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

Good morning, everybody, and thank you very much for, I guess, logging in as opposed to being in the room. We were hoping we'd be in Boston for the 13th Annual Global Transportation Conference hosted by Cowen, and it's being held in conjunction with the first annual mobility conference. I'm Helane Becker, Managing Director at Cowen and senior airline analyst. And this morning, we are so fortunate to have with us American Airlines' leadership team -- some of the leadership team. We have Robert Isom, President of American Airlines; Derek Kerr, CFO; and Vasu, Revenue Management. I know I didn't get anybody's -- I probably got nobody's title correct. So Robert, I'll let you fix that. So do you want to make a few remarks before we kick off the Q&A?

Yes. That'd be great, Helane. Thanks again. I've prepared a few things. And yes, we have Derek Kerr, our CFO here; and Vasu Raja, who heads up our revenue -- Chief Revenue Officer for American Airlines. So great to be here this morning. Good morning, everybody. And Helane, thanks again for the opportunity to be here. This is always a great event, even when it's disappointing, a virtual event. Hopefully, that's something that we can correct for next year. Before we get into questions, I want to provide the latest on American's ongoing response to the crisis we and the entire airline industry are facing. It goes without saying that we have never encountered such a significant challenge, but the American Airlines team is doing an outstanding job of leading through the crisis to ensure we are well positioned on the other side when demand does recover, and it will. In the face of unprecedented adversity and uncertainty, Americans team members are doing amazing work to take care of our customers and each other. We are tremendously proud of what they continue to do every day in the midst of difficult circumstances. I would be remiss if I didn't acknowledge the news that we had to share with our team 2 weeks ago. The need for involuntary staffing reduction starting in October, which we worked really hard to mitigate as many of these reductions as possible through voluntary leave and early-out programs but absent an extension of the payroll support program, 19,000 of our team members will be involuntarily furloughed or separated from the company on October 1. This is news that we never wanted to share with our team, but it is the reality that we're facing, and we must confront it. As we continue to manage the crisis, we remain focused on 3 areas: building up cash, reducing cost to conserve the cash that we do use and adjusting the way that we operate the airlines so that customers can return with complete confidence when they're ready. American ended the second quarter with $10.2 billion of available liquidity, which included a net $3.6 billion raised during the quarter through the capital markets. We continue to expect to close on the government loan by the end of this month. In addition, we announced 2 senior secured note transactions with Goldman Sachs, totaling $1.2 billion. Our daily cash burn rate came down considerably in the second quarter from approximately $100 million per day in April to $56 million per day in May to $30 million per day in June. The improvement was largely driven by our aggressive cost actions. In total, we have removed approximately $16.5 billion from our operating and capital budgets for 2020, we continue to expect our third quarter burn rates to be below our second quarter rates and our fourth quarter rates to be lower than our third quarter rates. Our goal remains to be cash positive in 2021 as demand for air travel gradually improves. In line with previous guidance, we expect to end the third quarter with approximately $13 billion of available liquidity, assuming no additional financing activity for the remainder of the quarter. We have moved quickly to size the airline for the demand that we're seeing. Our flown capacity was down approximately 60% year-over-year in July and August, and we expect it to be down approximately 60% in September as well. We continue to evaluate our future capacity plans. And based on current projections, we expect our fourth quarter capacity to be down more than 50% compared to the fourth quarter of 2019. There is still pent-up demand for air travel, and we're seeing some gradual improvement since our last earnings call, but it's fair to say that we're still planning for a slow recovery. We've taken additional steps in recent weeks to give our customers confidence as they return to the skies. We've upgraded our Clean Commitment by adding the electrostatic spraying solution, SurfaceWise2,, to our cleaning and safety program. SurfaceWise2 is an improved -- is approved by the EPA as the first-ever, long-lasting product to help fight the spread of the novel coronavirus, and it will be applied to American's entire fleet in the coming months. The actions we are taking to ensure the safety and well-being of our team and customers are working. While we're operating a much smaller airline than we did this time last year, American's 100,000 team members are still transporting millions of customers each month. We are seeing the lowest levels of COVID-19 infection rates among our teams since the start of the pandemic. Even with our team members being on the front lines and working throughout the pandemic to support our communities and serve our customers, our team has a lower rate of COVID-19 infection compared to the national average. Notably, we have seen fewer cases of our customer-facing team members that are infected, such as our flight attendants and customer service agents than other ground -- other work groups at American Airlines. We've also made travel easier and less complicated for our customers by eliminating change fees for most domestic and short-haul international flying. Additionally, we are giving customers the ability to fly standby on earlier flights on the same day at no charge. These are new customer-friendly initiatives, along with changes to our Basic Economy fares, and the new AAdvantage lead benefits that give American's travelers even more flexibility when they fly. We still have a long road ahead of us and a lot of difficult work, but our team remains fully engaged and focused on getting through the crisis. And we're confident that through the dedication of our team and the actions that we've taken and will take, American will emerge in a strong competitive position. So Helane, that's some opening comments and happy to take any questions.

That was -- thanks, Robert. There was like a lot of information in a few short sentences. So thank you for -- actually, for saying all of that.

So a couple of things. As I look at those TSA numbers and here, you say, you have millions of passengers. And every day, people I know travel. They feel compelled to send me e-mails about their flights, and I'm sure you got similar e-mails from your friends and family about how they're packed, which is a good thing, like when people say my American Airlines flight is packed. My response is, "And is that a bad thing?" I think we want your flights to be packed. So a lot of questions in there. How do you think about like going into this winter since this year was nothing like we anticipated when we all returned to work on January 2. How do you think about the winter and coming out of the pandemic and kind of winning the recovery because I think we're starting to think about shifting to that. So when I look at TSA numbers, do I say 20% of that is American? Or do you have a greater share of that because maybe you're less exposed to New York and the Northeast where there's been low -- fewer travelers? So we'll start with that question.

Yes. So a lot in that question. Vasu can help me out. Helane, your comments and the folks that you interact with, they see the same thing I do, which is, look, I fly every week, and flights are getting fuller. But remember, we have a limited portion of our schedule that we fly. And we're coming off of a second quarter that don't remember where revenue was down 87%. So we're building off of a really, really depressed base, and we're doing our best to match capacity for demand. And I say -- what I'd tell you is as we take a look at the future, while we do see gradual improvement in bookings, and hopefully, it's sustainable, it's still too soon to tell. So the key for us is flexibility. And that is, at the end of the day, how we intend to come out of this very strong. We have to take some really decisive actions now to get our cost structure aligned for the future. But as we see more in terms of what comes back in terms of leisure, and again, Vasu will give you some more color on that, leisure travelers, and hopefully, some business travelers coming back, too, we'll make sure that we're ready to accommodate them.

Yes. And Helane, I'll just elaborate around 2 points. First, you were alluding to the question how much of the bookings that we're seeing is just kind of geographically where our network is versus something that we're doing; and then two, how we're thinking about, as you described it, winning the recovery. And we have different key words for -- we'll likely rephrase that. So to the first one, look, it's no doubt that a disproportionate amount of the benefit that travel is coming back benefits American Airlines because Sun Belt markets, Florida, Texas, Arizona and places like that, are seeing a greater rebound in bookings after they come off of their highs in both COVID counts and in case growth. And of course, our network is so disproportionately concentrated in the Sun Belt and so relatively small in the big coast that we do see a benefit from that. But the thing which we have endeavored to do is preserve the connectivity of our network as much as anything. So pre-COVID, our 2 biggest connecting complexes in Dallas, Fort Worth and Charlotte, might have been 40% of the airline. Now they're running in something like 55% to 60% of the airlines. And as we go through the winter, I think it's pretty reasonable to think that those percentages are likely to continue. And to Robert's very important point, added to that, we try to be as flexible as possible. So we have changed a number of our processes where before we built the schedule 120 days out, now we can build and revise the schedule between 75 days at the time it flies to 45 days, which is when our crews finish bidding on the schedule. We have a range of tools to even go work on a schedule after it's closed for crews without driving a lot of incremental costs. And so maintaining that flexibility is key, and that's where you see us coming into markets like Austin to Cancún or Indianapolis to Cancún. That's not necessarily a long-term reflection of what American Airlines might do but a short-term response to things that we see. And then to your second point about, as you phrased it, winning the recovery. Look, one of the things that we've been -- it was fortunate. We flew a much larger schedule in June, but one of the benefits we got out of that was that we got to see a lot of customers fly on the airplane. And it was interesting for us because our customer mix very much shifted where we spilled off maybe 20 points of our revenue mix, historically, was coming from customers that were over 40 years of age and traveling disproportionately for business, even in the summer. And it shifted to people who are under 40 years of age, many of whom had no status on the airline at all and were traveling disproportionately for leisure or at least a mix of leisure and business. They were leaving on a Monday, coming back on a Thursday but going to Dayton Beach. And so for us, as we think about, as you call it, winning the recovery, a big part of it is acknowledging that the customer is changing. And historically, the network airline business was really leveraged around a small percentage of customers who flew with us disproportionately for business. Those customers are also more likely to be older in the demographic scale, live in the coast. In short, less likely to come back to travel until we are deep, deep, deep into vaccine penetration. But there's people out there right now, and so we need to go and build a relationship with them. And a lot of how we're thinking about, as you call it, winning the recovery is bringing new customers to air travel and graduating them to higher tiers of loyalty.

Got you. I want to come back to that because I think that's really important. But I want to ask Derek a question first. And that's -- when we look at your balance sheet, you've got about $50 billion in debt at the end of the second quarter. I know you have nothing due until, I think you said on the last earnings call, the first quarter of 2022. But when I look at $1.5 billion of interest expense before you bring any money to the bottom line, and of course, you're not in a tax-paying position, how should we think about you getting that balance sheet in -- under control again as you shrink the airline to the new level of demand and maybe you have to furlough some folks next month with that debt position that I know -- I mean, we talked a little bit about it on the earnings call in the second quarter. I mean I know that debt is 3% or lower debt, so it's good cost. So how should we think about that? That question comes up a lot from investors. I'm sure you are sick of answering it, but they're -- we have to ask it, I guess.

No, no. It's what -- I mean, that's what we're going to have to do as we move forward. I mean the 2 things we have to do today, as we go forward, right, is to lower the cash burn and make sure it's down as low as it can be. And that's looking at all CapEx, whether it's non-aircraft, aircraft CapEx. So there's still work to do in those areas going forward as we continue to work with our suppliers and things as we move forward. And then it is to try to turn this airline, as Vasu was talking about, into cash positive as soon as possible, right? All of that cash will go to pay off the debt. We will continue to drive down the CapEx needs of the airline and use all that cash to go to pay off debt. So as I said, we have a period of time. We have a $750 million convert that's due in June of 2022, and we have nothing till 2023. So we have a long period of time to be able to do that, and that's what we have to focus on. So it really is incumbent on us, number one, to get the cash burn down, get us as positive cash as possible and then use every bit of cash that we have in order to pay out the debt. There may have to be some rebalancing of the balance sheet, right? I mean there's -- we did an equity deal and a convert deal in the big bang that we did just 1.5, 2 months ago. There may have to be more of that as we move forward to rebalance the balance sheet and to pay that off. But we've set it up pretty well now. We've got it pushed out 2 or 3 years. So what we're working on right now is, number one, the cash side of things; and number two, the capital side of things to make sure that we free up every bit of cash flow that we have to pay off the debt over time. I mean you know we were set up as we move forward to pay off $8 billion to $10 billion worth of debt over the next 4 to 5 years. That's still going to happen because a lot of that's aircraft debt as it comes due, and we pay it off. So unfortunately, we're starting from a higher base, but we need it to, to get through this pandemic. And hopefully, what we're doing is not tying ourselves up with long term -- as you can see, we haven't done a lot of long-term, high-cost debt to move forward. We've kind of stayed back a little bit on that, and we're trying to manage that portion of it. So that when we come out of this, we just pay off the aircraft stuff that's coming due and try to drive that down. But there will be some rebalancing of the balance sheet that we have to do over the next few years. The good part is we have time to do that.

Got you. The -- yes. I've said you don't have to pay off $50 billion down at once, so it gives you some time, right?

Correct, yes.

So Vasu, I want to go back to the loyalty program a little bit with respect to 2 things or maybe 3 things. So the first question is, as you think about loyalty shifting more to leisure from business, is there a point in time where, let's say, business traffic starts to come back a year or so from now, you shift back to business and annoy your newly found leisure customers? Or do you maintain -- is there a way to maintain the focus on both? And then the other question maybe more short-term focused is, as we look ahead to the holidays, I'm kind of thinking fourth quarter revenue might be higher than third quarter. How are you guys thinking about that?

Great questions, Helane. I'll take them sequentially. Look, to the first one, no, absolutely not, like being able to deliver a product for what's predominantly leisure-oriented travel right now in no way precludes us to -- from being able to deliver for business-oriented travel in the future on a number of different levels, right? First and foremost, historically, in this business, even through the worst of crises, the great financial crisis, post 9/11, we've never struggled for traffic, right? We've always -- within a few quarters of every crisis, airlines post typically pretty good load factors. The real issue in those past crises was generating enough yield, and this crisis is a crisis of demand, right? There's simply not enough traffic to go and build the airplanes. And so for us, it's causing us to really rethink how we approach leisure and business. And if you look at it historically, primarily through our loyalty program, we would disproportionately reward you when you flew us for business. But if, for example, you flew us for leisure with your family, those benefits will be a lot different. Well, now increasing ability to think about as how we think of the customer as a customer, not as a series of transactions. And looked at like that, you see a lot of different patterns starting to emerge, where we see people who are, like I mentioned earlier, who are traveling on what seems like a business travel pattern, but they're going to leisure markets. And so we think that what that will do that the more and more we can understand the customer and not just the transaction, one, the better we can go and plan the network. So we see already that being able to -- there are some things which are just in our wheelhouse, being able to offer the connectivity of DFW, Charlotte, Chicago, really, really work for us. But then there's other things that we're seeing really emerge out there, which are very promising for us. Phoenix has been posting really, really great load factors. And a lot of this is people going to Phoenix as a destination. So we need -- as Robert mentioned earlier, we need to keep the airline as flexible as possible. And the more we can understand the customer, the more the airlines' network will change; and then two, the more of the loyalty program will change such that we can get a disproportionate share of wallet of the actual customer. And that will enable us to go serve both a leisure-oriented travel pattern and a business-oriented travel pattern.

And Helane, to that point as well. While business traffic is off...

95%.

95% or more, one of the things that we do see is a lot of the leisure travel, it actually -- it comes from folks that would otherwise be covered under corporate contracts. So while many corporate headquarters are shut down, those team members for those companies are actually taking some leisure trips. And so we maintained a connection to them through our loyalty program. As Vasu mentioned, it's really important to ensure that they receive the same type of treatment as they fly leisure as they would under the old corporate contracts.