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Executives

Chris Ducey – Managing Director, Investor Relations

Gerard Arpey – Chairman and Chief Executive Officer

Tom Horton – President, AMR and American Airlines

Bella Goren – Senior Vice President, Chief Financial Officer

Analysts

Bill Greene - Morgan Stanley

Gary Chase – Barclays Capital

Michael Linenberg – Deutsche Bank

Hunter Keay – Stifel Nicolaus

Helane Becker – Dahlman Rose

Dan McKenzie – Hudson Securities

Jamie Baker – JPMorgan

Bob McAdoo - Avondale Partners

AMR Corporation (AMR) Q3 2010 Earnings Conference Call October 20, 2010 3:00 PM ET

Operator

Ladies and gentlemen, thank you for standing by. Good afternoon and welcome to the AMR third quarter 2010 earnings conference call. At this point, we do have all of your lines on a muted or listen-only mode. After the executive team’s presentation today, there will be opportunities for your questions. As a note, we will be taking questions first from the members of the analyst community and then after a short break, move in to our media Q&A session. As a reminder, today’s call is being recorded.

We are very pleased to have on the call with us today AMR Chairman and Chief Executive Officer, Gerard Arpey; the President AMR and American Airlines, Tom Horton; and Senior Vice President and Chief Financial Officer, Bella Goren. And here with our opening remarks is AMR Managing Director of Investor Relations, Chris Ducey. Please go ahead.

Chris Ducey

Thanks, operator and good afternoon, everyone. Before we begin the call I would like to point out that today’s call may contain forward-looking statements. These include our forecast of cost and revenue performance, fuel pricing and fuel hedging, capacity and traffic estimates, and other statements concerning our liquidity and our expectations of future performance. Today’s call will be concluded with a question-and-answer session and would like to ask the analysts to limit themselves to one question with a brief related follow up. And with that, I would like to turn the call over to our CEO, Gerard Arpey.

Gerard Arpey

Thank you, Chris. Good afternoon, everyone. As you have seen in our press release this morning, we reported a profit of $143 million for the third quarter, our first profit since the third quarter of 2007. Our results are substantially better than a year ago in spite of significantly higher fuel prices. If you exclude special items, our third quarter results are better by over $400 million versus the same period last year.

Obviously, we have a lot room for improvement but the fact that we generated our first profits since the third quarter of ’07 demonstrates a meaningful step forward, the progress we are making takes the dedication of our entire team and I would like to just take a moment and thank all of our employees for their efforts to serve our customers during a very busy summer as well as their ongoing efforts in what is shaping up to be a very busy fall as well.

In a few moments, Bella will walk through our results in more detail but first let me highlight a couple of developments. Today, we announced significant steps to bolster our already strong presence in Los Angeles. This plan is the next step in our cornerstone strategy which focuses our service in five key markets – New York, Chicago, Dallas-Fort-Worth, Miami and Los Angeles.

Next year, we will be increasing our service at LAX adding flights to Shanghai, China as well as to nine new markets in the US. By next summer, we expect American and American Eagle to offer 153 daily departures from Los Angeles with numerous connections to our own network and to our unmatched network of partners.

Our oneworld partners including American will offer 18 daily international departures to key markets including Sydney, Hong Kong and London, and beginning next April, Iberia will fly from LA to Madrid. In addition, we plan to expand our bilateral relationship with Alaska Airlines in Los Angeles offering customers the ability to purchase tickets to eight destinations in Mexico.

Earlier this month we launched our trans-Atlantic joint business with British Airways and Iberia.

As all of you know we have been working on this for longer than any of us would like to remember but on October 1, we were very pleased to actually get started. This has tremendous positive implications for both American and British Airways.

With the launch of the – enhanced our frequent flyer program, adding the ability for Advantage® members to earn and redeem frequent flyer miles on BA flights across the Atlantic something that was not possible before. We have also better aligned our frequent flyers programs in particular the benefits offered to our premium customers which they obviously value greatly.

We started code sharing on numerous additional routes on October 1. For example, British Airways added its code to over 2,000 American in Iberia flights serving 181 destinations and we have added the American Airlines code to over 320 BA and Iberia flights to 101 destinations. So in total the joint business combined network serves more than 400 destinations in 105 countries with about 5,200 flights and that is a powerful combined network we can now sell.

We have realigned our own schedules and expanded our service including announcing American Airline service to oneworld® partner hubs in Budapest, in Helsinki, new British Airways flights to San Diego as well as Iberia service to LA in 2011. New York and London are key markets for our business customers and indeed business customers all over the world and we plan to have 11 daily American and British Airways flights between Kennedy and Heathrow. Any flights will be much more evenly and conveniently spaced throughout the day. In fact, during the peak periods we are going to be in effectively operating a shadow between Kennedy and Heathrow so we are very excited about our plans for that markets next year.

This is just the beginning of our joint efforts. All of these initiatives as well as our broader alliance strategy are uniquely focused on premium customers. In fact, at each of the top four airports for premium travel in the world – Heathrow, Kennedy, Hong Kong and LA – our oneworld® alliance has the largest share of premium seats and our alliance’s hubs in five of the top eight premium travel airports in the world providing an unmatched network for our premium business customers.

We remain focused on expanding our own network and our alliance footprint even further. In fact, within the last week we have announced new relationships with JetStar and WestJet. These announcements capped a very busy couple of months of activity on the alliance front. We have added Air Berlin as the newest member elect of oneworld®. I think many of you know that is the fifth largest carrier on Europe. We launched our commercial agreement with JetBlue and added new code share routes with GOL in South America.

Of course we recently have good news regarding our proposed trans-Pacific joint business with Japan Airlines when the US Department of Transportation tentatively granted US Antitrust Immunity and all of us are looking forward to a much closer relationship with JAL in the coming months once our joint business is fully approved.

So as we look forward the next year, we are working hard to lay the track for continued improvement in our result at the same time we have a significant amount of flexibility in terms of our fleet and we will continue to exercise capacity discipline as we move into 2011.

To sum up, we are glad to report a profit at the same time, we are intensely focused on improving our results going forward and with that said, I will turn things over to Bella.

Bella Goren

Thank you, Gerard. Good afternoon, everyone.

The third quarter continued the trend of significant improvement for AMR. We posted a profit of $123 million. This compares to a loss of $265 million excluding special items in the third quarter of 2009. We had special items totaling $94 million in the third quarter of last year and no special items this year.

Please refer to the press release for details of these items. For the remainder of the call, I will exclude the impact of special items to have a more meaningful discussion of our performance on an on-going basis.

We improved our net results by $408 million versus last year and this is despite paying $123 million more for fuel than we would have paid at last year’s third quarter prices. This is our first profitable quarter in three years since the third quarter of 2007. Our profit this quarter is a step in the right direction and we are committed on building on the momentum we have created.

Earlier this year, we outlined our road map forward and I would like to provide a brief update on the work being done to continue improving our performance. First, looking at revenue, we are laser focused on building upon the revenue improvement that we posted this quarter. As a reminder, we estimate that we will see over $500 million in revenue improvement and cost saving from our network realignment in our alliance activity.

We expect to realize much of this improvement in 2011 and reach the full run rate by the end of 2012. This estimates includes our partnerships as well as the impact of our cornerstone strategy focusing our network on the largest market in the United States – New York, Los Angeles, Chicago, Dallas Fort Worth and Miami, the gateway to Latin America.

Today’s announcement of enhanced service in Los Angeles is another step in executing our cornerstone strategy. Next year, we plan to start new service from Los Angeles to Shanghai and add service from Los Angeles to nine new domestic markets including Albuquerque, Houston, Phoenix and Salt Lake City and further build on our alliance in our partner relationships. With our fellow oneworld® carriers including Cathay Pacific, Qantas and JAL across the Pacific LAN to Latin America as well as British Airways and starting next year Iberia across the Atlantic. We have an unmatched set of partners in LAX especially when it comes to attracting premium traffics.

A big component of our expected revenue improvement and cost savings comes from our joined business with British Airways and Iberia launched earlier this month. We are now offering coordinated service to over 400 destinations in more than 100 countries. We offer expanded opportunities to earn and redeem frequent flyer miles and more choices for our corporate customers and we are working together to align our schedules to provide better connection and (inaudible) of service.

Additionally, our team including sales, pricing and marketing, are now able to coordinate activities within the joint business. One of our highest priorities is to quickly implement all aspects of our partnership to achieve its benefits. And we will plan to do the same with Japan Airlines once our proposed trans-Pacific joint business is fully-approved, which we expect later this year.

If you are aware earlier this month we received tentative approval from the US Department of Transportation for Anti-trust Immunity with JAL and with our focus on the Pacific operations, we are looking forward to initiating New York to Haneda service in early 2011. As Gerard mentioned, we are moving expeditiously to further expand our already strong alliance portfolio both by strengthening our current relationship and by adding new partners in key markets. With our oneworld® partners, we are working together to enhance and expand our alliance in key regions with quality carriers and we are looking forward to welcoming F7 in Russia and Kingfisher in India into our alliance.

Furthermore, during the third quarter we announced that Air Berlin, the fifth largest airline in Europe is the newest member elect of oneworld®. At the same time, American is expanding our list or bilateral partnerships. In fact, within the past week, we have announced new relationships with WestJet in Canada and JetStar in Australia. Within American, considerable energy is fueling our efforts to further enhance the experience we offer our customers especially to our premium customers.

We are rolling out new and modified CRJ-700 aircraft with first class seats upgrading the interiors and seats of our original Boeing 737-800 fleet to match our new delivery, and enhancing the value of our Admiral’s Club memberships. We are also continually working to make it faster and easier for our customers to get through the airport. For example, knowing how important time efficiency is to our customers, we are now offering mobile boarding passes on smart phones at 50 airports. We offer a new application for the iPhone and online check-in for more international flights on aa.com.

As we worked to improve our results, we are also sharply focused on costs. Heading into the fourth quarter, we anticipate lower unit costs excluding fuel. While this is a step in the right direction, we still face a number of challenges on the cost side of the equation such us increases in airport costs, revenue related expenses and aircraft transit.

However, our main challenges are mostly related to our status as the only major airline which did not file for bankruptcy resulting in the highest labor cost in the industry. That is of course history and we are focused on improving our performance for the future.

So let me summarize why we believe that labor cost disadvantage will be reduced going forward. There is clear evidence that our labor cost gap is closing this year as carriers Live Delta restores some of the compensations restructured by the court. Right now across the industry more than 50% of union contracts are open. By the end of next year, we anticipate 24 of 30 contracts or 80% will be amendable. And of course, as United and Continental as well as Southwest and Air Trans work to combine their companies and negotiate with their unions. We believe their labor costs are likely to rise going forward.

However, we are not waiting for the industry to change around us. Much is up to us and our team is dedicated to achieving fair, responsible and competitive labor agreements. That is the path to the most opportunity in job security for our people. As we work to reach new agreements and as the labor cost of other airlines increased, we believe that the current cost gaps will continue to narrow.

Now, I will take a few minutes and comment on our third quarter result starting with our revenue performance.

In the third quarter, main line unit revenues increase 10.7% and about 3.5% more capacity. Load factors remained high in lined with last year’s level and yield were up 10.7%, our consolidated passenger unit revenue also increased by 10.7% for the quarter. Up until this year, our unit revenue growth outpaced the competition for almost two straight years and as we review the trends it is important to keep in mind the impact of differences between geographic regions particularly those areas where our network is concentrated versus our competitors.

For example, we continue to see strong unit revenue growth in the third quarter in Europe and in China. These markets are rebounding from hard hit they took at last year’s down turn and a relative share of capacity in those regions is less than that of our US Airline. On the flipside, we have significant presence in Latin America and the Caribbean where our unit revenues remained healthy and on absolute basis but increased less year-over-year than other geographic entities causing growth of 7%.

Within Latin America, we saw significant unit revenue increase in deep South America which was moderated by our results in Central America and the Caribbean, entities that were particularly strong last year. So our geographic mix continues to affect our unit revenue comparison to the industry this quarter.

Domestic unit revenues improved by about 10% while overall international unit revenues increased by almost 12% versus 2009. Domestically, we saw year-over-year improvements in all of our five cornerstone markets.

In terms of corporate travel, we continue to see positive signs. Corporate revenue increased for the quarter versus last year and we continue to have a corporate revenue share premium versus the industry. As we head into fall, we are continuing to see fewer fare sales and at the same time, the industry’s having success in raising fares.

Turning to advance booking, our booking for the rest of the fourth quarter are strong in line with last year. In summary, we are sharply focused on improving our entity by entity revenue performance and we are quickly implementing our joined business with British Airways and Iberia.

Furthermore, we are looking forward to strengthening our Pacific operation by implementing adjoined business arrangement by Japan Airlines once it is fully approved. Our strategy is to build the strongest network in the most important market across the globe for the long term and we are committed to executing our plan. On the regional front, quarterly revenue increased about 18% versus the prior year.

Our regional capacity was up 8.5% for the quarter driven by two class CRJ-700 delivery. Our cargo revenues increased 23% versus the third quarter of 2009. Freight traffic was higher by 18% and freight yield continue to show double digit improvement. In other revenue which saw year after year improvement of about 3%.

We saw continued strength in baggage revenues partially offset by the decision we made this summer to enhance our offering for premium customers by no longer charging a fee for certain Advantage® reward redemption. We are focused on growing our revenues by increasing the variety of customized products option we offer.

In the third quarter we introduced Express Seat, a feature the enables customers to purchase the right to sit in the first few rows of coach and board aircraft as part of group 1 boarding. Shifting to cost our third quarter unit cost excluding fuel improved 7/10 of a percent for the main line and almost 1% on a consolidated basis.

We achieved this improvement through a lot of hard work and through relentless focus on cost control. Fuel prices increased during the quarter to $2.24 per gallon, up over 8% versus last year. Consequently we paid over $123 million more for fuel in the quarter that we would have at last year’s prices.

With respect to our balance sheet I would like to direct you to our press release for more information on our debt, cash position, fuel hedging as well as 2010 capacity in cost guidance. But first let me point out a couple of highlights.

In terms of cash we ended the quarter with over $5 billion in cash and short term investments including a restricted balance of about $450 million. A year ago we had $4.6 billion in cash in short term investment including a restricted balance of about 460 million.

In the third quarter our principal payment on long term debt and capital leases totaled about $400 million. We expect 2010 principal payments in long term debts and capital leases to total about $1.1 billion with approximately 270 million of this coming in the fourth quarter.

We have completed our planned cash pension contributions for 2010. Our contributions total approximately $460 million. For 2011 we expect to make contributions of approximately $520 million. Of course this estimate may change somewhat by year end and we will provide an update on our next call.

Looking at our cost guidance we continue to expect full year 2010 unit cost excluding fuel to be just over 1% higher than last year. With fourth quarter 2010 unit cost excluding fuel improving by 3.5%. This improvement is a result of numerous costs, control initiative and modestly higher year over year capacity.

We continue to take a measured approach to our capital spending. Our capital expenditures for the third quarter totaled about $675 million including approximately $75 million of non-aircraft CapEx. For the full year 2010 we continue to expect about $2.1 billion dollars of total CapEx including approximately $1.8 billion in aircraft capital expenditures all of which are financed. Next year we expect that our aircraft CapEx will be reduced significantly to approximately $900 million.

At 737-800 delivery are expected to be reduced from 45 this year to 15 in 2011. We have arranged financing for all of these aircrafts subject to certain terms and conditions.

Finally, I would like to give you a preview of our capacity for 2011.

At the main line we anticipate domestic capacity to be up about 1%. Internationally we have already announced that we are adding long haul flight including Los Angeles to Shanghai and New York to Tokyo Haneda in Asia-Pacific; Chicago to Helsinki and New York to Budapest across the Atlantic; and both JFK and DFW to Rio in Latin America. We will also see the full year impact of the service we launched from Chicago to Beijing earlier this year. The reinstatement of some of day-of-the-week cancellations we put in place last winter as well as the impact of new service we recently announced to Mexico that is filling some of Mexicana’s capacity.

All of these services make sense in terms of our network strategy and alliance partnerships. Our biggest area of our new international service is Asia which of course is the area of the world seeing the fastest economic growth. This adds up to contemplated 2011 capacity being up about 3.5% at the main line.

On the regional side our capacity plan reflects the impact of the 22 CRJ-700s we are adding to the fleet. As a reminder, deliveries of these airplanes all of which have first class seats started in the middle of this year and will continue until spring of 2011. For a number of years American has had significantly less regional feed than our US competitors. These CRJ-700 which we are deploying primarily to provide service in key business markets start to level that playing field.

So to wrap up, this quarter was one of significant progress which reflects our dedication and commitment to further improve our resolve. So with that Gerard, Tom and I will be happy to take your questions and thank you.

Question-and-Answer session

Operator

(Operator instructions) Our first question is from Bill Greene of Morgan Stanley, please go ahead.

Bill Greene - Morgan Stanley

Yeah. Hi good afternoon. I’m wondering if we could just talk about a little bit about the JV and the HI with JAL. Can we get a stance for how the mechanics of it work? If you went over that, I’m sorry, I jumped out a little bit late. But I’m just kind of curious thinking about how sort of model the revenue and profit impact from anything that happens over the trans-Atlantic or ultimately trans-Pacific.

Bella Goren

Hi, Bill this is Bella and let me sort of start off on your question and then of course open it up to my colleague.

What we have shared publicly is the way to think about it and I will point right now to the trans-Atlantic example, we have a $7 billion business and it is metal neutral meaning that we share proportionately in terms of revenues based on our capacity that we offer – each airline offers in the market but we are indifferent as to whether the customer chooses a seat on BA or American Airlines or Iberia. And as a matter of fact to Gerard’s example that he gave earlier between two top business markets in the world JFK and Heathrow we will be offering 11 frequencies. It will be a shuttle type service and a customer can fly one direction on British Airways and return on American Airlines and we will share in that proportionately queue the capacity we have in that market.

Bill Greene - Morgan Stanley

I guess it is safe to say the margins one to fully ramp are materially higher than average.

Gerard Arpey

Well, Bill without speculating on that let me give you – this is Gerard – and I don’t know if this will help you with your modeling but maybe a different take or perspective. I think one of the challenges that we have had in our partnership with British Airways has been the fact that while we have been great partners for many, many years we have also been ferocious competitors because we orchestrated that partnership around the fact we didn’t want people riding on BA to London nor did they want anybody riding on American to London. Thus we have all kinds of head hurting restrictions or in fact outright elimination of coach sharing and frequent flyer benefits because we did not want to see any of our traffic diverted to BA or their traffic diverted to us.

Of course all that ended on October 1, which means we now really do have a partnership where our economic interests are aligned and they are aligned to take business not from each other but from the other guys. I think, and again I don’t know if that helps you with your modeling but now we truly have a partnership where we are working together to price, sell and provide good customer service to all of our passengers and to do that in concert with one another. So I really can’t over emphasize the change from what we were doing before to what we are doing today.

Bella Goren

Bill the only thing I would just add to that in terms of what we have shared publicly is that we have not broken down each component of what we have communicated with respect to Atlantic. You know how much of the 500 million and quite frankly 500 million in our view is a pretty conservative estimate but I will just say that that is inclusive of obviously our joint business agreement with BA and Iberia; our plans for a relationship with JAL, as well as well as enhancement, and the beneficial effect we are anticipating in our cornerstone market as an example. If you think of that number of $500 million, it is incorporated in that. We will start seeing the results immediately. A large portion of them will be in effect next year and then a full run rate by the end of 2012. It will be – I want to emphasize that point. We have been saying 500 million plus and we do believe there is a plus at the end of that number.

Bill Greene - Morgan Stanley

Okay, that’s great. Just one quick question on – I guess I’ll describe it as sort of assets that you still have. There has been some news on selling Eagle again. Can you just give us a rundown of kind of what the assets are that you have – if we think about kind of whether you want to think about them as unencumbered or what-nots sort of what assets you got there that still could be monetized?

Bella Goren

You mean in terms of what we have at American?

Bill Greene - Morgan Stanley

Yeah, I think you just have Eagle at this point but maybe there is more assets there that I am not thinking of that you could modify.

Gerard Arpey

We could just – of course Eagle. Most of our competitors have done slot and root financings. We have not done that, so all of our slots at Heathrow or in Narita engaged and that kind of a deal is not one that we have done but certainly other carriers have done. As we paid off debt this year we are going to pay off debt next year we are going to free up a lot of airplanes. In most – many of those airplanes are good aircrafts in terms of their ability to be refinanced and then you got things like spare parts. Other guys I believe have done spare parts deals; we haven’t done that. So there is quite a number of things on the shelf.

Bill Greene - Morgan Stanley

Thanks for the time.

Gerard Arpey

Thank you, Bill.

Operator

Next will be Michael Linenberg with Deutsche Bank. Please go ahead.

Michael Linenberg – Deutsche Bank

Oh yeah, hey. Good afternoon guys. Couple of questions: Just back to I guess the point that Bill brought up that Eagle being in the news – you probably can’t comment you know what ultimately. I guess you know maybe… Of course once you go down is just other than what has been said in the press. I think that there is a date where sometime in 2012 a deal either has to get done or maybe Dan Garton is free to move on, etc.

But when I think about Eagle there is a lot of aircraft that could be tied to Eagle. The question that I am getting to is I believe AMR maybe the guarantor on some of that debt and so the question is: Is there a way that you could structure a deal that a divestiture of Eagle would also include the removal of some of the debt on AMR balance sheet?

Gerard Arpey

Well, I think Michael that I can’t give you a definitive answer to that question but it's certainly one of the things that we are puzzling through, which we figure out what is best for Eagle in the long run and what is best for American Airlines over the long run. I will just be redundant with our prior comments about American Eagle but our goal there is to provide long term stable cost effective feed to American Airlines and also give American Eagle the opportunity to exploit their many strengths and their future and we have thought that that might be better done under a different ownership structure and that is what is being explored.

Michael Linenberg – Deutsche Bank

Okay good fair enough. Then just my second question Gerard and this is sort of a bigger picture to you and this is just in regards to the Emissions Trading Scheme. It looks like that there will be something out there in 2012 and yet you get one view from ICAO a week ago you have a different view from the EU. Do we see any sort of resolution on this any time soon? Are we going to be facing some sort of a process that runs into litigation? What can you say if anything can you say about what you know how this potentially plays out?

Gerard Arpey

It's a good question Michael and it's hard to answer other than to tell you that I think the airlines both here in the US and our counterparts around the world through IATA and ICAO has made some very strong commitments to address climate change and our part in helping to improve our impact on the environment. I do not think we’re expect any ruling until the back half of next year.

Michael Linenberg – Deutsche Bank

Okay.

Gerard Arpey

But I do think we have targeted – and you have to check me on this but through IATA we have targeted a 2% efficiency goal or reduction in greenhouse gases across all of the carriers and that is I think a pretty aggressive goal that we took on on our own and we have committed to do that through 2020 and then we continue to work on what we are going to do beyond that but a lot of is to do with the engine manufacturers in Boeing and Airbus. I think the industry is making good-faith efforts to be a good steward when it comes to the environment.

Michael Linenberg – Deutsche Bank

Okay, so then Gerard for now it sounds like that – still though you are sort of on this dual track, right? Because I maybe wrong on this or not for the EU-ETS I guess carriers has to provide information or had to provide information about potential carbon footprint. I guess you walk down that path until we get this resolved.

Gerard Arpey

Yeah, that is right and we have done that. We are providing them with the data that they have requested.

Michael Linenberg – Deutsche Bank

Okay very good. Thanks and nice to get back to profitability.

Gerard Arpey – Chairman and CEO

Yeah, thank you, Michael.

Michael Linenberg – Deutsche Bank

Okay.

Operator

And next we are going to Gary Chase with Barclays Capital. Please go ahead.

Gary Chase – Barclays Capital

Good afternoon everybody.

Gerard Arpey

Hi Gary

Gary Chase – Barclays Capital

I wanted to see if I can get you to splash out a little bit more on the 500 million – I mean a lot of the stuff that you are talking about in the joint business agreement stuff that should be off from most of the year. I know you have talked about how the majority of it will be recognized in 11 but not entirely. Is it something we should be thinking we will as early as Q1 or is it going to take more time than that before you really start seeing some of these benefits that you are describing?

Gerard Arpey – Chairman and CEO

Gary I think Bella’s comment was accurate. She said much of it would be achieved next year but full value would not occur until the end of 2012. That is based on our looking at what we can do immediately and what have already done by BA and Iberia that some of the additional plans we have for next year and then trying to figure when we might get the final approval for the partnership with JAL and actually get that thing up and running. So there is some art and some science here but I think those are the right words.

Bella Goren

Absolutely. Gary the only thing I would add to that just to kind of give you an example of why there is a phasing up aspect to it is: If you think for example coordinating and realigning our schedules. Obviously we do not change schedules on a 30 day notice ‘cause that is very disruptive to our customers so much of that will be going into facts early next year and through the spring and summer. On the other hand obviously joint selling will start much sooner and we have already started many aspect of the joint business with British Airways and Iberia in terms of how we service customers; in terms of how we sell our products through our direct channel; in terms of pricing coordination. There is immediate aspect to it and there is also some phasing items just due to the operational major. As Gerard pointed out, JAL for example obviously we have to wait the final approval to be able to talk about some specifics for example joint pricing but there is a lot of work that has been done that is legally available to us in anticipation of that.

Gary Chase – Barclays Capital

Okay and then I am wondering for your thoughts on you can do this analysis in an all constant kind of frame work but as we think we all know all else is not going to be constant next year. You have got what is now as of few weeks ago the largest airline in the world; they are going to be implementing a merger that is describing a lot of their own kinds of revenues synergies. As we think about what shifting in the competitive landscape should we be thinking that there are material off-set to those numbers or do you really think that even when you clean up for the activity that is going on you will actually be able to recognize an incremental 500 million dollars in benefits?

Tom Horton

Gary this is Tom. When we get our analysis around what we thought the joint business and network realignment would work. We took into account the fact that that merger was on the horizon so it is reflective of that.

Gary Chase – Barclays Capital

Okay. Alright, thanks guys.

Gerard Arpey

Thank you, Gary.

Operator

Next we have Bob McAdoo with Avondale Partners. Please go ahead.

Bob McAdoo - Avondale Partners

Hi. Going back and getting just kind of making sure understood of what was said. Bella was talking about that the end about of 2011 capacity and there was a 1% main line domestic and 3.5% of the international, may I assume that includes all the new stuff with LA and whatever. She talked-in about RJs but did not really talk – did not give us her number and we do not have composite what is the whole thing turned into.

Bella Goren

Okay. So Bob let me just clarify – make sure that all of us are on the same and everyone is looking at the same number. So for the mainline domestics, we were talking about 1%. When you include our mainline international into that equation the overall mainline is going to be about 3.5% and if you look at the consolidated number including regional percentage that is roughly around 4%.

Bob McAdoo - Avondale Partners

Alright fine. And then the other thing I want to go back one more time to make sure I understanding what you are saying about this metal neutral concept. And let’s just take for example: Let us just say you have 60% of those seats back and forth between Kennedy and London and British Airways had 40% and what you are saying if it is a 60-40 split on the number of seats then no matter who carries the passenger or on what air – whether it's front of the plane, back of the plane or whatever you will get 60% of all revenue that the group carried back and forth and if they happen to do a better job because of their time of day or whatever. They happen to get a better share of the – in terms of physically the better share of the front of the plane kind of customer you still get 60% of that? Or conversely if your cost was something less than theirs on a per seat basis you could actually get a higher profit out of it because it's 60 – the revenue was just split 60%, 40% is that the way you said it?

Bella Goren

I think Bob there is lot interpretation that was involve in that question so I think because of the confidential nature of our actual agreement we have not given a lot of details. What I can share with you is that do not think seats; think of it as – we started with a certain share of capacity and we will be sharing revenue based on how our capacity was at the base year and then changes over time. Beyond that, due to confidentiality of the actual agreement we cannot share more than that.

Bob McAdoo - Avondale Partners

You are – conceptually, where you are going there I think it is right in that, all three of the carriers that are in the joint business are motivated irrespective of whose airplane to drive more passengers in any cabin of business to expand the pot and most importantly to stop trying to take passengers from each other which we had been doing even though we have been long time Oneworld partner and take traffic from the other guy. It goes back to the same that what are you saying then that if you share of capacity when seat your capacity; what is your shared capacity is 60%. Then regardless of what your costs are you supposed to get about 60% of the revenue?

Gerard Arpey

Well the reason Bella is being careful on a way she answers that is we have a contract that has some conditions that limit what we can say about the mechanics. So I think what we are trying to say to you is conceptually we’re – I think you have the picture correct.

Bob McAdoo - Avondale Partners

Okay very good. That is all what I have thanks.

Operator

(Operator instructions) We will go to Hunter Keay - Stifel Nicolaus. Please go ahead.

Hunter Keay – Stifel Nicolaus

Thanks, good afternoon. I think there is a – in my opinion a bit of a misperception out there mostly those things – we read that a lot of the work flow a disadvantage that you have particularly if it pertains to regional flying exist almost exclusively with the pilot contract. I don’t think that it is really the case. Can you may be healthy flush out sort of how much whether it is ASM cap or just a scope clause how much of the regional disadvantage you have relates the TWU contract and how much is in the APA contract? Give me just a high – at a high level.

Gerard Arpey

Well at a high level Hunter you are accurate. We have restrictions on both of those contracts that we are trying to address in these rounds of negotiations because the other network carries either through bankruptcy or through their own collective bargaining do not have those restrictions and the way we use Eagle is to buttress the American Airlines network so it is important to American that the company have the same degrees of freedom that our competitor have to feed their networks. So that is one of the important topics that we are discussing both ATA where we have a number of restrictions and with TWU where we likewise have restrictions. But that is an area where – if we bring the facts to the table I think there should be common ground because if we have the degrees of freedom that the other airlines have we can feed more traffic to the American Airlines network and make American Airlines stronger and bigger.

Hunter Keay – Stifel Nicolaus

And I do not want over simplify, over generalizes this but that sort of – can you may be ball park. Is it like maybe – this very difficult to do but 75-25% of your disadvantage you would attribute to the pilot contract or is it more lie 50-50 split, I mean can you even have this conversation meaningfully.

Gerard Arpey

Because – it would be hard to quantify that way because in certain ways the pilot contract allows you to fly a lot of airplanes at Eagle but those airplanes are not economic so you would never do it and so it would be hard to put that in percent.

Hunter Keay – Stifel Nicolaus

Alright I appreciate that and you talked about the fleet flexibility obviously was your order book but how flexible might you be or how open might you be – maybe introducing a different fleet type to the main line? I am specifically referring to like larger C Series for example. Is it something you consider adding to the mainline of fleet if you are to get really favorable pricing or you pretty much dedicated in all Boeing fleet in the mainline side indefinitely?

Gerard Arpey

I think it is something definitely worth considering and it is – that is an interesting airplane. I do think that we think about airplane in the context obviously of capacity in the way we think about capacity is correlated to GDP. So I think the long term vision if you will or strategy under our Flight Plan 2020 would be to grow the American Airline Network consistent with GDP growth in the regions of the world that we operate which is most of them. I think subject to that way of thinking about the need for lift the C Series is an interesting Airplane.

Hunter Keay – Stifel Nicolaus

I appreciate that perspective cause I think it is interesting if you look into the seat count. The C Series 280 versus the 737-800 is interesting.

Gerard Arpey

You have got all of the complexity of adding different airframe potentially different engine and quite frankly the labor agreements are not friendly today anyway to added fleet types because of all the training that is required the way we do it today. Now it don’t have to be that way. You do not have to train everybody through every type of airplane you have and there again there are ways to do that smarter that would be good for the company and I think good for our pilots and those are kind of things that we are talking to them about.

Hunter Keay – Stifel Nicolaus

That is really great. Thank you for that.

Gerard Arpey – Chairman and CEO

Thank you Hunter.

Dan McKenzie – Hudson Security

Operator

We will go to Jamie Baker with JPMorgan. Please go ahead

Jamie Baker – JPMorgan

Hi good morning everybody or good afternoon rather.

Bella Goren

Hi Jamie

Jamie Baker – JPMorgan

Hi. Gerard and Bella and Tom we all discussed before how the lack of aligned community and the labor disadvantage explains the margin deficiency relative to your peers. Obviously the alliance situation is being reversed and thanks to United the labor disadvantage should moderate a bit in the next year or so. The thing is when you look at the third quarter your margin efficiency actually worsened year over year versus you peers and in 2009 it also worsened year-on-year versus your peers. Of course during those periods, Delta labor expense was rising. It is not clear that Sky Team or Star had any particular incremental alliance momentum obviously they have immunized components which you did not. Is there a possible third or fourth or fifth or sixth factor other than just alliance immunity and in labor that explain why your relative position appears to have been worsening?

Bella Goren

Well, Jamie, certainly there is a lot of components there involved. You highlighted the two and then kind of raised the question about the other and so let’s just kind of step back and one that I think we have been talking about which going forward we actually think will moderate in American favor. But the entity mix is not insignificant, and so if we look on a year-over-year basis versus for example taking a look to 2007, which was a more normalized year there is a considerable entity mix impact that had impacted our revenue numbers so that’s one that we have explained and I think had impacted our current quarter results.

There is also – you know when it comes to -- for example the tension extent, not the cash component but the expense component, there is more variation in our number year-to-year than some of the other network carriers’ numbers and I think that I will just kind of add one more point on the alliance while others have been in place for a while. I think it’s fair to say it is reflective in our plan as well that it does strengthen over time. That’s kind of the beauty and the benefit of having partnerships and alliances is that you are able to do so much more and it doesn’t just happens in one month or even six months. So we think that they benefited considerably which when I say there’s a lot of components it’s almost impossible to separate them all into specific buckets because the entity mix in the alliance strategy, in the alliance – immunized alliances which go hand and hand, as well as the impact in the domestic system.

Jamie Baker – JPMorgan

Okay. That’s a good observation.

Gerard Arpey

One other fact for Jaime I would add to that and that is because we have had for sometime a systematic approach towards fuel hedging. We hedge right on thru late 2008 when prices were high and as consequence we had a penalty for that earlier this year was most notable in the first quarter and if it continued so that’s the bad news. The good news is going forward that’s largely behind us and so I think the fuel hedge comparability with the rest of the industry should be more normalized.

Jamie Baker – JPMorgan

Also a good point. A quick follow up, you talked about capacity discipline but at the same time you’re entering a market like Los Angeles, Phoenix, which has I think 21 daily flights already. You offered a number of explanations as why 2011 main line is going to be up. I understand first class on RJ’s LA - Shanghai but 4% consolidated growth is still higher than any of your competitors at least so far. Growth in excess of real GDP has proved damaging in the past so I wonder why you think it’s going to be different this time?

Gerard Arpey

Oh, I think we’re doing the things that we are think make sense for our company and if you look at the growth, it is as Bella pointed out principally international growth and principally capitalizing on our joint business agreements where we been a little bit hamstrung in the past so this is really about doing things that are smart for our company and I think are unique to our company.

Operator

Our next question is from Helane Becker with Dahlman Rose. Please go ahead.

Helane Becker – Dahlman Rose

Thanks very much operator. Hi guys.

Bella Goren

Hi, Helane.

Helane Becker – Dahlman Rose

I just wanted to talk about capacity in this sense. Up until now, we’ve had most of the airlines kind of focused, yourself included, on growing out of your hubs and growing from a position of strength and we’re seeing things like LA - Shanghai so you guys announced it and a week later, United announces it. Then you are already in Heathrow to Miami and Delta is going into that market. I’m kind of wondering if you’re thinking airlines are not really playing well on the sandbox anymore together and that this is a backhanded way of market share grab or is it still a position of strength and it’s – I mean I know you’re focused to share was on LA so that’s consistent for you but could you maybe discuss that?

Gerard Arpey

I think the LA add was one that makes a lot of sense for us across the Pacific because we – today we have a very strong position with LA with oneworld®. With have 18 international flights a day out of LA and so it makes sense to build up a fleet a little bit and to add a flight to one of the most important and dynamic cities in the world which is Shanghai so that made a lot of sense to us. It may not make as much sense for two airlines to be adding that flight but we thought it made a lot of sense for us. I can’t speak out the competition thought about it but LA is really important market for us and if you look at it from an alliance context, I think you’ll see that oneworld® is very, very strong. They are not just what Americans fly in but BA, Qantas, Cathay, JAL and it is of course far and away the most important gateway from the US into Asia much –more important than say San Francisco or Seattle or Chicago so it made a lot of sense for us. And with respect to Miami, of course we think we’ll be successful – Miami-Heathrow for a long time to come. We’re effectively having a hub on either end.

Helane Becker – Dahlman Rose

Got you. Could just I ask a JAL related question? Gerard are you worried about them emerging from Chapter 11smaller than having gone in I noticed they’re grinding their 747 aircraft and they’re shrinking. How is their change or how did their changes affect the alliance and affect your growth opportunities in the Pacific? Thank you.

Gerard Arpey

Well, Helane, yeah they are of course restructuring through bankruptcy and that is going to ultimately affect the size of the airline but they are doing the right things to make the company successful on the long run and they are going to come out of this bankruptcy still a very large airline. And I don’t have the (inaudible) but they’re going to be – still remain among the largest airline in Asia. I think they probably were the largest prior to the bankruptcy. I don’t know where they will rank coming out of it but I don’t it will be a whole lot different and divided by us Helane it’s all about connectivity and we got five flights to Tokyo and we’re going to go to the Haneda market and I think if – it is not a great analogy but I think if Haneda’s kind of like I think of Love Field being a closer airport to the city and JAL has a very strong presence at that airport and so we’re excited and optimistic about what we’re going to be able to do there. And just like I said earlier about BA without immunity JAL has been a great partner but still we were very competitive with each other across the Pacific and if we get all these immunity finalized we will be able to focus on the other alliances as opposed to each other so we’re really excited about what we’re going to be able to do there.

Operator

Our next question is from Dan McKenzie, Hudson Security. Please go ahead.

Dan McKenzie – Hudson Security

Oh hey, good afternoon guys. Thanks very much. Two very quick hopefully questions, a more high level question and apologies if you already answered these. I did join late. But first, was the (inaudible) down to 3.5% for the fourth quarter are main line only or consolidated stat? And then secondly what are the dates and (inaudible) can begin sharing the profits on the new JBs?

Bella Goren

Let me kind of peg the second one first and then I will get back to you on the specifics of this quarter. On the joint business, what we had mentioned Dan is that we have provided an overall number that includes our joint business agreement with British Airways and our anticipated anti-trust immunity agreement with JAL as well as the impact for example of our cornerstone market. The short answer to that question is that a lot of it is taking effects as we speak but it will be phased in over next year as we coordinate schedules etcetera and then the full run rate will be by the end of 2012. But much of it is unfolding as we speak.

Gerard Arpey

But Dan if you’re asking we’ll we be producing a JB, joint business P and Ls, we won’t be doing that going forward.

Dan McKenzie – Hudson Security

No, I guess my question was if there’s profits to be had from the JB? Would they be hitting the fourth quarter result? And I know you talked some phasing in the 2011, 2012 so I just want to more of the technical questions.

Gerard Arpey

Yeah, I think Bella do the answer that.

Bella Goren

Okay. And so to your other question on the main line excluding fuel are – our fourth quarter unit cost guidance is down that our cost per assemble be down 3 and a half percent. In a consolidated basis, it will be around that number as well.

Dan McKenzie – Hudson Security

I got it. Okay, thanks. Then my other – my final question is from 500 million improvement JB and the cornerstone strategy, if the total 500 million falls to the bottom line it seems to me there will be substantial upsize for AMR. I mean versus the consensus outlook but I’m wondering from your perspective word of confidence comes from to the expense that you can provide some perspective that the benefit does fall for the bottom line versus say labor, fuel or passengers benefitting from lower fares and I know you can’t talk about fares but I only added because we did see Southwest passed 1 billion in fuel cost saving to passengers via lowered fares. Thanks very much.

Tom Horton

Dan, I would really think of it as an almost like a merger synergy. We’re putting together these companies effectively in their businesses across and it’s going to be an enterprise with over $7 billion a year revenues and so think about the synergies that are brought about by joint scheduling full reciprocal frequent fire programs, joint marketing, joint sales to corporate accounts and all of those sorts of thing. And it’s a sort of network of facts of putting together a bigger network that we can grow ourselves. I would think of that as revenue synergies in a merger that’s really effective we’re talking about here.

Gerard Arpey

Yeah, I think too Dan. I would add – what I would add to Tom’s comment is that I said earlier, working with BA for many years, they’d been a great partner but not knowing whether we would ultimately get immunity made it difficult to work on projects for example like the Kennedy Terminal. As you know BA’s in a different terminal at Kennedy than we are but now that we have immunity we have worked together very constructively with BA and with our other oneworld® partners about an expansion of our footprint at JFK that would allow all the oneworld® carriers to move in one terminal. And as you can imagine that has tremendous benefits for customers when we can get there and so those are the kinds of things that aren’t going to produce any benefit next year but there are kinds of things that we’re working on now that down the road if we can make that vision a reality and we can all get in the same terminal, we can have something very, very powerful at Kennedy that is very good for our customers.

Tom Horton

And very hard to replicate.

Operator

Ladies and gentlemen, members of the analysts and financial community that does conclude your question and answer portion for today. After a brief break, we will begin the Media Q and A session.

Operator

And ladies and gentlemen thank you for your participation and for using AT&T executive teleconference. You may now disconnect.

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