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

All right. Good morning, everyone, and welcome to the fireside chat with American Airlines. I'm Savi Syth, the analyst covering global airlines here at Raymond James. And I'm happy to have with us today, Vasu Raja, the Chief Revenue Officer at American. Over the last 1.5 years, not only has Vasu had to throw out everything he knows about revenue management to successfully execute through one of the most challenging demand environments, but he's also been at the forefront of some very creative partnerships that American is rolling out both on the domestic side and international operations side. Also in the room with Vasu is -- from Investor Relations is Managing Director, Dan Cravens; and Senior Manager, Chris Irvine. [Operator Instructions] With that, Vasu, thank you for joining us this morning, and I'll turn it over to you.

Thanks, Savi, and good morning, everyone. It's a pleasure to be with you today. Since the beginning of the pandemic, the American Airlines team has worked nonstop to solidify our business. We focused on our Green Flag Plan to reset the airline and ensure American exits the crisis stronger than ever. That plan focused on 4 key objectives: doubling down on operational excellence, reconnecting with our customers, building on the positive momentum we have established with our team and passionately driving efficiencies. Now that the Green Flag has dropped, our customers are returning to travel, and we're ready. During the pandemic, we focused on furthering our innovative partnerships with airlines like JetBlue and Alaska to improve our value proposition to customers. We've also reshaped our own route network to focus on where customers want to fly right now, and we are planning for exciting new routes in the future. And we have continued to simplify and harmonize our fleet to be more efficient both operationally and financially while offering a more consistent product for our customers. When it comes to our balance sheet, we ended the second quarter with more than $21 billion total available liquidity. With this record amount, we have begun the deleveraging of our balance sheet, and we feel good about the future. Demand has come back in a big way. American flew 44 million passengers, more than any other airline in the second quarter. For the summer season, we increased our operation rapidly, adding as many flights as the entire old US Airways would fly in a typical summer. With respect to the current environment, this has been and will -- and we expect will continue to be a very choppy recovery. Passenger demand and revenue in July was better than we had estimated. However, the recent uptick in COVID cases and related headlines created some softness in [ closed-end ] bookings with a corresponding increase in [ closed-end ] cancellations. Currently, August revenue is trending below our previous internal forecast. However, given the fluidity of the current demand environment, we are not ready to make definitive adjustments to our capacity plans or guidance at this point in time. As we have throughout the pandemic, we will continue to be nimble and make adjustments as and when needed. While we still have work to do before we get to prepandemic demand and yields, we remain very encouraged by what we're seeing and hearing from our customers about the future. In fact, even with the uncertainty I just highlighted, our booked business for the holidays remains incredibly strong. With all that, we couldn't be proud of the American team. Thanks to their hard work and dedication, we are well on our way towards a recovery. And with that, I'm happy to take any questions you might have, Savi.

Appreciate that, Vasu. Maybe just to kind of go off of what you were talking about a little bit on some of the demand softness that you're seeing in August, American was -- in the last earnings call, you were kind of upbeat on the return of business demand, especially in 2022. What does -- do you see business demand maybe -- I think the thinking was maybe in October, mid-October, you'll see the -- a little bit more of a step-up and more meaningfully in 2022. Does the current environment kind of change the thinking in how you're approaching the end of the year and even your kind of view on 2022 business demand?

Yes. That's a great question, Savi. And look, for us, really, as we thought about our revenue plans for the year, the big slope that we had anticipated was what we call the Q2 transition that we saw early as so many states where we have hubs in Texas, Arizona, North Carolina reopened that there was a surge in leisure demand, followed a few weeks later by growth in really small and mid-market business travel, followed by larger corporations coming back to market. And so expecting that, we anticipated a big step-up in Q2 as reopenings happen and then a more muted rise to revenue through the rest of the year where kind of sequentially, there wasn't going to be that much, we didn't anticipate that much change to the growth in business demand until we got into Q4. And where we looked at Q4 as more of an inflection point was that then you'd have schools back to starting and companies back to office. And so everything was kind of pointing in that direction. It certainly seems that with delayed returns to office that -- and those plans will probably be a little more muted. But that said, as we look out there, we were really pretty conservative on how we kind of planned both the airlines revenue production and capacity plans into the rest of the year. So we do anticipate that there will be a more -- a slower recovery in business demand than what we've seen, but there will still be a recovery in business demand. It'll first come in short-haul domestic types of itineraries. As more markets such as the U.K. open, we do anticipate that in Q4 of this year, Q1 of next year, there will be some more transatlantic business demand certainly than what we've seen in quite a long time. But then for the really long-haul trips to the South Pacific to Asia, things like that, it's probably a much longer time horizon before people are ready to go jump on a 16-, 17-hour itinerary to go somewhere.

Makes sense, especially with masks.

Indeed.

And somewhat tied to this kind of faster recovery that you talked about, at least on the leisure side, most U.S. airlines have experienced operational challenges at some point this summer. And it appears kind of beyond kind of the typical, we always know summer weather is a tough one, kind of storms come out from nowhere. Could you talk about what American has experienced on this front and if there are any longer-term implications either to the cost or growth as a result?

Yes. Look, this summer, as challenging as it has been for us operationally, it's probably equally educational. I know that's maybe a small solace when -- given some of the customer difficulties that have been out here, actually, difficulties for our team, too. But we've said all along that in the pandemic, the airline effectively took itself down to nothing and was building -- it was -- we were really resetting the airline. And through that, we realized there's a ton of things, a ton of our operational processes, of our planning and scheduling processes, of our revenue management processes, whatever it might be, that were tuned really, really well when the airline was built to a certain level of scale and its size would fluctuate plus or minus 2% or 3% over the course of the year. But when it's going -- when in a 3- to 6-month period, it's effectively doubling its size every 2 or 3 months, like that rate of growth is a very different thing. And so all of a sudden -- and given the fact that we had changed so much of our staffing levels and where our support airplanes were, that ramp-up was challenging not just for us, but I'd probably wager for the entirety of the -- of really the global industry that's -- that presents a unique level of challenges. And unfortunately, our customers and our team bore that. But through that, there's also been an immense level of education because there are so many processes that this airline has been built on that are really legacy processes, vestiges of bygone companies that no longer exist anymore. And whenever something breaks, it's a chance to fix it, fix it right. And so in great credit, David Seymour and the entirety of our operations leadership team, whenever there have been problems, what we look to do is go solve them at the root. So to bring it back to your question, actually, far from us being -- feeling more, whatever, challenged or intimidated about what this might mean for our future prospects, future growth, how we execute capacity plans for our front, we feel actually more confident about it because now we actually are building processes, systems, people, organizations that are tuned to the airline that we're looking to deliver.

Do you see -- kind of given what you've learned and then also this kind of maybe a slower ramp-up in business demand in the fourth quarter, are you relooking at fourth quarter capacity plans at all at an operationally or business -- or demand-driven standpoint?

Not really in a major way. I mean we are -- we continue to assess things. Of course, the -- how and when businesses come back to office will be meaningful, maybe less so in terms of the absolute level of capacity production, but much more so in terms of the mix of capacity production that's out there. Certainly, as we get into Q4, we were -- and you can see it in our published schedules there, we are anticipating a certain level of business demand. If that fails to materialize, one of the great blessings of our system is that we have a lot of ways that we can redeploy that capacity and things that we know will be cash positive flying, whether it's leisure market trips or trips in mid-continental markets, whatever the case might be.

Makes sense. And that brings me to another question that as you kind of pivot to the leisure side, which has been really strong, and American has had a lot of exposure to the markets where people want to go to, do you have a view on if the leisure strength that we've seen in domestic and international here this summer, is that a sustainable new normal or is it reflecting pent-up demand or redirection from like lack of international options -- long-haul international options for passengers?

Yes. Savi, look, that's an excellent question and one that we think about a lot. And I think as we stand today, our answer will probably be both. That is that, one, there was definitely -- there were aspects of what we saw over, I'll say, the last 4 to 6 months, which are probably a little impractical to expect. We would see people who would leave from Dallas, Texas on a Tuesday and go to Bozeman, Montana, and they would come back the following Wednesday. That's -- that probably works in a world where everybody is working from home and children aren't in school and things like that. But in any sustainable form of the economy's future where at least schools are back in session, some more meaningful amount of people are back at work, it's unlikely to think there's going to be nearly as many of those trips as what they were. But what does seem like a more pronounced shift to us, and we certainly see this as we talk with a lot of our partners, whether they're corporate accounts or our credit card partners or whatever it might be, is that if people have realized anything over the last 1.5 years, you can replace a lot of things, you can replace going out with eating in and working at the office from working at home, but the one thing you can't replace is connecting with other people. And the core product that we offer to customers is the ability to connect with other people. And there is definitively a great amount of consumer desire to do more of that. And to your point, there's a level of savings, which is really quite unprecedented in contemporary times. And so you put those 2 things together, yes, we do anticipate that there's going to be a different kind of leisure travel. And that may not be the leisure travel, which is leaving on Tuesday to go to Bozeman, Montana, but we certainly see it across any form of visiting friends and relatives markets. And we used to think of visiting friends and relatives market as just people going to Caribbean Islands or India or places like that. Now we see visiting friends and relatives as people going to Abilene, Texas and things like that. It's a much bigger and more diverse pool of customers than I think we had -- we would have reckoned with before.

And as I look at talking about having the hubs in the right places, even precrisis, American has been concentrating a lot of the growth in Dallas and Charlotte. Could you describe how the kind of the various American hubs are utilized and if the rules have changed as a result of kind of the last year?

Yes. Well, it's funny you should mention that. There was probably a bygone time in our airline where I think we had a more dogmatic view that all the hubs should be utilized for certain purposes and their purposes shouldn't cross. And that was -- we used DFW for things that we didn't use Phoenix for and Charlotte for things we didn't use DFW for. And indeed, through the pandemic as much as anything, that has very much changed our view on that. But the thing that we do better than anybody in the world is connecting people from all the small cities of the Americas into the global marketplace, whether that city is Abilene, Texas or Bogota or whatever the case might be. And so the more of that we can do, the more of those O&Ds that we can make, the better it is. And so if we can take these things -- wherever our hubs may be regardless of the geographic location, the more and more we can construct O&Ds that are unique for the customer, that creates unique value. And unsurprisingly, when you create unique value for your customers, they pay you more and fly you more. And we've seen that throughout the pandemic. And so for us, far from having defined roles that this hub must do X or that hub must do Y, we just -- well, we want to use the hubs for us to maximize their full scale potential because the marginal cost of adding another flight into Philadelphia Airport or Phoenix or something like that is relatively small. But the customer value creation, therefore, the revenue generation from it is massive. So we can't fly as many times as we -- like flying into El Paso used to be a thing we did in regional jets. We fly it in mainlines or we fly it from Chicago and Phoenix and DFW. We overfly DFW to Charlotte. And so the more we add to those cities, the more we seem to add. Probably the lone exception to it is how we think about long-haul international where Miami will always be the cradle of our Latin America network. And increasingly, Seattle and DFW will become the cradles of our Pacific network, augmented by some trips from L.A. And New York and Philadelphia will both be massive transatlantic gateways for us. And they'll be complemented by services across every one of our hubs and even a couple of spoke cities that are out there. But other than that, our goal is just to create as many unique O&D combinations for the customers as we can.

And actually, that brings me to -- you have kind of rolled out these very unique partnerships in the domestic market with Alaska and JetBlue. Does those partnerships change how you think about the hubs, too? Or like does that change anything at all for the hubs?

Absolutely, it does. Yes. It very much does. For the simple reason, American Airlines has long been kind of a strange network in that the parts of our system that outperform, which are domestic and flying to small cities, the kinds of which many people wouldn't know what the airport codes were, were really, really strong, but we've historically underperformed in some of the large business markets that were there, which are the 5 or 6 major cities along the West Coast and New York and Boston. And that, of course, also led to real underperformance in the international network because so much long-haul international demand is based out of those, call it, 6 to 8 cities that are there. And they're not really easy cities to go and connect when you have to backhaul one of your mid-continental hubs to fly them. So it very much does change things because what it means is that for the first time, American has really the best possible network for customers. And the more we can integrate with JetBlue and Alaska, the more we can create that value for customers. And we're already seeing that in play. Certainly in the New York and Boston area, the level of competition that AA and JetBlue have brought has probably been -- I don't think it's hyperbolic to say that it's probably without precedent, certainly in the post 9/11 era. But now we have flatbeds in all of the transcon markets. We have -- we are the fastest-growing airlines in the Northeast. And that's a huge, huge benefit to customers and that does change how we think about things. Because we have New York and Boston and the West Coast, we realized in places like Austin, Texas, we actually have a really ubiquitous network for the customer. And the only things we need to go do are fly trips like Kansas City or New Orleans. So it is very much changing how we think about the world. And integrating those partnerships so that a customer who willingly choose an AA, JetBlue itinerary over an entirely online network from one of our competitors is a massive corporate priority for us and one we are keen to deliver for the customer.