AMR (AMR) Q4 2010 Earnings Call January 19, 2011 2:00 PM ET
Chris Ducey - Managing Director of Investor Relations
Tom Horton - CFO, EVP Finance
Gerard Arpey - Chairman and Chief Executive Officer
Bella Goren - Chief Financial Officer and Senior Vice President
Garrett Chase - Barclays Capital
Daniel McKenzie - Hudson Securities Inc.
Jamie Baker - JP Morgan Chase & Co
Glenn Engel - BofA Merrill Lynch
Helane Becker - Dahlman Rose & Company, LLC
Ladies and gentlemen, thank you for standing by. Good afternoon, and welcome to the AMR Fourth Quarter 2010 Earnings Conference Call. [Operator Instructions] We're very pleased to have on the call with us today, AMR's Chairman and Chief Executive Officer, Gerard Arpey; the President of AMR and American Airlines, Tom Horton; and Senior Vice President and Chief Financial Officer, Bella Goren. And here with their opening remarks is AMR's Managing Director of Investor Relations, Chris Ducey. Please go ahead.
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 Bella Goren will provide the details regarding our earnings for the fourth quarter, along with some perspective on the first quarter and the full year of 2011. After that, we'll be happy to take your questions. [Operator Instructions]
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 a webcast of today's call, is available on the Investor Relations section of aa.com.
Finally, let me note that many of our comments today, including statements regarding our outlook for revenue and cost, 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 and our quarterly report for the third quarter of 2010 on Form 10-Q.
And with that, I'll turn the call over to Gerard.
Okay, thank you, Chris. Good afternoon, everyone. As you have seen in our press release this morning, we reported a significant improvement in both our fourth quarter and full year 2010 results compared to 2009. We substantially reduced our net loss for all of 2010 compared to the $1.5 billion loss that we incurred in 2009. This obviously represents an improvement of more than $1 billion versus a year ago. And that in spite of a fuel bill that was merely $850 million higher than it would've been at 2009 prices.
A lot of hard work on the part of everyone at American went into accomplishing this improvement. And while we have a lot more work to do to achieve our goal of sustained profitability, we are optimistic about the trajectory we are on, and we believe that the groundwork we laid in 2010 has positioned us well for future success. I want to thank our employees for their hard work and dedication this past year and for their continued efforts in what is shaping up to be a very busy start to 2011.
Bella will walk you through our results in more detail in a few moments. But first, let me just highlight a couple of things. In 2010, we took several major steps to restructure and fortify our domestic network. Today, nearly 98% of our capacity is in one of our five cornerstone markets. We are now stronger in the markets that matter most to our premium and corporate customers: New York, LA, Chicago, Dallas/Fort Worth and Miami, the premier gateway to Latin America. And in 2011, our focus on our cornerstone markets will include a significant expansion of our Los Angeles service starting in April.
Our transatlantic joint business with British Airways and Iberia is now up and running, offering customers better fares, more choices and easier connections. The transatlantic joint business, initially representing approximately $7 billion in combined revenue between the carriers, serves more than 400 destinations in over 100 countries with approximately 5,200 daily departures.
This new relationship is enabling our three companies in oneworld to compete far more effectively with the other global alliances on routes between Europe and North America. In 2011, we look for us to deepen our relationship with BA and Iberia on many fronts, importantly including more coordinated joint flight schedules beginning this spring.
Turning to the Pacific. Last week we announced that we expect our joint business with Japan Airlines to launch on April 1. Our transpacific joint business will initially include 10 nonstop routes across the Pacific. American and JAL will also code-share on a total of 123 routes, and we will continue to expand our code-share whenever that is possible.
In addition, American will begin flying to Tokyo's Haneda airport nonstop from New York's Kennedy Airport on February 18. As we launch our joint businesses across both the Atlantic and Pacific, we are simultaneously enhancing and expanding our global network of partners, adding quality carriers in the markets that matter most to our customers, including airberlin in Europe, S7 in Russia, and Kingfisher in India. We are also very pleased to welcome our long-time partner Qantas to Dallas/Fort Worth with the announcement last week that they plan to start flights to DFW airport in May.
As all of you know, our fleet renewal efforts are well underway as we took delivery of 45 new 737 aircraft in 2010 with more coming over the next few years. In addition to today's announcement regarding our intent to purchase two 777-300 aircraft will bolster our network strategy, allowing us to take advantage of new opportunities made possible by our joint businesses across the Atlantic and Pacific.
So before I hand it over to Bella, in closing, all of us are intensely focused on improving our results going forward. As always, we're keeping a close eye on fuel prices and the economy. And we're looking forward to work ahead in 2011 as we become a stronger, more successful airline for the benefit of our shareholders, customers and employees.
And with that said, I'm going to turn things over to Bella.
Thanks, Gerard. Good afternoon, everyone, and thank you for joining us. The fourth quarter continued the trend of improvement for AMR. We posted a loss of $97 million or $69 million excluding special items. Our $69 million loss reflects a $35 million tax benefit primarily related to the tax release act of 2010 passed by Congress in late December, the effect of which was not reflected in our Eagle Eye guidance.
Our fourth quarter results compared to a loss of $415 million in the fourth quarter of 2009, excluding special items in a noncash tax item. We had a special item of $28 million in the fourth quarter of 2010, and our fourth quarter 2009 results included the positive net impact of $71 million in special items in a non-cash tax item. Please refer to the press release for details. For the remainder of this call, I will exclude the impact of special items to have a more meaningful discussion of our performance on an ongoing basis.
We improved our fourth quarter net result by $346 million versus last year. And that result was achieved despite having paid $171 million more for fuel in the fourth quarter than we would have paid at last year's fourth quarter prices. This is the best fourth quarter result in four years since the same period of 2006.
Obviously, all of us recognize that we still have a lot of work to do to return to satisfactory levels of profitability. Still, our improvement versus last year is clearly a step in the right direction.
Now, I'd like to provide a brief update and a few of the key initiatives that we have underway to continue improving our performance.
First, looking at revenue. We are continuing to build the revenue-generating power of our network. As we begin 2011, we expect to reach three key milestones this spring: the initiation of our joint business with Japan Airlines; the start of enhanced service in our Los Angeles cornerstone market in early April; and the re-timing of our transatlantic schedule which will allow us to offer our customers a more convenient joint schedule of American, British Airways and Iberia flights.
Across the Pacific, our joint business with Japan Airlines has already received the necessary government approval and is scheduled to start on April 1. With joint service on 10 transpacific routes and code-sharing in 123 markets.
We are already working closely with JAL to better align our schedule, coordinate joint services and enhance the experience we offer our customers and offer them a greater variety of fares. Our joint business will also include American's new service between New York and Tokyo's Haneda airport, which we plan to launch on February 18, as well as something JAL's new service between Haneda and San Francisco which started last fall.
In April, we also plan to take the next step in executing our cornerstone strategy, which focuses our network on the largest markets in the United States: New York, Los Angeles, Chicago and Dallas/Fort Worth, as well as Miami, the gateway to Latin America.
Los Angeles is the cornerstone market where we expect the most dramatic year-over-year change in 2011. Los Angeles is not only a huge market in its own right but is also the most important gateway between the U.S. and Asia. With that in mind, this year, we will be adding service from Los Angeles to Shanghai, as well as to nine new markets in the U.S.
With our fellow oneworld carriers, including Cathay Pacific, Qantas and JAL across the Pacific, plan to Latin America as well as British Airways and starting this year, Iberia across the Atlantic. We believe we have a truly unmatched set of partners at LAX, especially when it comes to attracting premium traffic.
And turning to the Atlantic. By April, we expect to launch a truly coordinated schedule in our transatlantic joint business. So let me give you a specific example. Now that we are collaborating, American Airlines and British Airways together plan to offer 14 daily flights between the New York area and London in a pattern of service that is in demand by our corporate business base.
By April, our joint flight will be much more evenly and conveniently spaced throughout the day. In fact, during the peak periods, we're going to be effectively operating a shuttle. We are working diligently to expand our joint efforts as quickly as possible. And a few weeks ago, in December, as a matter fact, we expanded our code-sharing relationship so that American's code is now displayed on over 800 British Airways and Iberia flights to almost 175 destinations.
As these and many other examples demonstrate, we are focused on building a more effective, which is to say, a more profitable network. With fleet being the foundation of our network, we have accelerated our fleet renewal efforts by taking delivery in 2010 of 45 new, more fuel-efficient 737-800 aircraft, with more to be delivered over the next couple of years.
At the same time, we are in the process of adding 22 new CRJ-700s bringing that fleet to 47 aircraft, all of which will offer a two-class product targeted at premium customers.
Today's announcement of our intent to acquire two Boeing 777-300ER aircraft for delivery in late 2012 is the next step in our fleet strategy. And more importantly, it underscores our strong focus on network and alliance strategy. We expect to be the first U.S. airline to fly the 777-300. These aircraft will facilitate our opportunities to grow in slot-constrained airports, as well as a greater ability to serve new long-haul markets, facilitated by our own network strength and our alliance partnerships.
The 777-300 is a highly efficient airplane. And we believe it is a great fit for American Airlines. But of course to have a successful future, we must be profitable. So as we evaluate our fleet going forward, we fully recognize that building a thriving, successful business requires a competitive network, a competitive product and a competitive cost structure.
Just as our long-term strategy demands that we have competitive costs, we are also keenly focused on cost control in the near term. Heading into 2011, we anticipate flat unit costs for the full year, excluding fuel. To keep our x fuel unit cost flat, we will have to offset a number of headwinds, including aircraft trends and facilities cost. To do so, our entire team has an intense focus on managing and controlling our cost and reducing cost where appropriate.
It is certainly well known that our biggest cost challenge is having the highest labor cost in the industry. And as you know, we have open contracts with the Transport Workers Union, the Association of Professional Flight Attendants, and the Allied Pilots Association.
The mission we face is pretty straightforward. Not easy, but straightforward. We are working towards labor agreements that provide American with competitive labor costs while securing good wages and benefits and a bright future for our people. We are determined to reach deals with our three unions that provide our people with good compensation and enhance job security while putting in place competitive provisions needed for the success of our business. We remain determined to reach agreements that are fair to everyone concerned, and we are dedicated to accomplishing that objective.
Now before commenting on our fourth quarter results, let me take a moment to share a few comments on distribution. As I'm sure you know, the global distribution systems or GDSs include Sabre, Travelport and Amadeus, have for many years served as the primary intermediaries between airlines and travel agencies. Over time, technologies has evolved and new technologies are now available that allow airlines to distribute services directly to travel agencies using more efficient and flexible platforms. Specifically, in conjunction with technology providers, over the past few years, American developed an alternative distribution approach that can connect travel agencies more efficiently to our internal system. The new technology helps us to lower our costs with the positive impact on fares and more choices for the traveling public. And we believe that the GDS companies can have a role in offering travel agencies access to our Direct Connect technology.
So our objective with respect to distribution are pretty clear. We have an opportunity to use new technology to customize the products we offer resulting in more choices to better meet customer needs; generate new revenue from the sale of customized products and services; and lower our distribution costs, helping us to offer good fares while meeting our financial obligations.
It is important to note that American Airlines' fares and schedules continue to be widely available through a number of outlets, including our own website www.aa.com; American reservations call centers, thousands of travel agencies in locations worldwide, search engines such as kayak.com, and online travel agencies such as Priceline.com. As a matter fact, it became public yesterday, Priceline.com expects to begin issuing American's tickets through our Direct Connect in the near future.
Now, I will take a few minutes and comment on our fourth quarter results starting with our revenue performance. In the fourth quarter, mainline unit revenues increased 7.1%, on 3.1% more capacity compared to the fourth quarter of 2009. Load factors reached a fourth quarter record of 81.6% and passenger yields were up 6.5%.
Our consolidated passenger unit revenue increased by 7.3% for the quarter. Domestic unit revenues improved by about 7.7% while overall international unit revenues increased by about 6.1% versus 2009. Domestically, all of our cornerstone markets were strong for us year-over-year while internationally, the Pacific and Mexico posted significant growth versus 2009.
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. In recent weeks, the industry has had some modest success in raising fares. This is particularly important in light of recent fuel price trends.
Turning to advance bookings. As we look out to the remainder of the first quarter, our bookings are in line with last year. On the regional front, quarterly revenue increased about 18% versus the prior year. Our regional capacity was up 11.6% for the quarter, driven by the new two class CRJ-700 delivery. Our cargo revenues increased 10% versus the fourth quarter of 2009. Freight traffic was higher by 6%, and freight yields posted about an 8.5% improvement.
In other revenue, we saw year-over-year improvement of almost 3%. We saw continued strength in baggage revenues, partially offset by the decision we made last summer to enhance our offering for premium customers and no longer charge for certain Advantage award redemptions. For the full year, we grew our other revenue by over $120 million, reflecting our continued focus in this area.
Shifting to costs. Our fourth quarter unit cost, excluding fuel, improved 3% for the mainline and almost 3% 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 $2.42 per gallon consolidated, up 11.5% versus the fourth quarter of last year. Consequently, we paid over $171 million more for fuel in the fourth quarter than we would have paid at last year's prices.
I'd like to direct you to our press release for more information on our debt, cash position, fuel hedging, as well as specifics on our 2011 capacity and cost guidance. But first, let me point out a couple of highlights. In terms of our cash, we ended the quarter with over $4.9 billion in cash and short-term investments, including a restricted balance of about $450 million. A year ago, we also had $4.9 billion in cash and short-term investments, including a restricted balance of about $460 million.
In the fourth quarter, our principal payments on long-term debt and capital leases totaled about $280 million, bringing our total payments for 2010 to about $1.15 billion. We expect 2011 principal payments on long-term debt and capital leases to total about $2.5 billion with approximately $325 million of this amount coming in the first quarter.
Our 2010 defined benefit pension contribution total approximately $460 million. For 2011, we expect to make cash pension contributions of about $520 million. Our 2011 P&L impact related to the defined benefit pension expense will be about $640 million.
Looking at our cost guidance. As you know, our year-over-year unit cost improved as we moved through 2010, so the comparisons this year will be guided by that trend. In the first quarter of 2011, our unit costs excluding fuel will be improving by about 1.5% of the mainline and about 1.8% on a consolidated basis. For the full year of 2011, we anticipate that unit costs, excluding fuel and the potential impacts of new labor agreements, will be comparable to the full year of 2010. We anticipate achieving this through numerous cost-control initiatives and modestly higher year-over-year capacity in the face of headwinds in several areas, including higher aircraft rent and facilities costs.
Our 2010 capital expenditures totaled under $2 billion, excluding approximately $250 million of non-aircraft CapEx. For the full year 2011, we expect about $1.1 billion of aircraft CapEx, which is a modest increase from our prior guidance, driven primarily by the pre-delivery payment for the 777-300 aircraft order we announced today.
As you can see, our aircraft capital spending will still be down significantly versus 2010 as 737-800 deliveries are expected to be reduced from 45 in 2010 to 15 in 2011.
We are currently projecting our 2011 non-aircraft CapEx to be between $450 million and $500 million, bringing our total capital spending for this year to about $1.6 billion. One of the key drivers of the year-over-year increase in non-aircraft CapEx is deferred projects from 2010. You may recall that while we initially estimated about $400 million in non-aircraft CapEx from 2010, our final spending was reduced by about $150 million versus our expectations a year ago to the total of $250 million I just mentioned.
Some of the projects we will be focused on this year includes customer-facing aircraft cabin upgrades to our 757 and 737 fleets, facility improvements including terminal projects to support our cornerstone strategy and necessary technology in avionics improvement.
With respect to capacity, our 2011 guidance is in line with what we discussed on our last call with mainline domestic capacity up about 1% in 2011 and international growing just over 7.5%, resulting in mainline capacity growth of about 3.5% and consolidated capacity growth of just over 4%.
To wrap up, this quarter was one of significant progress which reflects the dedication and commitment of our entire American team to further improving our results.
So with that, Gerard, Tom and I will be glad to take your questions.
[Operator Instructions] Our first question comes from Michael Linenberg with Deutsche Bank.
This is actually Bridget Hallowell [ph] calling on behalf of Mike from Deutsche. I just had a question regarding a press release you guys put out recently that you expect $150 million in revenue and costs synergies from your recently approved JV with JAL. And per today's release, there's something in there that said you and JAL collectively generated $1.5 billion in revenue in the combined markets. So seeing that the synergies are about like 10% of that, is that a good number to use when considering the $7 billion JV you have with BA? Or how else should we think about that?
I think one thing to consider if you look -- we're describing sort of current business as it stands today and the immediate synergies that both of us see. But I think what it doesn't reflect and something that we haven't specifically commented on at this point are new routes. And so as we go forward, that is something that needs to be considered as well, but we did not specify that explicitly.
But is there any way we can imply that similar 10% number to any sort of number to the $7 billion for the JV you have with BA?
Well, what we have shared publicly and I just want to kind of recap, what we said is that there are a number of initiatives. In aggregate, they will represent over $500 million on an annual basis. And we broke that down further by saying that our joint business agreements both with BA and Iberia and with JAL represents the bulk or the biggest portion of that $500 million, but we did not break it out publicly in any great detail. That $500 million also includes cornerstone strategies and a lot of other initiatives. But think of it in terms of on a steady-state basis which we expect to attain by the end of next year, it should be in aggregate over $500 million.
With regard to revenue trends, you talked about that the fuel surcharges that the industry is trying to pass on. Can you talk a little bit more about your experience in that regard and comment on what you're seeing in terms of the revenue environment in light of this?
Well, we don't prospectively comment on pricing or fare initiatives. As I've shared just a few minutes ago, we have seen strengthening in the fare environment in the marketplace. And as you look across the industry just within the last couple of days, there's been a number of initiatives and I think that's a good reflection of the fact that as fuel has been increasing, there is also strengthening on the revenue side.
And next we go to you by Gary Chase with Barclays Capital.
Garrett Chase - Barclays Capital
Wondered if you could elaborate a bit on what some of the near-term impact is that you're seeing from the distribution issues that you referenced. Is there any way to calibrate that in terms of revenue impact?
Gary, I think at this point, kind of given some of the legal matters that are involved, we are not specifically commenting on any one aspect. What I can share with you is that as we look out to the remainder of this quarter, our bookings are in line with last year.
Garrett Chase - Barclays Capital
Can I ask you to clarify that as well, Bella? When you say the bookings, you mean to book load factor or the absolute bookings because obviously capacity is up year-on-year?
An excellent clarifying question, Gary. What I mean is as we look at advance bookings, it's the advance book load factor that's in line with last year.
Garrett Chase - Barclays Capital
And is there any regional color to that we should be aware of, like it's better in certain regions and not in others or not really?
I think at this point we really aren't breaking it down further. I think that across the Atlantic, the industry overall is not seeing the same kind of strengths that it saw earlier. So I think kind of that is one region not uniquely for us, but for the industry as far as we can tell, other than that, the number that I shared with you is more of an aggregate system number.
And next we go to Hunter Keay with Stifel Nicolaus.
I wanted to touch a little bit on -- I mean, the tone of your prepared remarks sounded very optimistic and I appreciate that. But I mean, if I'm taking some of the guidance you guys provided with fuel, non-fuel, CASM, it looks like a pretty sizable loss in 2011 is pretty likely here. I mean, I'm getting something like 7% RASM growth or something close to breakeven which would be a pretty strong top line performance given the 4-plus percent capacity growth. First of all, is that an attainable number do you think? I mean, is the 7% plus RASM? Or is there maybe some arrows in the quiver that, that merge is not appreciating, that maybe you want to help us get some sort of body language on? I mean, what do you see that makes you feel optimistic right now?
Well, Hunter, unfortunately or fortunately as you can appreciate, I cannot comment on revenue projections for this year because that is not what we do. What I can share with you -- and perhaps I'm generally more of an optimistic upbeat person so you're probably something that is felt. But I think it's fair to say that there is a lot for us to be optimistic about in a sense of the foundational work that we did last year in terms of JVA, both over the Atlantic and the Pacific. And the fact that as we are now putting, for example, a more coordinated schedule in place with British Airways and Iberia, that is actually not going to be effective until April. But the good news, it will be in effect until April. We see a lot of synergies that we've anticipated for many years that we're hoping to get. So a lot of things happened in 2010 that I think position us very well going forward. And I think perhaps that's what you're sensing. Also, I know that word can be overused, so you have to forgive me. But I think we have -- we're just very energized by a lot of things that happened in our favor in the last 12 months. And I think it's laid the groundwork for us to be stronger in the future.
By my math, I think you guys can do about $350 million to $400 million in incremental operating income from charging $25 for international first bag fee. I know you're not going to give any kind of comment on that. But can you maybe tell me what percentage of bags roughly speaking that you transport right now have a fee attached to them? United told us about six months ago it was only about 40% which I think is remarkable. Do you have any kind of similar metric you can help us out with?
Hunter, I'm going to defer and have maybe Chris look at that. To be honest, that is not a number I have readily available, and I would rather not try to guess.
Next, go to the line of Glenn Engel with Bank of America, Merrill Lynch.
Glenn Engel - BofA Merrill Lynch
First question would be on looking at RASM. If I look at the domestic RASM over one or two-year period, you've outperformed by decent margin. And yet if I've looked at the international margin by any region, transatlantic, transpacific, however one or two-year period you significantly underperformed. Can you talk about what's driving the domestic -- better performance on the international worse performance?
Well I think that -- and I can comment about 2010. And in 2010, first of all, we have not benefited from antitrust immunity like some of our competitors have benefited from. So that's one aspect. Another one, the Pacific region on a year-over-year basis was very strong. And of course we are not as large there directly, and we did not have a joint business with JAL at that point in time. So there are some unique regional challenges that have impacted us given our geography. And even over the Pacific, one of the areas that, on a year-over-year basis, did not increase as much as some of the other ones if for example, Japan because it was stronger the year before. So there are some unique sub-geographies within a geography. And then in the case of Latin America, for example, there are regions -- like in Brazil, we've seen pretty good economic growth but there were some other regions, and specifically I can comment on Mexico. So going back a little bit in history, in 2009, there was a unique impact from the H1N1. And that made the Caribbean pretty strong that year. So if you look at the Caribbean in 2010, it did not show some of the same strength and that's a large region for us. So there are kind of unique geographical impact that I would say. Now I think that on a year-over-year basis, kind of as we look out, I think it is going to be less of an issue as a general statement.
Glenn Engel - BofA Merrill Lynch
And the $640 million pension accrual for 2011, does that compare to $677 million in 2010?
It's about $660 million, $670 million in 2010.
And next, we go to Kevin Crissey with UBS.
Going back to the distribution stuff, I know -- I can understand why you wouldn't be able to talk much about that specifically. But maybe you could talk about something, maybe not as revenue directly related that kind of maybe some changes in your website traffic or something along those lines that would get us appreciation for any shift in distribution trends.
Kevin, I appreciate your question, and I appreciate your understanding. Because if you can understand, there is not much we want to kind of share given where we stand at the moment from a legal perspective. I can share with everyone that we have seen a positive trend on www.aa.com. As you would anticipate it, as we anticipate it. So that's been a positive for us. And the only other thing I would share with you is that we do have our sharing date with respect to the Sabre dispute. That is actually now in mid-February, February 14. And so that's kind of another piece of public information I could share with you at this point.
Kevin, this is Gerard. I think despite all the lawyer-ing going around to come back to what our objectives are. And of course we have distribution costs which is part of the equation here. But we're also attempting to customize our products and services to better address what customers are asking from us. And to increase the choices available to them. So of course, we want to lower our distribution cost which will help us keep offering low fares. But we're also trying to be customer-centric in what we're offering our customers. And it is no secret we want to try to generate new revenue sources from the sale of customized products and services. And of course, part of the equation for doing that is developing a closer relationship with our travel agency partners, and ultimately, the folks that are riding on our airplanes. So despite the fact that we've got to be cautious because of all the lawsuits about the data that we are sharing, I don't think there's any harm. At least I hope there's not. I'm trying to frame for you what our objectives are in all of this.
I guess as it relates to the Sabre stuff from an accounting perspective, the increased cost that they have passed on that I don't think you got an injunction against, if I'm not mistaken. Are those in your guidance? Would it be material if suddenly you got that back? Or you're not capturing that currently in your guidance and it would be material to the negative? You know what I'm talking about, with the increased cost per transaction for Sabre?
I think at this point, I certainly agree with Gerard that it really is very important for us to highlight what our objectives are. But as far as any specific aspect like that, given where we are right now, we prefer not to comment specifically, as I'm sure you can appreciate.
What can I do with a flat, advanced book load factor? I mean, you could do that with low pricing. You could do that with high pricing. I've never been able to find much use with it. I know you're trying to give color on things that are fine, but I don't know that, that necessarily does. Is there another way to frame things are fine?
We weren't trying to do anything other than what we do on every quarterly call. So that's the same framework we use on every quarter to give guidance on revenue outlook as it relates to bookings.
It just seems more important now, I guess, because of the distribution headwinds, as well as the fuel headwinds and where capacity is. But I don't think that many people on the call did expect you to come out and say, "Here's what our RASM is going to be for the first quarter." But we can all try.
The next question is from Bill Greene with Morgan Stanley.
This is John Goddard [ph] filling in for Bill Greene. First, Gerard, I just want to ask a bigger picture question on your negotiations with OTAs [ph] and GDSs. It's great that American took leadership on the issue but if the industry presented a more unified front, I'm guessing chances of favorable outcome would in all likelihood be higher. I'm sure it's not that simple, but can you just discuss how you arrived at your current strategy and what some of the challenges are in coordinating a more unified front with other airlines and how the industry deals with OTAs [ph] and GDSs?
John [ph], of course, we don't talk to other airlines, and we do not have a unified front with other airlines, nor would we be permitted to do so. So that's not something that's legally permissible. So of course, we wouldn't do that. But we have been thinking about the subject for a long time, and we have been working with technology providers, including some of the world's current GDSs about our vision for the way technology is potentially changing the distribution of airline products and services. And so those goals that I highlighted earlier, we have been thinking about for quite some time and working towards an ability to be able to achieve some of those objectives, while at the same time recognizing that we have, despite the fact we have some disputes going on today, we have some very good partnerships with GDSs and OTAs [ph] and of course travel agencies across the world. And we want to work constructively with everyone with our ubiquitous approach to distributing our product so that I think in the end, we can have potentially a good result for everyone. Well I guess I did directly answer your question, which is we have no unified front because that's not the way we work.
Bella, one thing that stood out in the release was the fact that you've had your fuel guidance to the average curve in December. But fuel prices have gone up since then. Is your about 4% 2011 capacity growth guidance consistent with current prices? Or is that based on the older fuel price guidance from December? And what would trigger a reassessment of your capacity outlook?
Well, I think at this point what I can share with you is that of course fuel prices move considerably up and down in any given week. What we shared with you is our plan for 2011 as what's finalized. And so the guidance that's provided in the press release is, if you will, consistent -- the different components are consistent with each other and at that point in time, we pegged it to December. Obviously, there's been some movement. But at the same time as you know, fuel prices are quite volatile, and so we'll have to see kind of how things progress. But the guidance we gave is consistent with each other, if you will.
Sure. But is there a specific fuel price level that would trigger any sort of reassessment of capacity?
That is not something that is formulaic as you're describing. So I would say not at this point.
On the other hand, if you look at history, you can look at our behavior historically. And I think the answer is yes, of course, there's a point at which if you can't recover your input costs to any satisfactory level, you obviously have to think about capacity and that's certainly been our history.
Yes, I think that's absolutely true in terms of capacity discipline that we've demonstrated. I would also, John, kind of point you to the fact that our international growth is kind of what you're seeing and it's driven by very, I guess, strategic and specific decisions that we made that build to our network's strength. Of course, as Gerard points out, we are rational people and obviously are very focused on the overall well-being and financial health of AMR.
Our next question is from Jamie Baker with JPMorgan.
Jamie Baker - JP Morgan Chase & Co
Question for Bella on fuel hedging. It looks like last year's program reduced your earnings by around $190 million or so. I'm just taking what you overpaid for fuel relative to U.S. Air. It doesn't actually include what you paid for those hedges. I respect that maybe U.S. Air goes from first to worst this year in terms of what they ultimately pay. But you've got to admit, this program worked against you in 2010. It seems to me that if your shareholders want to hedge their exposure to fuel and many of them do so, that should be left up to them. But it isn't clear to me why AMR should be in charge of this process sort of strategy. If you accept that longer-term you and the industry can absorb higher fuel prices, what's the rationale for continuing to tie up capital that could be put to other uses?
Jamie, I appreciate your question, and certainly your perspective. I think we've been pretty, I guess, open in sharing that. We take a systematic approach to fuel hedging. So we are not if any one extreme and we feel that given how tickets are sold in the industry, in other words, tickets are presold for future travel that having a more systematic way of managing and reducing some of the fuel volatility is a reasonable, prudent manner in which we manage it. And so I think that over time, we have achieved significant savings. But of course, if you look at any one point in time, it may be up significantly or down significantly. Our approach had been a systematic way and basically about 18 to 24 months out, we start buying in small increments so that by the time we consume it, are hedged about 35% to 50% and is our plan.
Jamie, this is Gerard. If I could just add to that, I appreciate your perspective on that and I'll think about what you had to say. I do think that the underlying premise of the program was when it was conceived and is today that in any given year, as Bella highlighted, you're going to either win or lose but that's not necessarily the objective. The objective was to dampen the volatility of fuel prices and your expenses and that's hopefully dampened the volatility of earnings. And then I think if you keep the logic stream going, if you dampen volatility, you lower the data in your stock and that's a good thing and accrues to your shareholders. So I think that's the underlying thinking behind the program. But where you started is correct that because of the systematic way that we do this, we were on the wrong side of the hedges in 2010. As we currently sit, we're on the right side of them for 2011 and the whole purpose is just to try to dampen some volatility.
Jamie Baker - JP Morgan Chase & Co
I have a follow-up just on the 777-300ER. How should we view this aircraft within the context of the 787 deliveries? Look like they're going to be starting around the time that 787 was originally slated. Is this aircraft likely to be a long term part of the fleet? Is it part of Boeing's compensation to America in over 787 delays? Does your existing pilot contract even allow for this model? Or is it contingent on a negotiated solution there? Also, unless I'm mistaken, two planes won't allow you to do a daily round-trip, maybe across the Atlantic but not the Pacific. So should we expect another order for this set?
Jamie, this is Tom. The 777-300, this was really a strategic decision. It's a really efficient airplane that will allow us to capitalize on some near-term opportunities given our cornerstone strategy and our joint business agreements. It's a very advanced airplane. It has unit costs that are about 7% or 8% better than the 747-400. So it's really a very good airplane. And so we did it to capitalize on some opportunities. It is good to have the flexibility to get these airplanes given that the 787 is delayed, but that's not the principal reason why we exercise our options here. As to your question about whether we'll do more, I would say we have ample flexibility under our agreement with Boeing to capitalize on more opportunities. But we'll evaluate those as they come. Because we do have that flexibility, we don't need to do anything until we're closer to the time of the opportunity.
Jamie Baker - JP Morgan Chase & Co
And I know your existing VA contract specifies the 777-200 but this does require sitting down with the pilots and negotiate the cockpit economics?
No, we believe we have the provision to fly these.
And next we go to Dan McKenzie with Hudson Securities.
Daniel McKenzie - Hudson Securities Inc.
One small housecleaning question on the network, consistent with your cornerstone strategy, I've seen AMR cut a significant amount of domestic capacity at certain non-cornerstone markets. But one that jumped out at me was San Juan, Puerto Rico where I'm seeing AMR cut flying 35% starting in the second quarter. And I'm wondering if you can provide a little more perspective about what the plans are, either for the equipment at this market or the market in the context of AMR Eagle to the extent that it serves that market?
I can add a little color on that, Dan, then maybe Bella can jump in. But it's really -- consistent with our cornerstone strategy, it's really about focusing on Miami. And so many of the markets we serve out of San Juan, we also serve out of Miami. So this is a way for us to do that more efficiently and capitalize on the north and southbound fee that we have coming into Miami. So we think it's a really smart, economic and strategic thing to do.
Daniel McKenzie - Hudson Securities Inc.
And then following up, I hope I'm not kicking a dead horse here but maybe I could try a little different tact. It looks like everyone has the same interest in the biggest markets that matter the most. And by that, particularly New York and Los Angeles to your cornerstone comments. And even in more granularity, domestic flying at these markets. So I'm wondering if you can provide any perspective about whether or not these large markets can absorb the influx of capacity. And I know you can't talk about pricing, but maybe you could talk about perhaps the volume of corporate travel transactions or other demand points. And I guess at the end of the day, we are all trying to figure out is if the pie is big enough to go around for everyone.
Dan, it's Tom again. I'll give a little bit of the strategic point of view and Bella can chime in if she likes. We chose our cornerstones very carefully because four of the five are the largest metro areas in the U.S. and the tip of our cornerstone is Miami, which is uniquely a hub for the Americas. So in three of those places, Chicago, Dallas, Miami, we have very large and powerful hubs and I think we're unique in that regard. In New York, clearly that's a three-way battle, at least a three-way battle between the big alliances. We think we have a very strong strategic position there, given our historical strength for corporate accounts, our brand new, beautiful Terminal 8 at JFK that is unmatched. We now have a joint business with British Airways across the Atlantic into the far and away, the most important travel corridor out of New York. We are very big in the trans cons. We now have a partnership with JetBlue. I don't think anybody's got anything close to what we have in New York, particularly as regarding the highest value travel and the premium corporate accounts. And then in LA, I think our unique strength there is not only our own flying, which as you know we're growing this year, but also our partnerships. We have the best partners in LA, particularly going across the Pacific with Qantas, Cathay, JAL. And so we think the combination of our domestic growth, our own international flying and those partners makes us a natural winner in LA. So we think we've got very strong strategic positions in all five cornerstones. And that's why we've dedicated virtually all of our capacity now to the cornerstones.
The only thing I would add to that is if you look at the largest premium markets in the world, Heathrow is by far the largest. And the second largest is JFK. And so obviously, as I mentioned, we're going to offer in a shuttle-like pattern of service, 14 flights between the New York area and London and we feel that, that is very powerful.
And next, we go to Helane Becker with Dahlman Rose.
Helane Becker - Dahlman Rose & Company, LLC
Can you just comment, Gerard, perhaps on the flight attendants. I think that after a few days of negotiations earlier this month, talks broke off and they asked to be released on a 30-day cooling off period. And without commenting on any of the negotiations, can you indicate when or if the NMB has responded or when they'll respond?
Helane, I don't think I could give you any unique insight based on that, because it's really up to the NMB in terms of how they judge the status of negotiations. We've certainly worked with them and worked in good faith at the table with our flight attendants to reach agreement that does, as Bella suggested earlier, try to balance the long-term interests of our employees against their short-term desire to improve their paycheck. And we certainly understand that. But the unique challenge that we have, that you're familiar with, is the only legacy carrier not to have gone bankrupt. We just have to face the reality that we have the highest labor costs in the industry. And so, we are not trying to negotiate down to the bankrupt carriers. We are formerly bankrupt carriers. We're simply trying to recognize where we are relative to them and not put our company or our employees' long-term interests at jeopardy by not confronting that reality. And of course, we're watching very closely what's happening at the other carriers. And so since you raised the flight attendant, I read that the Continental flight attendants reached an agreement that was ratified by their members. And that agreement would be perfectly acceptable to American Airlines. So I think that will show you the fact that we're not -- we're trying to be responsible in the way that we're conducting ourselves. We're also trying to recognize where the rest of the industry is and the fact that all these companies did go bankrupt and had labor contracts, imposed on their people their bankruptcy.
Helane Becker - Dahlman Rose & Company, LLC
So the NMB doesn't talk to you before releasing them into a 30-day cooling off period to get an agreement off to timing? Or are they just -- I mean, it's been a long time, I don't really remember, they just one day wake up and decide it's just time to be released. Is that how it works?
Gosh, Helane, I guess in theory, we would have a heads-up on that. I'm not aware that there's any formal process for that.
Ladies and gentlemen, members of the analyst and financial community, that does conclude your question-and-answer session for today. After a brief break, we'll begin the media Q&A. Ladies and gentlemen, thank you for your participation and for using AT&T teleconference. You may now disconnect.
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