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

Okay. I think we are officially live. So good morning, everyone. Thank you for joining us. My name is Peter Arment, senior aerospace defense analyst here at Baird. We're very happy to be hosting American Airlines here this morning. With American Airlines, we have Robert Isom, President; Derek Kerr, CFO; and Dan Cravens, Managing Director of Investor Relations. Really appreciate, gentlemen, all of you for joining us, and hopefully, everyone is staying safe. I wish we were doing this live with you. But hopefully, that will happen next year. But then again, thank you, again, for your time. I'll kick it over to you. You go through some slides, and if we have some time at the end, we'll go through a little bit of Q&A. Thanks, again.

Thanks, Peter. I appreciate it. And we'll pull our slides up here real quick.

Where is the deck?

Hold on 1 second. This is why no travel is going to come back because I'll tell you what, meeting in person would be much easier. Okay.

Peter, can you see these slides?

Not yet, but I think they will -- hopefully, they'll be able to put them up for everyone.

Go back [indiscernible]

Okay. Well, Peter, you can't, but I'm going to go ahead and give the -- I'm going to start the presentation if that's okay.

Yes. Well, we'll see if they can get the sharing your screen up shortly. And if not, then we can just begin to talk to your side.

Okay.

Here we go. All right.

Got them. Everybody see them?

Yes.

Okay. So hey, we'll go ahead and click through. Obviously, there's, yes, the cautionary statement regarding forward-looking statements and information on the next slide, Dan? There we go. Okay. So hey, look, we're coming into the third quarter, and I'll tell you what, none of us ever seen like anything like this before. The pandemic has created a challenging environment to say the least, and the third quarter was representative of that. Revenue down 73% to $3.2 billion. And we concluded the quarter with $13.6 billion in liquidity, $15.6 billion on a pro forma basis, which is inclusive of the CARES Act loan and the upsizing of that. But hey, we are laser-focused on making sure that American is well prepared to weather the storm. And so we have been paying really close attention to raising cash, reducing spending wherever we can and then starting to encourage travelers to come back when they feel that they're ready. And as a result, our aggressive actions, they've positioned us to really, I think, perform as demand returns. We've got a strong liquidity position. It gives us a runway with very few near-term maturities. We've taken structural cost actions that will live long beyond the pandemic that are reducing our cash burn right now. And a lot of the work that we've been doing is really accelerated and fast forward, putting a network in place to best serve the marketplace. And we're doing everything we can to get customers back with our clean commitment. So next slide, Dan. So in terms of liquidity, now here's a quick look going back to June -- the end of June, where we had $10.2 billion of liquidity. But then adding to that the treasury loan and also a $1.2 billion financing with Goldman Sachs. That gave us a $15.6 billion pro forma liquidity at the end of the quarter. As we take a look forward, look, we're doing everything we can to maintain and to certainly limit any deterioration. I think everybody knows that through an ATM and block trade transaction, we've added to what will be a year-ending liquidity number by $1.3 billion. So we're estimating year-end to have $14.5 billion of liquidity, which is certainly enough to weather the storm ahead. Next slide. So with that, who knows what comes up. And certainly, we've been -- we're optimistic with the development of vaccine, that are testing, in therapeutics. But we're going to be ready no matter what happens. And to that end, we have additional levers to pull for liquidity. $3.2 billion, almost $3.3 billion of unencumbered assets and also capacity under existing financings of almost of over $7 billion as well. So look, we haven't had to tap into that yet, but it's available if we need to. And so far, we've been able to manage through the crisis well from a liquidity perspective. So in terms of maturities, this is, I think, really important and hopefully, a differentiator for American. Look, the maturities that we have going forward are certainly manageable. As we take a look at the 2021, $400 million, that's an undrawn line of credit. And if you take a look at the other dashed box, that's the undrawn U.S. treasury loan. But between those, we have a $750 million unsecured note. But outside of that, the dark blue bars, the $2.1 billion in 2023, the $1.7 billion in 2025 and the $1.1 billion out in 2027, those are all term loans that got solid collateral underneath and slots gates and racks. And we think that we're really well suited. Even the drawn revolver in 2024, look, once we repay that, we anticipate retaining that capacity for additional liquidity going forward. So certainly, efficient, flexible, manageable. Okay. Action that we've taken to limit the outflow. We've been really aggressive, striking first with getting our fleet made as efficient as possible, pulling forward decisions that we had hoped to make over the coming years, retiring 76s, 75s, A330-200s, A330-300s, E190s, making the operations simpler in terms of sparing, provisioning, staffing for pilots and flight attendants. And we've removed and deferred really every bit of noncritical CapEx that we've been able to. So $700 million in 2020, already $300 million out in 2021. And then, of course, in terms of what it takes to run an airline, it takes a lot of people. We've -- through furloughs and leaves and early retirements, we've reduced our team count by 40,000 people. So what's that meant in terms of reducing cash burn, sequentially better quarter after quarter and estimating the fourth quarter to be in the $25 million to $30 million per day range. So our goal is to get back to cash positive as soon as possible. It's going to take a return of air travel to do that. That's really what's standing in the way between us and that target. We're looking to make sure that our network is really designed around where we can make a return the fastest. And we anticipate that international travel is going to be slow, and we are taking aggressive action to make sure that we're sized for demand as that returns. And then we've gone through the largest reinvestment and fleet renewal program really in commercial aviation history. So we have a fleet that is set well and aircraft that are coming off of lease and the older aircraft that can be put down that gives us a great amount of flexibility. So that fleet simplification strategy, I want to underscore that, next slide, Dan, is something we've had in mind for some time but we've really focused on simplifying yet still being able to meet demand in whatever pockets that it resides. So we started back in 2016 with 46 different sub-fleet types and whether it's operators or seating configurations or pilot and flight attendant, different type of configurations, all that is just inefficiency in terms of being able to go to the marketplace. We're being able to resource for providing the service. So as I said, we like where we're at in terms of fleet. We don't have a major renewal to do, certainly compared to our largest competitors. As you can see, we have the youngest fleet of the major network carriers. That's going to serve us well in terms of fuel efficiency. And these aircraft are sized for the demand that we see in the marketplace as well. So a benefit that will extend long beyond. And I think this -- and the prior slide is important. Look, while we've reduced a tremendous amount of operating and capital costs in 2020, there's a good chunk, $1 billion of that, that we think is permanent, and that will continue on long into the future. And we're going to try to do everything we can to make that even bigger. So underlying all this is that American has a network that will perform certainly in the future. But even now as you take a look, our philosophy has been to concentrate our flying that we do, do, where we can take the best advantage. That's been ensuring that we have the greatest level of connectivity and getting people to where they want to go. And right now, they want to go to places in the Sun Belt where things are open. They want to go to close in Caribbean and Mexico. And our results have shown that we've positioned the network appropriately right now. Certainly through our unit revenue outperformance in the third quarter. And our focus going forward is to make sure that our network stays as flexible as possible. You will see us continue to try to leverage our assets in DFW and Charlotte to the greatest extent possible and making sure that we can provide a network where people want to go. So we're really pleased with what we've done in limiting down international travel, refocusing the capacity where it needs to be. And a note that I think is really of importance is 1 out 3 passengers flew American in the third quarter. That's 1 out of 3 passengers that flew in the entire United States. So that bodes well for us as we look to the future. So that's how we focused our domestic network. But look, that domestic network really combines with an already fantastic set of relationships and partners through joint business or other relationships that put us in a position to serve more city pairs, more nonstop markets and more destinations than anyone. And so as we take a look out into the future, in Los Angles, New York, Chicago, the biggest markets where people are going to want to go, we have strong positions. And we're only adding to that. And we're adding to it, next slide, in a way that it's asset-light. Look, parts of our network over time, out West, Los Angeles in California, in New York haven't performed as well as other parts of our network. And so we're bolstering that through relationships with Alaska, which is kicked off and I think in good position moving forward. We're really pleased with that partnership and can't wait to see where that goes. A terrific partner. We have the same teed up with JetBlue, and hopefully get that started in the coming months. And even internationally, we've made sure that we've augmented where we need to. So building the relationship with Qatar, reestablishing that. And then also with GOL, the largest domestic Brazilian carrier and one that fits incredibly well into our network. So what are we doing to get passengers back and trying to reassure the safety of travel? Well, it's -- it all comes down to making sure that people know that when they travel, look, it's -- you can't -- you couldn't be in a safer place than on an aircraft. And whether that's through asking our customers to fill out a checklist, mandating face coverings, doing everything, including helping develop the latest in terms of coronavirus-killing devices and procedures and working with manufacturers, that is all going in the right direction. And then using, of course, the aircraft themselves in HEPA filtration and enhancing the cleaning throughout. Look, it's making a difference. And so next slide, Dan. It's making a difference and we see it in terms of, certainly, infection rates of our own team members, which are lower than the U.S. on average. And then most importantly, the lowest infection rates are really among our most customer-facing team members, our agents and our flight attendants, that clean commitment that we've embarked on with an outside travel advisory panel, getting certification from the Global Biorisk Council. Partnerships with companies like PURELL, mandating face coverings. And as I said, disinfectant advancements and electrostatic spring that is really, I think, best in the industry. And then also looking to give our customers the control that they need so that, look, you really don't have to touch anything. You can interact and keep control of your itinerary as you want to. It's making an impact, and we're using that then to try to open markets. And so we're opening markets, working with governments. We've had some success in terms of launching testing programs both to Hawaii, but then also into the Caribbean as well. Jamaica is the most recent and you'll see even more as we're working with countries, setting up testing regimens, giving easy ways for customers to get tested before or even on the day of travel, it's working. It's making a difference. And it's helping these countries be able to take travelers in and to do it in a very safe way. So as a result of that, and work throughout the industry, we are seeing a gradual increase in terms of overall bookings and travelers. And so the slide that I note here is the TSA traveler throughput, that's very representative of what we're seeing as well. Of course, there's been a little bit of a flattening as we've gotten into the election and certainly, the spike in COVID. But still, the trend is upwards, and we expect that to continue. Now one of the things I think is important to note as well is that most of the travel that we see right now is highly leisure based. And there's a lot of questions about, hey, well, what happens? When will -- how dependent are you on business travel? When does that come back? And the chart on the right is just simply showing, look, the major -- the big companies that are out there, look, they're not traveling much at all, but they really fit into a segment of managed corporate business for us, which represents about 16% of our total revenues in 2019. So it's big, but it's something that we're not waiting for to come back. We're certainly working very closely with the small- and medium-sized businesses, which are starting to move at a greater pace. And even within the managed corporates, we do see some movement right now in terms of improvement, in terms of government travel and industrials. So the big point here is that, look, American is -- certainly wants business travel to get back as soon as possible, but we're not waiting on it. And for American, it's less a proportion of our overall base than you might think. All right. So rolling that all together is just important. We haven't waited, and we've certainly taken advantage of the downturn to make sure that we get American position to lead as demand returns. And so whether that's making sure that we have the liquidity to take on whatever comes ahead of us, really getting down and taking advantage of the opportunity to get our airlines sized right with the right assets in the right places, rebounding from what was just an underperforming 2019 for American for a number of reasons. We think that we're going to come out of this very well. The network strength that we have has only been improved based on new relationships that we put in place. And some of the things that we're doing to ensure customer safety and cleanliness is just going to be part of what we do going into the -- what we do going long into the future. And I think it's going to give confidence far beyond what we're doing right now. And that adds up into maximizing the value for all of our stakeholders. Look, we're going to produce a return that is where we're headed. We're going to get to positive cash flow as soon as we possibly can. We've got efficiencies in the organization. Our network strengths, delivering operational excellence, it adds up to what I believe is a bright future for American, and we're definitely looking to the future. So with that, Peter, I'm happy to engage Derek and to anybody that wants to ask any questions and have...

I appreciate it. Yes. No, it's a great rundown, and you guys have really managed this crisis tremendously well. And I think everyone is looking forward to getting on an American plane and be part of that 1 in every 3 as soon as possible because I think everyone's -- but one of the things that jumped out of me was, when you mentioned the $1 billion maybe permanent cost-out, maybe you could just give us a little more details of what that makes up and just any more color there?

Yes. I think as we go through it, Peter, I mean, the biggest chunk of it is going to be management head count. We took 30% management head count out leases about $500 million. That's not going back in. We will probably have to add some volume stuff in the airports. But in general, from an overall management perspective, we did a 30% head count reduction, much needed because, as you know, we've been merging these 2 airlines for the last, whatever, 6 years, 7 years, and it was time to do that. So that will stay out for sure. The other efficiencies, as Robert talked about, are going to be really from the fleet reduction. So as you take out different fleet types, we won't need as many pilots in each area, right? We don't have a A330 anymore, we won't have the E190 anymore. So we don't have to jump through the seats and there'll be less training. So as you talk about those efficiencies, aircraft coming out that we took out that had overhauls, older aircraft, things like that, that was -- is what will drive that $1 billion. We already know it's there. We know we're not going to add it back in. And as Robert said, we're looking for more as we go through the 2021 budgeting process. And I think that number is going to be bigger. But that's what it really is. It's number one, efficiencies; number two, management head count; number three, the fleet being changed and being able to reduce a significant amount of cost because the fleet has been consolidated into 4 types versus having 9 types.