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

Hi. Good morning, everyone. Below. Hi. Good morning, everyone. David Vernon, covering airlines and transports for Bernstein. Welcome to Day 2 of the 37th Annual Strategic Decisions conference. We are pleased to be joined once again by American Airlines. We have an entire basketball team of American Airlines executives. We have Robert Isom, President; Don Casey, Revenue; Derek Kerr, CFO; and the IR team joining us today for a fireside chat. If you have questions during the conversation, or you'd like us to add some items into the conversation list, please use the ask a question button on your list, and we will do our best to work it into the conversation. I'm going to ask you, Robert, to maybe kick us off with a couple of comments, prepared remarks. And then we can get into the Q&A. I'm not sure, Dan, if you have any disclosures you want to read out as well. We will hand the podium over to you guys.

No, I think we're ready.

All right.

Hey, David, it's great to see you. Now I can't wait to be in the same city, in the same place. And if we're going to do a fireside, let's have real fireside and real cash that we could be sitting on. So looking forward to that. I'm out in Washington D.C. today. The rest of the team is back at our headquarters in DFW. But I'd just like to say good morning to everybody. It's a pleasure to be with you. since the beginning of the pandemic, we've maintained focus on taking care of our customers and team members during the moments that mattered most. We continued to connect people and moved goods around the globe during the most challenging times, and we helped keep the global economy moving. It is a responsibility that we don't take lightly and we're honored to have. Even so, but there's no doubt that this crisis has exceeded even the most trying times our industry has ever seen. It's meant monumental changes for our team, how we do business and what our customers expect from an airline. And still, the American team has delivered and responded to every challenge with determination and by providing the highest level of care in everything we do. And we're very proud. As we turn the corner with regard to recovery, our goal has always been how do we come out better than we were before? And to that end, during the pan, we focused on furthering our innovative partnerships with airlines like JetBlue and Alaska to improve our value proposition to customers everywhere. We've reshaped our route network with a focus on where customers want to fly right now, and we're planning out for exciting new rates in the future. And we've continued to simplify and harmonize our fleet to be more efficient, both operationally and financially, while offering a more consistent product for our customers. We've done a lot of work to prepare for the recovery. And the good news is that, that work is paying off. With vaccine rolled out in the U.S. going well, demand for summer travel is bouncing back, and we've seen that especially over the most recent Memorial Day weekend. Leisure bookings remained very strong, specifically, domestic markets and destinations to Mexico, the Caribbean and Latin America. Business travel is making a return, too, slowly. But 47 of our top 50 corporate accounts have announced a full return to travel by the end of the year, and that's good news. And while long-haul international travel has been forecast to be the slowest to return, and it really -- it hasn't made a heck a lot of progress yet. We're starting to see some encouraging signs that, when travel restrictions are reduced and eased, that travel returns pretty quickly. So things are clearly looking up from the last time we've talked, and we're pleased to talk to you about that. And we still -- while we still got a tremendous amount of work to do, we are encouraged by what we're seeing. We're welcoming back customers. And when they come and they do see us in the future, you're going to notice an American that is ready to welcome them back and has a really compelling product for them to use. So David, happy to answer any questions. And I've got, as you said, the whole basketball team here with me.

So it's 5 on 1, it was an observation that I noticed.

So okay. Let's start with the fare recovery and the state of the leisure travel market. It feels like several airlines have commented that fare levels are getting back to something close to 2019 this summer. I think that's faster than most anybody would have thought. What are the 2 or 3 things that stand out to you or to Don or to anyone in the team about the pace of the recovery here that has been surprising?

Well, from a leisure perspective, look, demand is back. And we've seen that over the most recent Memorial Day weekend, load factors approaching 90%. And even for the month of May, and Don, you can correct me, but I think we reported that we had those factors of 84% for the month. Building that base of load factor is critical to being able to ultimately yield up and to work pricing. So we're encouraged by that. And David, the point I make is that load factor has -- we've been able to produce that even while adding additional capacity domestically. And as we take a look to the summer, we're going to be, as we've reported in our peaks during the summer, we'll be at about 90% of where we were in 2019 domestically, and we're confident that we can fill those seats. The next question is being able to yield up. That is dependent on, to some extent, on getting business traveled back and certainly opening up international markets, bringing higher-yielding traffic in. And to that end, Don, you might want to give some more color.

Yes. I think the question you asked, David, is, is there anything that's been surprising, right, in terms of what we've seen of -- in terms of the leisure recovery? One is through this entire pandemic, we've seen things move pretty quickly. I think we saw early on that the minute markets opened up, there was demand for people to travel. It's probably even higher than we probably even imagined it could be as quickly. Savings rates in the U.S. are at all-time highs. Customers are telling us they're missing experiences, whether it's go into restaurants or whether it's going to theme parks or whether it's going to the beach, visiting family. And the minute markets open up, we see an immediate, immediate response. We're seeing that now. Starting to see that a little bit in the long-haul markets and some of the European markets that are opening up. We're seeing really an immediate response. So from a surprise perspective, I think demand is, I think, even stronger than we would have, for leisure traffic, might have assumed looking back even just a few months ago. It's just extremely robust right now as markets open up. And we see it everywhere, everywhere.

And as you think about that demand recovery and that consumer sort of preference for either -- when you're looking kind of within the data, if you're looking at the more convenient itineraries or the premium products, is have you notice any sort of differential in terms of consumers' willingness or desire to pay up for either convenience or a premium product?

Don, go ahead.

Okay. I think the way I guess I would describe it is that there has been a fundamental change in the market, right? So the one big change that's happened in COVID is a change in the definition of the kind of the products that we have out in the marketplace among the legacy carriers. So we now have a basic economy product that is not changeable. So even for a fee. It's a nonchangeable product. And if you want the ability to change, then our main cabin product provides the opportunity to change really for no fee. And that is a big change and the difference, I guess, from where we were pre-COVID. And so we were, pre-COVID, almost 1/3 of our traffic that we carried domestically were on a basic economy fare. We think that's going to change going forward. And people are going to be more willing to buy up into the flexibility that we're offering as part of our main cabin product offering. We're also going to be able to create fare products that offer cash refundability as part of the product, which is a -- will be another sell-up. So this redefinition of the products that we have, I think, is going to be important going forward. Now in addition to doing that domestically, we rolled out the same portfolio of products across our international markets as well. And so the basic product now is the basic product no matter where you go. The same is true about our main cabin product, the flexibility that we're providing. So having this consistent offering out of the marketplace so people have a lot more clarity in what it is they're buying and no matter where they're traveling, we think, is really a good thing for customers and will allow us to be more effective at selling up to the main cabin product overall.

And how has those up-sell and premium levels been trending as we've kind of seen the demand recovery come in? Is that also coming in better than expected? As expected?

Yes. Well, in the -- so let me just start with domestic, right? So the premium product in domestic is -- we've done actually better. So it's actually recovered faster. But again, the sell-ups are relatively much lower, right, in the domestic market relative to the long-haul market, where we're looking for a lot more money. Now interestingly, in the long-haul markets, premium cabins, if you look at a year-over-year, or year over 2-year basis, have done better than coach from a revenue perspective, but that's because so few people are flying. There's still -- we're just saying premium cabin is doing a little bit better, but that's -- demand is still down dramatically in those long-haul markets, right, where the markets haven't opened up yet. But -- there are people have money, right? And so our ability to sell-up, I think, is going to continue to look positive when we look back at historic trends.

Okay. So it feels like we're at a point where domestic fare levels are getting back to, again, this sort of 2019 bogeyman. Is the domestic leisure market enough to get American to a position where it can start to approach sort of EBITDA or pretax profit? Breakeven? Or do we need to see a recovery in business travel before we can turn that corner?

I'll just start off there, David. Look, I think over the long run, we're going to need international traffic, we're going to need business demand back. Now clearly, we've been encouraged by what we've seen and the trend lines that have been moving in the right direction, although slowly. But as we look out to the third and fourth quarters, we're much more optimistic about where American is, where we're positioned and the demand that is coming in through international, through business and also from leisure on a combined basis.

And I'll just add that the revenue side is only half of that equation, right, when you talk about getting back to EBITDA margins, right? And the other is really all of the initiatives we have around improving our cost structure, right, where we've taken out more than 150 airplanes. We have the capability of flying the same capacity that we flew in 2019 with 10% less airplanes. We've identified and actually have in our plan this year $1.3 billion in cost savings. And so there are 2 sides of the equation, right? And we think we've made material improvements in our overall cost structure as well.

Okay. I do want to talk about the EBITDA trajectory in a second here. But if we talk about sort of business travel. So if coming into this early part of the crisis, I think one of the lazy bear cases on airlines was domestic fare levels wouldn't come back because too many seats. That seems to have been disproven. One of the things that's still out there, though, is this notion that business travel and the recovery in business travel is going to be more muted, it's going to take longer. We're never going to get back to where we were. How has American's thinking about the recovery of business travel changed as we've moved through the pandemic? And where do you sit now on the question of where are we going to be when business travel returns, and what is it going to look like?

David, I'll start on this. Look, so much of business travel is really predicated on being able to go someplace where something is open. And so where you see -- in the middle of the country, where you see the opportunity to go back into offices, you see people that are willing to do business travel. In Texas and at our headquarters, I can tell you that we have received a number of partners and customers over the last few weeks and months. And every time that we do, there's somebody else that is saying, "Hey, I want to come out and see you as well." So my view is that there's actually a lot of pent-up demand, maybe not the same as leisure, built up over the course of the year. But there are a lot of companies that need to go back out, whether it's from a sales perspective or just checking up on assets that are out in the field that has to happen. And so when things open up, when offices open up, business is, in my view, is returning in a proportional share. So as we take a look out to the future, it really is tied to vaccination rates, offices opening and then ultimately business can get back to it. And over the long run, our view hasn't changed. Our view has been really rooted in every advancement in technology, communications technology ultimately leads and drives a need for people to get together, and I don't think what we're going through right now is any different. While there may be some internal meetings that can be conducted like we're doing today, it just drives the need for more different types of getting together in travel, whether that is people working remotely that now have to get back to a headquarters office or new connections that have been made through these types of Zoom meetings that inspire travel. So my confidence is that business travel is something that is going to return, and over the long run, will be a significant portion of our business.

So as you think about the relative levels of -- I mean, one of the bear cases that we get is the earnings leverage to the business travel that existed before the crisis is going to restrain your profitability kind of post crisis. How should we think about that mix changing and whether or not the lack of business travel is going to keep -- what kind of headwind that's going to create towards overall sort of profit margins? I guess the question is really, like as you think about this, what the mix used to be, is that -- should we be thinking about the percentage of EBIT driven by business and leisure in 2019 being the same on the other side of the crisis? Or will there be some shifts in there as you adjust the fare levels for domestic flying -- and leisure flying? Sorry.

Thanks, Dave. I'll let the team jump in here as well. But I'd just say -- I'd just start with this. We have always been a business -- we've always been an industry that has had to react to changes in demand. And that is one where -- just as today, we're leaning more heavily on leisure traffic. Ultimately, we have levers to pull that can bring our cost structure in alignment with the revenue opportunity that is out there. And so this is going to be Economics 101. Supply and demand are still going to be prevalent as we look into the future, and we expect that we will change the way we fly and our cost structure to accommodate the revenue that is out there. It is our feeling, as I said before, that there will be business travel returning. I do believe that international markets will open up. And as we can see, there's a tremendous desire to get out there and travel from a leisure perspective. So Derek or Don, anything you want to add to that?

Yes. I'll just add to that. The key thing, Robert mentioned earlier is really kind of getting load factors back to where they've been historically, which gives us the ability to sell-up through the fare ladder, right? So business traffic, and I think about the domestic business, business traffic is just buying off the public fare ladder, right? And they're getting a discount, typically big corporations, right, a relatively material discount when they buy off the public ladder. But they buy closer to departure, right, where we typically have fares going up. As long as demand is very strong, right, and outstripping the supply, we're going to be able to sell up through the fare ladder. Business travelers are not buying typically first-class fares. They're buying economy fares, they're upgrading with the first-class cabin. The nominal difference that we charge to get into the first-class cabin domestically isn't that large, right? It's $70, $80, $90. That's not true to long-haul international. Where I think the whole industry is a little more exposure is really the recovery in the long-haul business. Because in the long-haul business, business customers are flying in business class, okay? And they're paying $2,000 more than they would have paid in economy. So if you look at our particular business at American here, right, we have a very, very large domestic and short-haul international footprint, right? We are the largest domestic carrier in the U.S. We're the largest carrier to the Caribbean. We're the largest carrier to Mexico. We're the largest carrier to Central America, okay? And that part of the business, okay, is just a lot less exposed to the recovery of business traffic based on leisure demand. But the long-haul market is where the risk is when you look forward. That is, we know, lagging because markets aren't open. But that is, I think, where the industry has more risk going forward from a margin perspective.

Okay. And I guess as you think about that international part of the business, the rationalization of some lower-cost sort of long-haul services that were -- existed before the pandemic. How do we think about the relative attractiveness of the international business kind of opening up to the U.S. airline industry kind of going forward? Are you thinking that this is going to be a much better sort of market opportunity because of the supplier rationalization that's happened because of the pressure that your international competitors may be under? Or do you think that it will be a similar market as we saw kind of back -- as the travel restrictions come down, it's going to just go back to the way it was in 2019?

Dave, just my survey of carriers outside of the U.S. suggest that there's a lot of distress. And whether it's in Europe or South America and Asia as well, there's restructuring literally that's going on all over the world. As much as the U.S. domestic market has rebounded, that hasn't happened in so many other places throughout the world. That's -- in a way, that's good news. That's upside to our case today from, as you mentioned, a rationalization of capacity throughout the world, but in addition, pent-up demand that just hasn't had a chance to get out and travel. So for us, I like what we're doing. As we've talked about from a domestic perspective, we're focusing on what we do best. And what we've done in DFW; in Charlotte; as I mentioned, the work that we're doing here at DCA, we've really structured our domestic network like we think it will -- we want it over the long term. Those places that we've been weak, we've structured new, innovative relationships with both Alaska and JetBlue. And during this period of really trying to make sure that we're strong as possible, we've been working with our partners throughout the world. And so whether that's IAG and BA or Qatar and JAL, we have, I think, the fleet, the network and the relationships to best take advantage of how international demand is going to return. I do think that the business markets internationally are going to lead the way. I am hopeful that we are able to work with the government, the U.S. government and also in the EU and U.K., to open up markets sooner rather than later. Of course, we have to follow science and vaccination rates. But I do believe that American is very well positioned to take advantage of the opening of markets that are most likely to have the chance to allow traffic the soonest.

So domestically, you mentioned kind of focusing on the markets around Dallas, Charlotte, D.C. And the partnerships that you've kind of entered into with Alaska and JetBlue, how does that complement or change the strategy? What does that do for you that you're not able to do with your own sort of mettle in those markets? Or how does that change the attractiveness of those markets where you partnered with Alaska and JetBlue? How do those partnerships play into the story for American over the next couple of years?

Okay. Look, we've been playing a distant third and fourth out on the East Coast, the upper -- the Northeast Coast, for years. And look, there's -- you take a look at facilities, whether it's LaGuardia or JFK, it's an asset-based proposition where you have to have the right number of gates, you have to have the right number of slots to compete. And we've been a distant third. But being able to partner with JetBlue allows us to really do things that haven't been possible in the past for, quite frankly, either JetBlue or American. And look, just as already, we have 100 codeshare flights. We have announced 57 new routes. We've been able to launch, I think, today is the start for Athens out of JFK. And we've already put Tel Aviv in place. We plan to fly to Delhi later in the year. But we're able to offer a customer proposition that is much more broad than we can today. From a frequent flyer base perspective, we're able to earn -- our customers are able to earn across the American and the JetBlue network. We're elevating the premium customer experience, both out of New York and Boston to Los Angeles and San Francisco by really having some capacity from a premium perspective that is going to be great once business does come back. So that then bodes well from an international perspective. Our corporate clients love this. And I know that from a competitive perspective, we are a much more viable proposition and one that, as I said, both from a leisure and from a business perspective, we've got a really compelling proposition.

So as you think about looking at the performance of the partnerships to date, obviously, you're in the early stages of implementing these, how should we think about the relative economics of a passenger who's connecting into an American flight on JetBlue or Alaska versus somebody who would be connecting in from another part of the network? Like is it going to be a similar sort of economic proposition for American? Is it going to be you're sharing more of the revenue, but less of the cost. So return is good, but it's a little -- maybe lower margin? Like how should we be thinking about the relative attractiveness of those partnership travelers?

I'll ask Don to pipe in here. But there's a couple of things at play. One is, as I said before, we're able to -- in the case of the Northeast Alliance with JetBlue, we're actually able to take a look at how we can best serve the marketplace. And whether that's adding flights or being able to move capacity in different places across our network, where it could be more profitable, that benefits us on all fronts. So we participate in the business that is there and that is going to grow on a combined basis, both the JetBlue-American offering will be larger in New York and Boston than it's been and will continue to be that way. But at the same time, it allows us to make sure that we have the assets in the right place in other parts of our network as well. So it's a win-win-win for us. Don?

Yes. I mean, the key in our industry is just increasing demand, right? The more we can increase demand on our network, right, the more we're going to average up, through our yield management system, the average price we get for tickets, right? And so if you go look at what this partner -- these partnerships are going to do, is they're going to increase demand, right, on the American Airlines network. They're going to do that through providing more connectivity. And so the more opportunity people have to connect into our network, the more we can average -- more demand that creates, the more we can average up fares. The better our combined schedule is, okay, the more we're going to get greater share of demand. It's the old S-curve effect, right? We know that schedule drives demand. Our schedule has improved dramatically through these partnerships that we have. And at the same time, you look at our frequent flyer program. We have dramatically increased the utility of our frequent flyer program by expanding the ability to accrue and eventually redeem, right, on Alaska, at JetBlue as well. And so all of those things put together increase demand in our network. And as we increase demand in our network, our yield management system will be able to average up the fares that we take.

And as you're thinking about -- sort of sifting through the data to see the effectiveness of these partnerships, when do you start to actually expect to see that showing up in the numbers?

So David, from -- look, where true realization will be when demand fully returns. But I can tell you today, the codeshare relationship with JetBlue is already becoming one that is probably the largest codeshare operation within our network. So it's bringing passengers onto our network today, and I know that JetBlue is feeling the same benefit. Same holds true with Alaska. It's a little bit different story given the nature of the relationship. And look, we don't quite have the international schedule yet, and we're dependent more on markets opening up. We anticipate that, that will be even more productive.