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

Okay, everybody. Good morning, here I am again, Hunter Keay, Wolfe Research, I'm supposed to say the name. Sorry. I'm Hunter Keay. This is Wolfe Research it's 8:00 Eastern time, May 25, doing a fireside chat with American Airlines. We have Derek Kerr, the CFO; Vasu Raja, the Chief Revenue Officer; and Dan Cravens, Head of Investor Relations. So the format is a fireside chat. We have 30 minutes. I'm going to turn it over to these guys, they're going to talk. And by the way, thank you for joining us.

Well, thank you, for having us.

Great to see you guys. Type in your questions in the box. I get them right here. I will read them anonymously and there'll be plenty of time for Q&A after Derek's opening remarks. So Derek, please.

Thanks, Hunter, and good morning, everyone. It's great to be in New York for the first time in 14 months. For me, at least, so. It's great to be here. Before we dive in, first, I want to say how incredibly proud we are of the American Airlines team and everything they've been able to not only withstand, but accomplish over the past 14 months. The resilience the team has shown has been inspiring, putting on their uniforms every day to serve our customers, allowing American to fly more customers than any other U.S. airline, all while producing the highest passenger unit revenue of any global U.S. carrier. Also, not to understate this, our treasury and finance teams working with our government affairs teams raised over $30 billion in liquidity to build the strong cash position we have today. It's efforts like these that make us so confident in our path forward. Demand for travel is coming back as vaccinations have increased across the country. Leisure bookings remain very strong, which we'll talk about, both in the U.S. and to destinations in Mexico, the Caribbean and Latin America. And business travel and long-haul international travel are starting to show encouraging signs, too. Many of our corporate customers are returning to their offices and have told us they plan to get back to travel in weeks and months ahead. Travel restrictions are being revised and lifted in certain parts of Europe as well, which we expect will continue to be the case as vaccinations are rolled out. Over the past year, we have dramatically reduced our costs and built significant efficiencies into the business. The changes we have made will drive more than $1.3 billion of permanent nonvolume-related savings in 2021 and beyond. As we have said in the past, we will naturally reduce our debt from where we are today by $8 billion to $10 billion over the next 5 years to regularly scheduled debt amortization. While we need to make an additional -- while we needed to take out additional debt due to the pandemic, we are prepared and well positioned to manage it. This is all good news after a year of heavy turbulence. As customers return to the skies, they'll be met by a different and better American Airlines, one with the broadest and best global network that has been enhanced by new partnerships at American with a revamped experience that makes travel more convenient for our customers and ensures they feel safe and comfortable as they return to fly. And in American Airlines that's more financially and operationally efficient. We're encouraged by everything we're seeing, and we believe American is prepared for a strong recovery in the months and years ahead. So with that, Hunter, I'll turn it back over to you and answer questions that you have.

Sure. Thank you. I guess, the first -- we have one question from the audience. I'll get to that. I guess, let's start off, I don't know if you saw, but a couple of your competitors filed 8-Ks last night and this morning, noting some positive trends in the environment. You just obviously mentioned 2, Derek. How are you feeling about business travel right now, relatively to where we just talked about this a couple of weeks ago, but this is a dynamic situation. What's the last indication you have on business travel coming back mainly in the fall? What do you -- are you still expecting it? What's your sort of target for business travel return to be by the end of the year?

Yes. I can start, and Derek can add color, but we continue to see it starting to pick up, but there's huge variations across the type of sector and also place of the country. But if we started the year where there is [ skin ] depending on business travel, let's call it, 10% to 15%, 2019 levels. When we closed the first quarter, we were about 30%. And we continue to see an improvement along a pretty similar trajectory, driven heavily by small and midsized businesses, a lot of companies such as industrials, energy, things like that. But looking forward, we are really encouraged. A lot of our top corporates are not just coming back. In the fall, they have indicated that they're going to relax travel policies with sort of getting back on the road. We have more and more inquiries for meeting travel from the corporate conventions. So we still anticipate that it will be in the fall and beyond when business travel resumes. To what degree it is, is still uncertain. What that means for long-haul international, still uncertain. But certainly domestic starts to come back more and more. And this conference is a great indication of it.

Okay. How do you think about these corporate travel budgets? What are your large corporates telling you? Are they starting from a base of zero and building it up? Or are they starting where they spent in 2019 and...

Yes. It's a great question, and it varies very much across the whole of scheme of corporates. For the big managed corporate, probably the better predictor is what's happening by industry. There's a lot of industries where business is growing back to life and -- basically, get on the road and make sales and that sort of thing. And so it's a little bit of both for them, but demand is coming in the need to go. There's others in more client-facing industries where then things are dependent on a lot of different things. If they have to relax the travel policies, client has to be able to relax their visitation policies. And so there, you see it a little slower. And then, last but not least, it's really small and mid-sized business where there, you have people who are just out there generating sales. And then for us, that's a big chunk of our overall business portfolio almost, if not slightly more than half of our revenues come from small and midsized businesses all across the South and West.

And Hunter it's been about like no place to go, right? We've been open as a headquarters for the entire time. We never closed. We had a policy where no one could come in for a while. We relaxed that policy. We have visitors all the time now. We have bankers, we have consultants, we have everybody visiting all the time. And there -- what they say is, I can't go see so and so because they're not even in their headquarters or they're not even there. So it needs to be both sides, and I think they're all ready to go. They're all ready to go visit and see people, but even some of the airlines aren't back into their place. So they'll say, well, we can come visit you but we can't go visit somebody else. So I think it takes both sides and I think you're starting to see that more and more as the headquarters open and other people -- they have places to go, then they'll get out on the road more often.

Are you renegotiating multiyear contracts of some of your large corporates? Because I would imagine a lot of these corporate contracts either expired or need to be readdressed because of a different overall need, really for the next couple of years. Are you sort of preselling a lot of corporate travel at this point at a discount to stimulate business demand?

We are not and nor has there been a big rush in corporates who want to go and renegotiate. I think the general approach is let's see how things come back.

Okay. And then just sort of lastly on this, how do you think about the OSHA Duty of Care mandate? Obviously, it's going to be more applicable to these parts, these massively bureaucratic companies, companies like IBM who've got people employed literally just to do that one thing. Do you expect there to be a lot of friction as it relates, not only to the actual act of traveling, but booking and tracking spend around Duty of Care requirements like we saw after 9/11 or just overall bureaucracy?

We don't see it yet. Time will tell, right? So many corporates are in the nascent stages of coming back. So we'll see how things evolve, both in the volume of their travel, the types of patterns they have and any other rules, requirements, restrictions we may see. So it's still pretty early to go and tell. And ultimately, when business travel comes back, we are nothing, if not adaptable and we'll adapt to whatever it might be. Right now, not very much.

Derek, on the $1.3 million of cost savings, that's about a 0.5% of CASMx at full capacity. Where are we going to see that most on the P&L? Which expense categories?

Salaries will be the biggest spot to see it. Both -- almost $900 million of that is salaries. And as we took out the salaries, we took out $500 million in management salaries, $400 million in other salaries. There's still a lot more, I think, we can do. That's what we've put together for this year and that will be -- it's built into this year's budget. This isn't something we have to go get. This is something that's built into this year's budget and we're meeting it. So very confident with that. And our job going forward is to continue to do that, continue to find efficient ways to reduce cost across the system as we...

And who were these -- because your people have been asked to do more, in some cases, for less in terms of Cares Act restrictions and the like. So these people are not working harder than they were before. Are you -- are they prepared to continue to do that? I mean, are you going to hire back some of these management staff...

Well, there are some -- the management staff, no. I think the management staff is, as we went through the process, we were merging 2 companies, right? And to make sure when you merge 2 companies, the #1 thing you have to do is complete the merger, right? I mean no matter what you do, it would have -- if we had failed in merging the 2 companies, we would have had to take a step back. So there are things that -- we just finished the payroll system, right? We just completed the payroll system. The last pay thing. There's a group of people in that, that are working on that payroll system, don't need to work on that payroll system anymore, right? So there are pockets of those things that we now can be more efficient from a management perspective, where we do not -- we don't need that anymore, and we don't need those positions anymore. So that has happened, and we have moved that out. As we looked at some of the other things, as we went through from an operational perspective, what are other things that we're going to do? We're going to do single-agent boarding at the gate, right? But that requires us to have the systems available at the gate for someone to be able to do that job, right? So as we continue to put in new systems and continue to merge the companies to get things done, we can be more efficient and it was time to do it and we did at this point in time. So I'm not -- will people have to work a little bit harder in some certain areas? Yes. But I think our team is up for the challenge. They've done a great job throughout this, and I have no problem with where we're at. The team's ready to go.

So the $1.3 billion, a lot of companies, not just airlines, talk about cost-savings initiatives on a gross basis. It's hard to go back and say we did, we didn't do it, at least for [ pricing ], yes, you could do it. But are we going to see -- simply to ask the question, if 2019 ASMs get back to where -- or if 2022 or 2023 ASMs were back where they were in 2019, is your nonfuel OpEx going to be lower than it was in 2019?

Yes, it should be lower by $1.3 billion.

Okay. All right. Got it. And then, were there any cuts that the existence PSP has or still is precluding you from making? I don't just mean headcount, right? That's not what I mean. I meant just sort of all around the business because PSP, the whole point of PSP was to kind of maintain this sort of infrastructure to be able to respond to an improving demand environment. That's what it was all about. Was there anything, any other cost to these programs that you think you can continue to find incrementals from the $1.3 billion as PSP runs out in the end?

Yes. I think there -- well, no -- put this way, I think you're asking 2 questions. One is PSP did not preclude us from doing anything that we would have done strategically or cost effective at the company. The only thing that we did do is we brought all the workers back, right? So everybody's back. So the timing of, say, from a pilot higher -- let's just take the pilot group, right? We would have need -- we need the pilots. We need them all here. We need them here for the summer. We probably brought them back a little bit early, okay? So -- but that is covered by all the PSP costs. So some areas, we're going to be hiring flight attendants in the back half of the year, even though we brought everybody back. So from now until the summer from maybe April, May, we may have carried a few extra costs, but we need all of that to fly in the summer. We need all of that for 2022. So there are not a lot of inefficiencies because of PSP2. And I think because of getting PSP2, we didn't change the strategy of the airline. We didn't change anything that we did from a PSP2's perspective or PSP3 perspective that we wouldn't have done both.

We've got 2 questions. I will get to those in a minute. We've talked about tough demand for leisure travel and you see it obviously, full airport's peak times. How is pricing not -- too much about pricing, but how is it not better than it already is given how strong it is? I mean why is it not a 4-month conclusion in pricing is going to be significantly better as we move through the course of the summer, just based on so much demand? I realize there's still corporate mix that we're going to deal with on the yield side. But are these -- these revenue management systems capitalized where they can really push through because there's so much inelastic leisure demand out there?

Well, what makes the summer hard, and I need to be careful here on this question because we don't usually comment on pricing. But I will say this, that what makes summer and beyond a little bit strange is less the demand environment and more the uneven ways in which everybody is bringing back supply, right? So we know there's -- right now, in our system, the only thing that's keeping us from being at 2019 booking levels is because we're restricting the system. We -- I would say there's not even pent-up leisure demand, it's just out in the open leisure demand and the need to go. And these are constrained as not airlines putting seats back in the market, the constraint is being able to get a hotel, or a rental car or things like that. However, with all that demand out there, the challenge is that we are bringing back capacity in a relatively lumpy way. Other people are, too. And then we have a pretty strange set of reopenings, right? Not just internationally, but even domestically, the rules and regs from going to Florida and going from New York are very different, right? And so, there's -- though there's an aggregate demand, how that actually manifests itself in the process is still -- it's lumpy at best. So that said, though, what we see pretty consistent -- it's been pretty consistent with our last quarterly call, that as we go into the summer and beyond, we're still seeing yields at or above 90% in 2019. So all new bookings are coming in something north of 90% at 2019 levels. And after Labor Day, that number goes to 100% above. We put less stock after Labor Day because we're taking such little demand then, but we do see that as an encouraging thing. The system is able to go and generate comparable yields to what it was doing before. And a big part of that is how we structured the network. So it's focused around places where the demand is highest. And so far, we've been encouraged that throughout the life of the booking curve, that number of 90% is holding for future. That hasn't been the case from this last year where once we got inside of a 20 AP, 14 AP time frame, that business demand, the yield curve was greater. So we'll see if that hangs though through the summer. We have a long way to go yet, but we see encouraging signs out there.

Here's a question that is related to what you just said. Why wouldn't there be pent-up demand that pushes corporate demand beyond 2019 levels and even '21 or early '22?

That could be a very real possibility. To build on what Derek said earlier, that -- this is very anecdotal but there's some practicality in it all. The thing that's always surprised me is whenever people come to our headquarters, for example, within days if not weeks, their competitor comes, right? And it is interesting how quickly it is. I mean we're to the point where we encourage taking meetings in large part because our headquarters is a safe place, things are vaccinated and people are ready to come back to travel. We're ready to have them. So we anticipate that as you -- there very much could be pent-up business demand because if we are in a world where clients are ready to host client services businesses, it's a question of if [ they get a sale ] or not, so...

Yes. We had a banker day and we talked at the banker day and Doug made the point of the team -- the bankers who led the AAdvantage deal were people who would come visit us at the office. Do you know how many bankers showed up the next week? Every other one. So I think it is something like that. No, for sure, we're going to see as it rolls out.

Did you know the percentage of business travel internally oriented among these major companies? I've heard 30%. That seems high to me.

No. We've looked at this a lot in the pandemic. The challenge of the number is it varies so much by industry and by sector. And there is a classification problem. But for some of the heavier professional service organizations, that number can be something in the 20%, 25% range is what we've estimated. For other companies that have more fixed businesses like industrials, energy, things like that, a lot smaller, like 10% minus.

Okay. You had said that you're 50 to 60 aircraft short on long haul right now. Are those coming back? Are they permanently retired?

No. Those are -- that's the retirement of A330 fleet, the 767 fleet and the 757 fleet, which we count as long haul because that's where we -- that's primary -- was just primary [ mission ] purpose in the event that slogged around the domestic commitment. But yes, no, they're not coming back. Indeed, so much of how we get at $1.3 billion is we didn't just take out those airplanes, we took out all of the fixed costs associated with it, the inefficiencies associated with reserve crews, training and efficiencies, all of that. And that's going to make the airline a whole lot nimbler. If we're down 150 airplanes, ballpark, where the schedule is only down about 80 to 90 airplanes ballpark, right? So that's -- that's an airline that could be a lot more efficient. We've tried as much as possible to use the pandemic to get out of big long-term structural things, have positioned the airline to perform better being part of the taking up those wide-bodies.

But Hunter, I'll add to that just a little bit. I mean, we do have 25 789s that come in at '23 to '25, right? So when we talk about it, are thing come back? They're not coming back in the short term without a doubt. But '23 to '25, we're going to have -- we'll have 25 aircraft coming in those 3 years. Now we can take out 777s, if it's not there, or we use those to grow into -- back into places that there's options. So we do have aircraft coming that are wide-bodies just depends on whether they're replacement or not depending on how the recovery happens up '23 to '25.

Yes, so that was the other question. You had 1,547 aircraft in the year '19. How many do you have at the end of '22? More or less?

Less.

Less, right? Okay.

Yes.

Okay. Are you going to mandate vaccines for your employees?

No, we're not going to mandate vaccines for employees.

I know you're incentivizing to get them.

Yes.

Let's see, so what do you think happens in the fall with kids going back to school? I mean look, we've said before, I just said it, the recovery is not going to be linear. But nobody's [indiscernible] if you'll add back supply for summer demand and be able to pull it back for 3 months. Like it's going to be -- but also, it could continue to go up if business travel gets better. But is it -- what are you expecting from leisure travel after Labor Day, knowing that corporate is going to be corporate?

Yes. Look, we had -- well, we think it's going to be a step to something different. And we just don't know the magnitude what different is and how elaborate. But we certainly anticipate that once we cross Labor Day, we -- this summer, we're able to make a living on -- I think it gets a lot of publicity, but it's a small percentage of system capacity, which is what we call opportunistic flying, right? Flying point-to-point trips to the Bahamas or things like that, 9 flights a day to cities and the mountains and things like that. That's pretty unlikely to think but once the Labor Day crosses over and be it schools return, people return to work, the people are going to be going to NASA on Tuesday, and then come back on a Friday, which is a trip pattern we're seeing now. So we anticipate there'll be some kind of stall of leisure demand, at least, in the September, October period. What we don't know is how much business might ramp up, one. And the other thing that we don't know that we've been observing through this is Thursday for us used to be our peak business day. Thursdays are becoming our peak leisure day. And a lot of it is people going for a 3-day weekend and things like that. We do anticipate that as we go into the fall, that people come back to work, there's going to be more generous policies around it, where people may be working from a leisure destination on Friday. So if that starts to happen, then we could also see some different trends, which could impact things. But fortunately, we're far and about, and again, we're nothing if not adaptable. One of the things that -- one of the adaptations of COVID is we can now book schedule a whole lot closer to the departure and execute it well, too. So we have a bit of time before we go and figure it out. But we do anticipate that there'll be some stalling of leisure demand, not yet a big ramp-up of business demand. And how those trip patterns play out by time of day and day of week remains to be seen.

Yes, you mentioned opportunistic flying. One of the things you've also said about this too is no more strategic flying?

Absolutely.

What's wrong with strategic flying? [indiscernible]

I mean the industry -- strategic flying as we've said, is often the euphemism for losing money.

Yes, losing money. So what is -- personally, there's a reason for it.

Yes. No, absolutely. Look, strategic flying, I'll classify it as 2 things, right? Strategic flying, which is we need to build something which may lose money today, but can make money tomorrow is good at best, right? But you need to have something -- there needs to be some discipline...

It's a mid-late cycle thing, right?

Yes. We'll look at it -- and as we think about our own international system, right, until recently, we haven't had coastal gateways outside of Miami, from which we go and launch international flights. So it's one thing to go and fly 5 things to China, it's nothing like a China strategy on how you make 3 things to try to work over time. And so strategic flying, which is -- yes, we need to be in the markets that our customers want, we've got to be able to go serve a profit. And we can't go and tell ourselves that we're going to go sit around the cost of 60 wide-bodies that we get to go make money on for 4.5 months of the year and can barely cover the capital expense.

Well, does it mean maybe you're going to be willing to shoot those a little bit earlier?

Absolutely. Well, even more directly, what it is, is that it's what you see right now, and it relates to what we talked about on the call that a lot of what you see in the summer schedule is also the scale of what the airline looks look, right? But for us, we've always done really well in the domestic system. That's the thing that we can go and work off of. We've always struggled in the long-haul international business outside South America. And so, for us, when we bring it back, the things that we're bringing back are going to be a volatile problem. If you go back in time, we were an airline that had probably 50 or 60 too many widebodies in the sense that they could make money to part of the year, but not for the entire year. And so we tried a lot of really opportunistic things to do. COVID's given us a chance to go and really reset that. And so what comes back is not to -- it's to Derek's point about the 787, we're not just going to go get a bunch of 787s and put them in markets because we think they're strategic. The idea is any of those airplanes that are coming in need to be able to produce a real return on invested capital is common to what we can do with the domestic system.

We've got about 3 minutes left. I've got a bunch of few quick ones on it. I'm going to ask this question to every airline today. On a scale 1 to 10, how concerned are you about inflationary cost pressures over the next couple of years? Any number you give is fine.

Five.

Thank you. Helpful. And then, there was another one here. It's a different question. Do you know what percentage of your highest value business travelers are people that are -- that have children under college?

No. And I'm loath to find out. That's certainly where you're crossing the line, personalizing your service as in being creepy with your customers. So no, probably no, we don't know that.

Ask the city. They probably know.

So -- all right. And then what is the generally -- pre-COVID, what was the fair differential between front cabin, back cabin for both domestic and international? Pre-COVID?

Yes. Well, the -- probably the more apt thing you're getting at is how the revenue mix was, right? And for us, the long-haul revenue mix was, let's call it, 40% to 50% in the front cabin, where peak time was in places like [indiscernible] 60% or 70%. Domestic, it was 90% of the time, right? Or said better -- let me say it better, 90% were based on sales where the customer purchased an economy ticket, but they might have been upgraded in the -- that's why you go off of revenue versus fare differential. Thing we've been really encouraged by actually as the prices has unfolded is that premium revenues have held up much greater than what we have anticipated, where if domestic revenues are down -- or economy revenues are down 50%, 60%, premium revenues in domestic system are half of that and we're able to go and generate traffic. We think a good chunk of that might be people seeking out space that comes with the premium cabin upfront. So we'll see how long that lasts. But what's been similarly encouraging is in long haul, we've seen the same kind of trend where those long-haul flights that are going right now, their revenue mix might be 60% or 70% from the front cabin. And one of the things that we anticipate seeing -- and so even though we don't have the big corporate business travelers that are -- that normally fill those cabins, there's a lot more customers that are willing to actually go and pay to sit up there and that's the thing that we think is a little more likely to go to and put us to ground.

All right. We're out of time. I'm sorry, I didn't get to all the questions in the queue. So if you asked one and didn't get asked -- answered, please don't be discouraged. I'll try again next time. But Derek, Vasu and Dan, thank you guys for joining us. It's good to see you guys in person.

Thank you. Appreciate it.

Thanks for hosting it.