US Airways Group Q4 2007 Earnings Call Transcript

Jan.24.08 | About: American Airlines (AAL)

US Airways Group, Inc (LCC) Q4 2007 Earnings Call January 24, 2008 10:30 AM ET

Executives

Elise Eberwein - Sr. VP of People, Communication & Culture

W. Douglas Parker - Chairman, Chief Exec. Officer

Derek J. Kerr - Chief Financial Officer

Janet Dhillon - Senior Vice President, General Counsel

Daniel E. Cravens - Investor Relations Manager

C.A. Howlett - Senior Vice President of Public Affairs

J. Scott Kirby - President

Robert Isom - Chief Operating Officer

Analysts

Jamie Baker – JP Morgan

William Greene - Morgan Stanley

Michael Linenberg - Merrill Lynch

Gary Chase - Lehman Brothers

Daniel McKenzie - Credit-Suisse

Raymond Neidl - Calyon Securities (NYSE:USA) Inc.

Robert Barry - Goldman Sachs

Bill Mastoris - Bank of New York

Frank Boroch - Bear Stearns

Operator

Good day and welcome to the US Airways fourth quarter 2007 earnings conference call. This call is being recorded. At this time for opening remarks and introductions I would like to turn the call over to Ms. Elise Eberwein, Senior Vice President, People, Communications, and Culture. Please go ahead, Ms. Eberwein.

Elise Eberwein

Good morning. Thank you Peter. Good morning, everyone. Thanks for joining us today for our fourth quarter full year 2007 earnings results. With us in the room today in Phoenix of course Doug Parker, Chairman and CEO, CFO Derek Kerr, Janet Dhillon, our General Counsel, and Dan Cravens, our IR Manager. Joining us from Philadelphia, C. A. Howlett who’s our Senior Vice President of Public Affairs, Scott Kirby, our President, and Robert Isom, our Chief Operating Officer. As we usually do, we’ll start with Doug today. He’ll provide general comments on our fourth quarter and full year results, talk a little bit about the industry, where he sees the industry going in 2008, then Derek will then take us through detail on the quarter, including cost structure and liquidity. Scott’s going to follow with the revenue environment, performance in the quarter, and also provide an update on our remaining integration efforts, and then after we hear from those comments, we’ll open the call up for questions. We’ll take analysts first and then we’ll hear from the media as we normally do.

Before we start today, let me read through the forward-looking statements and today’s call does contain forward-looking statements, including statements concerning future fuel prices and our future financial performance. These statements represent our predictions and expectations as to future events but numerous risks and uncertainties could cause the actual results to differ materially from those projected. Information about some of these risks and uncertainties can be found in our earnings press release that we issued this morning, also in our form 10-Q for the quarter ended September 30, 2007, and other SEC filings on the company.

In addition, we’ll be discussing certain non-GAAP financial measures this morning. These include net loss and CASM excluding unusual items. A reconciliation of those numbers to GAAP financial measures is included in the earnings release. You’ll find the earnings release on our website at US Airways.com under the Investor Relations tab.

Lastly, a webcast of this call is available on the website. That call is going to be archived on the website for one month and the information that we’re giving you on the call is as of today’s date. We do undertake no obligation to update the information subsequently.

At this point I’ll turn it over to Doug and thanks again for being with us this morning.

W. Douglas Parker

Thanks Elise, thanks everyone. We did indeed release this morning our fourth quarter and full year 2007 earnings. Full year excluding charges, a year where we made $440 million given where fuel is we think is very nice results, not only that $440 million a nice number, if you look to margins of the five Big Six carriers that have reported so far, we’re talking about Continental for the best margin of our peers, so we’re pleased with the results for the year as it relates to earnings. I’m particularly pleased that as a result of this level of earnings we’re able to pay a nice profit sharing payment of $49 million to our people who have just done a fantastic job of working through 2007 and getting us through some integration issues that we had earlier in the year and delivering us to where we are now, which is running a nice airline and taking care of our customers. Particularly important this year as we completed some major operations integration issues at the tail end of the year, the most noteworthy being moving all of our systems onto one platform so that we have all of those integration issues now resolved and behind us and also getting onto one FAA operating certificate.

As we look to the quarter, you’ll see we unfortunately reported a loss of $42 million. We’re obviously unhappy about that, $42 million excluding charges, certain charges. The large driver of that of course is much higher fuel prices. Had our jet fuel prices just stayed where they were in last year’s quarter when they were high, we thought, but if they had just stayed where they were in the 2006 fourth quarter levels, our fuel expense would have been $230 million lower. So that ended up being more than we could overcome in terms of pricing increases and the result is we moved from a profit to a loss. On a year-over-year basis we’re extremely pleased, however, despite those financial results with the operations improvement that we experienced in the quarter.

In the month of November the DOT announced we were second among the Big Six airlines in terms of on-time performance. The December results aren’t out yet but we feel pretty good that we’ll be at least that high when the December results come out. That momentum is carried into January. Our team is doing a great job of taking care of our customers so far in 2008 so we feel extremely good about where we are in terms of operating reliability and our plans as we move into 2008 to continue that momentum.

From a financial perspective in 2008, it’s looks like it’s going to shape up to be a difficult year, which is often the case in this business. If oil prices stay where they are, where the current foreign curve is, we project our fuel expenses will be about $800 million higher than they were in 2007 and while we really haven’t seen anything yet in terms of our bookings, and Scott will talk more about this, we certainly read enough about a slowing economy that gives us cause for concern about our ability to pass along $800 million in higher fuel prices onto our customers.

Having said that, we’re still encouraged and continue to be encouraged by the industry’s capacity constraint and what we’ve heard from other airlines as they look forward, you’ll hear from us, we’re doing the same things and continue to keep our capacity in check. So that’s encouraging and initially I think it will help us to do what we can, anyway, as the economy slows to keep our revenues hopefully in line with the cost of the industry.

As it relates to US Airways, we’re prepared. We went and built an airline at the time we built this merger we said we’re going to build an airline that could withstand the inevitable down cycles of this business. We’ve done that. We have an airline we feel good as we head into 2008 that we have completed these major integration milestones. We’re running a good operation and taking care of our people. As the operations improved, our unit cost excluding fuel become much more under control as Derek will talk about and we’ve built a strong balance sheet with $3 billion of cash and no material debt amortizations for a number of years that allows us to withstand these kind of cycles and we’re prepared for it.

So with that said I’ll turn it over to Derek who will give you more details, followed by Scott. Before we do that I will mention that Scott and our CO, Robert Isom, are in Philadelphia. We’re sitting in Tempe, me, Derek, and Elise and others, but Scott and Robert are in Philadelphia working there, so if we sound a little disjointed, that’s because we are. We’re in different parts of the country but I’m sure we’ll be able to manage through.

Derek J. Kerr

Thanks, Doug. As announced in our press release earlier this morning, we recorded a full year 2007 profit of $427 million or $4.52 per diluted share. This does include $13 million of net special items. If you exclude those as Doug said, our 2007 profit was $440 million. For the fourth quarter, we recorded a loss of $79 million or $0.87 loss per diluted share versus last year we had a profit of $12 million or $0.13 per share a year ago. If you exclude the special items, the company’s loss for the fourth quarter was $42 million or $0.45 loss per diluted share versus a profit of $86 million last year in the fourth quarter. We did have a number of special items in the fourth quarter. I’ll touch on those real quick.

The net of those was $37 million. These are outlined in our press release and I’ll only go over a few of the major ones. The major expense items, the first one was a $99 million increase in our long term disability obligations for pilots as a result of a change in the FAA mandated pilot retirement age from 60 to 65. Our east pilot contract specifically calls for long term disability to be paid until mandatory retirement age rather than age 60 and with that change in legislation we were obligated to accrue for benefits payable to the age of 65.

The second one is a $15 million of merger-related transition expenses. We will see this in the first quarter of 2008 and then past that we will probably not have transition expenses as we move forward into 2008. We also had a $10 million impairment loss on available for sale auction rates securities that was considered to be other than temporary.

The major credits were $59 million non-cash credit for unrealized net gains associated with our change in fair value on our company’s hedge transactions and a $17 million gain on the sale of the company’s investment in ARINC, Incorporated. We did receive proceeds of $25 million in that transaction. As Doug said earlier, we’re happy to report the full year 2007 results include a $49 million accrual for employee profit sharing which will be paid out later in the first quarter.

Now going through the numbers for the quarter, total capacity mainline and express was 21.7 billion ASMs, down 4.4% from 2006. Our mainline capacity for the quarter was 18.1 billion ASMs, down 4.6% from a year ago. Express capacity was also down. It was 3.6 billion ASMs down 3.5% from 2006.

We ended the year with 360 aircraft in our fleet which is also where we plan to end the year in 2008. Even though the fleet count is staying flat, we continue to replace older aircraft with new fuel-efficient aircraft and this will continue over the next few years as we modernize our fleet. In 2008 we plan to return 19 aircraft throughout the year, four 757s and fifteen 737s while we add fourteen ERJ-190s and five [8321s] in the back half of the year.

Our operating revenues for the quarter were $2.8 billion, down 0.4% from the same time period in 2006. Mainline passenger revenues were $1.9 billion, down 0.8%. Mainline revenue passenger miles were 14.2 billion resulting in a load factor for the fourth quarter of 78.2% which is 1 point higher than the same period last year versus fourth quarter 2006 total passenger RASM was up 4.3% to $0.1282. Mainline was up 3.9%. Express was up 5.2% and combined yields were up 2.9% for the same time period last year.

On the expense side, the airline’s operating expenses for the fourth quarter were $2.85 billion, up 5.1% compared to a year ago. Mainline costs per ASM was $0.1204, up 9.8% year-over-year on a 4.6% decrease in mainline capacity. A stubbornly high fuel cost continued to be a major issue for us and the industry, including the gain in 2007 and loss in 2006 associated with our fuel hedge program. Our average mainline fuel price for the quarter excluding tax was $2.30 per gallon versus $2.00 per gallon in the fourth quarter of 2006 and as Doug said, if our fuel price had remained constant at $2.00 per gallon, our fourth quarter fuel expense would have been $230 million lower.

For the fourth quarter we did have 56% of our mainline fuel consumption hedged which resulted in a realized gain of $75 million or $0.26 per gallon during the quarter. Excluding special items, fuel realized gains and losses on fuel hedge instruments, our cost per ASM was $0.0809 in the quarter, an increase of 5.8% versus 2006. Express operating costs per ASM excluding fuel and special items was up 3.7% versus 2006 on a 3.5% decline in capacity.

As we have discussed throughout the second half of the year, the increase in cost is driven by the implementation of our operational improvement plan and the rationalization of our capacity. As we talked about in the third quarter, we are taking the steps necessary to improve our operational reliability and continue to see significant improvement as evidenced by our on time rankings in November and December. Reducing costs by running reliable airlines throughout 2008 continues to be a strategic imperative for the company which we are all dedicated to.

Turning to the balance sheet, we finished the year with $3 billion of total cash and investments of which $2.5 billion was unrestricted. Our scheduled debt payments for the fourth quarter was $12 million while net payments for new aircraft, the Embraer 190 aircraft and pre-delivery deposits totaled $70 million for the quarter. We also invested our cash to gain access to London Heathrow which we will begin flying from our Philadelphia hub this summer.

During the quarter we entered into an agreement to finance all 14 Embraer 190 deliveries that will be delivered in 2008 and completed a PDP financing arrangement covering all Embraer 190 aircraft on firm order. In the first quarter we will continue to look at opportunities to strengthen our balance sheet including prepayments of debt and refinancing any existing debt.

Looking forward to 2008, I’ll start with capacity. As has been the case in 2007, we will remain disciplined on our capacity. As I mentioned on our last call, we plan to shrink overall capacity by 1% to 2% in 2008. Domestic mainline is expected to be down approximately 2% to 3% while total international forecasts should be up about 5%. Mainline ASMs are projected to be approximately 74.9 billion for the year. The ASM breakdown by quarter is as follows: at approximately 18.3 billion in the first quarter, 19.2 billion in the second quarter, 19.3 billion in the third, and 18 billion in the fourth quarter.

As for fuel, we’re forecasting fuel price to remain high in 2008. For the full year we expect a fuel price in the range of $2.60 to $2.65. Our forecast breaks down by quarter as follows: $2.52 to $2.57 in the first quarter, $2.60 to $2.65 in the second quarter, $2.63 to $2.68 in the third quarter, and $2.68 to $2.73 in the fourth quarter. In terms of fuel hedging, we continue to actively increase our hedge positions. We have 50% of our mainline fuel hedge in the first quarter, 36% in the second quarter, 23% in the third quarter, and 10% in the fourth quarter. That equates out to 30% overall for the full year. The first quarter fuel hedges are capped at $78.00 per barrel. The caps are due to increase throughout the year but are on average at $82.00 per barrel for the year.

In terms of CASM ex fuel guidance for 2008, we will continue to see cost pressures resulting from our operational improvement plan, higher engine maintenance costs, and just general inflationary cost increases like medical and other things. For the full year we are forecasting mainline CASM ex fuel to be up 2% to 4% versus 2007. More than half of that increase is due to a higher engine overhaul volume throughout the year. We’re projecting on the A5, A1, and RB211 engines to have 72 overhauls versus 41 that we had in this year.

For the first quarter we project mainline CASM to be up between 7% and 9% with half of that unit cost increase due to the increase in engine overhauls, the rest of the increases primarily due to the operational improvement plan. In the second quarter, it should be flat to up 2%, third quarter should be up 2% to 4%, and the fourth quarter up 1% to 3%. Express CASM is actually forecasted to be down for the full year 1% to 3% for the full hear 2008.

Looking at CapEx, since the merger we built a strong balance sheet with a very strong relative cash position. In 2008 we plan to continue to invest in our product and we have set aside a significant portion of our capital plan to do just that. We are forecasting total CapEx to be $430 million in 2008. This is broken up into non-aircraft CapEx of $315 million and net aircraft CapEx, the Embraer 190 deliveries and PDPs of $115 million in 2008. Our scheduled debt payments for 2008 are only $104 million as we have refinanced the major portion of our debt repayments until 2014.

In summary, I feel prices are a major concern going forward. We continue to see benefits from the operational improvement plan that we put back in place back in 2007. Our investment is working and we plan to continue to invest in our operations. We still have work to do to drive down our unit costs and know that watching capacity increasing our focus on cost discipline and investing in our airline is the way to do that.

With that I’ll turn it over to Scott to go through the revenue and operation picture.

J. Scott Kirby

Thanks, Derek. I’ll take a minute to talk briefly about our operational results and then turn to the revenue environment. As Doug said, I’m sitting here in Philadelphia with our new Chief Operating Officer, Robert Isom, and he’ll also be available to answer questions during the Q&A session.

During the fourth quarter our operational results continue to show dramatic improvement as the operational fixes put into place during the summer led to strong results including an on time performance that was second in the Big Six in November and first in December. Additionally, we’ve gone from on time performance that was 17 points worse than industry average in March of last year during the middle of our migration issues to 10 points better than industry average in December of this year. I’d like to thank all of our 36,000 employees who pulled us through a very challenging summer and are now delivering these fantastic results.

Turning to the revenue environment, during the fourth quarter we saw the revenue pace slow from the third quarter with consolidated RASM up 4.3%. For a little more color, we saw weakness over both the Thanksgiving and Christmas holidays with RASM up less than 1% in each period. This may have been due to macro economic weakness showing up first in a leisure oriented market or it may simply have been that we were too aggressive from a yield management perspective in managing the holidays.

Second, our Atlantic RASM underperformed the industry and was up only 2% with our 15% capacity growth. Most of this underperformance is due to new markets ramping up and I expect to see this performance versus the industry improve in coming months. Domestically our RASM was up 5% so with the exception of the holidays, it’s hard to look back and see much substantive evidence of a macroeconomic slow down, at least in airline revenues.

Turning to our outlook going forward, we remain concerned about the economy so it’s hard to find any concrete evidence of a booking slow down and fundamental trends for US Airways and the industry at large remain robust. Additionally, US Airways and the industry continue to respond aggressively to higher fuel prices with capacity cuts which we believe will continue to lead to strong revenue results. Given this, and the fact that Easter will fall in March this year as compared to April last year, we expect our first quarter RASM to be up more than our fourth quarter RASM was. We remain concerned that economic weakness at some point will translate into revenue pressure but that is less because of any evidence we see in our own data and more based on what we read every day in the Wall Street Journal.

In conclusion, we’re extremely pleased and grateful for the great job our employees have done turning around the operation. We expect industry capacity discipline to continue to help US Airways and other airlines cope with higher fuel prices and we’re cautiously optimistic about the revenue outlook for 2008.

With that I’ll turn it back to Doug.

W. Douglas Parker

Thanks Scott, and we’re now ready to take questions.

Question-and-Answer Session

Operator

Thank you. Today’s question and answer session will be conducted electronically. (Operator Instructions) We’ll take our first question from Jamie Baker, J.P. Morgan Chase.

Jamie Baker - J.P. Morgan

Good morning, everybody. I apologize, I’m sort of on this Continental Sky Team kick so if you can just bear with me for a second because I assure you it does tie back to US Air. What I’m wondering is there’s a way for existing Sky Team members to compel Continental to remain within that alliance which could obviously upset the potential for any United-Continental merger if you believe what you read. My question for US Air therefore is twofold. First, in general, can you comment on what sort of costs or penalties might preclude an airline from typically defecting from one alliance to another, and second, if Continental turns out not to be the free agent that many believe it might become, does it make sense for you to revisit the United-US Air transaction from earlier in the decade?

W. Douglas Parker

Okay, Jamie, let me try. I’m doing my best not to spend a lot of time speculating. Let me start with just, I didn’t talk in my opening comments about consolidation but it’ll come up as well. We believe that first and foremost, consolidation is going to happen. United said for a while, and I don’t think Delta has any choice at this point, but to do what they’re doing, and to follow through, and to do some sort of consolidation. They clearly have a choice but the facts of the matter are well documented. We offered those guys $10 billion or $11 billion of value which they turned down in exchange for their desire to go create a standalone plant would be worth more and stated that they’d build a standalone plant worth $9.4 billion to $12 billion or something like that and today their airline is worth something less than $5 billion. So rightfully, shareholders get upset in situations like that and they need to go show that they indeed have a standalone plant or now are blaming someone else. They can create the kind of value that they said they were going to create on their own so. Again, I think it’s the right thing for them to do. With a new CEO there who I think is extremely competent and intelligent and knows what to do, I think they’re headed on the right path, so something’s going to happen here is my view. Once that happens I think all the Big Six are going to participate. The answer is too fragmented and there’s just too much value to be created for that not to happen. So what I don’t want to do is go through a bunch of scenarios and speculate how that happened but I feel quite strongly that it is going to happen and that certainly every airline that believes it’s in their best interest to participate will have the opportunity to participate.

So anyway now on your specific question, I guess I’ve okayed, without giving a billion scenarios, at least to talk about the one scenario, maybe give you some insight as to why I think just going in looking at any one scenario could not be right and frankly, Jamie, I tend to agree with what you’re postulating, that is, at least if you read where people are speculating right now what happens, Delta does Northwest, then United goes and does the Continental transaction. I have no view on that other than to say that scenario seems --

Jamie Baker - J.P. Morgan

-- less popular...

W. Douglas Parker

It’s a popular scenario and you get through it and you think, “Why would they do that?” It seems less likely than I think popular conception, popular views are, for the reasons you stated. Delta an d Northwest getting together probably makes a lot of sense for that alliance. Air France, KLM, to go do something to strengthen that alliance, but if the net result of that is that, and simply because of that transaction, you free up Continental to leave the alliance, that doesn’t seem like you create a lot of value and with smart people at Northwest, Delta, Air France, KLM, I’m not sure why they would do the transaction that caused that to happen. That just doesn’t seem logical. So at any rate, it’s all their decision to make, but I agree wit h you, that is something clearly I’m sure that they’re concerned about. Remember here that the transatlantic operation of Continental is obviously one of the better assets of that alliance. In a world where making passive investments in Jet Blue for the hope one day of maybe having some international operation from JFK, clearly Continental’s New York hub is a huge asset to that alliance, so why they would go through all this trouble simply to lose Continental to the alliance simply doesn’t seem to make a lot of sense. I guess I could agree with that suggestion.

So anyway, how to make that happen, I don’t know, Jamie. You asked what is it about alliances that precludes someone from wanting to leave them. It’s because you have a lot of value in that alliance and you can’t replicate it in another one, so presumably they work out a way that Continental decides that this is better than the alternatives, but again, that’s a much better question for them and again I said I wasn’t going to speculate and I moved further than I probably should have even, but again, not so much me trying to say, “Look, here’s what I think is going to happen” but rather I would just, as you guys are doing what you need to do, and I think you’re right, I think people just looking at... There’s more behind all of these transactions then simply trying to look at two route maps and/or just trying to figure out let’s put these two pieces together. It’s much more complicated than that and I think the things that people are... the more popular ideas probably aren’t where we end up. But I did my best.

Jamie Baker - J.P. Morgan

Any comment, I realize you weren’t at the helm back in the United-US Air day so to speak, but any thoughts on that?

W. Douglas Parker

Yeah, I’m not going to comment on that.

Jamie Baker - J.P. Morgan

Okay, fair enough. Doug, I appreciate your response. I think it may have been the most thorough response I’ve ever gotten to a question in my career. So I’ll turn it over to somebody else. Thank you.

W. Douglas Parker

I’m not sure that’s a compliment, but thanks.

Jamie Baker - J.P. Morgan

It is.

Operator

We’ll go next to William Greene, Morgan Stanley.

William Greene - Morgan Stanley

Hey, Doug, can I just follow up then on Jamie’s question here. You talked in the past quite a bit about the window for M&A. In your view is it still open and based on your Delta-US Air efforts, do you think DOJ is prepared or willing to contemplate multiple airline mergers?

W. Douglas Parker

Again I think the argument is so compelling and indeed the Delta-US Airways transaction never got to DOJ. We continue to believe firmly that had it, it would have been approved. I think the timing issue is more an issue of there is going to be a change and given the fact there is going to be a change in administration, irrespective of whether it’s Republican or Democrat, since there’s going to be a change, that’s going to result in some delay so if you’re close to getting a transaction announced, you clearly should try to get it announced sometime before the end of February I would guess so that you can get it through this administration’s process, otherwise you’re going to wait for a new administration to come in early 2009 so it’s more of a timing issue I think as opposed to a “Gee, this is the window and it may close.” That clearly could happen but we’re less concerned about that issue indeed because I think irrespective of the administration, the arguments are so compelling as you look around our industry for the need to do this and the preponderance of competitive activity that I’m not overly concerned that if not this administration, the next administration’s going to be harder on the transaction.

William Greene - Morgan Stanley

Okay, and then if we switch to capacity, it sounds from the comments that the capacity cuts that you’ve outlined at least at the mainline level won’t quite be enough to offset the increase in fuel costs, so I’m curious if you can sort of talk to why not cut a little bit more and what sort of [puts and takes] are that you’re kind of thinking about in terms of whether it would perhaps when we get our first quarter update maybe you’ll be cutting more, how should we be thinking about what’s left to go, how much utilization flexibility is there?

J. Scott Kirby

We continue to have flexibility to reduce more. We cut more in 2006 I think than most in the industry so we arguably have less flexibility on that front. We haven’t changed our guidance on capacity going forward yet, but we continue to look at it every day and may decide to do that more later in the year, but where we sit today, we haven’t made changes largely because we put much of our capacity reduction into our guidance several months ago and haven’t incrementally reduced capacity in the last month beyond that, but we have the flexibility to do that if conditions deteriorate from where they are today.

William Greene - Morgan Stanley

But fuel being where it is, is not enough for you to want to change that at this point is what you’re saying?

J. Scott Kirby

Well given where the conditions are today, we think we have the right amount at least through the summer. We’re looking a lot harder at what happens in mid-August and beyond but through the summer we think we’re at the right place.

William Greene - Morgan Stanley

Thank you.

Operator

We’ll go next to Mike Linenberg, Merrill Lynch.

Michael Linenberg - Merrill Lynch

This is actually two questions. My first is probably to Doug and Derek. Derek, in your comments, you talked about looking at opportunities to clean up the balance sheet. That said, you also highlighted the fact that a lot of your big debt payments have really been pushed to 2014. You are sitting on a sizable cash position. When you think about means to whether improve balance sheet and/or sort of balance that with returns to shareholders, it would seem that the biggest bang for the buck would be to at least buy back some stock or maybe have the Board authorize a share repurchase program. What are your thoughts on that?

J. Scott Kirby

I don’t know how we got to be the most conservative of all people in this regard, but we are. Yes, we have $3 billion in cash but we also have an environment where while as Scott said we’re not seeing any economic slow down in our bookings, we sure are reading a lot of things that tell us we should be. On top of that we have oil hit $100 a barrel and now everybody’s excited when it retreats down below $90 but extremely high oil prices. It just does not seem like an environment given the history that we have in this business where an airline should be using its cash to buy back shares. I add to that the fact that all of our credit ratings are in the single B- range, including US Airlines. None of that adds up to me to say that as much as we know who we work for, as much as we spend our time doing everything we can to maximize the value that our shareholders, I don’t think that’s a shareholder maximization scheme, shareholder value maximizing scheme. I think the best thing for us to do for our shareholders is to manage our business through the economic cycle and make sure that we can manage through them and do everything we can to make sure that we’re building an airline that can withstand the economic cycles or help us get this industry into a shape that doesn’t have the kind of cycles, and that’s consolidation, but short of.. If the industry is going to be in this sort of status quo position, heavily fragmented, this competitive, the right thing to do is to make sure you have an airline that can withstand the volatility that that kind of industry is going to have.

Michael Linenberg - Merrill Lynch

Okay, good answer, and then just my second question, when you demonstrated to all that you definitely have aspirations to merge at least domestically. You’ve done one merger and you’ve pursued another. When you think about your network and what it could offer to somebody from overseas, you have a solid domestic network and yet you’re pretty limited on the international. You can always grow that business but when you look at where you are in Latin Pacific and you’re a smaller player in the Atlantic and I know you did highlight the fact that you underperformed this quarter, some of that’s just specific to a ramp up, so maybe it’s not indicative of what the company’s going to look like internationally out over the next couple years. That said and giving EU and US Open The Skies Phase One going into effect the next couple of months, are you more open to maybe doing something more comprehensive with one of the European carriers, maybe one of the larger European carriers who just doesn’t have the presence or the level of comprehensiveness, if there’s such a word, with a US carrier in some form of an agreement?

W. Douglas Parker

I don’t want to spend much time speculating on what we might want to do or what might happen other than... but one thing I would mention on that point is when we talk about consolidation, while there clearly is value in getting international route networks broader, the real value of consolidation is rationalization of the domestic industry which is overly fragmented and that is the cause of the problem. So while I know it’s enticing to say the airlines that are doing well are the international routes, I wouldn’t take the next leap and say, “Therefore, you should go try to put bigger international networks together.” The right thing to do is figure out why the domestic entity is not doing as well and the reason is it’s too fragmented and the value of consolidation is rationalizing the domestic industry. I don’t want to dismiss the value of creating international networks, but the bigger value, and what we found in our US Airways-America West transaction, what we know is the value of a Delta-US Airways, and what will be the value of any of these transactions, is rationalizing the domestic network.

Michael Linenberg - Merrill Lynch

Okay, great, I appreciate the comprehensive answers.

Operator

We’ll go next to Gary Chase, Lehman Brothers.

Gary Chase - Lehman Brothers

Good morning, guys. I hope you don’t mind if I ask some uncool fundamental questions. It seems to always be a theme. Just a quick one and then I want to ask one on the revenue side, but just for Derek, I’ve seen no mention of any changes to pilot rates assumed in that CASM guidance and from the looks of it, it doesn’t look like there is any, I just want to verify that that’s the case.

Derek J. Kerr

That is correct. The guidance doesn’t include any new contracts on the labor side for any of the four that are still open and when we complete those contracts we’ll update guidance for that.

Gary Chase - Lehman Brothers

And then if I could just ask Scott to shed a little bit more light on sort of what you saw in the fourth quarter and how you think that plays into the first. You said kind of at the same time that you don’t think bookings are slowing but 4Q was a little bit of a disappointment and I know you reference the peak periods. Does the assumption looking forward to get to the numbers you are referencing for 1Q is the assumption that we are going to be strong in the peaks again, that trend continues? Could you just flesh out a little bit more about how you get to that number.

J. Scott Kirby

Okay, the revenue data in the fourth quarter was a little schizophrenic in the sense that we saw strength in a lot of places, in particular business markets and business oriented travel so outside of the holidays and a little weakness in leisure oriented markets and during the holidays as I said. The leisure oriented market weakness, however, is arguably attributable to capacity. Places like Florida, Las Vegas, and the Caribbean have a lot more capacity than the rest of the system so I’m not clear that it was leisure weakness so much as too much capacity in those markets and frankly that’s what I think it was, there was too much capacity in those markets. Where we really, our performance where I guess was disappointing to us was probably across the Atlantic and I think there’s a lot of tactical reasons as we went into new markets where we don’t have a code share partner on the other end and didn’t do some of the things that we’ve traditionally done in our non code share markets from the European point of sale side to generate revenue. We didn’t do as well as we would have anticipated from Europe. Those issues I think are tactical and are correctible which is why I said I think Europe will recover for us, so I think our underperformance relative at least to our own expectations was largely due to that single issue. Looking into the first quarter, I’m not so much making assumptions about the peaks versus the non-peaks but looking at actual data and in March I think will be quite strong for the industry. January I think will be okay, I think February will probably be the weakest month of the quarter but the peaks still look strong. We just finished the Martin Luther King holiday, that went well and was strong, so I feel it’s had to have a firm read on where we’re headed from a macro economic perspective but like I said I’m cautiously optimistic given the data that we can look at.

Gary Chase - Lehman Brothers

And have you made the mid-course corrections on some of those other issues already? In other words, you recapturing some of the revenue you think you lost in the fourth quarter from the European point of sale issue, et cetera?

J. Scott Kirby

We have and are making those corrections. I don’t think though we will have had time to impact the first quarter for Europe. That will become more of a fact in the second quarter and beyond.

Gary Chase - Lehman Brothers

And the changes that Southwest made to its schedule at least to us appeared as though they were going to be helpful for you, was there some kind of a spool up associated with that?

J. Scott Kirby

The changes should be helpful. Some of the markets I think we were too aggressive from a yield management perspective in November in particular and maybe had some slide in performance, that’s an easy adjustment to fix. But those markets have done well and that has been helpful. One of the things that has happened that I did reference that is a little bit of a negative is there’s more capacity to Florida, the Caribbean, and Las Vegas. So all those markets are under a little bit of pressure because there’s more LCC capacity in particular in those markets so to some degree that counteracted the benefits that we got in Philadelphia and Phoenix.

Gary Chase - Lehman Brothers

Okay guys, appreciate it.

Operator

We’ll go next to Dan McKenzie, Credit Suisse.

Daniel McKenzie - Credit-Suisse

Hi, good morning, thanks. Scott, I’m wondering if you can talk about the booking trends following the past couple of fuel surcharge increases. They were pretty big and I guess in particular I’m wondering if you saw a bigger change in corporate or in leisure bookings?

J. Scott Kirby

We didn’t really see any change at all in bookings from either the corporate or leisure side during those cycles. When those surcharges were in and out though were also low booking periods so they were mostly over the weekends when you have almost no corporate bookings and limited number of leisure bookings in any event.

Daniel McKenzie - Credit-Suisse

Right, of course. I guess as a follow up, I’m wondering if you could talk about an average fare for the shuttle in the fourth quarter and I guess just following that up, I appreciate you probably have no plans to sell the shuttle assets, but I’m wondering if you or Doug could talk about your willingness to consider selling the shuttle assets.

J. Scott Kirby

The shuttle has done quite nicely. As I said earlier, business demand is strong. Yields were up, double digit percentages in the shuttle year-over-year without disclosing the actual average fare, but yields were up double digit percentages so the shuttle market remains strong. New York remained strong, so not just the shuttle. Actually all of New York and Washington in particular remained strong. As to selling the shuttle, I would think of it more comprehensively over the long term that we’ll do anything that creates shareholder value. It’s not clear how you could go sell things like that today if you wanted to. There’s some regulatory complications with it. But in any event, our current strategy with respect to our portfolio slots at LaGuardia is to try to more effectively utilize those slots through changes to the perimeter rule and if we can be successful in getting some modification to the perimeter rule, I think our LaGuardia franchise becomes much more valuable so nothing happening today on selling the shuttle but as Doug said earlier, I think we’re motivated to do what’s in the best interest of shareholders and if someone made a compelling offer, we would certainly take it seriously. That hasn’t happened and I don’t anticipate that’s going to happen, so nothing going on on that front.

Daniel McKenzie - Credit-Suisse

Okay, thanks, I appreciate it.

Operator

We’ll go next to Ray Neidl, Calyon Securities.

Raymond Neidl - Calyon Securities (USA) Inc.

Speaking of the shuttle and the regional operation, what flexibility do you have in cutting capacity with the regionals? Would that be desirable in this market with high fuel costs to further take down capacity of the regionals, and with the shuttle, some of the off-peak times would it make sense or could you even put in regional capacity replacing the mainline capacity for some of those operations?

J. Scott Kirby

If we could get rid of more express capacity we probably would. We have very limited flexibility on that front. We are getting rid of a few airplanes this year. What we can do contractually, we are doing the maximum amount we can on the express side. As to putting the aircraft into the shuttle, maybe it makes sense, but the incremental value that you create isn’t very big and not a product risk that we’re willing to take at least yet because while if you assume customers wouldn’t care, you could make the P&L slightly better, it’s not much, and it’s not worth the product risk.

Raymond Neidl - Calyon Securities (USA) Inc.

Okay, great and Derek you’re in pretty good shape with your debt maturity it appears, but I was just wondering, you did see that you might try to bring down your interest payments by refinancing some of the debt. In this particular market, would that be kind of difficult to do?

Derek J. Kerr

No, there’s some aircraft transactions. We still have the A320s to be financed in the back half of the year and we have some transactions that we’re working on PDP financing and things like that so they’re already in the works and with the environment, we still believe that we can get some good transactions out there in the first quarter.

Raymond Neidl - Calyon Securities (USA) Inc.

Great, thank you.

Operator

We’ll go next to Robert Barry, Goldman Sachs.

Robert Barry - Goldman Sachs

Hi guys, good morning. Just a couple small things remaining. You had mentioned that the operational performance had improved a lot. I was just wondering if you can kind of dimension how much work there is left there to do and when does the cost of implementing the operational improvement plan start to be a net benefit to costs?

Robert Isom

You know we’ve certainly benefited from a lot of the work in getting all of our systems onto one platform and this is part of the integration process. We’ve set new goals for this coming year that we think will put is in the position on most important measures to certainly finish in the top half of the legacy carriers and possibly even better. It does bring up what is there more that we can do. We think that there is some investment and certainly this year’s plan that we’re working towards includes significant investment in airport customer service, certainly automation at our gates and within our operations control center and certainly it will require some investment in terms of making sure that we have the appropriate resources in all of the right places at the right times. So when you take a look at where we stand right now, we actually think that there’s a bit more improvement we can bring to it, and certainly the performance we’ve seen in November and December and even in the first part of January, we think that’s something that’s pretty sustainable over the course of the next year.

Robert Barry - Goldman Sachs

Is that going to continue to be a net drain on costs at least for the first half of the year?

Robert Isom

No, I don’t think so and outside of the investments that we make, those investments certainly will bring about better operating performance but as Derek mentioned in his comments, the good news with some of the investments that we’re making is that they are investments in technology and automation and ultimately they bring a cost benefit to them as well.

Robert Barry - Goldman Sachs

And then just finally I was wondering if you could just update us on what’s happening with the gate situation in Philadelphia and to what extent it has any impact on your international capacity growth plan?

Robert Isom

We are here in Philadelphia as Doug said earlier in the call and working well with the airport administration and the new mayor’s office here in Philadelphia. We don’t have anything substantive to report yet but feel good about where we will end up. I think we will be okay for the summer and look forward in 2009 to being able to get back onto a growth trajectory for 2009 and beyond here in Philadelphia.

Robert Barry - Goldman Sachs

Okay, thank you.

Operator

We’ll go next to Bill Mastoris, Bank of New York Capital.

Bill Mastoris - Bank of New York

Thank you. Derek, with any free cash flow that might be used for debt reduction, would you view that there would be a greater economic benefit to you going after the bank debt versus any other alternative debt? What’s your thinking there?

Derek J. Kerr

Our thinking is the alternative on the bank debt is the rate does reduce if we pay it down by a significant amount. We have refinanced a lot of our debt. Everything we have is below a certain level that we have out there, so there’s probably one or two more things that we could do and pay down but after that it would be going after the bank debt, but we don’t really reap a huge rate reduction benefit until we’ve paid it down from about $1.6 billion down to about $1 billion. We would reduce obviously interest expense but it wouldn’t reduce the rate until we got it down first a significant portion.

Bill Mastoris - Bank of New York

Okay. You also indicated that you were taking a look at various aircraft debt transactions. Does that include any refinancing? It seems as though if you take a look at the EETCs that you have some pretty attractive rates as they stand right now.

Derek J. Kerr

It does include refinancing of some but not the EETCs.

Bill Mastoris - Bank of New York

Would those be one offs, various bank debts, in other words putting together a collection of smaller loans?

Derek J. Kerr

Yes it would.

Bill Mastoris - Bank of New York

Okay. Thank you.

Operator

The media may now ask questions. (Operator Instructions) We’ll go next to Frank Borach, Bear Stearns.

Frank Boroch - Bear Stearns

Hey guys, thanks for squeezing me in. Doug, I was hoping maybe you could give us an update on some of the various labor discussions. I know there are a lot of moving parts and you recently had the favorable IM ruling and it looks like the NMB ruled on single carrier status and I guess what does it take to sort of bring everyone, turn momentum for them on the labor side?

W. Douglas Parker

We got past one big open question mark which was a change in control agreements on the IM contract. That has been resolved so that’s no longer a question mark which has gotten us back to today which we’re happy to see. We were in negotiations all week with our IM ground service employees. Shortly we’re moving to mechanics so I am hopeful that as it relates to two our larger groups, fleet service and mechanics, both represented by IM, that those negotiations now will move forward rather quickly. That’s still to be seen but encouraged by the fact that we are now back talking to each other with that grievance now being resolved so we’ll have to watch that one. That leaves pilots and flight attendants. Pilots is an issue. It’s kind of taken on its own life as you know because of a seniority integration issue that’s arisen between the two groups themselves but they are continuing to work amongst themselves to try to resolve that. While we’ve received reports on how that’s going, the reports at least are modestly encouraging but they’re working together and continue to have meetings to come to us with a proposal on how they would like to move forward with negotiations but right now those negotiations are not happening because the two [alpha] groups continue to work with each other on something that they think that they will come back to us with on how they want to resolve getting back to the negotiating table so we wait for that to happen. The flight attendants had gotten somewhat tied up in that. We decided we need to figure out a way to break through rather than waiting for the pilot issue to get resolved because it’s taken so long so we are in regular negotiations with our flight attendants. Still not probably as far along as the IM is, but further along than pilots, so hopefully we get all of that resolved. Worth nothing on all that while those negotiations continue, our people are doing a great job as we’ve noted a couple of times now and need to again. They’re taking care of customers and really through a difficult integration process in 2007 and now doing a great job of doing it so while we’d like to get those issues resolved and plan to get those contracts resolved, the good news is our team is not letting it affect our ability to give good customer service and I would expect that to continue.

Frank Boroch - Bear Stearns

Great and I think Scott made some comment about the demand environment. I’m just sort of curious, without seeing any signs of weakness, what’s your assessment of why last week’s surcharge attempt was unsuccessful? I think US Airways is one of the last carriers to match so I’m just interested if what sort of gave you pause to not join in earlier and sort of what ultimately led to its failure?

W. Douglas Parker

I’ll let Scott answer that with me noting to him that our general counsel is looking at me shaking her head about being careful about pricing.

J. Scott Kirby

Janet isn’t here.

W. Douglas Parker

I know, but she’s here with me.

J. Scott Kirby

I can’t comment specifically on that other than I suppose would say it was not a consistent fuel surcharge and it was on in some markets and not in some markets and typically that means that those fuel surcharges or fare changes fall apart if they’re inconsistently applied across different carriers.

Frank Boroch - Bear Stearns

Okay, great. Thanks.

Operator

We’ll take our next question from Mary Schlangenstein, Bloomberg News.

Mary Schlangenstein, Bloomberg News

Hi, good morning. On the last call, Doug, you said that US Airways was going to examine possible options for its frequent flier program and I just wondered if you could give an update on that, whether you’ve been looking at that, what you’ve been considering, and if you’ve come to any conclusions?

W. Douglas Parker

The analysis continues. We haven’t come to any conclusion.

Mary Schlangenstein - Bloomberg News

Okay, thank you.

We’ll go next to Tom Belden, Philadelphia Inquirer.

Tom Belden - Philadelphia Inquirer

Yes, thank you. Good morning, gentlemen. In regard to one of the questions about Philadelphia operations, and Scott, I believe you said that you had been talking to airport administration, have you gotten a sense, can you give us any more details about that? Have you actually met with the mayor or is it with the airport staff, and how you think you may resolve those questions for this summer?

Robert Isom

Tom, it’s Robert. We really haven’t had any formal discussions yet. A lot of what I’m trying to do out there this week is really get some of the new people that we announced I think two weeks ago introduced to the appropriate folks here so we can start building the relationships that we really need to have in place to make Philadelphia the international gateway that we all want it to be and so just to refresh everybody’s memory, we did appoint a new Senior Vice President, Suzanne Boda, head of international and cargo and our shuttle operations and also overseeing all of Philadelphia, and we also appointed a new vice president of Philadelphia, Bob Ciminelli, who came to us from American Airlines, and they’re just getting started out here and meeting all the folks and really trying to put in place the relationships again that we need to have to build the airline we want to, and fortunately we’ve had a good meeting already with the airport authority here and we’re very hopeful that will bear some fruit as we go forward.

Tom Belden - Philadelphia Inquirer

All right and one other question which I don’t know who might be able to answer this, but there was a report a couple of weeks ago I think that you had paid about $60 million for the Heathrow slot and I was wondering if you had confirmed that, if there’s been anything more said about that I missed it.

J. Scott Kirby

We certainly haven’t confirmed it and I haven’t actually seen that report. We have not disclosed what we paid for the Heathrow slot and aren’t planning to.

Tom Belden - Philadelphia Inquirer

All right. Thanks very much.

Operator

We’ll go next to Jefferson George, Charlotte Observer.

Jefferson George - Charlotte Observer

Good morning. The question is you mentioned the labor discussions earlier and how they’re in different stages with different groups. When is this new US Airways labor coalition representing some 30,000 employees due for your discussions with those different groups?

J. Scott Kirby

I’m not sure. We haven’t been contacted by that group. I saw the same press release. I don’t know. I don’t think it has any affect on negotiations. A number of our labor groups getting together to coordinate but our negotiations, I don’t think it has an impact on how the negotiations are handled. We obviously negotiated with each unit separately in separate negotiations.

Jefferson George - Charlotte Observer

Just as a follow up, I know there’s not any deadline about merging the various groups but is it still a situation where you could go on as you said earlier indefinitely with the groups, particularly the pilots, not merged?

J. Scott Kirby

We certainly don’t want to do that. We’d like to get onto one contract and get one team working so that’s what we’re trying to do. We’ll wait for them to get back to the negotiating table but we’d like to get through the process.

Jefferson George - Charlotte Observer

Thank you.

Operator

We’ll go next to Chris Kahn, Associated Press.

Chris Kahn - Associated Press

Hi everyone. I have a general question about capacity. I was wondering just how much flexibility do you think the airline industry has to reduce capacity right now without consolidation and will there be a point where consolidation really is one of the only options for substantially trimming capacity afterwards?

W. Douglas Parker

Scott, you can jump in after me if you have anything different to say, but it’s difficult for individual airlines to make major reductions in capacity in double digit numbers or anything close to it. Most of us you’ll see, the way the reductions are made, they’re either pulled down to utilization flying which are airplanes that have some spare time during the day and we and other airlines take that time and fly routes that otherwise wouldn’t be flown if you didn’t have the airplane to begin with, so they’re kind of low-yielding, low-cost flying, and you’ll see some of that pared back and the other thing is that airplanes come off of lease so then you see airlines return them so those types of measures generally will get airlines the ability to pull down depending on what their lease return schedule looks like. 2% to 4%, something less than 5%, and each of them individually, you’re seeing kind of what numbers in that range, certainly not higher than that, but consolidation-wise, you can do much more than that. What we do with America West the combined reduction was in the order of 15% because you go through and rationalize the two networks and return aircraft to lessors and it allows for better rationalization in the networks than doing it individually. Scott, do you want to add to that?

J. Scott Kirby

I think that’s good.

Chris Kahn - Associated Press

So there’s a lot of room you think still to reduce capacity right now within the industry?

W. Douglas Parker

As long as you define a lot of room as something in the 2% to 4% range, which is material, yeah, I think that’s what you’ll see from most of us, but that pretty much is the limit of it and there’s more to be done, and again it’s not so much the amount of capacity reduction as it is just making sure that you have rationalized networks instead of hyperly competitive networks that adds value, so consolidation does more than just take the capacity out, it makes all the systems more rational, and that certainly is helpful.

Chris Kahn - Associated Press

Okay and finally, I might as well just ask, are you guys talking to anyone right now about any of your own consolidation efforts?

W. Douglas Parker

We can’t comment on that.

Chris Kahn - Associated Press

Okay. Thanks, guys.

Operator

We’ll go next to Jennifer Michaels, Aviation Daily.

Jennifer Michaels - Aviation Daily

Good morning. Derek, there was something you mentioned about the age 60 rule that was very interesting. If I heard you right, I think you said it’s a $99 million increase in your long term disability options. Is this a one-time, you’re getting it all to there, attributed to the fourth quarter, or how did that work exactly?

Derek J. Kerr

Correct, it’s a one-time true up, so what we do, we were accruing to age 60, then when they changed the age to 65, what you have to do is look at it, see where everybody is in that spectrum, and what that does is it made us take a one-time charge up $100 million so that we have it covered through age 65.

Jennifer Michaels - Aviation Daily

Okay, thanks very much.

Operator

We’ll go next to Donna Hogan, East Valley Tribune.

Donna Hogan, East Valley Tribune

Hi guys, you know what, you guys have just answered all my questions in the last few calls, so I’m done.

Operator

We’ll go on to Ted Reed, TheStreet.com.

Ted Reed, TheStreet.com

Hi, thanks. I’ve got two things. First of all, when you were trying to do the Delta merger, you were easily able to raise money. There were a lot of Wall Street firms that wanted to help. I’d like to know if your capacity to raise money has diminished due to the share price decrease.

W. Douglas Parker

Everyone’s capacity to raise money has been affected by the credit market so that would clearly be... Having said that, Ted, I think... Let me give you my views on this which are not earth-shattering by any means. What the change in share prices for all the airlines has done, Ted, has made it to where shareholders of any of these mergers are not going to be looking to cash out and aren’t looking for cash but rather for the synergies of a merger, so my guess is any merger activity you see in this industry certainly in the near term are going to be equity for equity transactions because the shareholders again, even where the share prices are, would rather see their shares be converted into a stronger airline with the ability to generate synergies as opposed to receiving cash at this point, so the ability to provide cash is much less important now than it was a year ago and even if it were important, it would be very difficult to raise the kind of levels we were talking about, $8 billion of debt financing, in today’s credit market. So that’s not a US Airways issue, that’s a world credit market issue.

Ted Reed, TheStreet.com

Does that have any impact on the likelihood of mergers getting done?

W. Douglas Parker

Again, I think it doesn’t change the likelihood, it just changes the structure of the transaction and the structures will move from what would have been, what could have been, more debt financing to almost pure equity financing.

Ted Reed, TheStreet.com

Okay. Thank you. One other thing. Some carriers have said they’re reinstating Saturday night stay requirements in successful business markets. Are you doing that at all?

J. Scott Kirby

We have not done that anywhere yet and don’t really see that frankly happening across the industry.

Ted Reed, TheStreet.com

Why do you think it’s happened in a couple of carriers?

J. Scott Kirby

I actually am not aware of markets where it has happened.

Ted Reed, TheStreet.com

Oh, so probably not yours. Thank you very much.

Operator

We’ll go next to Joe Napsha, Pittsburgh Tribune Review.

Joe Napsha - Pittsburgh Tribune Review

I was wondering, is there any chance of restoring some of the Pittsburgh flights that were trapped, especially including nonstop international service?

J. Scott Kirby

Unfortunately the short answer is no. The Pittsburgh market, and I’ll give you a little more color, it’s just not large enough to support international service and it is some for example 70% smaller than the Philadelphia market and while it could be a connecting hub if you still had 500 flights a day, the fact hat it’s 70% smaller means there’s just not enough local traffic, so an unfortunate reality of the economics of the business, particularly with high fuel prices, that small and medium sized markets simply can’t support service internationally and Pittsburgh is a great market and it has some great business there, it is just not large enough to support international service.

Joe Napsha - Pittsburgh Tribune Review

But some of the other domestic flights may not be restored then?

J. Scott Kirby

We don’t have any plans at the moment to change capacity in Pittsburgh either way.

Joe Napsha - Pittsburgh Tribune Review

Okay. Thank you.

Operator

We’ll go next to Jefferson George, Charlotte Observer.

Jefferson George - Charlotte Observer

One follow up question. This is going back to the merger talk. I know you guys love speculating on all the scenarios but beat with me. We’ve all seen the talk, we know it’s a lot more complex, but the way things shake out in the scenarios that are out there, sort of leaves you all and American kind of as the unmerged to the great unmerged. Is there any way that you all could even pair up though because it seems like there’s a lot less overlap than opportunity to increase sufficiency and reduce capacity given your respective hubs and networks?

W. Douglas Parker

Jefferson, I’m sorry, I just can’t engage in that speculation. We can’t talk about speculative transactions.

Jefferson George - Charlotte Observer

Fair enough.

Operator

We have a quest ion from Dan Reed, USA Today.

Dan Reed - USA Today

Hi Doug, how you all doing? Did you say when you did the America West-US Airways merger you were able to reduce capacity, was the number 19%?

W. Douglas Parker

The number I said was 15% Dan, but is that right Scott?

J. Scott Kirby

That was our plan in the Delta merger. In the US Airways-America West merger, we got rid of 69 mainline aircraft out of a total of about 400. I’m not sure if that translates, it’s probably less, it was probably about 15%.

Dan Reed - USA Today

About 15%. Okay, and the question I have, whether it’s you guys or any carrier, getting a merger that’s built as you have laid out the case, it’s built on creating both revenue and cost synergies and to some extent reducing [inaudible], how do you sell to the regulators and to the interested politicians the idea of a merger, I mean they’re skeptical, that reduces capacity when in fact that’s what they don’t want? They don’t want the reduction in capacity because that hurts local jobs and local economies. So how do you sell that merger? You did it with US Airways through a bankruptcy. Right now you don’t have that level to pull.

J. Scott Kirby

That’s correct, and I was trying to be careful as I was answering that. There is more value to be created if you can do that. Because of the bankruptcy, US Airways was easier to do because one, US Airways didn’t have many alternatives, and two, we had the ability to return aircraft through bankruptcy. In today’s world, again, as the deals are being discussed, I don’t think you’re going to see deals announced where airlines are talking about reducing the combined capacity as they put them together, and for some of the reasons you indicated and for some reasons, much of it is just about rationalizing the industry and rationalizing the existing hub and spoke networks instead of kind of some of the things we were doing in our transaction. I think you’re right and to the extent deals are announced, I doubt you’ll hear airlines talking about the transactions going to result in reductions of the combined capacity of two airlines.

Dan Reed - USA Today

Then how do they make sense?

J. Scott Kirby

Well they still make sense because you get a lot of the cost synergies, you do put together two networks to make a bigger network which helps, and then over time, what happens, Dan, is those two airlines don’t grow at the same rate they were going to grow before. As airplanes come off a lease, they’re less likely to stay in the system, so it ends up over time, it takes longer to be a little more rational network than doing it overnight but it does help with the concerns of labor because indeed in that scenario you’re not required to [inaudible] and I bet it’s hard on labor and all of our collective employees and it makes it easier I think for regulators to see that it’s not going to cause the concerns that they thought were going to happen.

Dan Reed - USA Today

Okay, thanks.

Operator

And there are no further questions. Mr. Parker, I would like to turn the call back over to you for any additional or closing remarks.

W. Douglas Parker

We are good. Thank you everyone for listening in and if you have any further questions, please contact Derek or Elise. Thanks a lot.

Operator

This does conclude today’s conference. Thank you for your participation.

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