American Airlines Group Inc. (AAL) Earnings Call Transcript & Summary

Hey, everybody. This is Hunter Keay of Wolfe Research. Thanks for joining. I appreciate everybody kind of making these quick transitions from one webcast to the other. I'm here with the American Airlines guys; Robert Isom, Derek Kerr. Who's back there? Is it Don?

Don and Vasu.

Okay. Great. Awesome. I didn't know you are going to be here. That's wonderful. We have a huge interest. There's a lot of people still dialing in. I'm going to get right into it, and I'll turn this over to you guys. You have until -- you have 30 minutes. So 28 minutes now. And then we get into the Q&A, and we look forward to hearing from you and hope to have a good discussion. So I'll turn it over to you, guys. Thank you.

Thanks, Hunter. It's good to be here today. And good to see you. It's been, what, middle of March that we last talked?

Something like that.

Yes. It seems like forever ago, but really not. So anyway, I appreciate the opportunity to be here virtually. As you know, we have -- we just provided an update just 2 weeks ago on our first quarter earnings call. Not a heck a lot has changed over the last 2 weeks. So I just want to briefly recap how American is responding to the crisis that we and the entire industry are facing. Never before have we encountered such a significant challenge, and in the face of unprecedented adversity, the American Airlines team has done a phenomenal job taking care of our customers and each other, and I'm incredibly proud of what our team is doing every day. In light of the current environment, we have acted quickly to take care of our team and customers, reduce our costs and improve our liquidity position. We've enhanced our cleaning procedures, and we've recently started requiring masks for our customer-facing team members and customers alike. We've temporarily relaxed our seating policies and adjusted airport procedures to encourage distancing. We're confident these measures are working as evidenced by the significant decline in active COVID cases that we've seen with our own in-flight teams. We're reducing our costs and rightsizing the airline for the current environment. As we discussed on our earnings call, we plan to reduce our 2020 operating and capital expenditures by more than $12 billion. Most notably, we cut system capacity by 80% in April and May, and 70% in June. And we accelerated the retirement of 4 aircraft types; our Embraer 190s, Boeing 757s, Boeing 767s and Airbus A330-300s, along with a number of our older regional aircraft. And since our earnings call, we've announced as well that we are putting even more aircraft into long-term storage, including our A330-200s and certain older 737s. These fleet changes remove operating complexity and bring forward significant cost savings and efficiencies, and additionally, we suspended nonessential hiring, paused pay increases, reduced executive and Board compensation, deferred marketing event and training expenses and implemented voluntary leave and early retirement programs to reduce labor costs. We've taken a collaborative approach with our team and had great success with close to 40,000 team members opting for an early retirement or reduced work schedule or partially paid leave. As we discussed on our earnings call, we continue to expect the end of the second quarter -- to end the second quarter with approximately $11 billion in liquidity, which includes the assistance from the payroll support program as well as the $4.75 billion loan that we recently applied for. While I don't want to get into specifics, we continue to have very productive conversations with the treasury department and its advisers. Treasury has been nothing but fantastic to work with through these unprecedented times, and we remain very confident that we will move forward with this loan in a prudent and efficient manner. We continue to expect that our average estimated cash burn rate during the second quarter to be approximately $70 million per day, which we define as cash receipts plus disbursements including debt and principal and interest. Importantly, that rate is expected to decline to approximately $50 million per day for the month of June as our cost initiatives gain traction. Aside from regular debt amortization payments, we don't have any large non-aircraft debt maturities for more than 2 years, outside of the $1 billion 364-day delayed draw term loan facility we arranged in March. We still have a lot of difficult work ahead of us. We're squarely focused on getting through this period of uncertainty. We're very confident, though, that through the dedication of our team and the actions that we have taken and that we will take, we will emerge from this crisis in a strong and incredibly competitive position. So Hunter, with that, I'll turn it over to you, and my friends here, Derek, Don, Vasu. They can help out in any detail that you want to get into.

Well, look, I really appreciate you guys taking the time to be here. I know this is not an easy time for the industry. And you've got a lot of calls on your time. So thank you very much, guys. Although you're not six-feet apart, just you know...

Pretty 6-feet myself. Derek and I are both over 6 feet, so...

That's fine. The scale is all messed up. Okay. So yes, if things -- if business travel is impaired for a long time, I hate to use the word permanent, but let's just say for a very long time, particularly long-haul international. How does American position itself or size itself to make more money or to make money off of a predominantly leisure mix?

Okay. So just to start with, we're pretty well situated in terms of our assets to take advantage of a domestic rebound. And we do anticipate that it will be domestic focus. When it does come back, we anticipate that it's more leisure than business. But our hub assets, incredible connecting opportunities, that's where our strength is. And we anticipate that it will be a longer period of time for international to come back. So we're going to have to be sure that we adjust our network accordingly. And so from that perspective, we are taking both short-term and long-term actions. Right now, we're really trying to identify where the market will be next summer and later this fall. You'll see us, I think, continue to really look at international to make further reductions. On the domestic front, we're happy to go into more detail on that, but we have a network today that is ideally suited to help the country get back on its feet, and we're seeing some modest improvements. It's a long way to go, but modest improvements in terms of loads on our flights today.

I thought you put a 787 on Philly to DFW. I think it was last week. And the schedule was weird, and I'm not suggesting that, that's not part of a broader puzzle, obviously, it is. But broadly speaking, thematically, it sort of got me thinking. What about the idea of using more wide-bodies in the domestic market? You can facilitate distance between passengers. You can minimize your seat costs because certainly these low-cost carriers are going to be hungry for their own volume. And you have the opportunity to basically eliminate any potential for any spill should there, of course, be any, which there won't be. But the idea of using these wide-body assets in the domestic market, particularly in a low fuel cost environment. Tell me why that's not a good idea for you guys.

Vasu?

Yes. Actually, it's kind of the converse of that, Hunter. I think you'll see a lot less wide-bodies in domestic, in part because the trip costs are so high, right? With such high trip costs on that airplane. And then like you say, in an environment where there is less demand to be able to fill those things, they become very expensive, very, very cash intensive, very, very fast. So as far as distance is concerned, I think, there's other things that we can go and do in the interim to do it, which is more economical for the airline but still satisfies the customer. So that's something which is more spurious, and indeed the 787, which we saw last week was also already in the process of being turned into a 321 this week. That was only their position for a long-haul network, but now actually is shrinking increasingly. So we don't -- we're not probably going to go in the world. We have more wides. Domestically, it's probably even less.

So in that sense, what's your narrow-body, wide-body mix at American Airlines, 3 to 5 years from now? I mean, is there a scenario when we have maybe 100 wide-body aircraft in total and you're using the 321XLR to reach places in Europe and even South America, and you only have just this basically small handful of wide-body aircraft. Is that -- if we forget the coronavirus demand, I mean, just the returns on wide-body aircraft are generally lower anyway. Is there a scenario where you might just really avoid wide-bodies permanently going forward because of the true operating costs and the lower ROIC on them?

So Hunter, let me start on that. The first thing that we've focused on is really getting fleet simplification. And so even when we met back in March and we've been certainly talking about this. Over the years, we've had a desire to reduce the complexity in our operation. We had fleet subtypes and different operating partners that one time, I think, accounted for 100 different variants in terms of plane types and operators and seating configurations. We've done a remarkable job of getting that number down to 10 -- 10 to 15 different subfleet types. And we intend to take advantage of that. So from a wide-body perspective, we're down to 78s and 777s. We have an order book that is very flexible in that those 78s that are coming in, they can serve as potential growth or they can take out additional 777s over the long run as that fleet ages out. So a lot of it's going to have to do with where the market -- how the marketplace develops. But we like where we're situated in terms of our hubs. As I said before, DFW being as large as it is or will be, I think it creates an ideal opportunity for launching traffic, both to Atlantic, South America as well as Asia. And then from an East Coast perspective, we're a little bit lighter served. As you mentioned, we have the XLRs coming in that can play a big role. So we intend to take advantage of all those fronts, but it's going to really, I think, matter how well we develop our hubs domestically. Vasu?

Yes. Look, Hunter, the only thing I would add is you're on to something. And that so much of our planning is around building flexibility into the airline, which makes that really obvious, but the history of airlines, they haven't been those flexible organizations that can react nimbly to demand. And in that, that is something where our huge concentration domestically or big domestic connectivity was actually an asset for us. So to your point, yes, we're preparing for a range of scenarios, one in which international has a very long and muted comeback, in which case either the XLR can be used to go and fly international or the XLR can fly domestic and long-haul segments in -- across the Americas. But also if indeed international comes back fast, we have levers, including the 78s, as Robert mentioned, or even the 330-200s or more utilization on the 777s, which can go and meet that demand. So we're trying to build for a range of possible outcomes and design the infrastructure of the business where we can respond to it quickly.

Yes. And we don't have any -- we don't have any wide-body CapEx pass next year, Hunter. So given that the -- any growth in wide-body is exactly what you said is those XLRs that is coming in 2024, 2025. But we don't have any plans. Once we pull down all the wide-bodies in this -- with the 76s and the A330s, we don't have any plans over the next 3 or 4 years to grow that wide-body fleet any bigger than the 78s that are coming in.

And Hunter, as you know, we plan to continue to work with our joint business partners. And whether that's BA and IAG, Madrid and London Heathrow or JAL through Haneda and Narita or Qantas now, we have a lot of opportunity to make sure that we're using assets across carriers in the best possible fashion.

Okay. Here's a question that just came in. We had a bunch of questions from the audience. Thank you for these, keep them coming. How should we think about the value of the AAdvantage program as it relates to an additional source of cash? How much money could be raised from the program if it's pledged as collateral for additional debt? And is the AAdvantage program being considered as collateral for the U.S. government secured debt?

Yes. I think the AAdvantage program is considered as collateral for the government debt. So we have been working with the government. We have an appraised value of that program that should be -- can -- anywhere from $18 billion to $30 billion depending on the way you want to look at it. So it's a significant asset that's been appraised. We are working with the government today. We have not finalized anything. But that plan would be to use that asset as collateral for that loan. And to have the capabilities to do other things with that. So -- and not to preclude us from doing prepaid miles if we needed to or other forms of liquidity from those -- from Citi and Barclays, our partners, who have been with us this whole way and they are willing to help us as we move forward. So it is -- that is where we are, that's where we're going. The deal is not done yet with the government. We're still working with them, but I fully expect it to be -- as we have announced and said that we're going to be at $11 billion at the end of the second quarter with that government loan, I fully believe it will be done and complete by that time. And we're working really well with treasury, they're working well with us, and believe it will be done by that time.

How does it actually work, lending against this program? I mean, the fact -- everyone agrees that the program is very valuable. But I think where the debate is the program is not worth anything outside of the airline. A Heathrow slot is worth something if American goes away, 737 MAX is worth something if American goes away. If American goes away, what do you have with the loyalty program other than just a list of names. So how do you...

That's very valuable. That's massively valuable, and it's -- and even in a -- I mean, number one, American is not going away. So you can take that one off the list. So -- and in an environment, if you get down to some other path that this program survives, it survives in anything that you do. It's the biggest asset we have in the company. We have slots, gates and routes we leased against. We have aircraft that we leased against, as you said. This is just another asset that we have and we lease against with a value of -- an appraised value that's out there today. So we haven't figured out the total structure and where we go. That's why we're working with the government. That's why it's not complete yet. So we're working through that process. We're working collaboratively with the PJT team and the Cleary team to work through that, and the government is on board with that. So we will have a structure. We will have it complete by the end of June, and we'll be ready to roll by that time.

Okay. Thanks, Derek. And then I've gotten -- this question came in 4 different ways. So I'll just ask the most simple one. Have you considered doing a secondary offering? Another derivative of that question is, why haven't you done a secondary offering? So you can just answer that question in any way you want, but that's getting like 4x or 5x.

No. I think, Hunter, I mean, we said it on the call, and our #1 priority is to get the government loan done. I think that is the most efficient financing that we have an opportunity to do today, which is, as we've talked about, the terms are there, the rate and the LIBOR plus 350 is there. It's the most efficient financing that's out there today. We have other opportunities that we could do today that I think become better after the government loan gets done. So there is some uncertainty out there that we won't get this done and that we won't come to an agreement and that this is going to be difficult like the ATSB loan and other things that we had. We don't believe that. So it's important for us to provide the confidence to the Street. It's important for us to get that deal done, put that in the bank and then move forward. It's a prepayable loan. So if there are other opportunities that allow us to raise money to pay that off quicker, then we can do that. So we have other opportunities. We have things that we can do, whether it's another secured debt. We'll have significant amount of unencumbered assets when we're done with this. We do have to refinance the 364-day term loan, which is over-collateralized, in my view, at this point in time. So I think the right answer for us is to go forward, get the government loan done and follow that up with other types of things that other people have done, whether that's secured debt, whether that's a secondary, whether that's AAdvantage miles, whatever those type of things are become, I believe, better opportunities once we get the government loan done. And so that's the track we're taking. It might be a little different than others are doing, but I believe that's the right track for us as we move forward to get us to where we need to be at the end of the second quarter, and then possibly follow that up with other transactions as we see what the environment is, going forward.

Okay. And Derek, we all know that you have a $2 billion minimum cash covenant, but what's a practically minimum acceptable cash level for you when you think about working capital and interest expense and things like that, what's a minimum comfortable cash level for you?

That depends on what the outlook is, going forward. I mean it really does. I think we don't hit any trigger until $2 billion. We would never take it down to that $2 billion, as you know. As we've had a minimum cash number at $7 billion, which has enabled us to be at a higher cash position when we went into this, so the right move is we went into this. So is that $4 billion, is that number $3 billion? It all depends on what the trajectory is going forward. In a low trajectory, you wouldn't want to take it past a certain point. If things are turning the other direction, then you're fine going down to those numbers and bringing it back up. So we don't have a number that says, "Hey, we won't go past X." It all depends on what the trajectory of the recovery is and what we're seeing as we move forward.

Okay. And then just one quick one while I'm talking to you, Derek, on cash. Are you still looking at $500 million minimum cash pension funding requirement next year? Is it still a good number to keep there in place?

That's a good number. Yes.

Thank you. And then I don't know if there's a question for Robert, but Vasu. But what is Alison Taylor -- Alison Taylor is the head of effectively corporate sales? What is she telling you right now that she's hearing from her corporate buyers? Is there a disconnect between corporate -- the individual's willingness or appetite or desire to travel, but there's a bottleneck at the corporate level that's going to be harder to break through? How does she expect that to spool up? Or is there this potential difference between a willingness to take business trips and an ability to take business trips?

Yes. Don can help elaborate on this, too. But look, Alison is conducting calls with corporates, with TMCs, with everybody multiple times a day. And what we hear is that people want to get back out and start traveling from a business perspective. Their ability right now with a lot of corporates that have travel bans in place is made difficult. But we do see signs that as things are starting to open up that even things like charters are on the table.

Yes. And I'll just add, corporates are going to be the last part of the government or business travel, right? So we're going to see the unmanaged business travel start back sooner. And we're actually already starting to see that in the numbers. So we were very negative early on in terms of bill 0 to 6. We saw lots of cancellations, and not -- the 0 to 6 for us now is actually quite positive. And that is not being driven by the large corporates. The large corporates really aren't doing a lot of traveling, and that's being done by unmanaged business. So we're starting to see the unmanaged business come back. And we expect, as we kind of head to the fall, we'll see a relaxing of some of the corporate restrictions.

Okay. And how does the debt balance that you have right now impact your decision to cut capacity, just given the fact that there's just a raw amount of cash that you have to generate to service this debt? How is that factoring into your ability to caught in a worst-case scenario?

So I don't think it's impacting our capacity. I mean what Vasu is doing is he's going to do it. He's looking at from a cash perspective, what's going to be positive, where we're going to be. What we have to do is we have to rightsize the airline from a cost perspective to make sure that what we fly next year is cash positive, okay? So we're doing everything we can. We are going to look at all of the staffing in the fall, all the staffing next year. Everything that we do from a cost perspective is under review at this point in time. All CapEx is under review at this point in time. So we are going to go through and rightsize this airline from a cost perspective to make sure that whatever we fly next year and what we think from a revenue environment, is -- will make us a profitable airline next year. That's imperative. That's what we have to do. That's the steps we're all taking from a finance perspective. So would we like to come out of this with less debt? Yes. But we still are going to over the next few years. Still, we have -- we don't have any -- as Robert said, we have $1 billion -- the 364-day that we have to do. We have $750 million unsecured 2 years from now. The rest of it is just aircraft debt that we pay off over time, that will continue to reduce that debt over the next 5 years by a significant amount from where we're at. Now it's a higher portion of where we're at. To get through this unprecedented time, but it's still -- the track is still to go down that path. What we have to do is we have to get this company rightsized from a cost perspective in order to have that free cash flow come back like we thought we would have had in 2019 -- in 2020, actually, where we're at to go down that path that we had set forward from reducing our debt and reducing our debt profile. All of the cash will go to -- all of the excess cash will go to debt repayment. Everything will go to that over the next 5 years. So it's what's the imperative that we have to do is get this company cash positive as soon as possible, driving our cash out per day as low as we can and rightsizing the costs and the capital of this company, so that we can fly the schedule that Vasu thinks is right going into next year. And that's what the process we're going to do over the next 6 months.

Great. Thank you, Derek. A couple of questions. There's still a lot more questions. I'm not going to be able to get to all these guys. Thank you for asking them. Is the second government loan imperative to paying off coming EETC debt. And then related to that question, how do you roll the EETC debt with used plane values falling?

There's no -- no -- we're not going to roll EETC debt at this point in time. We're just going to pay it off as we see coming due. The government debt is required for us to get through this scenario where there's no revenue coming in the door. That's what the government debt is about. So we're working through that $4.75 billion term loan to get that done to have our liquidity at $11 billion at the end of the second quarter to get liquidity as high as we can while there's uncertainty on what the revenue environment is going to be. So that's the purpose of the loan. I think that's the purpose of everybody who's raising liquidity at this point in time. On the second part of the question, we have no plans to go refinance in our -- as we look forward to refinance, those would be unencumbered. Those aircraft would come unencumbered. We might be able to do other things with them, but it's not like we're going to go out and do EETCs on those aircraft that come out. But we could -- all that does is take our unencumbered assets from $11 billion and increases them as we pay those off for us to do anything if we need to in the future.

Okay. And then, Don, I'm asking this question to every airline. So just bear -- simple one-word answer will suffice. U.S. domestic load factor in 2019 for the aggregate industry was 85%. If I set the over-under for 75% at an industry level for 2021, not an American Airlines question, but the industry, will you take the over or the under?

I -- for the whole year?

In a whole year.

I don't have a sense of, but what I will tell you right now, in April, we had a 15% load factor, right? So far, month-to-date in May, we're at 35%. And the trends as we look at May to June remain...

2021. Don, 2021, to be clear.

Yes. It all depends [indiscernible] in 2021, right? We'll have to see whether seats fill up.

And Hunter, just for -- look, as Vasu has said, we're going to be incredibly flexible in terms of our capacity and our network next year. So you'll see us trying to get back to where we can actually yield manage and price and then sell it to customers, the ancillaries that they've been accustomed to in the past. We know there's a lot of changes out there. But operating in a low load factor environment is not the goal of this airline.

Yes. Right. Okay. All right. Well, I have to go. I have to -- I don't know, we have something like 50 more questions. Here's a one -- here's a quick one. Will Flagship Lounges open before Admirals Clubs? There's a question for you.

So yes. Just let me help out with that. Look, Flagship Lounges were all designed around a business and first-class product that really isn't being purchased right now. So in terms of Flagship Lounges, those are going to be closed until we see any type of demand that warrants opening them back up.

Okay. Well, it's 11:45. Guys, I really appreciate taking the time. Like I said, it's not an easy time for you guys and for anybody for that matter, and I really appreciate you doing it. So good luck with everything, and we'll be in touch.

Thanks, Hunter. Appreciate it.

Thank you so much.