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Executives

Thomas Horton - President and President of American Airlines Inc

Isabella D. Goren - Chief Financial Officer, Principal Accounting Officer and Senior Vice President

Christopher Ducey - Managing Director of Investor Relations

Gerard Arpey - Chairman and Chief Executive Officer

Analysts

William J. Greene - Morgan Stanley, Research Division

Helane Becker - Dahlman Rose & Company, LLC, Research Division

Kevin Crissey - UBS Investment Bank, Research Division

Hunter K. Keay - Wolfe Trahan & Co.

Garrett L. Chase - Barclays Capital, Research Division

Michael Linenberg - Deutsche Bank AG, Research Division

Jamie N. Baker - JP Morgan Chase & Co, Research Division

James M. Higgins - Ticonderoga Securities LLC, Research Division

Glenn D. Engel - BofA Merrill Lynch, Research Division

Daniel McKenzie - Rodman & Renshaw, LLC, Research Division

Jeffrey A. Kauffman - Sterne Agee & Leach Inc., Research Division

AMR (AMR) Q3 2011 Earnings Call October 19, 2011 2:00 PM ET

Operator

Ladies and gentlemen, thank you for standing by. Good afternoon, and welcome to the AMR Third Quarter 2011 Earnings Conference Call. [Operator Instructions] As a reminder, today's call is being recorded. We are very pleased to have on the call with us today, AMR's Chairman and Chief Executive Officer, Gerard Arpey; the President of AMR and American Airlines, Tom Horton; and Senior Vice President and Chief Financial Officer, Bella Goren. And here with our opening remarks is AMR's Managing Director of Investor Relations, Chris Ducey. Please go ahead, sir.

Christopher Ducey

Thank you. Good afternoon, everyone, and 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 second (sic) [third] quarter, along with some perspective on the quarter and the full year. 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 and supporting slides, are 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 costs, forecasts of capacity, traffic, load factor, fuel costs, fleet plans and statements regarding our plans and expectations, will constitute forward-looking statements. These matters are subject to a number of factors that could cause actual results to differ from our expectations. These factors include changes in economic, business and financial conditions, high fuel prices and other factors referred to in our SEC filings, including our 2010 annual report on Form 10-K and our most recent 10-Q.

And with that, I'll turn the call over to Gerard.

Gerard Arpey

Thank you, Chris. Good afternoon, everyone, and thank you for joining us on our call. Before we review our results for the quarter and the steps we have taken to improve our performance, I'd like to start by providing a brief overview of how I see the landscape at American Airlines, where we are now, actions we're taking to address near-term challenges and how we are positioning the company for the future.

As all of you know, the past decade has been enormously challenging for the industry and for American. During that time, we chose a different path than others, and our actions demonstrate that we have been fully committed to that path. It's no secret, however, that the court restructuring process used by our competitors to restructure their labor contracts and thus lower their operating costs has intensified our competitive challenge.

To confront this fact, over the past couple of years, we have been moving forward to take the necessary steps to create a successful enterprise that will be competitive and profitable for the long term. Our powerful assets, which include one of the most recognized brands in any industry; our unmatched advantage program; our global network and alliances; our innovative approaches; and the loyalty of our customers remain real competitive advantages. Furthermore, another powerful factor which pulls all of this together is our people, the finest in the industry. Capitalizing on these strengths, American can and will become a profitable company again.

Over the past couple of years, despite the challenges faced by the industry and the overall economic landscape, we have put in place building blocks which, when taken together, create a strong foundation for long-term success. Specifically, we have restructured our network to serve the most important business markets, and we will continue to enhance and maximize its revenue-generation potential. We implemented joint business agreements across both the Atlantic and the Pacific with premier partners, and we will continue to fortify our oneworld alliance by building comprehensive partnerships with the best international carriers in the most important regions of the world.

We are innovating and continually enhancing our customer experience across the board, from improving dependability to new technology to improved cabin environment and onboard services, in particular, for our premium customers. The Boeing and Airbus deals that we struck in July accelerated the fleet renewal efforts that were already underway here at American with 737-800s replacing MD-80s, 777-300s entering the fleet starting next year and up to 100 787s just a bit further down the road. With the firm order of 460 narrowbodies split 50-50 between current and next-generation technology aircraft, we will soon have a new and far more efficient narrowbody fleet which offers tangible customer, financial and operational benefits the day we begin taking delivery. We will significantly lower our fuel and maintenance costs and provide a different level of customer experience.

The deal includes tremendous flexibility. 465 options give us the ability to grow or to speed up replacements, depending on which economics make the most sense. Furthermore, what is probably not as well understood is that the timing of our deal gives us a number of major advantages. Our position at the front of the line, if you will, with the best order book among our network competitors to acquire and fly the next-generation of narrowbody aircraft, as well as of the size of our order, both make it enormously challenging for anyone else to offer the combination of product, services and efficiency we will start enjoying in a few short years. And furthermore, the $13 billion in prearranged manufacturer-backed financing that we secured on the terms of that we did is another advantage unique to American in this time of uncertain capital markets.

The last and perhaps most essential building block is for us to become more cost competitive and efficient, allowing us to capitalize on the many foundational building blocks I just described. The most important element of becoming more cost competitive and efficient is to achieve next-generation labor contracts that will allow us over time to be more competitive and, when the time and economic circumstances are right, to more fully develop our cornerstone markets. We are committed to this, and now is the time to accomplish this objective. We've had ongoing discussions with all of our labor groups regarding more competitive agreements to enable us to achieve our common goal of a profitable successful airline with more job security and opportunities for our people, deals that improve productivity by reforming work rules that don't make sense, eliminate restrictions on the way we conduct business, establish a new paradigm for new hires and bring other elements of our contracts more in line with the competitive market reality that we're faced with. In particular, over the past several weeks, we have been in a very focused and intensive dialogue with our pilots union, the Allied Pilots Association. Our pilot colleagues have both a fundamental stake in the future of American, and of course, they play an important leadership role in our company. We have worked hard to find a solution that is in the best interest of the company, our pilots and all of our stakeholders, and those efforts continue as we speak.

In summary, we have powerful assets and have put most of the key components for long-term success in place. We are taking action in every aspect of our business that we can control to drive revenues, enhance our network, control non-fuel costs and manage our financial position. And you'll hear more about that in a moment. Our immediate top priority is to address the remaining foundational issue, which is our labor cost structure, so that we can change the competitive dynamics and move the company forward aggressively and capitalize on the foundation that we have put in place.

With all that said, let me turn the call over to Bella to walk you through our results. Bella?

Isabella D. Goren

Thank you, Gerard. Good afternoon, everyone. As you have seen in our press release this morning, we reported a loss in the third quarter of $162 million. This compares to a profit of $143 million in the third quarter of 2010. In the third quarter, we increased total revenue by more than $0.5 billion. Higher fuel prices, however, drove well over $600 million in additional fuel expense year-over-year. For the full year, we now anticipate that the price we pay for fuel will be approximately 30% higher than last year, increasing our expenses by approximately $1.9 billion for the year, even after recognizing the significant benefits from our hedging program.

As Gerard discussed, we have been taking a series of actions to address a number of issues impacting our business to improve our results. I will highlight some of our initiatives and the results we're seeing as we walk through a discussion of capacity, revenue and cost performance and a review of our balance sheet.

I will start with an update on our capacity plan. As you know, last week, we announced an additional capacity reduction to reflect the uncertain overall economic environment and ongoing high fuel costs, as well as to help us run a reliable schedule for our customers, given additional pilot retirements we anticipate throughout the fourth quarter. With this capacity cut, we now anticipate that our mainline capacity for the fourth quarter will be down about 3% year-over-year. This also means that now, for the 2011 full year, our mainline capacity will be about flat and our consolidated capacity will be up by about 1% compared to 2010. As a reminder, these are significant reductions from our initial 2011 plan, which calls for full year mainline and consolidated capacity to increase by over 3% and 4%, respectively. These reductions have been done in a way that is designed to maintain the strength of our network.

The schedule adjustments are being accomplished by reducing frequencies, as well as reducing flying on some days of the week. In some cases, we are also substituting smaller aircraft for larger aircraft, which results in lower capacity.

As previously announced, our estimated capacity for the fourth quarter incorporates the suspension of JFK-Haneda flying. It also reflects our decision to discontinue flying between Chicago and Brussels and, instead, focus on our service between New York and Brussels.

Turning to 2012. Our previous plans for next year would have resulted in a capacity increase in the low-single digits simply as the result of replacing 140-seat MD-80s with 160-seat 737-800s, as well as the year-over-year impact of new long-haul international routes such as Los Angeles to Shanghai, which we started flying earlier this year.

At this point, given the environment, we're planning for flat to down capacity next year. We will provide a more comprehensive update on our 2012 capacity plans in the coming months. We also announced that we plan to retire 11 757s next year. By retiring these aircraft next year in anticipation of the first deliveries under our new deals with Airbus and Boeing, we will be able to save certain upcoming maintenance expenses, as well as fuel costs.

Turning to our third quarter revenue performance. We are seeing positive trends from several initiatives that we implemented earlier in the year to improve our revenue results. In the third quarter, as you can see on Slide 7 of our supporting webcast presentation, consolidated passenger unit revenues increased by 8.7% on about 0.5 point more capacity compared to the third quarter of 2010. Consolidated load factors were high at just over 84%, and consolidated passenger yields were up 7.5%. Our mainline passenger unit revenues were up 8.1% compared to the third quarter of last year, and our unit revenue growth showed better trends than in the prior quarters.

The early returns for the day-of-week capacity reduction initiative, which we instituted in our domestic network in August, are quite encouraging. In fact, our unit revenue growth in markets where we reduced some frequencies outpaced the unit revenue growth in other markets. In addition, our fourth quarter capacity reductions, which we announced last week, are intended to similarly impact flying on days-of-week with lower demand. We have also seen positive revenue results for our regional network, with our regional unit revenue increasing 8.7% in the third quarter, driven by yields that were up over 6% and a 1.7 percentage point increase in load factors.

Looking at our international performance, overall international unit revenues were up 8.5% on a capacity increase of over 2%. The Latin region, which is our largest international entity, continues to see strong year-over-year growth, particularly in South American markets. In fact, in the third quarter, our Latin unit revenue was up almost 19% compared to last year on both strong yields and load factors, with South American unit revenues up nearly 25%. During the third quarter, we implemented several pricing initiatives in a number of Latin markets that contributed to these results.

Turning to the Atlantic. We're starting to generate revenue benefits from our joint business with British Airways and Iberia, as we experienced unit revenue growth of 3%. So far in 2011, our joint business premium share is up almost 1 percentage point over last year and has increased versus the other alliances, which is, of course, one of our primary objectives. We have also started joint corporate dealings with some notable successes. Specifically, in the third quarter, we have implemented more than 100 joint corporate deals and have secured commitments for increased revenue from several of our key customers. We also offered customers our first ever joint business fare sale in August and September, which was targeted to drive revenue improvement across our joint networks during what typically would be slower periods in the fall and winter.

Our third quarter revenue performance improved, despite the fact that we faced a number of unique challenges in the period, particularly in the Pacific. Our Pacific capacity is focused on flights between the continental U.S. and Japan, and the U.S. point-of-sale traffic represents a higher share of our traffic compared to that of our U.S. competitors who historically have had a larger presence in Japan. This traffic has been slow to recover after the earthquake. As an example, U.S. point-of-sale industry traffic to Japan is down about 30% year-over-year, while Japan point-of-sale industry traffic has almost fully recovered to pre-earthquake levels. Our flying to Haneda, which was suspended in September, also dampened our third quarter Pacific performance. I should also note that we are retiming our JFK-Narita flight to better serve the market. We have taken actions to increase our Asia point of sales in cooperation with our partner JAL, including implementing a joint strategy for Japan point of sale that includes joint pricing in products as well as a more coordinated network offering.

Let me now spend a moment on distribution. We are determined to strengthen the revenue-generating power of our business through an updated approach to distribution. While continuing these efforts, we are also focused on ensuring that certain legal proceedings do not disrupt our business base and our travel agency partners. In the third quarter, for example, we reached an agreement with Sabre to continue to provide the same content that agencies currently receive via Sabre's global distribution system until our antitrust claims have been resolved through the Texas state court system.

As those of you who follow this issue know, there are a number of claims and counterclaims on this. Last month, there was an important new development in the legal proceedings. Through the discovery process, we learned that there was an illegal coordinated effort on the part of Sabre to encourage travel agencies and corporate customers to book away from American, thereby impacting our revenue performance. You can find more information about this at our website that we established, called distributionupdate.com. While we will work through the legal process to get to all of the facts and sort out the impact, we believe that bringing Sabre's actions to light has helped reverse that impact.

From a commercial perspective, we are moving forward with our Direct Connect initiative with major online and global corporate travel agencies such as Priceline, Expedia, HRG and American Express. We have also expanded our GDS agreement with both Travelport and Amadeus, providing our corporate agencies and business partners uninterrupted access to AA content well beyond this year. These extensions afford the parties more time to continue our discussions as we remain committed to our strategy to deliver more customized products to travelers and to expand our revenue opportunity.

Turning to advanced bookings. Our advanced bookings are in line with last year. To give you some more detail, prior to the impact of the capacity reductions we announced last week, domestic bookings were up about 0.5 point, and international bookings were off just over 1 point versus last year, mostly driven by lower bookings in the Pacific. Of course, we’re keeping a close eye on broader economic trends. And while there is uncertainty with the recent reduction in our flying, lower overall industry capacity and the traction we are seeing with a number of our initiatives, we feel reasonably well about the revenue environment heading into the winter.

On the cargo side, our revenues increased almost 5% versus last year. Freight yields posted a greater than a 12% improvement, more than offsetting a 7% lower traffic. Our improved yields were driven by fuel surcharge revenues, as well as relatively strong performance in Latin America. In the other revenue category, we saw year-over-year improvement of almost 8%. This improvement was driven by continued strong performance from our Advantage program, as well as contributions from the confirmed flight change program and baggage charges. Furthermore, we continue to work to diversify our revenue stream and focus on growing our revenues from optional products and services, and we believe there is more opportunity in this area.

Shifting to costs, our third quarter unit costs, excluding fuel, increased about 4%, both at the mainline and on a consolidated basis. Much of that is due to lower-than-planned capacity, as well as higher aircraft rent and expenses associated with higher revenues. Fuel prices during the quarter were $3.15 per gallon, up over 40% versus the third quarter of 2010.

Looking at our cost guidance for the fourth quarter, we anticipate that our unit costs, excluding fuel, will be up about 6.5%, both at the mainline and on a consolidated basis. This is higher than what we have incorporated into the guidance we provided in September, driven by the fact that it is challenging to reduce expenses in the near term that are commensurate with the additional capacity reductions.

For the full year 2011, unit costs are now expected to be up about 2.5%. The cost headwinds created by capacity reductions are significant, and we are very focused across the company on identifying near-term opportunities to reduce that impact. And cost management will continue to be a very high priority as we develop our plans for next year. We will provide an update on our unit cost expectations for 2012 at the time we report this year's fourth quarter results.

Moving on to our balance sheet and liquidity, I'd like to point out a few items. We ended the third quarter with almost $4.8 billion in cash and short-term investments, including a restricted balance of about $475 million. Our capital expenditures in the third quarter totaled about $500 million, including approximately $400 million of aircraft CapEx and lease deposits. We expect fourth quarter CapEx to be about $400 million, of which about $300 million is aircraft CapEx and about $100 million is non-aircraft. Please note that all of our fourth quarter aircraft deliveries are financed. For the full year 2011, we expect CapEx to be about $1.7 billion, consistent with prior guidance.

In the third quarter, our principal repayments on long-term debt and capital leases totaled about $340 million. With respect to the fourth quarter, our scheduled repayments are just under $1.1 billion, and we have already addressed about $800 million of that amount largely with proceeds from a double ETC transaction we closed in early October. Overall, in 2011, we expect to have completed repayment of about $2.5 billion.

I also would like to use this opportunity to address a question that comes up from time to time about the potential for reserves under our main credit card processing agreements. As you know, these agreements typically have provisions that would allow the processors to require a reserve depending on a company's liquidity level. First, it is important to note that we negotiated a provision that allows some of the requirement to be satisfied with certain noncash collateral. Furthermore, while the specific contractual terms are confidential, I would like to set the record straight because we have seen some speculation that cash holdbacks would begin if our cash is in that $3.5 billion range. That is not the case. Perhaps the speculation is based on holdbacks we reported back in the 2009 timeframe, but it is not the case today. I can tell you that in 2009 and 2010, as part of regular renewals of those key agreements, the liquidity requirements were significantly lowered, and we believe they are approximately in line with the industry.

Looking to 2012 and beyond, our debt maturities begin to moderate next year with a total of $1.8 billion coming due in 2012 and $1 billion in 2013.

Slide 8 of the webcast-posted material shows the quarterly breakdown of these 2012 maturities, which are about $325 million, $200 million, $575 million and $700 million, respectively. In addition, next year's maturities are expected to unencumber over $800 million worth of aircraft assets.

In terms of capital spending next year, we anticipate taking deliveries of 28 737-800 aircraft and 2 777-300ER aircraft. Our current estimate is that next year's aircraft CapEx and lease deposits will be between $1.3 billion and $1.4 billion. We have arranged financing for all of these aircraft, subject to certain terms and conditions, with the exception of the 2 777-300s, which we view is very financeable. We also changed one of our previous 777-200 orders scheduled for 2013 delivery to a 777-300ER. We are currently in the process of budgeting for next year, and we'll provide an update on our non-aircraft CapEx when we report our fourth quarter results.

In looking at our cash requirements next year, it is important to keep in mind that based on the numbers I just reviewed, our new fleet agreements were structured in a manner that as to allow us to reduce our cash requirements for aircraft purchase commitments for this year and next.

With respect to pension contributions, this month, we completed our planned cash pension contribution of $520 million for the full year 2011 and expect to record pension expenses for the year of about $640 million. For 2012, we expect that our required minimum cash contribution to our defined benefit pension plans will be no more than $560 million.

In summary, we're aggressively pursuing immediate actions to improve our results and are taking important steps to secure our long-term future. So with that, we will be glad to take your questions.

In addition to Gerard, Tom and myself, we also have Jeff Brundage, our Senior Vice President of Human Resources; and Virasb Vahidi, our Chief Commercial Officer, joining us on this call. Thank you.

Question-and-Answer Session

Operator

[Operator Instructions] First, we will go to Michael Linenberg with Deutsche Bank.

Michael Linenberg - Deutsche Bank AG, Research Division

Okay. All right, one question. I just -- with respect to your RASM performance in the September quarter, you were roughly double what you were in the June quarter. How much of that do you attribute to this boycott that was going on, the fact that there was -- and maybe, I'm not even sure -- maybe you can’t answer, but what's your feel for how much revenue may have been left on the table because you had a part of the distribution complex working against you?

Gerard Arpey

Mike, this is Gerard. Perhaps, Virasb or somebody can comment further. I think that the fact that we highlighted it and highlighted it in the manner that we did is an indication of how we feel about the impact. And the fact that we are involved in a lot of litigation right now really limits what we can say. So I do think that, as Bella suggested, we think we have seen a reversal in those trends. And I think beyond that, we're pretty lawyered up on the subject.

Operator

And next, we’ll go to Garrett Chase with Barclays Capital.

Garrett L. Chase - Barclays Capital, Research Division

Wondered if you could comment -- Gerard, the press release when you were talking about labor negotiations, the language was maybe a little bit different than at least I think I've heard you use in the past. There was talk about changing the competitive dynamic. And I'm wondering if we should expect that you're sort of posturing for a different sort of outcome. In the past what you've described was more about getting to competitive costs through -- over a period of time, through productivity and things like that, but things without immediate impact. And I'm wondering if maybe the new thought process is that you need to have some more immediate tailwind to come from that.

Gerard Arpey

Gary, I think our overall macro objective hasn't changed. And I think that the way we described it in my remarks in the press release, I believe, continues to highlight what we believe we need to do to become competitive. And in many respects, what we're talking about, and the reason why I think it has taken time, is that we're talking about transformational kinds of agreements to move us to the next-generation labor contracts that will allow us to capitalize on the foundational blocks that we put in place. And of course, that new fleet plan, with the financing that we have in place, really can be one of the seminal catalysts to propel the company forward. And so as we think about these agreements, we're trying to think about them in the transformative way that we thought about that fleet deal. And so whether it relates to productivity or work rules that don't make sense or a new competitive framework for new hires, eliminating restrictions on the way we conduct business and just a wide range of the other elements in our contracts, trying to bring them more in line with the realities of the marketplace. So I don't know if all that helps you, but that's -- the goal is to become more competitive, and that's -- having talked about all of the other things we've done, that has now become our #1 priority.

Garrett L. Chase - Barclays Capital, Research Division

I guess, Gerard, what I was trying to get at was timeframe because you talked about the fleet order as one of the critical components to this transformation that you're describing. I mean, the new orders are not really going to have a transformative impact on the fleet until several years from now. And I'm just wondering if that's your thought process on the timeframe for all of these things coming together, or whether or not there's an objective to maybe drive some of that improvement closer in.

Gerard Arpey

No, of course, I think, Gary, that we would anticipate driving immediate benefits for the company in these agreements. And I might add also that when I say transformational, that can mean that unlike the approaches that have been taken by most of the industry, we can, through productivity and other creative ways of addressing this, we can actually -- we're talking about something that is actually good for our pilots, in particular, and good for the company. And so that's the intersection that we're trying to hit, something that is positive for them, positive for the company, positive for the overall institution. So, Tom can add something if you'd like.

Thomas Horton

Gary, I would just add, I certainly agree with the urgency around that and the focus on that. But I would also say that with respect to the fleet, we have some changes taking place right now. Between '09 and '12, we will have taken 130 new 737s. And so by next year, we'll actually have more 737s than MD-80s, and that's even before you get to the new airplanes we start taking under the new fleet deal, which will start in 2013. So that's really just around the corner, but we've been moving that pretty quickly.

Jeffrey J. Brundage

Gary, this is Jeff. We made really good progress with the APA in our negotiations. And we had set a deadline of hoping to maybe reach an agreement by the end of last week, and that didn't happen. But we made really good progress, and they went back to brief their board of directors, and they're doing that. We're going to be back in negotiations with them this afternoon later on. As Gerard said, we've made some real significant progress in scope, in scheduling and benefits and some other key areas. And I think the APA has indicated and we've indicated we see a path to an agreement. But we're going to stay focused, and we're working on this. And we understand the time to work on this is now.

Operator

Our next question is from Bill Greene with Morgan Stanley.

William J. Greene - Morgan Stanley, Research Division

Gerard and Jeff, just kind of to follow up on that last point. We've seen sort of in the past is often it's helpful to have some sort of deadline. And I realize you had sort of a theoretical in your mind for last week, and you're still in negotiations, so that's good. But we also have other labor agreements to come, and so should we think about there being some sort of timeframe here? Or is it open ended? Because it feels like there's momentum and urgency, but I don't know how to think about what the expectations should be on timing for not just pilots, but the other deals, too.

Gerard Arpey

Well, Bill, we can work on more than one deal at a time, and we are. And I think the best way that I can convey to you any more than I or Jeff has is to simply come back to -- it's now -- given the other things that we put in place, it's the #1 priority for the company. And beyond that, I don't think I really want to draw lines in the sand or anything like that. It's the remaining building block that we need to put in place in order to capitalize on all the other things we've done in the company.

William J. Greene - Morgan Stanley, Research Division

Okay And just one data point from Bella. Do you have an estimate for unencumbered assets?

Isabella D. Goren

I think what I have mentioned is that we will have about $800 million worth of aircraft-type unencumbered assets in next year -- by the end of next year. And so at this point, just give me a moment and I will -- yes, so $800 million is what I quoted, Bill. And that is by the end of 2012. And just to provide you a bit of specifics on that, we have some private mortgages that opened up, and as well as our 2009 10.5% bond, which also matures next year. And we assumed in that number that we would be able to refinance 757s and 767s. And I want to specifically point out that we excluded any MD-80s in that number.

William J. Greene - Morgan Stanley, Research Division

But your other facilities and slots and stuff, or they’re all encumbered at this point?

Isabella D. Goren

Well, as you know, we -- for example, in the double ETC that we just did, we have a tranche B that we could do as well, and then as we kind of just look at our liquidity, which I think maybe your broader question, for next year, we begin to amortize our Citibank facility, which is, if you will recall, is about a $1 billion facility that amortizes over a 5-year period, between 2012 and 2016. We have 2 B tranches actually available, the one I mentioned, as well as our 2009-1 double ETC that we also did not issue a B tranche on. So there is number of different points there that provide us with flexibility.

William J. Greene - Morgan Stanley, Research Division

Yes. Maybe we can follow up after, but I was just kind of curious if there's a total unencumbered number. I think that's the number people are trying to understand. In addition to the cash, there's likely some assets left to leverage. And my guess is it’s bigger than $800 million, but maybe you can follow up after.

Isabella D. Goren

It is bigger. Yes, it is absolutely bigger than $800 million. And at this point, what I can share with you because, obviously, it would depend on market conditions, on our timing and what we would want to do. But that's why I kind of mentioned all of the other facilities that become available and the fact that, that provides us considerable flexibility. So the $800 million is sized to aircraft. In addition to that, we have the 2B tranches that we could choose to go forward with, depending on the market conditions. And of course, our Citibank loan or our Citibank facility starts to amortize next year as well.

Operator

And we'll go to Glenn Engel with Bank of America Merrill Lynch.

Glenn D. Engel - BofA Merrill Lynch, Research Division

A couple of questions. One on the GDS, you've negotiated an extension of the agreements. Does that extension at the beginning-of-the-year rates, or have their rates changed?

Virasb Vahidi

This is Virasb Vahidi. We cannot, for reasons that you would appreciate, comment anything beyond what we’ve put in the press releases, the fact that we have renewed these agreements beyond this year into next year. But the terms of the agreements are confidential in between the parties.

Glenn D. Engel - BofA Merrill Lynch, Research Division

On the RASM side, while the third quarter was better, I guess what still puzzles me is that the trans-Atlantic RASM is both lower than the industry by about 5 points to gains, and it seems to be lower than what the IAG reports for their North Atlantic PRASM. Why would that be with the JV?

Virasb Vahidi

I'll tell you. We're starting to see, as Bella mentioned in her remarks, the benefits of the joint business. And as you pointed out, in the third quarter we saw positive unit revenue growth in the Atlantic for the first time in 2 quarters. A significant driver of our underperformance versus the industry in the Atlantic in the third quarter is the fact that a relatively higher percentage of our network had new entrants. So I'll give you an example. Industry capacity in our nonstop markets was up almost 5%, but in the U.K., it was up almost 16%. Now looking forward to the fourth quarter, we see signs of improvement. We've obviously taken some actions to reduce our capacity, both through day-of-week reductions, as well as permanent cancellation of Chicago-Brussels. But also, on the good news front, our exposure to the competitive capacity that I just mentioned will lessen, given that our competitors have done the same and have reduced their capacity. The question comes up often about the comparison to IAG's results, and I think what we need to keep in mind is that right now, and this will be the last quarter, we have different bases for our year-over-year comparisons. So for example, BA had a strike in 2010, but more importantly, our joint business did not launch until fourth quarter of last year. So looking forward, starting with the fourth quarter, we expect our results to move more in tandem once we look at an apples-to-apples comparison of both years of joint business performance.

Operator

And we'll go to Dan McKenzie with Rodman and Renshaw.

Daniel McKenzie - Rodman & Renshaw, LLC, Research Division

I guess, as someone who's a new convert to your stock here, no one wants to see the cornerstone strategy work like I do. But we've now got a year under our belt, and the cornerstone strategy hasn't delivered the revenues needed to offset the higher fuel cost, even if AMR had benefited from lower labor costs. So I guess, at what point do you conclude it just makes more sense to cut unprofitable flying, or are you -- I guess are you really telling us today that with no changes to the cornerstone strategy, an operating profit is achievable, not that you will do that, but that it's achievable even with a higher fuel prices?

Virasb Vahidi

This is Virasb again. Let me try to answer your question. Clearly, with industry consolidation and the expansion of low-cost carriers, the overall environment is a lot more competitive across the board. But it's good to recall that the realignment we make to focus over 98% of our capacity in our 5 cornerstone markets, which as you know, our key domestic markets in addition to serving as international gateways to our own network and those of our oneworld partners, have made our networks stronger in these tough business markets. So in the highly competitive markets of New York, Los Angeles and Chicago, our investments and alliance partnerships and some of the initiatives we’ve put in place have helped us retain our positive corporate share gap, despite the impact of consolidation. So even with the increasingly competitive environment, we believe we're on track to achieve most of the anticipated benefits from the strategy. One thing I would point out, when you look at our third quarter results, you see that, for example, as we reallocated our regional capacity to support our cornerstone strategy in our cornerstones, we have seen a relative improvement in our regional performance. So that gives you some indication of why this is important for us.

Operator

And next we go to Kevin Crissey with UBS.

Kevin Crissey - UBS Investment Bank, Research Division

Have the travel management companies that have signed, I guess, letters of interest in the Direct Connect software solution, or it's software, I'm not sure if "software" is the right word, but "solution," have they seen anything yet? I've heard from some that they hadn't.

Virasb Vahidi

This is Virasb again. I'm not sure I completely understand your question. You know we have, again, publicly stated that we have entered into agreements with 2 large online travel agencies, Priceline and Expedia, as well as 2 large travel management companies, American Express and HRG. Beyond that, we haven't said anything about how these agreements work and the details of the agreement. So I haven't seen any public statements myself about any feedback from this initiative.

Kevin Crissey - UBS Investment Bank, Research Division

I mean, but those were more -- the way I've read those is more we intent to have a Direct Connect. In some cases, I guess there is one. So when you work with an HRG or any other ones that have signed these letters, have they actually seen how it will work and have it proven, demonstrated to them as to how this process will work such that they can have a relatively seamless process given that they're booking with maybe your partner who may be not coming in through a Direct Connect or some other way?

Virasb Vahidi

Okay. I'd like to stick with what's publicly available. So one of these companies that we actually have publicly said that the system has been operating under a Direct Connect structure is Priceline. I understand that's not the question you're asking because it's not a travel management company, but if you're asking the question whether the technology works or it's a proven technology or whether we have the ability to distribute our products through this technology, I would say that Priceline has -- they’ve said publicly and we’ve said publicly -- processes our distribution through Direct Connect with American Airlines. So taking that platform and then taking it in the context of other agencies who have a different structure and trying to tailor that is the work we're doing with the other agencies that have signed up for the same initiative.

Kevin Crissey - UBS Investment Bank, Research Division

Okay. And did you guys give an update on Eagle? And if not, could you?

Gerard Arpey

Sure. Is this Kevin?

Kevin Crissey - UBS Investment Bank, Research Division

Yes.

Gerard Arpey

Yes, Kevin, we continue to work on a divestiture of American Eagle. By the end of the year, we plan to have American and Eagle begin operating under the terms of the new agreement that would apply when the separation is completed. We are implementing certain internal organizational changes and asset transfers we've disclosed previously. We're also pretty pleased that Eagle and Alpha [ph] have reached an agreement in principle for a new 8-year contract that would essentially guarantee competitive pilot costs at Eagle. And the language that will be presented to the Alpha [ph] membership for a vote is being finalized, and all that work is in process. But we -- I really credit Dan Garton and his team and their colleagues at Alpha [ph] for reaching that agreement. I think it is good for Eagle. It's good for Eagle pilots and, ultimately, will be good for AmericanAirlines and our shareholders because it means a stronger company. So that language is being presented to the membership for a vote. It's being finalized, and then they'll vote on it. And we’ll get those results by the end of the year. So I think that's kind of a summary of what we're doing, and we're moving forward. Obviously, we’re also sensitive to volatility in the capital markets, which may affect timing. But we're still pretty much full speed ahead.

Operator

Our next question is from Jamie Baker with JPMorgan.

Jamie N. Baker - JP Morgan Chase & Co, Research Division

Mark [ph] and I here were wondering, given all of the bankruptcy noise, can you elaborate or maybe just sort of reflect on why this isn't an option for the company? We're not questioning your commitment in that regard, but investors certainly appear to be. So is there any scenario that you can identify other than a liquidity event that management might choose to just, I don't know, throw in the towel in order to alleviate some of the structural burdens that you face? Any color on that?

Gerard Arpey

Yes. Well Jamie, I think our past actions and statements have made it clear that, that has not been our preference or our goal. At the same time, we are well aware of the fact that all of our legacy competitors have used Chapter 11 to reduce their labor costs. We understand that in order to have a successful company, we have to close our cost gap, and we are embedded with our pilots in serious negotiations to address that part of the challenge. And we're also, as I said earlier, we're continuing our discussions with our other unionized groups. So achieving a competitive cost structure in order to capitalize on all of the other things we've put in place, especially our fleet plan, is our top priority, and we will continue to work toward that goal.

Jamie N. Baker - JP Morgan Chase & Co, Research Division

Has your resolve waver -- I mean this is certainly consistent with what you've said in the past, Gerard, and I appreciate that. But has that resolve, either yours or that, that's held by the board, wavered at all in recent years, given some of the challenges?

Gerard Arpey

Well, Jamie, I think I already answered that question, so I think I pretty much gave you the answer already.

Operator

And we go to James Higgins with Ticonderoga Securities.

James M. Higgins - Ticonderoga Securities LLC, Research Division

With the Delta-US Airways slot swap at Laguardia National appearing to move ahead, it looks like American is falling to a distant #3 in size in the overall New York City markets. Any thoughts on what this means to you and what you can do to narrow the gap if, in fact, you think you need to narrow the gap?

Virasb Vahidi

Jim, it's Virasb again, and this topic is very dear to my heart as an ex-New Yorker. So we, alongside with our partners, have a very unique and long-standing advantage in New York. When you look at the top 10 corporate markets from New York, you're looking at Heathrow, Los Angeles, San Francisco, Chicago, Hong Kong, Dallas, Paris, Boston, São Paulo and Tokyo, where we, as well as our partners, have a very significant presence. And this superior network advantage that we have, along with our 3 class international and transcon product, makes us really the most compelling proposition for many of the corporate sectors based in New York, but in particular, banking and media entertainment. So I'll just give you a few examples. In the New York-London market, which as you know is the largest corporate market in the world, our Atlantic joint business offers 16 daily departures. In the JFK to LAX or San Francisco, which are by far the largest domestic corporate travel markets, we have unparalleled schedule and product. But apart from our schedule and product, as you know, our facilities, our Terminal 8 at JFK is the crown jewel in the industry, and we have been, over the last 2 years, investing in what matters the most to New Yorkers, especially our high-value customers. We're improving our facilities in LaGuardia, both in Concourse D, and that's about to finish in the near term. And we will start renovating Concourse C. We're renovating our club in Concourse D. If you haven't been there recently, I invite you to stop by. It looks really nice. And then adding the brand-new club in Concourse C. So together, when you think about the whole value proposition we bring in New York to our customers, we have all the right markets with our partners. We have a great product, and we have great facilities at the airports in our clubs. So we feel very good about our position in New York.

Operator

And we'll go to Hunter Keay with Wolfe Trahan.

Hunter K. Keay - Wolfe Trahan & Co.

Can you share with us how much cash you're consuming on a daily basis on an operating basis right now before interest expense?

Isabella D. Goren

Well, Hunter, as you know, sort of -- we don't forecast because it is so susceptible to the revenue and fuel environment. What I can share with you is kind of reconcile how we used our cash in the third quarter. And let me just kind of walk you through the use of our cash.

Hunter K. Keay - Wolfe Trahan & Co.

And to be completely clear, I'm not looking for any kind of guidance, Bella. I’m not looking for any guidance. It’s more about...

Isabella D. Goren

No, I totally appreciate it. So if you look at our third quarter balances, what I can share with you is that there were several things that drove the new balance. So first, we saw what is normally a seasonal decline in the third quarter in the air traffics liability, and that was about $250 million. And their customers were using tickets they purchased earlier in the year. We also had a reduction in our hedge collateral that we were holding as fuel prices eased towards the end of the quarter. That was about $100 million. The third quarter is also a typically heavier quarter for us as we make pension contributions for the year. And what I can tell you is that our cash contributions in the quarter was about $60 million more than our book expense. So if you look at our P&L, I would keep that in mind. And we also paid off about $300 million worth of debt.

Operator

And we’ll go to Helane Becker with Dahlman Rose.

Helane Becker - Dahlman Rose & Company, LLC, Research Division

Is there a way -- I think, Tom, you addressed this earlier, but didn't really put some numbers on it. You talked about the fact that the 737 fleet would be bigger than the MD-80 fleet. Can you say, for every 737 that comes in to the fleet, it saves you x dollars in fuel cost over an MD-80? Can you just talk to that specifically, I wonder?

Thomas Horton

Yes, Helane, it's about 35% more fuel efficient on a per seat basis. So I think that's the best way to do the math and sort of apply whatever fuel pricing you want to against that. Tremendously more fuel efficient.

Helane Becker - Dahlman Rose & Company, LLC, Research Division

Right. Okay. And then what's that fleet going to cap out to in terms of size? Do you have some estimate of that?

Thomas Horton

Well, we haven't disclosed that yet, Helane. But we -- what I can tell you is that in 2012, we'll take 28 more 737s, and in 2013, when we start hitting our stride on the new fleet deal, we'll take 31 737s and 20 Airbuses. And then in 2014, we'll take another 20 737s and 35 Airbuses. So we’ll really start going fast, even faster than we have been going on the new planes, which as I said, are about 35% more fuel efficient. So it's a huge transformation of the fleet.

Helane Becker - Dahlman Rose & Company, LLC, Research Division

Right. Got you. And then when will all the MD-80s be gone?

Thomas Horton

Well, we haven't made a final decision on that because we're retooling our fleet plan in the wake of the fleet deal and keeping an eye on, of course, the economic climate and just how big we want the company to be, which encompasses everything from the economic situation to what sort of cost competitiveness we're able to achieve. So haven't yet decided, but it will be a few years out.

Helane Becker - Dahlman Rose & Company, LLC, Research Division

Okay. All right. And then, can I just ask Bella one question? Is there any plans to freeze the management pension plan, or has that been done already and I missed that?

Isabella D. Goren

Helane, what we have done with the management pension plan is that for new hires, after a certain date, and that was a number of years ago, they are going into the defined contribution plan. For the existing employees, at that same time they had a choice to make. And for those that have chosen to go to the defined contribution plan, that's what they did. And for those that remained in the defined benefit plan, that's what happened. So at this point, those are the plans we have. And as far as management is concerned, they had their decision. And quite frankly, if we look at our overall pension obligation, that is certainly a relatively small component. But nonetheless, we were very, I would say, thoughtful and innovative at the time when we brought all of our new hires on that new paradigm.

Jeffrey J. Brundage

Helane, Jeff. I think we actually offered that choice in 2002.

Operator

And ladies and gentlemen, this will be our last question for the session of the analyst Q&A. The question will come from Jeff Kauffman with Sterne Agee.

Jeffrey A. Kauffman - Sterne Agee & Leach Inc., Research Division

Just a follow-up. Bella, you answered most of my questions on the cash flow. You gave fuel hedge guidance for 4Q, but if I look at the forward Brent curve, it looks like fuel is kind of approximating about $2.80 a gallon for 2012. Can you give us a feel, and I understand if you want to do this a little bit later, but kind of where is the hedge book for 2012? And then just a follow-up on that for Gerard.

Isabella D. Goren

So right now, we are about 22% hedged for 2012. And obviously, as you know, we have a systematic approach to our hedges that we layer in over time so that by the time we get to the prompt [ph] months, we're about 40% to 50% consumed, or we have about 40% to 50% of our consumption locked in. We have not provided the specific guidance for 2012, and I would like to defer on that a little bit. What I can share with you that I think would be helpful is we are seeing the curves that you've described, and they have -- the fuel is lower, and so we'll have to see where we end up. But at this point, we're about 22% hedged.

Jeffrey A. Kauffman - Sterne Agee & Leach Inc., Research Division

Okay. And just a follow-up. Gerard, as we look toward getting these agreements in with the labor group and some of the steps you've taken on the equipment side, I think you said on the last quarterly call, labor was about 40% of what you needed to get you where you wanted to be. Is that still the case? And what are the other big buckets, I guess, left to pull from?

Gerard Arpey

Well, Jeff, I don't remember that comment, and I don't remember in what context. I do think that I guess the overarching principle that we're following here is that for our company to be successful, we've got to have competitive costs across the board, and that, obviously, includes our labor costs and our degrees of freedom to run the company the way our competitors run their company. So that's what we're focused on in our negotiations, and we're mindful that the other airlines that use the Chapter 11 process to restructure their contracts are likewise negotiating as we are. And so the goal is to come through that process with a much more competitive cost structure, so we can take advantage of all of those foundational things that I think are tremendous strengths that this company has in comparison to our competitors. And I think that the fleet deal, while we don't take delivery of that first airplane until 2013, I'd really think that, that is a transformational foundational piece for our company because it represents so much power in terms of what we can do to transform the customer experience, our cost profile going forward, in terms of both fuel and maintenance costs. And the fact that we've got the financing lined up in this environment, $13 billion of committed capital, I think, is a real strategic advantage. And then on top of that, you got all the option flexibility. So maybe somebody else will replicate that deal, and I'll be watching for that. But I'm not sure that's going to happen.

Operator

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 will begin the media Q&A session. One moment please. Ladies and gentlemen, thank you for your participation and for using AT&T Executive Teleconference. You may now disconnect.

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