Once again, I will say to you TWA was not bankrupt and TWA''s ASMs gained AA almost 1/4th of the almost 1 billion dollars that the government gave after 9/11. So I do not think that 9/11 would have been our demise. The AA documents state, and please note that the unions from both airlines were to determine seniority, not just the acquiring carrier:
ANALYST BRIEFING
TWA LLC INTEGRATION
MAY 10, 2001
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SAFE HARBOR
This presentation contains forward-looking statements within the meaning of the “safe harbor†provisions of the Private Securities Litigation Reform Act of 1995. These statements are based on current expectations or beliefs of management and are subject to a number of factors and uncertainties that could cause actual results to differ materially from those described in this presentation. The forward-looking statements contained in this presentation address the anticipated benefits of acquiring TWA’s assets, the proposed acquisition of assets from United/US Airways, and the future financial and operating results of American with the acquired assets. Management undertakes no responsibility to update the information presented in these materials.
The following factors, among others, could cause actual results and benefits to differ materially from those described in this presentation: the inability to successfully integrate the operations of TWA; the ability of American to acquire and integrate assets from United/US Airways or the Northeast Shuttle operations into American’s existing operations; the inability of American to successfully integrate the workforce of TWA or any United/US Airways pilots to be employed by American; higher than expected acquisition costs for any of the described transactions; actions of competitors, including competitive or strategic responses to the pending transactions; and other factors, including but not limited to, those discussed in the section entitled “Forward-Looking Information†in Item 7 of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2000, which section is incorporated herein by reference.
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OVERVIEW
TRANSACTION SUMMARY
FLEET PLAN UPDATE
REVENUE SYNERGIES
COST IMPLICATIONS
INTEGRATION COSTS
FINANCIAL IMPACT
INTEGRATION PLAN
GUIDANCE
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TRANSACTION SUMMARY
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TRANSACTION SUMMARY
ON JANUARY 10TH WE ANNOUNCED A SERIES OF THREE TRANSACTIONS DESIGNED TO STRENGTHEN THE AMERICAN NETWORK IN LIGHT OF COMPETITIVE CHANGES IN THE INDUSTRY
FIRST, AMERICAN AGREED TO PURCHASE SUBSTANTIALLY ALL OF THE ASSETS OF TWA, IN CONJUNCTION WITH ITS CHAPTER 11 BANKRUPTCY
SECOND, AMERICAN ALSO AGREED TO ACQUIRE KEY STRATEGIC ASSETS FROM UNITED/US AIRWAYS, INCLUDING UP TO 86 AIRCRAFT, GATES AND SLOTS AT FACILITY CONSTRAINED AIRPORTS, AND ONE-HALF OF THE US AIRWAYS SHUTTLE OPERATION
FINALLY, AMERICAN AGREED TO ACQUIRE A 49% STAKE IN DC AIR, WITH WHICH AMERICAN WOULD ENTER INTO AN EXCLUSIVE MARKETING AGREEMENT
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TRANSACTION SUMMARY
THESE TRANSATIONS WOULD PROVIDE AMERICAN SUBSTANTIAL BENEFITS:
ENHANCED SCOPE AND SCALE OF THE NETWORK
A THIRD MID-CONTINENT HUB TO AUGMENT DALLAS AND CHICAGO
GATES AND SLOTS AT KEY FACILITY CONSTRAINED AIRPORTS TO SUPPORT AMERICAN’S GROWTH
ACCESS TO A VALUABLE NORTHEAST SHUTTLE PRODUCT
THE LARGEST PRESENCE OF ANY CARRIER AT WASHINGTON REAGAN THROUGH THE DC AIR MARKETING AGREEMENT
ACCESS TO SUBSTANTIAL MAINTENANCE FACILITIES AND PERSONNEL TO SUPPORT INTERNAL GROWTH
WHILE MAINTAINING AMERICAN’S SOLID FINANCIAL POSITION AND STRATEGIC FLEXIBILITY
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TRANSACTION SUMMARY
THE FINANCIAL COMMITMENT ASSOCIATED WITH THE TRANSACTIONS WE PRESENTED IN JANUARY WAS PRUDENT
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TRANSACTION SUMMARY
SINCE THE TIMING OF THE TWA AND UNITED/US AIRWAYS DEALS HAS DIVERGED, WE WILL TODAY PROVIDE MORE SPECIFICS ON THE TWA DEAL ALONE
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TWA SUMMARY
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TWA DEAL SUMMARY
IN JANUARY, WE ANTICIPATED THAT THE TWA TRANSACTION ITSELF WOULD HAVE A VALUE OF $3.5 BILLION
$0.5 BILLION IN CASH
$3.0 BILLION IN ASSUMED LEASES
THIS VALUATION ASSUMED WE COULD RENEGOTIATE TWA’s LEASES TO BETTER REFLECT AMR’s CREDIT RATING
OUR INITIAL ESTIMATE OF THESE LEASE SAVINGS ON AN ANNUAL BASIS WAS $80-100 MILLION OR $0.5 BILLION ON A PV BASIS
BY THE TIME THAT OUR LEASE RESTRUCTURING NEGOTIATIONS WERE COMPLETE, OUR ACTUAL LEASE SAVINGS EXCEEDED $200 MILLION PER YEAR
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TWA DEAL SUMMARY
THEREFORE, DESPITE INCREASING OUR CASH OFFER BY $125 MILLION, THE TOTAL DEAL COST WAS REDUCED TO $2.8 BILLION, WELL BELOW OUR INITIAL ESTIMATE OF $3.5 BILLION
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TWA DEAL VALUATION
BASED ON COMPARABLE TRANSACTIONS, THE TWA TRANSACTION WAS COMPLETED ON FAVORABLE TERMS
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TRANSACTION STRUCTURE
THE TWA ACQUISITION WAS STRUCTURED AS AN ASSET PURCHASE IN BANKRUPTCY
THIS APPROACH ALLOWED US TO SELECTIVELY ACCEPT ASSETS, LEASES AND OTHER CONTRACTS
THIS STRUCTURE INHERENTLY CREATED BUILT-IN SYNERGIES, FOR EXAMPLE:
REVALUED OR REJECTED LEASES
ELIMINATED THE KARABU AGREEMENT
OFFERED THE OPPORTUNITY FOR OVERHEAD RATIONALIZATION
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TWA - WHAT WE ACQUIRED
THE TWA DEAL ULTIMATELY PROVIDED AMERICAN:
A NEW HUB IN ST LOUIS
MAINTENANCE FACILITIES IN KANSAS CITY, LOS ANGELES AND ST LOUIS
APPROXIMATELY 18,000 HIGHLY TRAINED PROFESSIONAL LINE EMPLOYEES
A 26% STAKE IN WORLDSPAN
KEY GATES AND SLOTS
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TWA - WHAT WE ACQUIRED
TWA HAD 188 LEASED GATES PRIOR TO THE TRANSACTION
AA ASSUMED LEASES ON 138 GATES
AA EITHER REJECTED LEASES OUTRIGHT OR NEGOTIATED A TRANSITION OUT OF 50 GATE LEASES TO BE COMPLETED BY YEAR END 2001
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TWA - WHAT WE ACQUIRED
THROUGH THE TWA TRANSACTION, AA ACQUIRED A TOTAL OF 171 SLOTS AT FIVE KEY AIRPORTS
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TWA - WHAT WE ACQUIRED
IN TOTAL, AA ACQUIRED 173 AIRCRAFT
ASSUMED LEASES ON 153 AIRCRAFT
PURCHASED 20 AIRCRAFT OFF LEASE
AA REJECTED 10 AIRCRAFT
3 X DC9s
7 X 767-200s
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FLEET SUMMARY
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FLEET SUMMARY
AMR’s FLEET PLAN HAS THREE KEY OBJECTIVES:
MINIMIZE THE NUMBER OF FLEET TYPES AND SUB-FLEET TYPES
PROVIDE FOR FLEXIBILITY TO SCALE THE SIZE OF THE FLEET AS MARKET CONDITIONS WARRANT
IMPROVE THE ONBOARD PRODUCT OFFERING AND CONSISTENCY
THE TWA FLEET INTEGRATION PLAN WAS STRUCTURED TO ENSURE CONSISTENCY WITH THESE KEY OBJECTIVES
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AT THE END OF 2000, THE TWA FLEET INCLUDED 183 ACTIVE AIRCRAFT, MOST OF WHICH WERE LEASED
IN ADDITION, TWA HAD FIRM ORDERS FOR 35 BOEING 717s, 38 AIRBUS 318s AND 25 AIRBUS 319s
THE FIRM AIRBUS ORDERS WERE REJECTED
TWA LLC FLEET SUMMARY
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TWA LLC FLEET SUMMARY
THE TERMS AND CONDITIONS OF TWA’s AIRCRAFT LEASES WERE RENEGOTIATED WITH THE FOLLOWING OBJECTIVES:
REDUCE LEASE COST TO A LEVEL CONSISTENT WITH AA’s CREDIT RATING
TAKE THE OPPORTUNITY TO BUILD THE FLEXIBILITY TO CONTINUE TO SIMPLIFY THE COMBINED AMERICAN AND TWA FLEETS ON AN ACCELERATED BASIS
MAINTAIN AS CLOSELY AS POSSIBLE THE SCALE OF TWA’s OPERATION BY KEEPING AS MANY OF THE TWA AIRCRAFT AS ECONOMICALLY JUSTIFIABLE FOR AT LEAST THE SHORT-TERM
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TWA LLC FLEET SUMMARY
IN ADDITION TO SUBSTANTIALLY REDUCING THE OVERALL LEASE EXPENSE, WE WERE ALSO ABLE TO ADJUST THE LEASE TERMS FOR NON-COMMON AIRCRAFT, CONSISTENT WITH OUR FLEET SIMPLIFICATION GOALS
FOR EXAMPLE, DC-9 LEASES WERE SHORTENED. HOWEVER, MANY MD-80 LEASES WERE EXTENDED OR THE UNITS WERE PURCHASED
ON AVERAGE AA’s NEWLY NEGOTIATED LEASE TERM WAS SIMILAR TO THAT UNDER TWA’s AGREEMENTS
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TWA LLC FLEET SUMMARY
ALTHOUGH TWA OPERATES MANY OF THE SAME FLEET TYPES AS AMERICAN, IT WOULD NOT BE ECONOMICAL TO KEEP ALL OF TWA’s AIRCRAFT FOR THE LONG-TERM
TWA’s 16 BOEING 767s HAVE PRATT & WHITNEY ENGINES WHILE AMERICAN’s 767’s ARE GE POWERED
IT IS NOT PRACTICAL TO RE-ENGINE TWA’s AIRCRAFT
IN ORDER TO AVOID THE COMPLEXITY OF A SMALL FLEET OF UNIQUE AIRCRAFT, WE CHOSE NOT TO TAKE ANY OF THE SEVEN 767-200s
ADDITIONALLY, WE PRIORITIZED THE NINE 767-300s FOR SHORT-TERM REPLACEMENT
SIMILARLY, TWA’s 27 BOEING 757s HAVE DIFFERENT ENGINES FROM AA’s FLEET. THUS WE COMPLETED SHORT-TERM DEALS FOR ALL 27 AIRCRAFT WITH LEASE EXPIRATIONS BETWEEN 2004 AND 2007
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TWA LLC FLEET SUMMARY
AT THE BEGINNING OF 2001, TWA OPERATED 22 DC9s - ALL BUT ONE OF WHICH ARE AT LEAST 31 YEARS OLD
AMERICAN DOES NOT OPERATE ANY DC9s
WE REJECTED THREE UNITS WHICH WERE AWAITING HEAVY MAINTENANCE (SAVING $3 MM/AIRCRAFT)
WE CONCLUDED SHORT-TERM LEASES ON THE OTHER 19 UNITS WITH LEASE EXPIRATIONS IMMEDIATELY PRECEEDING THEIR NEXT HEAVY MAINTENANCE VISIT
AS A RESULT, THE ENTIRE DC9 FLEET WILL BE RETIRED BY YEAR-END 2003
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TWA LLC FLEET SUMMARY
TWA’s 103 MD80s WERE GOOD CANDIDATES TO KEEP IN THE FLEET LONG-TERM, SUBJECT TO ACCEPTABLE LEASE TERMS, GIVEN THEIR COMMONALITY WITH AA’s MD-80s
ULTIMATELY, WE WERE ABLE TO REACH ACCEPTABLE TERMS FOR LONG-TERM COMMITMENTS ON 99 OF THE 103 TWA MD-80s
79 ARE ON LONG-TERM OPERATING LEASES
20 WERE PURCHASED OUTRIGHT
WE NEGOTIATED ACCEPTABLE SHORT-TERM LEASES ON THE REMAINING FOUR UNITS
IN ADDITION, AS PART OF THE OVERALL LEASE NEGOTIATION PROCESS, WE AGREED TO ENTER INTO SIX-YEAR OPERATING LEASES FOR FIVE INCREMENTAL MD80s
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TWA LLC FLEET SUMMARY
AT YEAR-END 2000, TWA HAD 15 BOEING 717s IN THE FLEET AND ANOTHER 35 ON FIRM ORDER
WHILE THE 717 IS NOT COMMON WITH OTHER AIRCRAFT IN THE COMBINED FLEET, WE WERE ABLE TO STRIKE AN ATTRACTIVE DEAL WITH BOEING
AS PART OF THE LEASE RENEGOTIATIONS, AA AGREED TO ACCEPT 15 OF THE 35 BOEING 717s WHICH TWA HAD ON ORDER. IN RETURN, AA RECEIVED:
A SUBSTANTIAL DISCOUNT ON TWA’s LEASE RATES
VERY FLEXIBLE EARLY RETURN PROVISIONS
ACCEPTING THE 717s THEREFORE PROVIDES AA WITH SIGNIFICANT FLEXIBILITY TO ADJUST CAPACITY
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ADDITIONAL FLEET CHANGES
OUR GOAL OF ELIMINATING THE PRATT POWERED B767s FROM THE AA/TW FLEET CREATED AN OPPORTUNITY TO ADDRESS MULTIPLE FLEET PLANNING OBJECTIVES
AS A RESULT, WE RECENTLY EXERCISED 15 767-300ER PURCHASE RIGHTS THAT WILL PERMIT THE FOLLOWING:
REPLACEMENT OF TW’s NINE MORE EXPENSIVE AND NON-COMMON 767-300ERs, THUS ELIMINATING A SUB-FLEET TYPE
REDEPLOYMENT OF A300s FROM THE NORTH ATLANTIC TO THE CARIBBEAN, THUS BETTER MATCHING THE NEEDS OF THOSE MISSIONS, AND THEREBY ELIMINATING ANOTHER SUB-FLEET TYPE
IMPROVED SCHEDULE EFFICIENCY FOR OUR EUROPE FLEET - CREATING A SAVINGS OF TWO WIDEBODY AIRCRAFT
REALLOCATION OF EXISTING CARIBBEAN ASSETS TO DOMESTIC FLYING, THUS ELIMINATING THE NEED TO ACQUIRE 19 NARROW BODY AIRCRAFT
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ADDITIONAL FLEET CHANGES
THE ARRIVAL OF THE NEW GE POWERED 767s WILL ELIMINATE THE NEED TO INTEGRATE A SMALL FLEET OF PRATT POWERED 767-300s FROM THE TWA LLC FLEET INTO AA’s LARGE FLEET OF 767s
AS WITH TWA’s 767-200 AIRCRAFT THAT WE DID NOT ACCEPT, IT IS NOT PRACTICAL TO RE-ENGINE THE PRATT POWERED AIRCRAFT
THE ECONOMICS OF THIS APPROACH WERE FURTHER ENHANCED BY THE FAVORABLE PRICING THAT BOTH BOEING AND GE WERE PREPARED TO PROVIDE
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ADDITIONAL FLEET CHANGES
WE CURRENTLY OPERATE 10 AIRBUS A300s TO LONDON IN A 3-CLASS CONFIGURATION AND ANOTHER 25 A300s TO THE CARIBBEAN IN A 2-CLASS CONFIGURATION
THE NEW WIDEBODY ORDER WILL ALLOW US TO REMOVE THE 10 3-CLASS A300s FROM EUROPEAN SERVICE AND REDEPLOY THEM TO THE CARIBBEAN - LEAVING ONLY 767-300 AND 777 AIRCRAFT IN EUROPE
DUE TO IMPROVED ROUTING EFFICIENCIES, THIS CHANGE RESULTS IN TWO LESS AIRCRAFT BEING NEEDED TO SUPPORT OUR EUROPEAN SERVICE
THIS APPROACH PROVIDES A MORE CONSISTENT PRODUCT FOR THE CUSTOMER
AND THE 10 EUROPEAN A300s WILL BE CONVERTED TO 2-CLASS SERVICE TO MATCH THE OTHER 25 UNITS, THEREBY ELIMINATING A SUB-FLEET TYPE
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ADDITIONAL FLEET CHANGES
AS THE CONVERTED A300s BEGIN CARIBBEAN FLYING, THEY WILL FREE-UP NARROW BODY 757 AND 737 AIRCRAFT
THESE AIRCRAFT WILL FLOW BACK INTO THE DOMESTIC SYSTEM
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ADDITIONAL FLEET CHANGES
THIS REASSIGNMENT OF AIRCRAFT WILL HAVE NO IMPACT ON OUR DOMESTIC GROWTH PLANS
AA’s DOMESTIC CAPACITY PLANS ARE CALIBRATED TO EXPECTATIONS FOR ECONOMIC GROWTH
THUS, THE SUBSTITUTION OF 767s FOR A300s ON THE NORTH ATLANTIC, WHICH LEADS TO THE SUBSTITUTION OF A300s FOR 757 AND 737 AIRCRAFT CURRENTLY OPERATING IN THE CARIBBEAN, ALLOWS AMERICAN TO AVOID ORDERING A SUBSTANTIAL NUMBER OF NARROW BODY AIRCRAFT
THE NARROWBODY AIRCRAFT WITHDRAWN FROM THE CARIBBEAN AND NOW AVAILABLE TO OPERATE DOMESTICALLY EQUATE TO APPROXIMATELY 19 737-800S
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RESULTING FLEET PLAN*
* FIRM ORDERS ONLY
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FLEET SUMMARY
BY YEAR-END 2003, THE VARIETY OF AIRCRAFT ACQUIRED FROM TWA WILL HAVE BEEN REDUCED FROM FIVE TO ONLY THREE FLEET TYPES
MD80s WHICH ARE COMMON WITH AA’s FLEET
717s WHICH WILL PROVIDE SIGNIFICANT FLEET FLEXIBILITY GOING FORWARD AND
757s WHICH HAVE A COMMON AIRFRAME BUT NON-COMMON ENGINES. WE HAVE THE FLEXIBILITY TO RETIRE THESE AIRCRAFT BETWEEN 2004 AND 2007
IN ADDITION, WE WILL ELIMINATE ANOTHER SUB-FLEET TYPE AT AA - THE 3 CLASS A300
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FLEET SUMMARY
WHILE MAKING SUBSTANTIAL PROGRESS TOWARDS FURTHER SIMPLIFYING THE COMBINED AA/TW FLEET, WE WERE ABLE TO REDUCE TW’s LEASE OBLIGATIONS BY APPROXIMATELY $200 MILLION PER YEAR AND, VIA OUR 717 AGREEMENT, PROVIDE AMERICAN WITH SIGNIFICANT FLEXIBILITY TO RATCHET DOWN CAPACITY AS BUSINESS CONDITIONS WARRANT
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REVENUE SYNERGIES
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REVENUE SYNERGIES
REVENUE SYNERGIES ARE A KEY COMPONENT OF THE VALUE OF THE TWA TRANSACTION TO AMR
TWA’S REVENUE ON A STAND ALONE BASIS WAS LIMITED BY:
KARABU TICKETING AGREEMENT
SINGLE-HUB NETWORK
LIMITED MARKET PRESENCE OUTSIDE ST LOUIS
A RELATIVELY WEAK FREQUENT FLYER PROGRAM
FEW AIRLINE PARTNERS, EITHER INTERNATIONALLY OR DOMESTICALLY
A RELATIVELY LIMITED NUMBER OF CORPORATE CONTRACTS
REVENUE SYNERGIES WILL ALSO ACCRUE TO AA
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REVENUE SYNERGIES
REVENUE SYNERGIES ARE EXPECTED TO GENERATE $400-500 MILLION ANNUALLY ON A STEADY STATE BASIS
THESE SYNERGIES WILL BE DRIVEN BY THE FOLLOWING FACTORS:
ELIMINATION OF THE KARABU TICKETING AGREEMENT
SCHEDULING EFFICIENCIES
SHARE SHIFT/CITY PRESENCE ENHANCEMENT
YIELD IMPROVEMENT RESULTING FROM:
INCREASED SHARE OF PREMIUM TRAFFIC AT TWA
AADVANTAGE PROGRAM
ALLIANCE RELATIONSHIPS
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REVENUE SYNERGIES
THE KARABU TICKETING AGREEMENT WAS ESTIMATED BY TWA TO BE COSTING THEM $80-100 MILLION PER YEAR IN LOST REVENUE
WHILE IT IS DIFFICULT TO PRECISELY VALIDATE, OUR ESTIMATES INDICATE THAT THESE NUMBERS ARE REASONABLE
BASED ON TWA’s FULL-YEAR 2000 REVENUE, THE KARABU AGREEMENT REPRESENTED A 3% DILUTION TO PASSENGER REVENUE
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REVENUE SYNERGIES
SCHEDULE EFFICIENCIES WILL ULTIMATELY ACCRUE TO BOTH TWA AND AA AS THE COLLECTIVE CAPACITY IS BEST ALLOCATED ACROSS THE ENTIRE NETWORK
SOME OF THESE CHANGES ARE ALREADY OCCURRING, INCLUDING SOME RECENTLY ANNOUNCED REDUCTIONS IN SAN JUAN FLYING
ADDITIONAL SCHEDULE ADJUSTMENTS WILL OCCUR OVER THE NEXT SEVERAL MONTHS
FURTHER REVENUE SYNERGIES WILL BE DERIVED AS THE NETWORKS ARE ULTIMATELY INTEGRATED
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AA AND TWA NON-STOP OVERLAP
TWA AND AA NON-STOP OVERLAP IS PRIMARILY CONCENTRATED IN THREE AREAS:
SJU AND THE CARIBBEAN
TRANSCON
HUB TO HUB/FOCUS CITY
COLLECTIVELY THESE MARKETS REPRESENT ABOUT 12% OF AA’s DOMESTIC CAPACITY
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REVENUE SYNERGIES
REVENUE INCREASES RESULTING FROM ENHANCED CITY PRESENCE OR SHARE SHIFT SHOULD ACCRUE TO BOTH THE TWA LLC AND AA NETWORK
AS DISCUSSED EARLIER, TWA BOLSTERS AA’s MARKET POSITION IN ALL KEY FOCUS CITIES
FOR EXAMPLE, IN LOS ANGELES, AA’s DOMESTIC MARKET SHARE WILL RISE FROM 16% TO 20%. BASED ON ‘S-CURVE’ ECONOMICS, THIS SHOULD RESULT IN AN EVEN LARGER INCREASE IN REVENUE SHARE
ADDITIONALLY, TWA’s HISTORIC REVENUE BASE WAS LIMITED BY A LACK OF SIGNIFICANT MARKET PRESENCE OUTSIDE OF ST. LOUIS
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REVENUE SYNERGIES
TO PUT THE COLLECTIVE REVENUE SYNERGIES IN CONTEXT, TWA’s UNIT REVENUE DEFICIT TO AA IN 2000, AFTER ADJUSTING FOR STAGE LENGTH AND CONFIGURATION, WAS 20%
OUR STEADY STATE REVENUE SYNERGY ESTIMATES EQUATE TO CLOSING TWO THIRDS, OR 12-15 POINTS OF THIS GAP
OR, PUT ANOTHER WAY, IT REPRESENTS A 2% UNIT REVENUE IMPROVEMENT ACROSS THE COMBINED AA/TWA NETWORK
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REVENUE SYNERGIES
REVENUE SYNERGIES WILL PHASE IN OVER TIME
KARABU BENEFITS SHOULD COME EARLY ON
SHARE SHIFT AND YIELD IMPROVEMENT SHOULD GROW OVER TIME
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COST IMPLICATIONS
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COST IMPLICATIONS
WHILE REVENUE SYNERGIES ARE LARGE, THE COST IMPACTS ARE MORE OF A MIXED BAG
THERE WILL BE LABOR COST INCREASES AS TWA LLC’s UNION EMPLOYEES ARE MOVED TO AA CONTRACTS
HOWEVER, THERE ARE SOME CLEAR COST SAVINGS THAT DO RESULT FROM THIS TRANSACTION
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COST IMPLICATIONS
LABOR COST INCREASES ARE EXPECTED AS TWA LLC EMPLOYEES ARE TRANSITIONED TO AA CONTRACTS
APPLICATION OF AA WAGE RATES AND WORK RULES IS EXPECTED NO LATER THAN JANUARY 1, 2002
ANNUAL COST OF THESE CHANGES IS ESTIMATED AT $260 MILLION
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COST SYNERGIES
OFFSETTING THE ADDED LABOR EXPENSE ARE ANNUAL COST SYNERGIES THAT ARE EXPECTED TO GENERATE MORE THAN $150 MILLION ON A STEADY STATE BASIS (EXCLUDING THE LEASE SAVINGS NOTED EARLIER) DRIVEN PRIMARILY BY:
ELIMINATION OF DUPLICATIVE OVERHEAD
REDUCED AND RATIONALIZED FACILITY RENTS
CONTRACT PURCHASING
FUEL PROGRAMS AND HEDGING
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COST SYNERGIES
BY CONSOLIDATING HEADQUARTER AND STAFF FUNCTIONS, WE WILL BE ABLE TO ELIMINATE A SUBSTANTIAL AMOUNT OF DUPLICATIVE OVERHEAD AND ASSOCIATED SPENDING
SOME OF THESE SAVINGS WILL OCCUR EARLY (E.G. ADVERTISING, LEGAL, FINANCE)
OTHERS WILL NOT MATERIALIZE UNTIL THE TWA LLC OPERATION IS FULLY INTEGRATED INTO THE SAME CRS HOST (SABRE) AS AMERICAN (E.G. COMPUTER SYSTEMS MAINTENANCE, INTEGRATED AIRPORT MANNING)
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COST SYNERGIES
BY RATIONALIZING THE COMBINED AA/TWA FACILITY NEEDS, WE ARE ABLE TO REDUCE AIRPORT RENTS
A NUMBER OF AIRPORT LEASES WERE REJECTED OUTRIGHT DURING THE ACQUISITION
OTHER LEASES WERE MODIFIED AND SHORTENED AS NECESSARY TO FACILITATE A SMOOTH INTEGRATION IN AIRPORTS WHERE THE COMBINED SPACE WAS MORE THAN NEEDED
IN SOME AIRPORTS, LIKE DFW AND LGA, WE HAVE KEPT ALL OF TWA’s GATES DESPITE THE FACT THAT TWA’s OWN SCHEDULE DOES NOT JUSTIFY THEM. IN THESE CITIES, THE COMBINED ENTITY WILL GAIN IMPROVED UTILIZATION FROM THESE FACILITIES AS THE OPERATIONS ARE INTEGRATED
THIS REPRESENTS A SAVINGS OF $85 MILLION ON A PRESENT VALUE BASIS
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COST SYNERGIES
ADDITIONAL COST SYNERGIES WILL BE GAINED BY APPLYING AA’s CONTRACT PURCHASING PROGRAMS TO TWA’s PROCUREMENT
DUE TO LIMITED RESOURCES, TWA HAD ONLY 20% OF THEIR PURCHASING UNDER CONTRACT
AA PURCHASES ABOUT 70% OF ITS SUPPLIES UNDER CONTRACT
THE COMBINED ENTITY WILL ALSO ACHIEVE EVEN GREATER SAVINGS THROUGH AA’s PARTICIPATION IN CORDIEM
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COST SYNERGIES
SAVINGS ARE ALSO EXPECTED FROM FUEL PURCHASING AND HEDGING
SOME SAVINGS WILL COME FROM LOWER INTO-PLANE FUEL EXPENSE AS TWA IS ROLLED INTO AA’s FUELING CONTRACTS
ADDITIONALLY, TWA LLC SHOULD BENEFIT FROM REDUCED EARNINGS VOLATILITY AS AMR’s HEDGE PROGRAM IS APPLIED TO THE LLC’s FUEL CONSUMPTION
IN ANTICIPATION OF THE TWA TRANSACTION CLOSING, AMR BEGAN INCREASING OUR HEDGE POSITIONS TO ACCOUNT FOR THE ADDED CONSUMPTION TWA WOULD BRING TO THE COMBINED ENTITY
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COST SYNERGIES
AS WITH THE REVENUE SYNERGIES, COST SYNERGIES WILL PHASE IN OVER TIME
OVERHEAD RATIONALIZATION SHOULD BEGIN THIS YEAR
FUEL HEDGES SHOULD ALSO BRING EARLY BENEFITS
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INTEGRATION COSTS
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INTEGRATION COST
WHILE THE EXPECTED REVENUE/COST SYNERGIES ARE GREAT, THERE ARE A NUMBER OF INTEGRATION COSTS WHICH WILL IMPACT EARLY RESULTS:
REQUIRED FLEET MODIFICATIONS
FACILITY INTEGRATION
TRAINING
OTHER ONE-TIME ITEMS
FACILITY UPDATES
SYSTEM CONVERSION
SEVERANCE/RELOCATION
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INTEGRATION COST
THESE COSTS WILL PRIMARILY OCCUR DURING THE FIRST THREE YEARS
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INTEGRATION COST
WE ARE CURRENTLY REFINING OUR ANALYSIS ON HOW THE VARIOUS INTEGRATION COSTS WILL BE TREATED FOR ACCOUNTING PURPOSES
WHILE MOST OF THE INTEGRATION RELATED COSTS WILL LIKELY BE CAPITALIZED, WE DO EXPECT 15-20% OF THE COSTS TO BE EXPENSED
THE REMAINDER WOULD BE DEPRECIATED
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FINANCIAL IMPACT
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CAPITAL SPENDING
IN LIGHT OF THE TWA ACQUISITION, THERE WILL BE AN INCREASE TO AMR’s BASE, NON-AIRCRAFT CAPITAL EXPENDITURE AS WE MOVE FORWARD
ADDITIONALLY, WHILE THE INCREMENTAL 767-300s WILL ADD MODESTLY TO TOTAL CAPITAL SPENDING, WE DO EXPECT OFFSETS IN TERMS OF LOWER NARROW-BODY ORDERS
BASED JUST ON RELATIVE SEATING CAPACITY, THE 10 REALLOCATED A300s WOULD EQUATE TO APPROXIMATELY 19 737-800s WORTH OF CAPACITY
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CAPITAL SPENDING
BASED ON THE ADDITION OF TWA, AND THE OTHER CHANGES WE HAVE MADE TO OUR PLAN, WE WOULD EXPECT THE FOLLOWING LEVELS OF CAPITAL SPENDING OVER THE NEXT TWA YEARS:
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BALANCE SHEET
DESPITE THE REVISIONS TO THE CAPTIAL PLAN, WE WILL MAINTAIN A VERY STRONG BALANCE SHEET
LIQUIDITY REMAINS STRONG DUE TO AVAILABLE CASH AND UNENCUMBERED ASSETS
AMR’s NET DEBT TO CAPITAL SHOULD PEAK AT 69% IN 2001
IN ADDITION, AMR’s COVERAGE RATIOS SHOULD SEE MINIMAL DECLINES FROM CURRENT LEVELS
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ACCRETION/DILUTION
WHEN WE ANNOUNCED THE TWA AND UNITED/DC AIR TRANSACTIONS BACK IN JANUARY, WE PROVIDED SOME EXPECTATIONS FOR ACCRETION/DILUTION
OUR ASSUMPTIONS WERE BASED ON ALL THREE DEALS GOING FORWARD UNDER A SIMILAR TIME FRAME
SINCE THE TIMING OF THESE DEALS HAS DIVERGED, WE WANTED TO PROVIDE AN UPDATE ON THE TWA DEAL ON ITS OWN
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ACCRETION/DILUTION
BASED ON THE SYNERGIES WE OUTLINED EARLIER, WE EXPECT TWA TO BE NICELY ACCRETIVE OVER TIME
IN FACT WE INDICATED RECENTLY THAT THE DEAL COULD BE NEUTRAL TO EARNINGS IN 2001
WHILE WE ARE STILL HOPEFUL THAT THIS WOULD BE THE CASE, WE HAVE YET TO SEE SIGNS THAT THE WEAK UNDERLYING REVENUE ENVIRONMENT IS TURNING AROUND
SINCE THE GENERAL ECONOMIC CLIMATE WILL IMPACT TWA’S REVENUE BASE, AS IT DOES AMERICAN’S, THERE IS SOME EARNINGS RISK IN THE NEAR TERM
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ACCRETION/DILUTION
NONETHELESS, WE DO EXPECT THAT AS THE REVENUE SYNERGIES BEGIN TO ACCELERATE IN 2002 AND BEYOND, THAT THE TRANSACTION WILL BE SUBSTANTIALLY ACCRETIVE TO EARNINGS
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INTEGRATING TWA INTO AA
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OVERVIEW
INTEGRATION PERSPECTIVES
INTEGRATION PLAN
LABOR INTEGRATION STATUS
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INTEGRATION PERSPECTIVES
MERGING TWO AIRLINES IS EXTRAORDINARILY COMPLEX
IT REQUIRES CONSIDERATION OF COMPUTER SYSTEMS, CUSTOMER PROGRAMS, LABOR ISSUES, AND THEIR INTERDEPENDENCIES
AT THE SAME TIME, THERE EXISTS CONSIDERABLE FINANCIAL LEVERAGE TO MOVE FAST, PARTICULARLY ON MARKETING INTEGRATION
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RECENT AIRLINE INTEGRATIONS
THE TRACK RECORD FOR RECENT AIRLINE INTEGRATIONS IS LESS THAN STELLAR
FOR INSTANCE, AIR CANADA, DURING THEIR INTEGRATION OF CANADIAN LAST YEAR, CREATED SIGNIFICANT CUSTOMER SERVICE AND EMPLOYEE ISSUES
THESE ISSUES WERE DRIVEN LARGELY BY THEIR EFFORTS TO FULLY INTEGRATE SCHEDULES BEFORE LABOR AND SYSTEMS
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AA/TWA SUCCESSES TO DATE
WITH THAT BACKDROP, IT IS WORTH REVIEWING OUR SUCCESSES TO DATE WITH AA/TWA INTEGRATION
OVER 14,000 CONTRACTS WERE REVIEWED, OF WHICH ROUGHLY 5,000 WERE REPLACED OR RENEGOTIATED WITHIN A SIX-WEEK DUE DILIGENCE PERIOD
THE DEAL CLOSED ON APRIL 9, THE EARLIEST DATE POSSIBLE BASED ON THE BANKRUPTCY COURT SCHEDULE
TWA OPERATED SUCCESSFULLY AFTER CLOSE, WHICH REQUIRED TRANSFER OF FAA OPERATING CERTIFICATE, DOT ROUTE AUTHORITIES, AND A MYRIAD OF OTHER PERMITS UNIQUE TO A BANKRUPTCY SALE
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INTEGRATION PLAN
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OVERVIEW
WE HAVE NOW BEEN ENGAGED IN INTEGRATION PLANNING FOR ALMOST 5 WEEKS SINCE THE DEAL CLOSED. THE RESULTS OF THIS EFFORT ARE:
A DETAILED PICTURE OF THE INTEGRATION OF KEY MARKETING AND STRATEGIC FUNCTIONS INTO AA DURING THE NEXT 2 MONTHS, WHICH WE REFER TO AS PHASE 1
A CLEAR CONCEPT OF HOW THE INTEGRATION OF OPERATING FUNCTIONS SHOULD PROCEED, ALTHOUGH NOT YET TO THE POINT OF A DETAILED PLAN
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FUNCTIONS INVOLVED IN PHASE 1
EARLY IN THE PLANNING PROCESS, WE IDENTIFIED SEVERAL STAFF DEPARTMENTS WHICH WE FELT WERE CRITICAL TO IMPROVING TWA’S PROFITABILITY AND WHICH COULD BE TRANSITIONED WITHOUT MAJOR LABOR OR COMPUTER SYSTEM ISSUES
MARKETING FUNCTIONS INCLUDE PASSENGER SALES, REVENUE MANAGEMENT, SCHEDULING, AND ADVERTISING
KEY FINANCIAL FUNCTIONS INCLUDE TREASURY, PROFITABILITY ANALYSIS, PURCHASING, AUDITS, AND DISBURSEMENTS
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PHASE 1 SCHEDULE
WE ARE MOVING FORWARD WITH AN AGGRESSIVE SCHEDULE TO TRANSFER THOSE PHASE 1 FUNCTIONS COMPLETELY BY MID-JULY
LATE-MAY TWA INFORMATION SESSIONS
EARLY-JUNE INTERVIEWS FOR AVAILABLE POSITIONS
MID-JUNE NEW ORGANIZATION FINALIZED
LATE-JUNE WORK TRANSFER BEGINS
TO ENSURE ACCURATE INTERNAL FINANCIAL DATA, THE SERVICES PROVIDED BY AA WILL BE TRANSFER PRICED BACK TO TWA AIRLINES LLC
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OVERHEAD SAVINGS
IN THESE PHASE 1 FUNCTIONS BEING TRANSFERRED, TWA’S HEADCOUNT AVERAGED ABOUT 530 FULL-TIME EQUIVALENTS IN 2000
ON A STEADY-STATE BASIS, AA WILL NEED FAR LESS HEADCOUNT TO PERFORM THIS WORK
THESE SAVINGS ARE GENERALLY DRIVEN BY EITHER EFFICIENCIES DUE TO AA’S MORE SOPHISTICATED AUTOMATION OR SIMPLE SCALE ECONOMIES
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TRANSITION PHASE
WHILE MOST OF THESE HEADCOUNT SAVINGS WILL OCCUR IMMEDIATELY, SOME WILL BE GRADUALLY TRANSITIONED
FOR INSTANCE, APPROXIMATELY 80 TRANSITION HEADS IN THESE GROUPS WILL NEED TO REMAIN AT TWA SIMPLY BECAUSE TWA IS CURRENTLY HOSTED IN WORLDSPAN
HEADCOUNT SAVINGS IN JULY 2001 IN THESE PHASE 1 FUNCTIONS, HOWEVER, WILL STILL BE SIGNIFICANT
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PHASED INTEGRATION
WE ARE CONVINCED THAT A PHASED INTEGRATION MAKES THE MOST SENSE
PHASING ALLOWS US TO PROVIDE MANY OF THE CUSTOMER BENEFITS AND LEVERAGE THE AA BRAND QUICKLY
IN CONTRAST, MOVING QUICKLY ON OPERATIONS INTEGRATION IS SIMPLY NOT POSSIBLE, GIVEN OUR DIFFERENT AIRCRAFT AVIONICS, AIRCRAFT INTERIORS, CREW TRAINING, AND OPERATING PROCEDURES
FORTUNATELY, THE FINANCIAL LEVERAGE INVOLVED WITH INTEGRATING OPERATIONS IS NOT AS GREAT AS IT IS WITH MARKETING INTEGRATION
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MARKETING STEPS TO DATE
BEFORE DISCUSSING OUR THOUGHTS ON OPERATIONS INTEGRATION, IT IS WORTHWHILE REVIEWING THE MARKETING STEPS WE HAVE TAKEN TO DATE
RECIPROCAL FREQUENT FLYER PROGRAMS
EXTENSION OF AA CORPORATE AND TRAVEL AGENCY PROGRAMS TO TWA FLYING
COMBINABLE FARES AND CONSISTENT FARE RULES
RECIPROCAL AIRPORT CLUB ACCESS
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MARKETING STEPS IN 2ND HALF 2001
DURING THE 2ND HALF OF 2001, WE EXPECT TO CONTINUE WITH ADDITIONAL MARKETING STEPS
MORE ROOM RECONFIGURATION ON TWA LLC AIRCRAFT WILL BE EXPEDITED, WITH THE GOAL TO COMPLETE ALL AIRCRAFT THIS YEAR
INFLIGHT PRODUCTS AND SERVICE LEVELS WILL BE MODIFIED TO CONFORM TO AA’s WHERE POSSIBLE
AIRPORT CO-LOCATION AT SEVERAL AIRPORTS WILL LIKELY BE POSSIBLE BY YEAR-END, WITH SPECIAL ATTENTION FOCUSED ON HUB CITIES
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OPERATIONS INTEGRATION OVERVIEW
OPERATIONS INTEGRATION IS NOT ONLY COMPLEX BECAUSE WE HAVE DIFFERENT AIRCRAFT; WE ALSO CONTROL OUR OPERATIONS WITH DIFFERENT AUTOMATION SYSTEMS
THROUGHOUT INTEGRATION, WE MUST WORK HARD TO MINIMIZE CUSTOMER SERVICE FAILURES
DESPITE THESE CHALLENGES, WE BELIEVE IT IS POSSIBLE TO INTEGRATE OPERATIONS AT A STEADY PACE AND TO START RECOGNIZING EFFICIENCIES THIS YEAR
THE KEY IS TO FULLY UNDERSTAND THE INTERDEPENDENCIES AND CRITICAL PATH ITEMS
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LONG LEAD TIME ITEMS
OUR CURRENT THINKING IS THAT FULL OPERATIONAL INTEGRATION MAY TAKE AS LONG AS 3 TO 4 YEARS
THIS IS DRIVEN BY AIRCRAFT MODIFICATION, WHICH IS BASED ON PARTS DELIVERIES TAKING AS LONG AS 18 TO 24 MONTHS
IF THIS PRELIMINARY DATA IS CORRECT, WE WOULD BEGIN CONVERTING AIRCRAFT TO AA SPECIFICATIONS IN LATE 2002 OR EARLY 2003
THE AIRCRAFT CONVERSION SCHEDULE IS SIGNIFICANT TO FLIGHT CREW AND MAINTENANCE INTEGRATION, BOTH OF WHICH ARE GOVERNED BY SPECIFIC FAA OPERATING PROCEDURES
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FLIGHT CREW/MAINTENANCE INTEGRATION
CONCEPTUALLY, AS EACH AIRCRAFT IS MODIFIED TO AA STANDARDS, IT PASSES ACROSS THE “FENCEâ€
OUR CURRENT TENTATIVE AGREEMENT WITH OUR PILOTS UNION ALLOWS FOR A PILOT “FENCE†THROUGH DECEMBER 31, 2004
TO THE EXTENT THAT EXISTING TWA AIRCRAFT ARE RETIRED OR MODIFIED FASTER THAN TWA PILOTS ARE RETIRING, TWA PILOTS WOULD BE ALLOWED TO CROSS OVER THE “FENCEâ€
THIS PROCESS ALLOWS THE EXISTING AA PILOT BIDDING SYSTEM TO CONTINUE, WHILE AVOIDING EXTRAORDINARY TRAINING REQUIREMENTS
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AIRPORT/RESERVATIONS INTEGRATION
AIRPORT AND RESERVATIONS INTEGRATION CAN FOLLOW A MUCH DIFFERENT SCHEDULE
THE PRIMARY TECHNICAL ISSUES DRIVING AIRPORT AND RESERVATIONS INTEGRATION ARE AIRLINE MARKETING CODE AND CRS HOST CONVERSION
IT IS TECHNICALLY POSSIBLE TO CONVERT TWA FLIGHTS TO PREDOMINANTLY AA MARKETED FLIGHTS (AA*) VERY QUICKLY
THE QUESTION IS WHETHER WE CAN PRODUCE QUALITY CUSTOMER SERVICE AS QUICKLY
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CHALLENGES TO AIRPORT/RESERVATIONS INTEGRATION
THE REAL CHALLENGE IN AIRPORT/RESERVATIONS INTEGRATION IS CONVERTING TO A COMMON REAL-TIME SYSTEM FOR OPERATIONS. WITHOUT THIS CHANGE:
AIRPORT AGENTS ARE LIMITED IN THEIR ABILITY TO PROVIDE SERVICE TO ALL CUSTOMERS
RESERVATIONS AGENTS FACE SITUATIONS WHERE THEY HAVE INCOMPLETE PASSENGER INFORMATION
GIVEN THE CRITICALITY OF THIS ISSUE, WE HAVE FOCUSED CONSIDERABLE RESOURCE ON EXPEDITING THE CONVERSION OF TWA’S HOST SYSTEM TO SABRE
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KEY DRIVERS IN TWA’S SYSTEM CONVERSION
WE DO NOT YET HAVE ALL THE ANSWERS, BUT FOUR KEY ISSUES SEEM TO DRIVE THE SYSTEM CONVERSION
INFRASTRUCTURE FOR NEW SABRE HARDWARE AT EACH TWA AIRPORT LOCATION
INTERFACES BETWEEN SABRE AND TWA’S COMMERCIAL SYSTEMS CONTROLLING OPERATIONS
TRAINING TWA’S OPERATING PERSONNEL, PARTICULARLY AIRPORT AND RESERVATIONS AGENTS
SABRE/WORLDSPAN INTERFACE SOFTWARE TO ALLOW A PHASED AIRPORT CONVERSION
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TIMING OF SYSTEM CONVERSION
GIVEN THAT WE DO NOT HAVE ALL THE ANSWERS AT THIS POINT, IT IS VERY DIFFICULT TO COMMIT TO TIMING OF CONVERSION
AT THIS JUNCTURE WE CAN COMMIT TO CONVERSION BY EARLY 2002, RECOGNIZING THAT IT WOULD BE QUITE CHALLENGING TO IMPLEMENT THIS CONVERSION DURING ANY PEAK TRAVEL PERIOD
WE ARE EXPEDITING THIS EFFORT WITH ALL AVAILABLE RESOURCES
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INTERIM CODESHARING PLANS
DESPITE ALL THE CHALLENGES WITH DELIVERING PERFECT CUSTOMER SERVICE IN A CODESHARE PRIOR TO SYSTEM CUTOVER, WE WILL LIKELY START A FAIRLY MODEST LEVEL OF CODESHARING LATER THIS SUMMER
THIS WILL PROVIDE US SOME SCHEDULING FLEXIBILITY TO PURSUE BETTER OVERALL SYSTEM REVENUE OPPORTUNITIES
IT WILL ALSO GIVE US VALUABLE EXPERIENCE SHOULD UNFORESEEN EVENTS DELAY TWA’S CUTOVER TO SABRE
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LABOR STATUS
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LABOR INTEGRATION
BRINGING TOGETHER TWA AND AA EMPLOYEES WILL BE KEY TO A SUCCESSFUL INTEGRATION
PRIOR AIRLINE MERGERS HAVE STUMBLED BECAUSE OF LABOR ISSUES
HOWEVER, THE TRANSACTIONS WE ANNOUNCED IN JANUARY, INCLUDING TWA, WERE SPECIFICALLY CONSTRUCTED TO BE BENEFICIAL TO LABOR, AS WELL AS TO SHAREHOLDERS AND CUSTOMERS
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APA AGREEMENT
ON APRIL 9, IN CONJUNCTION WITH THE CLOSING, AMR AND THE APA ANNOUNCED A TENTATIVE AGREEMENT ON TRANSITION RELATED ISSUES
THE AGREEMENT DID NOT ADDRESS SENIORITY INTEGRATION
THIS AGREEMENT WOULD PROVIDE FOR THE SMOOTH INTEGRATION OF TWA INTO AMR WHILE ENSURING DESIRED PROTECTIONS FOR AA’S PILOTS
APA’S BOARD OF DIRECTORS IS SCHEDULED TO VOTE ON THIS AGREEMENT THIS MONTH
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LABOR INTEGRATION
WHILE MANY ISSUES WOULD BE ADDRESSED WITH A RATIFIED APA AGREEMENT, THERE ARE STILL SOME OUTSTANDING ITEMS:
SENIORITY LIST INTEGRATION NEEDS TO BE DETERMINED BY THE UNIONS AT AA AND TWA
APA AND ALPA
APFA AND IAM
TWU AND IAM
AN INTEGRATION PLAN FOR AGENTS, WHICH ARE NOT UNIONIZED AT AA, BUT ARE REPRESENTED BY THE IAM AT TWA, NEEDS TO BE FINALIZED
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LABOR REPRESENTATION
FOR THE IMMEDIATE TERM, TWA EMPLOYEES WILL CONTINUE TO BE REPRESENTED BY THEIR EXISTING UNIONS
ONCE SENIORITY INTEGRATION ISSUES ARE RESOLVED, WE ANTICIPATE THAT AMERICAN’S UNIONS WILL PETITION THE NATIONAL MEDIATION BOARD TO ALLOW THEM TO REPRESENT THE TWA EMPLOYEES
41 PM latreal wrote: 
38 AM firstamendment wrote: 
