1	TWU President’s Council Report State of the Industry 10/24/2006
2	Prologue: Is restructuring finally over? Much has happened since April 2003: United spent three full years in bankruptcy, extracting labor concessions twice US Airways entered bankruptcy twice over that period and took three rounds of concessions from their employees Delta and Northwest are following the same game plan Regional partner cascade effect Work rules have been relinquished Outsourcing has eliminated thousands of jobs Defined Benefit Pension Plans have been frozen and replaced Continental employees hit with concessions in March 2005 Over three years later, where does American stand, and where do TWU members stand?
3	Overview: Information for decision making Industry Trends Air Transport Association Data AMR and American Financial Condition Competitive Position Labor Cost Metrics Pay Comparison and Work Rule Update Aircraft Maintenance Technicians Plant Maintenance Mechanics Cleaners Stores Clerks Dispatchers Fleet Service Clerks Simulator Technicians Instructors (Pay only) Q&A
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5	The Bottom Line: $38.6 billion in industry losses since 4Q 2000
6	Industry Metrics: Is Recovery Imminent?
7	Traffic has finally exceeded pre-9/11 levels
8	Traffic recovery has not resulted in revenue recovery
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11	Pricing trends are positive but domestic yields are still below highs reached in 2000
12	Growth in fuel expense has outpaced cost reductions in other areas
13	Labor and fuel CASM
14	Fuel costs have tripled
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18	Industry recovery? Probably, but a fragile one. The domestic revenue environment is now a low cost one International opportunities are key – competition is great Revenues have strengthened as a result of fuel cost pressures and capacity constraint. Downside risks to fares include the following: Supply side - Capacity will grow in 2007 pressuring fares Demand side - Economic growth is underlying determinant of traffic and fare strength Will lower fuel = lower fares? Yes, lower fuel prices, but not that low Oil prices are likely to remain over $60 per barrel in the long run Barring political shocks or worldwide recession, these should stabilize here with OPEC supporting price Opportunities to reduce non-fuel costs are now limited Airlines are leaner than ever Rock breaks scissors – an economic slowdown will weigh more heavily than falling oil prices Traffic and ticket prices will fall again in a slowdown Average PPG for jet fuel was 60 cents between 1991-1994 Stable oil and stronger revenues will result in industry profits in 2007 Current trends must continue and not reverse
19	American’s Financial Performance
20	AMR cumulative losses
21	AMR’s cash balance at a record high
22	Capital structure is very unhealthy
23	Without profits, AMR’s increase in cash has necessarily been through new debt
24	Unit revenue and cost trend
25	Excluding fuel, costs are under control
26	Labor cost trend
27	Accrued pension liability is $5 billion 18% of the Company’ book value Under-funded portion was between $2.3 billion and $3.2 billion as of 12/31/05 Most other carriers are now out from under DB plans. All major airlines except for AA have negotiated replacement plans with unions – (exception is CO mechanic and related employees). AMR expects to contribute approximately $250 million to its defined benefit pension plans in 2006. Contributions reflect the provisions of the Pension Funding Equity Act of 2004. The Company’s 2006 contribution was $223 million as of 10/13/06. New pension legislation will ease funding requirements 10 years to fund at more favorable interest rates AA expects funding requirements to be $360 million in 2007 Without the new legislation funding requirement would have been over $1 billion
28	Fuel hedging SEC Filing 9/25/2006: 36% hedged at $66 per barrel for 3Q06 “and an insignificant amount of its estimated fuel requirements thereafter”
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31	The threat of consolidation There is great speculation about industry consolidation US Airways merger with America West UAL recently hired Goldman Sachs to explore “strategic options”. Low market caps; bankrupt airlines looking for financing need a story to tell Any major combination would be highly complex Fleets, networks, workforces, alliances, IT systems, financial obligations Consolidation means competition with low cost, mega-network carriers This is AA’s niche - a battle for market share would ensue
32	American’s financial condition – Tied to industry conditions Fares have recovered Oil prices are down from $78 highs and could finally stabilize Cash balance is at a record high The Company continues to seek new revenue opportunities International growth Maintenance contracts USPS contract The Company’s pension problem has eased 10 years to fully fund Strategic value in positive employee relations Commitment to business process re-engineering as cost focus Wall Street sees profitability ahead!
33	2Q06 Competitive Benchmarks
34	Profitability comparison
35	AA’s liquidity lags the industry despite holding $5 billion in cash
36	Only DL and NW have weaker balance sheets than AA
37	AA unit costs are among the industry’s highest
38	Yield premium is critical
39	Changing cost structures AA has reduced labor cost percentage less than any restructured competitor Fuel expense percentage has also risen to one of the highest in the industry
40	Competitive conclusion: AA faces significant challenges Restructured Legacies and LCCs will provide intense competition UA and US are well positioned, DL and NW are leaner now too New dynamic means domestic pricing will remain under pressure American’s labor costs are creeping higher relative to the competition One step forward, two steps back phenomenon Some of this is driven by more outsourcing at competitors One of the only remaining more costly Defined Benefit Plans (CO, AS) American is fully exposed to fuel price risk Hedging at $66 only buffers against catastrophic change Ineffective hedging is costly Most airlines are in the same situation AA must rely on continued strengthening of industry trends to be successful Not a cost leader Must leverage strengths to be a revenue leader
41	Labor Cost, Compensation, and Work Rule Surveys
42	What is a Contract Worth?
43	And then there is outsourcing so there are fewer employees to pay…
44	AA’s labor CASM is now the industry’s highest
45	Ground employees per departure
46	Revenue per employee
47	Pay and benefits per employee
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49	Aircraft maintenance trends
50	Aircraft maintenance outsourcing
51	Maintenance jobs
52	Comparables are proprietary and always changing
53	Aircraft maintenance technician
54	Fleet service clerk
55	Plant maintenance mechanic
56	Stores clerk
57	Aircraft cleaner
58	Dispatcher
59	Simulator technician
60	Pilot instructors – an eclectic mix
61	Money or jobs? Trading scope to preserve pay United Outsource all utility (airplane cleaner, parts cleaner, grounds keeper, janitor, utility man, cabin serviceman) jobs Unrestricted right to outsource fueling Unrestricted right to outsource cabin in 8 named cities Outsource all cargo and mail jobs including runners “Eliminate the language in Article II-C (Ramp) to allow the Company to eliminate the 40-flight departure threshold.” Delta Non-union (no restrictions) Northwest Outsource all stock clerk work except MSP and DTW (63 jobs) Outsource all cargo except 10 named cities (38 jobs) Outsource cities with <50 flights per week (492 jobs) Outsource food dock (126 jobs) US Airways Outsource cities with 69 or fewer flights Outsource all utility except CLT and PIT Outsource all GSE except CLT, PIT and PHL Outsource all Plant Mtc. except CLT, PIT and PHL Scope determined by Co.
62	Money or Jobs? Alaska Airlines example
63	Work Rule Survey
64	Mechanic and related work rules
65	Mechanic and related work rules
66	Mechanic and related work rules
67	Ramp work rules
68	Ramp work rules
69	Ramp outsourcing and scope
70	Dispatcher work rules
71	Dispatcher work rules
72	Stores work rules
73	Stores work rules
74	Simulator technicians
75	Simulator technicians
76	IAM healthcare summary The IAM compiled this list which appeared on the DL143 website Health care costs are difficult to compare in a simple manner Different Co-insurance Different plan types (PPO, POS, EPO, HMO, indemnity) Different co-pays Different Deductibles Plan offerings and coverage Who is covered (i.e. some airlines offer full coverage to full time workers only). Company cost is usually based on a blend of the above factors
77	Q&A