ࡱ> QSPa OEjbjbA]A] ,T+?+?O?XXXXXXX*"""" ",*$\"""""##########,%R4(<+$X#####+$#XX""@$#### X"X"##ltJXXXX####XX#" V"### V$0$#p(#p(##X****American Airlines Remarks of Gerard Arpey Chairman and CEO Bank of America-Merrill Lynch Event June 11, 2009 Good afternoon everyone. Its nice to be with you today, and it is great to see so many familiar faces. Before I begin I must point out the Safe Harbor language in this presentation that can be referenced on the investor relations section of aa.com. When we gathered here a year ago, we were just a few months removed from the end of our second consecutive year of modest profitability. We had begun 2008 with every expectation that we would continue our progress in strengthening the financial foundation of our company. But, as you all know, by the time we met here a year ago, our hard-earned progress was being overwhelmed by the crisis stemming from the skyrocketing price of oil. A year ago, I said the airline industry, as it was then constituted, was not built for 130 dollar per barrel oil -- 130 dollars being the price at the time. Of course, in the weeks following our meeting, the price rose even higher, reaching nearly 150 dollars per barrel, which translated into more than 170 dollars per barrel for jet fuel. In my remarks last year, I laid out a series of steps we were taking to deal with the reality of high fuel costs, and to close the gap between our revenues and costs. As we built our schedule for the second half of 2008, we eliminated a lot of consistently unprofitable flights. We also reduced our schedule broadly in an effort to realign supply with demand and enable us to charge a price for our product at least equal to the cost of producing it. At the same time, we accelerated a new revenue paradigm, introducing a number of service charges for various product attributes including checked bags, food service, confirmed flight changes and reservations assistance. We further unbundled our product, enabling us to generate more revenue from the customers who demand more, and allowing those customers who dont desire certain aspects of what we offer to avoid paying for them. And as you know, virtually the entire airline industry has matched these capacity and revenue initiatives. A year ago, the economic environment was difficult, to put it mildly, but the credit markets were open and functioning -- and, we were able to leverage the progress we made in recent years in strengthening our balance sheet to tap the capital markets and increase our liquidity and financial flexibility. We arranged a sale-leaseback facility in addition to a backstop facility. Subject to certain terms and conditions, together these constituted committed financing for all of our 2009 aircraft deliveries and our 2010 deliveries well into the second half of next year. A year ago, we were moving aggressively to confront our challenges, but by the fall of 2008, we were confronted -- as everyone knows -- by new and arguably bigger challenges -- the collapse of the credit markets, the deep economic downturn in the United States and abroad, and the resultant fall in the demand for air travel. While the price of oil has fallen, we have transitioned, rather seamlessly, from a fuel crisis to an economic crisis. And just as the airline industry was not built for 130 dollar oil, neither was it built for an environment of negative global economic growth and non-functioning capital markets. The economic crosswinds we are navigating are apparent when you consider that because of lower fuel prices and the capacity cuts we executed, our fuel bill in the first quarter declined by 750 million dollars year over year. Unfortunately, that very welcome reduction in costs was outpaced by a more than 850 million dollar decline in first quarter revenue. We havent seen a revenue decline of that magnitude since the aftermath of 9/11. The silver lining to that cloud is that just as the hard work and difficult changes we implemented over the last several years -- which enabled us to pay down debt and bolster our liquidity -- prepared us for last years oil shock, the steps we took a year ago have left us better equipped to weather this years economic storm. The supply and demand relationship is not nearly as bad as it would have been without the capacity reductions we implemented in 2008. At the same time, the various service charges we implemented last year have been very helpful, generating hundreds of millions of dollars in incremental revenue. Unfortunately, however, as effective as last years initiatives have been, they are not, by themselves, sufficient to meet this years challenges -- which include the ongoing deep recession, the severe tightening of the credit markets, and the recent rise in the price of fuel -- which, it is worth pointing out, is still very high by historical standards. In this current economic downturn we have our work cut out for us on the revenue front. Well have more to say in a couple weeks in our Eagle Eye filing, but it suffices to say that the demand for air travel remains challenged. Our advanced bookings through August are down about 2 points in both the domestic and international entities. Of course our challenge has been made that much more daunting with the recent H1N1 flu effect, which at least temporarily devastated our Mexico traffic, and has had a dampening effect on demand throughout our network. While I would never argue that there is any upside to an infectious disease, the H1N1 problem is a useful reminder that in the airline industry, you never know where your next challenge is going to come from -- and you better bake a lot of flexibility and resilience into your plans. More importantly, the best way to prepare for tomorrows challenges is to confront todays challenges head on, all the while keeping focus on long-term direction. And thats exactly what we are doing. As you know, capacity discipline has been our mantra for many years and it has been one of the keys to our ability to navigate our way through the industrys many storms. As I said, the cuts we implemented last year have been helpful, and as a result we did not make major changes to our summer schedule. But looking forward, we think an adjustment to our fall schedule is warranted, so we are making additional cuts beginning in late August. As a result, our full-year 2009 mainline capacity is expected to be down about seven and a half percent. These cuts represent a decline in mainline capacity for the second half of the year of about two points beyond our previous guidance -- made up of about a point domestic and about three and a half points international. The amount of capacity we have removed from the system over the last two years has been noteworthy. With our latest reduction we now expect our second half of 2009 domestic capacity to be down by fifteen and a half percent and international to be down about five and a half percent versus the same period in 2007. As always, we are going to be closely monitoring demand trends, and will remain responsible and disciplined in trying to keep supply and demand in reasonable balance, while preserving the competitive strength and revenue-generating power of our global network. While we adjust our network to effectively reflect marketplace reality, we are also managing through the equally challenging capital markets reality. Despite the difficult market, we were able to raise nearly 100 million dollars in financing during the first quarter, using vintage aircraft as collateral, not to mention the facilities we put in place last year before the credit market meltdown. Our ability to access the capital markets, coupled with the strides we made in repairing our balance sheet in recent years, has helped us build financial flexibility. And as most of you know, we still have unencumbered assets and other sources of liquidity that we estimate to be worth about 3.6 billion dollars. These sources include aircraft, our spare parts inventory, Heathrow and other slots, our regional carrier American Eagle, and the potential for a financing involving our AAdvantage frequent flyer program. We are working on a number of fronts to sustain our financial foundation during these uncertain times -- and as always, we are also looking for ways to wring costs out of the business wherever we can. Despite the upward pressure on unit costs resulting from our capacity reductions, in April we were able to revise our cost guidance down somewhat for the balance of the year. Some of the progress we have made this year is a by-product of less traffic -- and thus less variable expense -- but a lot just comes from us continuously grinding away on costs in everything we do, an exercise that is less an initiative than a way of life at our company. This is demonstrated in our ranking at or near the best of the Big 5 in terms of unit costs, excluding labor and fuel costs for the past several years. This is true even though we have never had the impact of cutting costs through the bankruptcy courts. Having said that, we are very upfront about the fact that we have, in recent months, consciously added some costs to the operation -- in effect, making targeted investments in greater operational dependability and customer satisfaction. Among other things, we adjusted the way we schedule our aircraft, flight attendants and pilots. We increased our block times, as well as the time planes spend on the ground between flights in many instances. We co-paired pilots and flight attendants with specific aircraft, deployed new technologies to help speed our customers through the airport, and most importantly, we continued to listen to, and leverage the energy and ideas of our front line people. Today we are doing a good job when it comes to delivering the basics of airline service. For the first five months of the year, on-time performance has improved by 13 points, we are cancelling fewer flights, and as a result our completion factor has improved by nearly two and a half points, and our baggage stats have improved significantly. Delivering on the basics helps keep us in good stead with all our customers, but our goal is to be the best at delivering what our customers truly value -- and whats most valued by our customers really depends on who youre talking about. As you know, our premium customers -- frequent, higher-yielding passengers who often fly in the first or business class cabins -- are extremely important to us. What they value most, in addition to the basics, are a broad global network, a schedule with lots of flights to the places they want to go, a travel experience that maximizes their time and minimizes hassles, and recognition for their loyalty. In terms of network, while we are always going to be disciplined when it comes to capacity, we have made some strategic additions in markets that are very important to our best customers. Were building a presence in China and India, and expanding our reach into new markets like Barcelona and Milan. Having just returned from a meeting of our oneworld partners in Kuala Lumpur, I can also assure you we are, despite our collective economic challenges, more enthusiastic than ever about the progress oneworld is making in becoming the worlds premier global alliance -- shaped, of course, around the best airline brands in the world. We also remain optimistic that our immunity application with British Airways, Iberia, Finnair, Malev and Royal Jordanian Airline will be approved by years end. Of course, network breadth and partnerships alone are not enough to attract the premium customers we rely on. So we have been very focused on enhancing and differentiating our premium product recently. Initiatives include priority check-in at the ticket counter and gates, as well as expedited security screening and dedicated phone lines at our reservations centers for premium passengers. We have improved the quality and variety of our first and business class food and wine offerings in a number of ways. And, we are now providing free wireless internet access in all of our Admirals Clubs, helping club members to remain connected -- as well as comfortable -- during their time in the airport. We are focused on doing what it takes to win a disproportionate share of the industrys premium travelers. And one of the most powerful tools at our disposal is AAdvantage, our award-winning recognition program. Earlier this month, we announced our latest innovation -- one-way flex awards -- which give our customers more options to redeem travel. Of course, the sheer size of the AAdvantage program -- we have more than 62 million members -- reminds us that in addition to our premium customers, we also serve many millions of customers, who fly less frequently and who -- despite being very budget conscious -- are extremely important to us. Earning their business means offering a competitive price and true value for their travel dollar. Delivering the basics -- getting them where they want to go, safely, on-time and with their bags -- in a clean airplane -- and treating them with courtesy and respect every step of the way -- and doing all that at a competitive price, is the key. That is not to suggest that all non-premium customers desires are the same. In fact, the key to our unbundled -- or a la carte -- pricing initiatives effectiveness is that it gives customers the ability to customize their travel experience as they see fit, according to what they value most. We have enhanced our Buy on Board food service in the coach cabin, selling Boston Market sandwiches and salads on some longer flights, and we are continuing to look for more opportunities to sell value-added products and services to our customers, both in-flight and on the ground. Last August, we became the first U.S. airline to offer inflight internet access, and our Gogo broadband service will be offered on virtually our entire narrowbody fleet within the next two years. Through the introduction of one-day passes, we have made our Admirals Clubs more accessible to less frequent fliers for whom an annual membership may not make economic sense -- generating a lot of revenue for American Airlines in the process. Being able to deliver what our customers value most, across such a broad spectrum of wants and needs, is challenging. All told, our overall customer satisfaction scores reflect excellent progress on virtually every front we measure in trying to hit that outcome. Of course, while these near term results are important, our objective is to make sure American is positioned to compete and win over the long haul. With that in mind, we have been making prudent investments in our product -- and most especially, in our fleet of aircraft. We continue to execute on our fleet replacement strategy, and today we are announcing that we expect to take delivery of an additional eight 737-800 aircraft over 2009 and 2010. With the additions, we now have 84 new 737s entering service in 2009 through 2011, and new widebody 787s slated to arrive starting in 2013. Were also continuing to invest in our long-term competitiveness by refurbishing our aircraft interiors and airport facilities. Despite our economic challenges, were making prudent investments to modify our 767-200 aircraft, to reconfigure the 757s we fly across the Atlantic and the northern rim of Latin America, and to upgrade our Admirals Clubs in Boston, Washington Dulles, and London Heathrow. These investments reflect our confidence in our long-term strategy. We are not sugarcoating the magnitude of what we -- along with every other airline -- are up against in this economic climate. Just the opposite. Our confidence stems from our long list of competitive strengths, our proven resilience, and the fact that despite formidable obstacles, we are executing well on a number of fronts today. 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