different question on M&A? That is, some of your competitors have argued that if you are going to change the return profile of the industry you have to change the structure. I am curious if you agree with that because I would think if you do wouldn’t it make sense to be more aggressive about consolidation? I am curious as to your views there.

Tom Horton

I will let Gerard chime in but I certainly think that the industry does need a more rational structure and that can happen in many different forms. Consolidation has proven to be a way to achieve a more rational return profile in a lot of industries including telecom where I spent a little bit of time. I think that is absolutely true. But as Gerard said I think we feel very confident about our network position irrespective of what happens around us. I think consolidation can only be good for the industry and only be good for us whether we participate in it or not.

Gerard Arpey

I think it does come back to not consolidation for consolidation sake. It is the issue in the industry of too many hubs and too many airplanes and what that does to pricing particularly one-stop pricing in this industry. Whatever vehicle would lead to a more rational balance between supply and demand would be effective in getting prices to the point where you are covering your costs. That can take many forms.

Bill Green – Morgan Stanley

Could it also be a form where legacy and a low cost could merge or could that never work?

Gerard Arpey

I wouldn’t say never to anything in this industry.

Operator

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

Helane Becker - Jesup & Lamont

On that $1 billion of debt due this year are you writing checks out of cash or are you refinancing it?

Tom Horton

We are doing a little bit of each of course. We have arranged a lot of financing for our new airplanes this year to the point where they are all fully financed at this point. Some of that debt is just being repaid out of cash as well.

Helane Becker - Jesup & Lamont

So as we look to the balance sheet what should we think of in terms of net debt by year-end let’s say assuming maybe a break-even level for the airline?

Tom Horton

Net debt at year-end will be a product of earnings. We don’t give forward guidance on earnings so I am not really prepared to comment on that. We produce $1.2 billion of depreciation a year so you can do some quick math based off of your own thoughts about earnings.

Helane Becker - Jesup & Lamont

With respect to labor can you give us an update on where the contract negotiations stand and how that is going? I noticed that I guess the NMB sent you back to negotiating with your flight attendants and your mechanics so my thought was perhaps you were making some progress they didn’t want to interrupt. Without negotiating publically can you comment on that?

Gerard Arpey

I think just to confirm really what you said which is yes more meetings have been scheduled by the NMB with the work groups that you mentioned.

Helane Becker - Jesup & Lamont

I know but do you have like a sense of the progress?

Gerard Arpey

I have to come back to what I said earlier which is the challenge is balancing the position we are in today which we have already commented on in terms of the labor costs versus the industry and ensuring the company is competitive for the long-term because that is the only way we will be able to secure jobs in this company. That is why the contract negotiations are taking a long time. We are trying to balance the company and our employees’ long-term interests against short-term desires. At the same time, as Tom indicated, see where the bankrupt companies land in terms of their new contracts as they settle those. I can’t give you a specific timeframe.

Operator

The next question comes from the line of Kevin Crissey – UBS.

Kevin Crissey - UBS

CapEx guidance for 2011, do you have if you haven’t given a specific number a rough number for that?

Tom Horton

No, we haven’t given a specific number on that and we wouldn’t yet. As I think I mentioned earlier we have only eight firm 737’s on order for next year. We may choose to increase that but at this point that is what we have as firm aircraft orders for next year. Ground CapEx you can kind of see how it has gone over the last couple of years and assume roughly in that zone.

Kevin Crissey - UBS

A lot of analysts have different ways to get back to a similar thing, so I guess I will go back to Jamie’s thought it doesn’t seem like radical changes here. I guess you have some limitations on what you can do that is radical to change things but if I think about the loss in this quarter unless my numbers are wrong it is basically as big of a loss this quarter as you have had of a profit in any year in the last decade or something in that vicinity. Yet labor is looking for increases and likely to get it even if there is convergence and others are going to lose more money as well. That shouldn’t make investors feel much better. They have a lot of other alternatives outside of the airline industry. I put that together with the growth of 1-1.5% and say okay I know there are reasons why you have that growth. But why not shrink 7% again? I don’t mean just you but everyone in the industry should be shrinking 7% again until the total cost of capital is reached?

Gerard Arpey

I think that is a legitimate question. What I think everybody in the industry is trying to ascertain is what is the new level of demand. Obviously we have just come off of an extraordinary downturn in the economy which has produced extraordinary losses in the airline industry around this country and around the world. But now we are seeing a pretty significant inflection point in terms of demand, corporate demand and even pricing which is a byproduct of the very significant capacity cuts we have made in the last 18 months. In fact, if you look at the network carriers’ capacity is down about 12% from the first quarter of 2008. So that is a pretty big reduction in capacity.

I think your question is that enough. That remains to be seen. I think it would be premature for us to make another big cut in capacity until we see how the economy begins to settle out. We are seeing obviously some pretty big improvements in unit revenues and we need more.

Kevin Crissey - UBS

I understand what you are saying that it is kind of like we don’t want to miss out on the peak. It seems like the industry is always trying to capacitize for the peak demand and when the peak isn’t exactly where we want it or you are losing money in the first quarter and the fourth quarter and there is money made in the summer. Most industries they have some seasonality but it is profitable most of the time if not all the time. I am not sure what is lost. You are going to lose some cash flow or whatever but if consolidation is about getting seats out which a lot of people argue, let’s just take seats out and see what happens. And say okay maybe we lose out on the peak but we will be well better positioned for the next problem that comes which we all know will happen?

Gerard Arpey

I guess I would just say we have done it. The industry has done it. The question is, is it enough. We are just going to have to wait and see.

Operator

The next question comes from the line of Will Randow – Citi.

Will Randow - Citi

I understand on a multi-year basis your RASM comparisons look relatively in line [inaudible]. When you think about there is a 300-400 basis point margin differential between you and your peers to make up [audio fades] or RASM, and that your corner post strategy is starting to hit how should we start thinking about your revenue comparisons starting to bridge that gap in the second quarter? Are you going to perform as well as the industry? How should we think about that for 2010?

Tom Horton

If I understand your question correctly it is regarding our RASM performance. I would just make a couple of key points there. The first is, over 7 quarters our year-over-year RASM performance as outperformed the industry. That I think is worth noting. Our mainline absolute RASM continues to be better than all of the legacy carriers and as I mentioned in this most recent quarter there has been a little bit of a favorable entity mix for some of our competitors; more trans-Atlantic than us, less Latin.

I think looking forward I would expect our unit revenue performance to continue to look quite good and as I mentioned in response to an earlier question I think the cornerstone strategy as well as the implementation of the joint business agreements should be even more net positive.

Will Randow - Citi

I guess my point is you have a large margin differential that needs to be made up either in RASM or labor. Labor is probably [inaudible] in awhile. Given your corner post strategy should reflect some relative RASM improvement starting with the second quarter do you think year-over-year, not on a multi-year basis, you will be able to generate a sufficient amount of RASM premium and start bridging that gap?

Tom Horton

I am not sure what gap you are referring to because we have a premium today and we have been outperforming…

Will Randow - Citi

I am sorry, I mean on an EBIT margin basis.

Tom Horton

On a margin basis that is our plan to by virtue of both the revenue initiatives we talked about, the cornerstone strategy and joint business agreements and some labor convergence we would expect the margin gap over time to narrow significantly.

Will Randow - Citi

How should we think about capacity for 2011 circling back to Kevin’s question? Given that fares are improving and your comments that you could take a few more planes based on your current expectations?

Gerard Arpey

We would be driven, we continue to be thinking about that from a replacement standpoint. I think back to the earlier line of questioning given the returns the industry has had over the past decade of course growth is not going to be helpful. That is not the way we would be thinking about it. We would be more oriented towards trying to drive ourselves to some sensible level of profitability.

Operator

The next question comes from the line of Bill Mastoris - Broadpoint Capital.

Bill Mastoris - Broadpoint Capital

On the last call you mentioned there are still some remaining aircraft you will be replacing into the 2009-1[EETC]. I wonder if you can give us an update on whether that is fully financed now or whether there are still aircraft that are yet to go in?

Tom Horton

I believe there are three airplanes left from that [EETC] which we have used for that purpose.

Bill Mastoris - Broadpoint Capital

So three more to go if I have that correct?

Tom Horton

That is correct.

Bill Mastoris - Broadpoint Capital

For all of the other aircraft deliveries what additional aircraft do you have that is non-backstop financing? I am just trying to get a pulse on the demand for or your ability to go ahead and attract maybe less expensive, again non-backstop financing.

Tom Horton

All of our airplanes on firm order now are financed. Outside of the backstops, the backstop remains in effect. Of course as we look to take additional airplanes as part of our fleet replacement plan we will be looking to line up further permanent financing but we still have the backstop as dry powder.

Operator

The next question comes from the line of Dan McKenzie – Hudson Securities.

Dan McKenzie – Hudson Securities

I wanted to see if I could peel back the onion on how and I guess to what extent AMR’s fleet strategy may be driving the earnings deficit relative to peers? I know AMR is adding more RJ’s this summer but when I look at fleets flown across the system I am finding that roughly 25% of those seats are flown by RJ’s and that compares to 40% in your four biggest competitors. I wonder if you could talk about how this RJ disparity is impacting or perhaps not impacting AMR’s earnings and also in general the competitive position relative to your peers?

Gerard Arpey

We are constrained as to what we can do with RJ’s by the scope clause of our pilot’s contract. So this year we are adding some CRJ-700’s which bring us up to the limitation on what we can do under the scope laws. So we are doing as much as we can. You are quite right. It is less than most of our competitors in the industry and there is an earnings impact associated with that.

Dan McKenzie – Hudson Securities

Is that an impact you can help us get our arms around or quantify relative to your peers?

Gerard Arpey

I don’t have anything at my fingertips. Let us think about that and we can give you a little bit more guidance on that on a future call.

Operator

Ladies and gentlemen and members of the analyst financial community that does conclude your question and answer session for today. After a brief break we will begin the media Q&A session. One moment please.

Ladies and gentlemen thank you for your participation and for using AT&T Executive Teleconference. You may now disconnect.

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Source: AMR Corp. Q1 2010 Earnings Call Transcript
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