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Executives

Gerard Arpey - Chairman, President and Chief Executive Officer

Eric Briggle – Managing Director of Investor Relations

Thomas Horton – Chief Financial Officer and Executive Vice President of Finance

Jeffrey J. Brundage - Senior Vice President of Human Resources

Analysts

Kevin Crissey - UBS

Gary Chase - Lehman Brothers

Frank Boroch - Bear Stearns

Michael Linenberg - Merrill Lynch

Jamie Baker - J.P. Morgan

Dan Mckenzie - Credit Suisse

Bob Mcadoo - Avondale Partners

Ray Neidl - Calyon Securities

William Greene - Morgan Stanley

Analyst for Robert Barry – Goldman Sachs

Presentation

Operator

Ladies and gentlemen thank you very much for standing by; we do appreciate your patience today while the conference is assembling. Good morning, good afternoon and good evening to our global audience. Welcome to the AMR fourth quarter 2007 earnings conference call.

During the presentation we have all of your phone lines muted or in a listen-only mode. However, after management’s prepared remarks there will be opportunities for your questions. As a note, we will be taking questions first from members of the analyst and financial community, and then we will move directly into members of the media that have joined us today.

(Operator Instructions)

As a note, in the interest of time, we do ask that you limit yourself to one initial and one follow-up question. I will repeat these instructions once we get to the Q&A session. (Operator Instructions) As a reminder, today’s call is being recorded.

It is always my privilege to introduce Chairman and Chief Executive Officer Mr. Gerard Arpey; Executive Vice President of Planning and Finance as well as Chief Financial Officer, Mr. Thomas Horton; and here with our opening remarks is Mr. Eric Briggle, Managing Director of AMR Investor Relations. Good afternoon sir and please go ahead.

Eric Briggle

Good afternoon everyone and thank you for joining us on today’s earnings call. Similar to last quarter, Gerard Arpey will provide an overview of our performance and then Thomas Horton will provide the details regarding our earnings for the fourth quarter, along with guidance for 2008.

After that, we will be happy to take your questions. As Greg mentioned, in the interest of time, please limit your questions to one with a follow-up.

Our earnings release earlier today contains highlights of our financial results for the quarter. This release continues to provide additional information regarding entity performance and cost guidance which should assist you in having accurate information about our performance and outlook.

In addition, the earnings release contains reconciliations of 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 regarding our outlook for revenue and cost, as well as forecasts of capacity, traffic, load factor, fuel costs and other matters will constitute forward-looking statements. These matters are subject to a number of factors that could cause actual results to differ from our expectations.

These factors include changes in economic, business and financial conditions, high fuel prices and other factors, referred to in our SEC filings, including our 2006 annual report on Form 10K-A.

With that, I will turn the call over to Gerard.

Gerard Arpey

Thank you, Eric. Good afternoon everyone. As all of you have seen by now in our press release, we earned an annual net profit of $504 million in 2007. This includes a net gain of $84 million due to special items and compares favorably to our 2006 net profit of $231 million.

This is the first time we have reported a profit in back-to-back years since the 1999 to 2000 period. I want to take a moment to give thanks to all of our employees for their hard work and resiliency in 2007. We are unquestionably a healthier, more competitive airline than we were when we launched our turnaround plan back in 2003, and our frontline employees in particular deserve much of the credit.

I am very pleased by the progress we have made under the fourth tenet of our plan, Building a Financial Foundation for Our Future. We have been working very hard on this for a number of years and I think it is worth highlighting some of the progress before I turn things over to Tom.

Many of you who have followed the company for many years will recall that back in the period between 9/11 and the 2003 to 2004 period we borrowed a lot of money to keep the airline running. In fact, by 2003 we were struggling under the heavy burden of nearly $21 billion in total debt, and our unrestricted cash balance was under $2 billion.

However all of our financial improvement in recent years has allowed us to make a significant amount of progress in strengthening our balance sheet and I think that is very important for our long-term future.

We have been steadily paying down our debt; in some cases, going beyond our scheduled payments as we did to the tune of $545 million in the fourth quarter, and $1 billion for the full-year 2007. And I think it is worth mentioning as well that Tom and his team has been out refinancing a lot of our debt to take advantage of lower interest rates early in the 2007 period.

All told, we have taken out our total debt down to $15.6 billion at the end of 2007, and our improved cash balances have allowed us to lower our net debt to $11 billion, compared to $19 billion at the end of 2002. If you look at our results, you will see that our net interest expense was down $174 million in 2007 versus 2006 because of all the progress we made on the balance sheet.

At the same time, we have been mindful of our pension obligations. I am very pleased to report that at the end of 2002 we had an accumulated benefit obligation or ABO for our plans, a funded status on that basis, of only 76% and today at year-end we reported the ABO status at 96%. So very significant progress on the pension front as well.

In short, I think over the past four or five years we have built the company that is much more capable of facing the difficult challenges our industry seems to perpetually face. Last year was certainly no exception in terms of challenges; in addition to record fuel prices we had to overcome some of the worst weather that any of us had ever seen in our careers. We had that along with the continuing air traffic control problem throughout the country, particularly in the north-east.

In recognition of our employees’ contributions during an incredibly challenging 2007, we announced earlier today that we are issuing a special one-time payment to eligible American Airlines employees of $800, along with our thanks and our appreciation for a job well done, in a very challenging year.

We have made a lot of progress on many fronts, but as is always the case in this industry there are many challenges facing our airline. Our results in the fourth quarter are a clear reminder of those challenges; notably, fuel. After earning a profit in six straight quarters, record fuel prices drove a fourth quarter loss of $69 million and that included a positive impact from special items of $115 million.

I will let Tom lay out the details surrounding the quarter, but obviously oil prices continue to be a serious concern for us in the industry. As a result, we have been very cautious with respect to our capacity plans for 2008. I will let Tom take you through that.

Thomas Horton

Thanks Gerard. Good afternoon everyone. As Gerard mentioned, in the fourth quarter we lost $69 million versus a profit of $17 million in fourth quarter of last year, ending our string of profits dating back to the first quarter 2006. Highlighting the fuel (demands?), one of the most significant challenges for us and the industry as a whole.

The 2007 earnings include a handful of special items which I would like to briefly touch on. As indicated in our (?) I released four weeks ago, this year’s fourth quarter includes a charge of $63 million related to the write-down of 24 MD-80 aircraft that we retired. These aircraft were previously in temporary storage.

Also we have a one-time gain related to our change in policy regarding AAdvantage mile expiration. As most of you will recall in the middle of last year, we announced that we would be moving from 36 months to 18 months for mileage expiration. The total impact of this one-time gain was $39 million in passenger revenue. Moving forward, there may also be some impact to our breakage rate assumption as a result of this change.

Finally, in October we completed the sale of our interest in ARINC. American received proceeds of $192 million on the sale, and realized a gain of $138 million in other income.

For the remainder of the call, I will exclude the impact of these special items to more accurately reflect our performance on an ongoing basis.

While the results for the full year 2007 show that we have taken another step forward in our recovery, the fourth quarter provides a stark reminder that there are still many challenges we must still overcome. While fuel is an obvious one and as I mentioned, in combination with intense competition and increased capacity within the industry, further heightens the need for continuous improvement required to deliver consistent and adequate profits for all stakeholders.

That said, we continue to make significant headway in many facets of our business in 2007. Our profit excluding special items represented a roughly 80% improvement over 2006. But as the fourth quarter illustrates, we still have a lot of hard work in front of us as we seek to continue (?).

Moving to the numbers, let us start with our fourth quarter revenue performance. For the quarter mainline unit revenue increased by 4.5% year-over-year on record load factors and improved yields; while unit revenue for our consolidated system was up 4.4%.

Let me get into the entity specific revenue results which are included in the earnings release. In our domestic markets, fourth quarter unit revenue increased by 3.4% compared to last year on flat capacity. Unit revenue improvements were particularly strong in Dallas, Chicago and Saint Louis.

I would like to also point out that we have taken several steps over the past year to enhance our customers’ experience. We have recently added complementary Wi-Fi service for our Admirals Club members in all of our domestic Admirals clubs.

As we have previously mentioned, we continue to enhance our on-board food and wine offerings, and are pleased to say we are receiving recognition for these investments.

In December it was announced that American had won two awards from Global Traveler Magazine’s 2007 awards, including Best Airline for Domestic First-Class.

On the international side, we saw strong unit revenue growth in the fourth quarter versus 2006 on both yield and load factor improvement. We had positive performance across all entities with all showing unit revenue improvement.

We were also very pleased to announce that American Airlines had been named Best International Airline for 2007 by readers of Travel Weekly in its annual Readers’ Choice Awards.

While the Pacific strong performance was partially influenced by our cancellations of Dallas-Osaka and San Hose-Tokyo at the end of October last year, this entity has continued to perform strongly on an absolute basis.

We are working to bolster our network to the Pacific, and as you may recall, we have recently been awarded the Chicago-Beijing route effective 2009, which will complement our Chicago-Shanghai flying along with all of our Tokyo flying and robust Alliance relationships.

Atlantic fourth quarter revenues were also improved. We are seeing strong load factors on slightly higher capacity. As we have discussed, we are making good progress on our product enhancements.

In December we completed our business class seat upgrades on all of our 767-300s. In addition, on the triple-7, the first-class product is now standardized around our flagship fleet, and the next generation business class fleet will be on the entire triple-7 fleet by mid-2008.

Finally, Latin America continued its positive performance this quarter, as unit revenue increased year-over-year despite an increasingly competitive environment in some markets. In particular, we experienced very strong unit revenue growth on our Central and South American routes.

As we point out in our press release, we are also excited about several new routes to Latin America, including Chicago to Buenos Aires; Fort Lauderdale to Santo Domingo and San Jose, Costa Rica; Miami to Barranquilla, Columbia; as well as DFW to Providenciales and Panama City, Panama.

On the Alliance front, 2007 marked the largest expansion of our Oneworld Alliance since its inception. With the addition of six new members, including Japan Airlines, Royal Jordanian Airlines, Malév Hungarian Airlines, LAN Argentina, LAN Ecuador, and finally, Dragonair which joined in November. We expect to announce at least one new member during the first half of 2008.

We continue to be proud of our membership in Oneworld and pleased that for the fifth year running, Oneworld has been voted the best Alliance by the World Travelers Association.

Turning to other revenue items, fourth quarter passenger revenue for our regional affiliate operation increased by 3.2% compared to last year, and showed a unit revenue improvement versus last year of 5.3%.

Total cargo revenue increased by 2.6%. As in the second and third quarters, our freight and mail traffic is lower year-over-year. However, we are seeing significantly higher yields that have offset these declines; in fact, December was the highest revenue month ever for freight as we saw significant sell-out in our premium product.

Finally, in the fourth quarter, our other revenue line was $363 million, an increase of 4.6% year-over-year. We have seen significant increases in revenues associated with change fees and excess baggage. And we have been very pleased with the revenue benefit associated with our new deal with American Express, to provide Admirals Club access to their top members.

Moving on to expenses, in the fourth quarter, our mainline unit costs, excluding special items, increased 8.6% year-over-year. On a consolidated basis, our unit costs were 8.8% higher than last year.

As seems often the case, fuel expense is the story of the day. Our fuel price came in at $2.41 a gallon consolidated, an increase of 28%, raising our consolidated costs in the quarter by $412 million. Obviously conservation continues to be one of our top priorities, and we continue to explore opportunities for more savings.

We are making progress on our winglet installation. As we mentioned last quarter, the 737 fleet is now complete and we have completed over 40% of our 757 fleet. We expect the entire fleet of 757s to be outfitted with winglets by the end of this year. We are installing more aerodynamic tail-cones on our MD-80s, as well as shedding weight from our aircraft by replacing our beverage carts with lighter-weight versions.

Excluding both fuel and special items, our unit costs rose by a more modest 0.6% mainline and 1.1% consolidated. We have experienced significant cost headwinds on a variety of fronts in the fourth quarter. These include accelerated depreciation from previously planned cabin refurbishment projects and investments in our customer service initiatives resulting in higher food and beverage costs.

In addition, as Gerard mentioned, today we made a (?) one-time payment to our employees to award the outstanding job they have done during a very trying year, 2007.

Moving to non-operating costs, on a consolidated basis, these were better year-over-year by $30 million in the quarter, driven by improvements in both interest income and interest expense as we had higher average cash balances and decreased our debt balances.

Turning to the balance sheet, we ended the quarter with $5 billion in cash, including $428 million in restricted cash. In the fourth quarter, our scheduled principle payments on long-term debt and capital leases totaled $320 million, for a total of $1.3 billion in 2007.

In addition, we prepaid $545 million of high-cost aircraft debt in December. As a result of scheduled principle payments as well as prepayments, refinancings and other efforts to strengthen our balance sheet, we lowered our net interest expense for the year by $174 million.

Our capital expenditures totaled $193 million in the fourth quarter. On the pension front, we contributed $380 million to our defined benefit pension plan in 2007. This funding combined with above average investment returns, higher discount rates and legislative changes to the mandatory pilot retirement age, all helped improve the accumulated benefit obligation funded status of AMR’s pension plan to 96%, up from 84% at the end of 2006.

While there is still much work ahead, we have made some solid progress towards righting the balance sheet in 2007. Our total debt as defined in the earnings release is now $15.6 billion; our net debt defined as total debt less unrestricted cash and short-term investments, is now $11 billion. That represents a $2.6 billion or 19% reduction in net debt versus the same time last year.

Looking forward this year, I want to first touch on capacity. As many of you know we have been very disciplined in our approach to capacity and it is encouraging to see that others are beginning to trend towards a more measured approach.

Since we last talked, we have decreased our 2008 mainline capacity plan by about 0.5%. This means that our capacity will increase about 1% compared to 2007. Many of you will recall that we faced some severe weather disruptions during 2007, which caused us to underfly our schedule.

On a schedule-over-schedule basis, our capacity is about flat. This being said, to minimize confusion, I will continue to reference the following comparables versus actual 2007 flying. Our outlook consists of a 0.4% reduction in domestic capacity, paired with an international capacity increase of 3.3%.

Likewise our mainline capacity in the first quarter is forecast to increase about 1% year-over-year, with domestic down over 1% and international up nearly 5%. On a consolidated basis for the first quarter, capacity will also be up about 1% versus last year. Book load factor is currently about 0.8 points higher than it was a year ago.

As for fuel, we expect fuel prices to remain high with first quarter fuel price of $2.64 and a full-year price of $2.65 on a consolidated basis. In regards to hedging we have 35% of our first quarter consumption capped at an average of $77 per barrel, with a full year hedge of 25% cap at an average price of $79 per barrel. Consolidated consumption for the first quarter is estimated at 771 million gallons.

As we begin 2008, we continue to work against inflationary headwinds, such as medical insurance costs, higher aircraft materials and repairs. Our aim this year is to at least partially offset these and other inflationary costs. These headwinds coupled with our expected fuel headwinds will keep us highly focused on finding opportunities for cost improvement and continued simplification and cost efficiency.

Over the past five years, we have removed over $5.8 billion worth of costs from our airline. Given our progress it obviously becomes more difficult to find high-value cost initiatives. Nevertheless, we remain determined to implement opportunities for cost savings. We have targeted about $150 million of cost savings for 2008.

In total, we anticipate a mainline ex-fuel unit cost increase by about 1.5% for 2008 versus 2007, with a consolidated ex-fuel unit cost increase of 1.4%. In the first quarter, we expect our ex-fuel mainline unit costs to increase 1.8% year-over-year and consolidated unit costs to be up 1.7%.

Given our expectation for sharply higher fuel prices, we expect overall unit costs to increase about 8.6% year-over-year for the mainline and 8.4% for our consolidated system. For the first quarter, we anticipate overall unit costs to increase 13.1% year-over-year for mainline and 12.9% for consolidated.

Moving to cash forecasts, we expect capital expenditures of about $800 million in 2008. This includes $300 million in pre-delivery payments associated with our 737s on order. You will recall that in March of last year, we announced our intent to accelerate the delivery of 47 737s on order. This amount represents the pre-delivery payments associated with 18 of these 47 aircraft as well as payments associated with the 5 incremental aircraft that we have announced to date.

However, this excludes the possible impact of pre-delivery payments associated with any additional aircraft commitments we make as we execute on our fleet renewal strategy.

Our scheduled principle payments from debt and capital leases are expected to equal $750 million for the full year, and our expected pension contribution for 2008 is about $350 million.

To summarize our outlook, high fuel prices are a serious concern for the foreseeable future and we are keeping a close eye on capacity trends among our peers, and what kind of impact that could have on demand and by extension, revenue. For these reasons, we continue to take a very measured approach towards capacity and continue to drive to find more improvements in our cost structure.

Finally, I wanted to give a quick update on our analysis of certain businesses under the AMR umbrella. In November, we announced our intentions to divest American Eagle. We think this is the best course of action for the company and its shareholders, as well as for AMR Eagle and its employees.

The separation will provide Eagle the opportunity to expand its business, thus providing new opportunities for Eagle employees. For American, this divestiture will allow us to focus on our mainline business while providing the company continued access to cost competitive regional feed. Our aim is to have the transaction completed during the second half of this year.

We also mentioned during the last call that we have been thinking about how best to provide financial disclosure and metrics for our other businesses to improve transparency. As promised, I will touch on some additional detail for Beacon and AAdvantage during this call. In the future, we will plan to provide updates in our 10K filings.

First I will touch on American Beacon. As I mentioned during the last call, Beacon is a successful money management business with a strong management team, with a demonstrated ability to steadily drive new business to the firm.

American Beacon’s average assets under management for 2007 were approximately $65 billion. American Beacon’s gross revenue was $101 million and pre-tax income was about $48 million – both of which increased approximately 40% year-over-year.

American Beacon has been particularly successful in growing its third-party business, as average third-party assets under management grew by approximately 39% in 2007, and accounted for $37 billion of the 2007 average total assets, and about $90 million of 2007 gross revenue.

With regards to AAdvantage, we continue to think about how best to build value for our shareholders in our company. AAdvantage has been a very successful part of the business at American. Currently AAdvantage has over 1000 partners, including a leading credit card issuer, hotels, rental car companies, and other product and service companies.

As of year-end 2007, AAdvantage had more than 62 million members. To give you another sense for the size of AAdvantage, in 2007, AAdvantage issued about 200 billion miles, a little over half of those were sold to our partners.

Finally, I want to emphasize that we will continue to analyze these businesses in the context of creating long-term value for our shareholders. So with that, we will be happy to take your questions regarding our results.

Question-and-Answer Session

AMR Corporation (AMR) Q4 2007 Earnings Call January 16, 2008 2:00 PM ET

Operator

(Operator Instructions)

Representing Lehman Brothers, for our first question we go to the line of Gary Chase.

Gary Chase – Lehman Brothers

If you don’t have this at your fingertips it might be great if Eric could email it out, just where that MD-80 charge was on the P&L? I don’t know if that is a quick answer, but if not, if you could send that around that would be great.

Gerard Arpey

It is in other operating expense.

Gary Chase – Lehman Brothers

And then, I guess the big question for both of you, Tom and Gerard, is the concern seems to be rising about the economic climate; fuel’s up, you have noted that that is a serious challenge, you are eyeballing $2.65 for 2008; it doesn’t feel like you have made much adjustment to the capacity plan.

I understand you are not growing, but could you not create a better outcome with less capacity? I understand it is an industry-wide issue but you are the biggest player within the industry so, can you just elaborate for us on what’s driving the capacity plan, and what might change it?

Thomas Horton

Let me start and Gerard can chime in. As you know Gary, we’ve been very focused on capacity discipline over the years, and I think in the past several years you can make the case that we’ve been the most cautious of all the U.S. carriers. We still have no aircraft deliveries in 2008, and any aircraft deliveries after that are really only for renewal purposes. In fact, if you look at our fleet count end of 2007, end of 2008, we’re actually going to be down about 3 units, so we are certainly holding the line on capacity.

As you look at where we stack up versus the rest of the industry, I mentioned what we are doing on capacity, about flat on a schedule-schedule basis, but we’re down a little bit domestically; we’re up a little bit internationally, but if you look at the other airlines in the industry, they are still up domestically and up considerably on the international side.

I think you are on the right point; I think there is a capacity issue in the industry, but I think we’ve taken a pretty measured approach.

Gary Chase – Lehman Brothers

Is it a competitive issue Tom? That you think you wouldn’t be better off for doing your own just because of where the competitive landscape is?

Thomas Horton

You are always balancing the integrity of your network against what you think is the right level of capacity ought to be and we think, at least at this point, we have struck that balance. Having said that, we are going to continue to monitor the economic climate, the demand climate and fuel prices and all manner of things throughout the rest of the year, and if we see something that suggests we ought to be even more conservative on capacity, we reserve the right to do that.

Gary Chase – Lehman Brothers

Should we read your book load factor being up as indicative of demand or is that just a facet of the way the booking curve looks right now?

Thomas Horton

As we think about the demand picture, it is good news that book load factor is up 0.8 points. The bad news is average fares in the industry aren’t keeping pace with fuel price, so while we are still seeing the demand, I think the real issue is the industry is going to need to find a way to price in a way that covers the cost of inputs and produces a profit. I think that is really the big issue for the industry.

Gerard Arpey

Gary, the only thing I would add to that, one of the things we were looking at in preparation for this call is looking at the history in our average fares, and if you look at the trend in fares going back all the way to 2000, despite what oil has done in that period of time, we haven’t made up any revenue ground in average fares; in fact, our average fare for the first 11 months of 2007 was less than the average fare we collected in the year 2000 despite the extraordinary run-up in oil prices.

Obviously, the way we generated more revenue is the ten or so pick-up in load factor the industry has traded over that period of time. So we continue to be frustrated by our inability, the inability of the industry to take this enormous fuel burden and put it where it belongs, which is on our customers, because that’s ultimately where every cost has got to go.

So we are going to continue on that front, but we really haven’t done a good job as an industry on the yield front for many years.

Gary Chase – Lehman Brothers

I appreciate the time.

Operator

Next in queue, we go to the line of Kevin Crissey – UBS.

Kevin Crissey – UBS

I have to ask the obvious question, how are you positioned from a consolidation perspective? Clearly we have seen heightened discussion of Delta-United, Delta-Northwest as per Wall Street Journal etcetera. What is your latest thinking; what would concern you with other deals? Basically, how are you positioned?

Thomas Horton

We generally don’t comment on that sort of thing. We do tend to operate more quietly than our peers. We don’t speculate on what our role might be, if any; but that being said, I think if you look back at our track record, we have done these sorts of things in the past, where we have seen an opportunity for our company.

Whether it is buying assets out of another company as was the case with some of the eastern assets, the (?) transatlantic routes, or the TWA acquisition, the Reno acquisition. As you recall, we participated in the United-U.S. Air deal back in 2000 where we were going to carve out some of the assets, so we tended to be pretty active where we see something make sense but we don’t talk about it in advance.

I think as to consolidation in general, our view is that given the industry’s history of losses and the fragmented structure of the industry, we do think that consolidation has the potential to create efficiencies and expand product offerings and benefit the industry and consumers. I think a more rational, sustainable industry structure is going to be good for everybody. It is going to be good for the companies, the consumers, and the shareholders as it would lead to greater efficiencies and capability and flexibility to pay debts and reinvest and grow and all of that.

So we do think there is something to this but there are a lot of challenges to consolidation in the industry and that’s why there are fewer actual deals than predicted deals and the challenges are labor and regulatory and integration and such, so we continue to assess the situation carefully and in the meantime we’ll just keep on managing our business as prudently as we can.

Kevin Crissey – UBS

You mentioned that American Eagle in the second half, would be a second half of the year transaction. Have you decided the structure at all or did I miss that?

Thomas W. Horton

No, we have not decided. We are still evaluating the best manner of divestiture and we’ll have some more for you on that as the year progresses.

Kevin Crissey – UBS

So you’ve had discussions with others in terms of a sale or we’re not to that point yet?

Thomas W. Horton

I can’t comment on that.

Kevin Crissey – UBS

Thank you very much.

Operator

Representing Bear Stearns, our next question comes from Frank Boroch.

Frank Boroch - Bear Stearns

Tom, in ’07 you were able to grow unit revenue in excess of unit costs and now with a projection of consolidated chasm growing over 8%, should we interpret the modest capacity growth plan as a bullish sign that you think unit revenue could grow over 8% in ’08?

Thomas W. Horton

No, I wouldn’t make that presumption at all. You only have to look at the -- today’s headlines to have a little pause about the economy and thus enough demand for air travel, so we are very cautious about it and as I mentioned earlier, our capacity plan is basically flat on a schedule-to-schedule basis. We think that makes sense. We thought that made sense when we built the plan. If we conclude that we need to be more conservative going forward, then we’ll do that.

Frank Boroch - Bear Stearns

Great, and are there any regions where you’ve seen any change in demand patterns, maybe as you are looking out in the next six weeks versus the fourth quarter, within the U.S. or outside?

Thomas W. Horton

I think in general what I would say is the international markets have been a little more robust than the domestic markets, and we see that in our advance book, and that’s reflected in the way we’ve allocated our capacity for the year.

Frank Boroch - Bear Stearns

Great. Thanks.

Operator

Merrill Lynch’s Mike Linenberg has our next question.

Michael Linenberg - Merrill Lynch

Just two questions; first, when you look at your unit cost guidance for ex-fuel for 2008, you are up 1.5% and yet capacity is roughly flat. You’ve targeted $150 million of savings. It would suggest that -- you also highlighted some of the -- that you face a decent amount of cost headwinds in 2008. So it would seem that just based on the commentary, that you would anticipate a larger unit cost increase in 2008. I’m just wondering if there’s other things going on there where either you are being more productive as an airline or maybe some of the cost savings that kicked in late in 2007, maybe something on the distribution front that’s at least keeping your unit cost ex-fuel pretty low with almost no capacity growth.

Thomas W. Horton

Yes, there is actually a -- we get a bit of a benefit from the new legislation on age 65 retirement in the pension and retiree medical line. So that’s probably the piece of the puzzle that doesn’t immediately jump out at you. And simply because what that means is that we assume a longer period as an active employee and a shorter period as a retiree, which tends to drive down pension costs and retiree medical.

Michael Linenberg - Merrill Lynch

Okay, good and then, just my second question, there was a blurb in Aviation Daily this morning talking about a possible retirement spike in February. What is going on there? It looks like there are some cancellations. Is that anticipation of the potential retirement spike or are you just taking some capacity out in advance of February typically being seasonally weak?

Gerard J. Arpey 

Mike, I think I can take that one. We have some provisions in our pilot agreement. I don’t know if they are unique to American but the way it works is that a pilot can tell us ahead of time that they want to retire and out in three months, and then when the moment of truth comes three months later, they don’t necessarily have to go. And the reason we’ve got a lot of pilots are telling us that they may very well retire in February, more than we had anticipated in our plan is because with the reduction in the stock market, it affects a big chunk of their pension plan. So they go through some calculus on whether it makes sense to continue working or actually decide to retire on that date based on what the stock market is doing. And so we faced this situation before and given the fact that it’s February, load factors are -- that’s one of our lighter months, not that any month is particularly light anymore.

But because of that, because more than we had anticipated pilots gave us notice that they were going to retire in February than we had anticipated, we did make some reductions in, tactical reductions in our schedule before we put the bid lines out for February. So that explains that. It’s pretty de minimis as I recall but we’ve got -- this affects really the 777 fleet, to a certain extent the 767 fleet, and the thing we want to ensure is that we protect the schedules above all else.

Michael Linenberg - Merrill Lynch

Okay, great. Thanks a lot, guys.

Operator

Our next question comes from Jamie Baker with J.P. Morgan.

Jamie Baker - J.P. Morgan

Good afternoon, Gerard. Against the current fuel and capacity backdrop and with the economy slipping here, I’m curious how you intend to generate a return for the owners of your company this year and whether or not that’s even a priority for the senior management team right now.

Gerard J. Arpey 

Well, of course it is a priority, Jamie. That’s what we are here to do and we have been working very hard to position our company for long-term success and as Tom highlighted, I think we have been a leader in the industry in terms of capacity constraint. We’re going to continue to do that and this year will be a year of working very hard to have a lot of the decisions we’ve made to improve our product come online and so yeah, we very much are going to be working hard on behalf of our shareholders this year.

Jamie Baker - J.P. Morgan

As a follow-up to that, you’ve obviously made no secret as to the uncompetitive nature of your labor cost structure. I don’t need to remind you that has an impact on the share price here. And it seems to me at least that the primary tactic that the pilots are using deals more with executive compensation than where the market currently is for pilot talent. Wouldn’t management welcome the involvement of a mediator under this circumstance? I guess I’m just surprised that you turned down the offer.

Gerard J. Arpey 

Well, Jamie, I’ve actually got Jeff Brundage sitting here, who’s our head of -- Senior Vice President of Human Resources, Employee Relations under him and now I’ll let him give you some of our thinking in that regard.

Jeffrey J. Brundage

Jamie, as you know, these were five -- these agreements have a five-year term and they were negotiated back in ’03, so the term of the agreement runs through April of this year. The unions did request a provision that would allow the agreements to become amendable earlier than normal. Typically they would just be amendable about at this time or actually the beginning of February.

When the negotiations began, the pilots initially invited us to participate in a private facilitation, which we immediately agreed to for the reasons that you describe. We thought it would be great to get somebody in to help us. Subsequent to that, as you are aware, the leadership of the union changed. They went through a significant period of surveying the members, re-evaluating their opening proposals, and in fact at this point, they just concluded putting their opening proposals on the table towards the end of the fourth quarter.

We have not yet had the opportunity to even respond to all of those proposals and our expectation here is that once the national mediation board gets, becomes part of the process, one of the things they do to manage the process is they control the timing of the meetings. And our experience has been, for instance, in negotiations with our TWU group last time around, we managed to complete the negotiations without ever entering facilitation or mediation and we did it in a little over six months.

Now historically, if you look at pilot agreements that end up at the NMB, they can take from 18 to some cases out to 30, 32, 36 months. And one of the reasons for that is that the NMB uses the timing of the process and we felt that our interest would be much better served in the near term to go ahead and continue to meet on a schedule that both the pilots and management were able to control.

We did indicate to the APA that we remain interested in private facilitation or even technical assistance from the National Medication Board because if we were to do that, we then would be able to remain in control of the schedule. But once the board becomes involved, it probably doesn’t make a lot of sense to have a lot of meetings when they are unavailable because you end up having to recover that ground and go back over it and bring the mediator up to speed.

So we think that this adds a layer of complexity that this time actually may slow down the process instead of speed it up.

Jamie Baker - J.P. Morgan

Okay. Well, thanks for the color on it. Appreciate it. Take care.

Operator

Representing Credit Suisse, we have a question from Dan Mckenzie.

Dan Mckenzie - Credit Suisse

Dan Mckenzie - Credit Suisse

I guess Tom, maybe it’s just because I’m in New York here, but the macro backdrop just seems absolutely frightening and I guess I’m just kind of curious. What do you need to see before concluding it makes sense to cut more capacity? I guess how quickly could you respond? Is that a six month timeframe, a nine-month? And if you could just provide some additional color there, that would be helpful.

Thomas W. Horton

We can respond if we think it’s appropriate, and it may well become appropriate. I’m not suggesting we rule that out by any means, but we do try not to manage our capacity based on headlines day to day. We do try to be very thoughtful about this and watch our advance booking, watch the pricing environment. We look at all the corporate demand survey data and we talk to our corporate customers.

So at this point, we think we’ve got a fairly conservative capacity outlook but we are going to keep watching. I think that’s really all I can say.

Dan Mckenzie - Credit Suisse

Can you provide -- just following up on that, can you share some of the corporate travel -- well, just your outlook on corporate travel as we look ahead and what you’re hearing in that area?

Thomas W. Horton

You know, we look at the same sort of things you guys do and we talk to our customers, but the data is conflicting, quite frankly. I mentioned earlier that our load factor is up. That’s a little bit of good news. Obviously the industry isn’t pricing to its costs. That’s bad news. You look at the corporate travel survey that was done by one of the investment banks and I think it was pretty bearish. You look at another one that was done by AMEX and it was fairly bullish. But again, just look at the headlines in the Wall Street Journal over the past couple of weeks might suggest a more bearish view.

So we’re just going to keep watching it and if we see a need to do more reductions in the interest of our shareholders and the company, we’ll do so.

Dan Mckenzie - Credit Suisse

Okay, thanks, and then just one final question here -- Southwest has put a big spotlight on ancillary revenue opportunities and quantifying potentially $1 billion. With AMR essentially twice the size of Southwest, I’m wondering if you can just talk a little bit about that opportunity for AMR.

Gerard J. Arpey 

Dan, I’ll let Tom fill in with some numbers if has them handy, but this has been an area of focus for us for many years now, going back to 2003. We recognized that we weren’t going to solve all our problems on the cost side and so we have put an intense focus on driving other revenues, whether it be upgrades to self-service devices from coach to first class, standby for a fee. We now charge for reservations that are not made online but are made through our res offices. Of course, in the coach cabin of our airplanes, we charge for food and for liquor and we have credit card readers now on board all of our airplanes to enable us to do that.

And so we have had an emphasis on this for many years now and our other revenue, I don’t have the numbers in front of me but I suspect it’s approaching at $1.5 billion when you include some of the work we are doing in maintenance and engineering and elsewhere.

So I think this is an area that we’ve been on top of for many years and we’re going to continue to push forward and I’m not surprised to hear that it’s an area of focus for Southwest now.

Tom, I don’t know if you have any numbers.

Thomas W. Horton

Yeah, I do. It actually as been, as Gerard mentioned, an area that we’ve really been focused on and the results have been pretty good. For 2007, we generated a little over $1.4 billion in other revenues and that’s up from $970 million back in 2002, so we’ve really been pushing that line hard.

And as you can imagine, that’s pretty high margin revenue, given that we’ve already got the capacity flying around. So it’s been a big success story for us.

Dan Mckenzie - Credit Suisse

Sure, but I was trying to get at the incremental opportunity.

Thomas W. Horton

Well, we are going to keep doing what we’ve been doing. We are going to look for opportunities to raise fees where appropriate. We are going to look for more opportunities to do maintenance and engineering, third-party work. It’s really just a continuation of the stuff we’ve been doing -- creative things with the Admiral’s club and the advantage program and each year, we’ve found a few new things to do and we’re going to keep looking.

Operator

Next representing Avondale, we go to the line of Bob Mcadoo.

Bob Mcadoo - Avondale Partners

A couple of questions about fuel -- I’m trying to understand what you said in the fuel expense and hedging paragraph. You talk about the 264 average fuel price. I’m trying to understand what -- I mean, obviously a barrel of oil has moved around a lot in the last week or so and I am trying to figure out how to think about that in terms of what kind of barrel price you were using to come up with the 264. If I mess around by doing things like relating the 221 to the 264 and then try to extrapolate the $77 that you tie to the 221 up to 264, that would imply like a $91 or $92 barrel overall, but yet you’ve got a lot of it hedged already -- I’m not sure I understand what you’ve done there.

Thomas W. Horton

The 264 equals about an $89 barrel of oil.

Bob Mcadoo - Avondale Partners

That’s what the market price is out in the world.

Thomas W. Horton

Well, that’s what 264 equates to, and $89 is hedged.

Bob Mcadoo - Avondale Partners

So I guess I’m trying to figure out, if you’ve got a chunk of yours at 77 and then overall at 89 you’ve assumed that the unhedged portion then is well north of 91 or 92 -- is that right?

Thomas W. Horton

All we really do is we take the forward curve, which you guys can go look at, and then we apply our hedges to it and then out pops our projection of fuel prices, so that’s what the 264 is -- take the forward curve, apply our fuel hedges to it, equals 264.

Bob Mcadoo - Avondale Partners

I guess the question is, when you did the 264, was that this morning or was that a week ago or two weeks ago? Because obviously the barrel has moved around a lot, from $99 to $91 to $90 even.

Thomas W. Horton

We use sort of an average forward curves during the month of December and it just so happens that that was pretty close to where we were about yesterday.

Bob Mcadoo - Avondale Partners

Okay, fine. And Tom, one other thing; one time you were -- we sat in a meeting and you made some comment that said, as to consolidation, if this was back in the Delta U.S. Air days, that if the Justice Department was going to see the -- try to think about what the landscape would be like if that merger took place, you’d want to be sure that they saw the entire landscape, implying that you wouldn’t be left behind if somebody else was going to do something. Is that statement still operative?

Thomas W. Horton

Well, I can’t comment on what we may or may not do. I do think there is some benefit from a public policy standpoint to the regulators having a full look at how the industry may shake out before they make a decision with respect to any one merger.

Operator

Next we go to Ray Neidl - Calyon Securities.

Ray Neidl - Calyon Securities

It sounds like from the Q&A that you are still looking at this year as being a fairly strong demand year. I think you said that demand still looks pretty strong, particularly in the business area. Is that the reason why you are not more aggressively grounding some of your older, narrow body fleet and bringing down capacity?

I think Ray, what Tom said is where we sit today, our advanced book is up from where it was a year ago. We have given you the capacity guidance for this year, but we will be watching very carefully economic trends, our advanced book and we will be paying careful attention to our competitors, many of whom have been growing for the past couple of years in the face of deteriorating conditions.

Eric Briggle

So we are going to be weekly monitoring all of those things and making judgments about what we should do going forward. As you point out, we’ve got a lot of airplanes and our fleet plan this year has fewer airplanes at the end of this year than we start with and depending on how all of those factors play out, we’ll be paying attention to whether we’ve got the right capacity plan for this year or not. We will make that those judgments real-time throughout the year.

Gerard Arpey

Ray, I think that is a very compelling question to be asked all around the industry, where you see growth occurring at some of the other carriers and aircraft being added to the fleet. I would argue that capital isn’t providing any return.

Ray Neidl - Calyon Securities

Assuming that the 265 gallon fuel and your other guidance, my back of the envelope indicate that you are going to have a fairly good loss this year. Then on top of that the CapEx, debt maturities, pension, it looks like it’s going to really start biting into your cash reserves.

Assuming that’s correct is it possible, do you think, for the industry, for American to levy maybe a fuel surcharge? Something, not a price increase, but a fuel surcharge to cover some of the additional costs?

Gerard Arpey

Ray, we are not prepared to comment on any of your observations other than to go back to the guidance that Tom has given for the year. Ray, I would just point out to you that we have been a consistent price leader in the industry and I highlighted earlier our frustration that we were selling tickets through most of 2007 for less than we did in the year 2000. I would say that is not necessarily where we would like to be, but nevertheless it is a function of 15 different airlines and different views of elasticity and we have a view that we would trade load factor for yield and we expressed that through our pricing actions and we will continue to do that going forward.

Ray Neidl - Calyon Securities

That leads to basically the industry is very fragmented which is calling for consolidation, is that in the back of your mind? Maybe holding off some American Eagle to give you some flexibility if you did combine with another carrier in the regional area?

Gerard Arpey

Ray, I think Tom gave a pretty full explanation on our views on consolidation and I don’t really have much to add to that.

Operator

Next, we go to the line of William Greene - Morgan Stanley. Please go ahead, sir.

William Greene - Morgan Stanley

The effort we saw last week to add a fairly significant amount to the prices, the fare increases you attempted, the fuel surcharge, whatever you want to call it, can you add more color as to why it failed? Was it all from the low-cost carriers? Did you see just too big of a drop in bookings? I don’t quite understand what the roll back was.

Gerard Arpey

William, I am not sure that I can comment specifically. But I know generally the way these things work is that if one carrier does not match, that will overlap with another carrier who overlaps with another carrier and the whole thing falls apart. So I am not sure about the specifics in this case and of course we have to be very careful commenting publicly on this subject. I think the short answer is it didn’t stick.

William Greene - Morgan Stanley

Let me ask you about balance sheet management. Given the challenges that we see on fuel, given the slowing economy and the potential for perhaps some sort of actions in the industry that may require you to react, should we think about, you mentioned $750 million in principal payments on debt but you were very aggressive this year in reducing debt. Should we assume you should be less aggressive this year, given those sort of outlooks or you can be as aggressive as you were in 2007?

Thomas Horton

We are just going to have to call them out on that depending on how the year shakes out. All we would say is that we are glad that we went out and did a lot of balance sheet repair when we did, when the markets were strong and I think the company is pretty well positioned to weather whatever ‘08 throws at us, including strategic activity in the industry.

William Greene - Morgan Stanley

Thanks for your help.

Operator

(Operator Instructions) Mr. Arpey and Mr. Horton, next we go to Robert Barry with Goldman Sachs. Please go ahead, sir.

Analyst for Robert Barry – Goldman Sachs

I wanted to know if you could give an update on how things are trending in the London market? I think previously last quarter you talked about some premium traffic was not performing as well; there was some aggressive pricing from competitors. What did you see in the fourth quarter and any color on what you are seeing in Q1 ‘08?

Thomas Horton

I think we are seeing much of the same. London tends to be weaker than the rest of the European marketplace. London pricing tends to be very competitive due to a weak market environment and some pretty aggressive pricing led by our biggest British competitors, BA and Virgin.

London point-of-sale yields are down year over year, despite the beneficial impact of exchange rates on the UK point of sale yields. Premium traffic results have also been impacted in London by a variety of factors, including a very competitive market condition in New York, London and Chicago, Heathrow.

So the load factor gains we have seen have been primarily driven by coach traffic. London continues to be a challenge. It is at least in the near term uniquely challenging for us because about 50% of our trans-Atlantic capacity is to London compared to less than 20% for most of the other US carriers.

In the long run, over the cycle, London is a terrific asset to have. But, at this particular point, it’s been a bit of a challenge.

Analyst for Robert Barry – Goldman Sachs

Just a question about getting back to that mileage plan, strategic transactions. I am just curious as to your thoughts thinking about the economic environment, where crude prices are, is it fair to say that the probability of a sale or spin-off of a mileage plan business diminishes in light of where we are in the economic cycle, where crude prices are? I think it’s a fair assumption that that business is generating a lot of cash for you guys. How would you think about that?

Thomas Horton

Well I don’t think I would offer any probabilities on that. It is an important part of the business but we are thinking about how best to manage that part of the business for our shareholders in the long run.

Operator

Thank you, sir. Ladies and gentlemen and members of the analyst and financial community, that does conclude your question-and-answer session for today so we do thank you very much for your participation.

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Source: AMR Q4 2007 Earnings Call Transcript
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