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

Good afternoon, everybody, and good morning, if you're on the West Coast. I'm Helane Becker Cowen, senior airline analyst. And this morning, this is the 14th Annual Global Transportation and Sustainable Mobility Conference. And this afternoon/morning we are joined by Derek Kerr -- I don't know what your official thing is other than Chief Financial Officer. So I don't know whatever.

That's fine.

Whatever. I can give you a promotion, I do that a lot. And with Derek is Vasu, and everybody knows Vasu, who does network planning and other interesting stuff, revenue Management. I don't know, I can make up stuff for you there, too. But it's all good and all a lot of fun. So this morning, you guys issued an 8-K. Derek, I don't know if you want to make some comments about that before we go into Q&A?

Yes, I'll do that really quick. So thanks, Helane. Thanks for having us. Good afternoon, everybody. We wish we were in Boston also. So we would get out of Dallas, and we wish we could be over there in Boston, but we understand being safe and having this virtual. But since the beginning of the pandemic, we expected the recovery would be choppy unpredictable, as we all know. But with respect to the current environment, the passenger demand and revenue in July was better than we had estimated. So July -- as of July, we were in really good shape. We provided guidance on the second quarter earnings call with that in mind. And as such, we were profitable in July. So we had come off June profitability, July profitability. But now as we look at it, August and September revenue is trending below the forecast due to the rising cases of the Delta variant and associated headlines. So in light of those current trends, as you mentioned, this morning, we did revise our third quarter revenue guidance to be down approximately 24% to 28% as compared to the third quarter of 2019. This is versus our previous guidance of down approximately 20% to reflect the softening in demand that we are seeing along with slightly lower flown capacity. So we had guided capacity down 15% to 20%, and we're at the lower end of that guidance. So we've also had less capacity. In addition, we also updated our third quarter pretax margin, excluding net special items guidance to reflect the lower revenue production of the quarter. With this change, we now expect our pretax margin, excluding net special items, to be between negative 10% and negative 14% versus our previous guidance of negative 3% to negative 7%. Even with these changes, we expect to a sequential improvement in both revenue and pretax results in the third quarter, which would be our best quarter since the pandemic began. So as we have throughout the pandemic, we will continue to be nimble. We'll continue to look at how things are and make adjustments as demand warrants. But in the meantime, we have focused as a company on our Green Flag Plan to reset the airline and ensure American exists in the crisis -- exits the crisis stronger than ever. That plan focuses on 4 key objectives that we've talked about, double down on the operational excellence, reconnecting with our customers, building on positive momentum we have established with our team and passionately driving efficiency. So we're continuing down that path. During the pandemic, we focused on furthering our initiative, our innovative partnerships with airlines like JetBlue and Alaska, and Vasu can talk a little bit more about that in the Q&A to prove our network position to our customers. We've also reshaped our own network to focus on where customers want to fly right now, and we're planning for exciting new routes in the future. As 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. We've also -- it comes to the balance sheet, we've had a lot of focus on the balance sheet. We ended the quarter with more than $21 billion of total available liquidity, which is a record for the company. We have targeted $15 billion of debt reduction over the next 5 years. And early in the third quarter, we began that process by prepaying approximately $1 billion of our spare parts term loan. So we're heading down that path. We remain encouraged by what we're seeing and hearing from our customers about the future. I think the recovery is just delayed a little bit. But in fact, even with this uncertainty I just highlighted, our book business for the holidays continues to be very strong. We couldn't be prouder of the American team. Thanks to their hard work and dedication, we are well positioned to navigate a rapidly evolving demand environment and are ready for the future. So with that, Vasu and I are here to answer any questions you have, Helane.

Well, thanks, Derek. That's very helpful because, honestly, I'm sick of talking about the pandemic. We've been talking about it for almost 2 years. It's been with us for that long. It's just that it was in the background, right, for the first 6 months of it. So let's not even go there. Since I think you said quite enough about it in your comments just now. But what can you share with us that actually you're most proud of at American over the last 18 months and maybe how you've done things?

Yes, I just think the team -- I've been doing this for 30 years, and this was something we've never seen as we look about 18 months ago and how do we react to it. I think the team did an incredible job of reacting to the environment, pulling down where we needed to pull down, raise what we needed to raise. We saved a bunch of jobs. That was the key for us. As we looked at it, it was how do we keep this airline going in the environment that we're in. I'm most proud of saving the jobs, I'm most proud of what Doug's leadership has done in this industry to help us all have enough liquidity to make it through this process. I think there was incredible work between our labor teams, Doug, the A4A, all the executives within the industry to work with the government to show how important this industry was and to be able to raise the money that we've raised to keep the airline running and to keep the jobs here. And I'm just proud of -- I'm really proud of what Doug did to lead that process and working with the labor unions. We couldn't have got it done without the labor unions, with the leadership from the labor unions. We meet with them every other week. We make sure that we're all on the same page, not always in agreement with everything, but without their help in D.C. and Doug's push, we would have never be where we are today. So I'm proud of that of what the team has done to do that.

I wanted to ask about that. Just -- I don't know if you can speak to it, but your pilots were out yesterday saying they were going to picket. I think some of the media outlets picked it up wrong, saying that they were going to strike. Of course, they cannot go out on strike.

Correct. Correct.

That is not something they can do. But are you surprised given how well, at least as an observer, how well Doug seemed to work with everybody last year to get the Cares Act financing and all the other stuff that you just referenced, were you surprised that the pilots feel this way?

We've been working very well hand in hand with the pilots union, with the flight attendants union, all the unions here at the company. And I think that work is still there. Doug has done an incredible job of making sure that, that has been a focus for us as a company. As we have grown the airline back, it's hard to grow the airline back and making sure that we do it flawlessly. We have had some issues as we've grown the airline back. Some of that have affected our employees. So what we're doing is really relooking at what we can do and how we grow it back and the changes that we're making. And we are working with the labor unions on those -- some of those issues that we have, whether -- I'm surprised that they're doing it or not, that's their prerogative as a union, and they -- it is what it is. But I believe that we are working hand in hand. We're working really well. We are keeping them informed on everything that is going on. As I said, we meet every other week with the management team. Vasu keeps them up on everything that we're doing. But I then say we have -- during the summer, we did have some issues with growing airline back, some weather issues here and making sure that we need to make sure that we take care of our employees and give them the resources that we need. And I don't think we fully did that as we grew the airline back. But I think we are in a much better position now and the last month on everything we've been running the airline very, very well. But it was some growing pains. No one's ever gone from a 50% airline to an 80% airline.

In 8 weeks.

Yes, in 8 weeks. And we could have done it better, put it that way.

Got you. So let's just move forward. How are you -- maybe this one is for you, Vasu. How are you thinking about the hub structure as we go forward? Like pre-pandemic and even last year at our conference, at this conference, you've discussed the importance of Dallas and Charlotte. You were expanding those hubs. You had a lot of new construction that had been going on there. And then DCA came on stream with improved regional connectivity. So how are they going to look going forward? How are you thinking about that? And maybe I want to talk about it in the context of the Northeast Alliance and what you're doing with the Alaska? But maybe that's too many questions all at that once.

Well, okay. No, thanks, Helane. Let me start with the first part, and then feel free, I'm happy to talk about the 2 domestic partnerships also. But look, the pandemic has -- we always recognize that we're very fortunate. In fact, the word we often need is very blessed having this huge domestic network that we have. Through the pandemic, we've even realized even more deeply and greatly just what great fortune we've got because we -- the reality is we have such a massive presence in so many major U.S. cities. And indeed, by creating more connectivity in our system, by trying to serve more and more markets it actually improves all of our hubs. There is a bygone time. I think it might have been at this conference, I was explaining this, but there's a bygone time where we thought if we have a really big DFW, we couldn't have a really big Charlotte, or if we flew from DFW to Austin, then Charlotte to Austin wouldn't be as good. And indeed, leading up to the pandemic, we found that actually it was far from true. The more we grew DFW, and we couldn't take people east and west across the U.S. enough. And Phoenix continue to get better. Charlotte continue to get better. Through the pandemic, it's even been more the case. And now as we look forward, we anticipate actually maximizing all of the footprint we have in our hubs. And for a simple economic reason, the marginal cost of going and adding flights into Philadelphia or Phoenix is really, really small. But the marginal revenues of being able to go and buy more ways to connect people from Nashville or Austin or whatever the case might be, is really pretty significant. And I know that you don't want to talk about the pandemic recovery. However the world may recover, we do see that domestic travel, short-haul business travel, things like that will come back first and probably come back strongest.

Yes. No, it's okay to talk about the pandemic. I'm just over it.

I think we all are, Helane.

I've decided to put it in my rearview mirror and just go about my life as if it didn't -- like with my head in the cloud. But actually, you bring up an important point because you have a big international network, especially Latin and South America. And I wonder if you could talk a little bit about how that fits into growing in the next few years and what you're thinking about. Because those seem to be markets that maybe will be more of a focus going forward than maybe some of the traditional international markets have been?

Yes, absolutely. I mean, look, already, if you look at our published schedules, you get into the fall and where at some 15% to 20% bigger across what we call MCLA, Mexico, Caribbean and Latin America. And we do see that as something going forward. It's an area, yes, where we have always had not just a really great product, a really great network but a huge customer base, which interestingly is not a U.S. originating customer base, almost 65% of our customers that climb on our airplanes in MCLA actually claim their place of residents somewhere in MCLA. So as we see it, that's a really big opportunity for us because we're so strong domestically, so strong in those markets. There's opportunity to expand the network, but also as we think even broader than that, one of the great ways we benefit -- our comprehensive network in domestic U.S. enables us to go and sell miles, currency to other parties, which generates a lot of value for our customers and for our investors. In South America, we see opportunities, however small they may be, they certainly would pale in comparison to domestic U.S. But the one thing we don't do in South America is offer short haul and domestic connectivity in a lot of markets. And so we're looking to create partnerships that do that and enable us doing further the reach of our loyalty program there.

Actually as you think about that, is that a big opportunity for the credit card and expanding that? Because a lot of -- that whole South America, Latin American market seems to be right for expansion in that aspect of the business, financials, almost financial services. Banks don't really -- at least the local banks don't seem to be egalitarian. And I wonder if that's an opportunity for the American Airlines Citi credit card?

We do see an opportunity. In many of those countries, we have a credit card today with different providers. We often find is that our rates of AAdvantage membership are comparable to domestic U.S., our rates of credit card ownership are actually greater than what they are in the domestic U.S. So we do see that as an opportunity. Now it's a very different marketplace where consumer spending, especially consumer spending on cards at large is a fraction of what it is in domestic U.S., but it is an opportunity for us. And as we see it throughout the world no matter how big an airline might be to Asia, Europe or what have you, it's really being able to offer a really kind of ubiquitous network to the local customer that can enable the expansion of the loyalty program. And that's something that we can uniquely do and uniquely do in Latin America because of just how big we are and how strong our brand is with the customers that are there.

Got you. And I want to come back to the Northeast Alliance, but Derek, you alluded to this in your comments about the balance sheet. And one of the big strengths for American was going to be the fact that you'd already done your big fleet replacement program. You did $25 billion worth of -- or maybe even $30 billion worth of aircraft in the teens. In the 2010s, whatever. However you refer to that decade.

Yes, exactly.

In the last decade. And then you weren't going to have to really do that. So as you look forward now, what do you think is the right -- yes, no, leverage, cash balance -- I mean cash balance. Because you and I have talked about this in the past, you capped higher cash balances to address the balance sheet issue. And now are they going to have to be even higher? Or how should we think about that over the next couple of 3 years, maybe?

Yes. I think the way to think about it is we ended the quarter with $21 billion, all right? And we said, over time, we can take that number down to $10 billion to $12 billion. So we've already said -- made that as a first target of where we're going to go. So we have been looking at the debt levels. We committed to a $15 billion debt reduction. $8 billion to $10 billion of that is just amortization. So as we look at the next 5 years, we're going to amortize $8 billion to $10 billion. And as you recall, when we sat in 2019, we said the same thing. So that is still going to happen and we're just now at a higher level. So we have higher cash balances and higher debt levels. What we've committed to is all of the cash above that $10 billion to $12 billion is going to go to pay off the debt. So we started that process at the end of the earnings call -- or right on the earnings call and spent about $900 million to pay off prepay the spare parts loan that was due in 2023. So we did do. We took the first step there. So if you take the $8 billion to $10 billion and add $5 billion to that, we've already done $1 billion of that -- of the next $5 billion, and we'll look for opportunities as we go forward. The thing where we're at today is because things are choppy and the recovery is choppy, we're not yet ready to take the cash levels down to the $10 billion to $12 billion. And so we're going to hold on to cash as long as we can as we go forward. So -- but once we feel comfortable where we're at, we'll have excess cash that we will use to pay off debt or to pay cash for aircraft because we have some aircraft coming in the first and second quarter of next year, that would, in our original plan, as we look at a 5-year plan, we would assume that those are financed, AADC finance, sale-leaseback finance, 80% finance. So we would have that in our plan. We could offset that extra debt by paying cash for aircraft. So as we look at the end of the year, we'll let the recovery happen, we'll see where we go. I don't expect too much movement until the end of the year. But as we get into 2022, we're going to have, where we believe the earnings are, we're going to have cash generation and excess cash to be able to do that and to take on that extra $4 billion that I talked about pretty quickly. I don't know if it's going to be first quarter or second quarter or whatever. But we can take that on pretty quickly because we should take the cash down to that $10 billion to $12 billion. We don't need to hold $20 billion worth of liquidity in today's world. And then the question, as you move forward as things go, which we will work with our Board and we'll work with our finance committee on this is where is the ultimate cash level? And what -- will we have more excess cash to pay that off? So we have a plan. We have an entire plan to go forward. We always talk about the green flag, but I have not given my treasury department to Green Flag to move yet. It's prudent for us to hold on to as much cash as we have today until this recovery happens. We thought we were in one spot in July, and now we're in a different spot in September. So let's just hold on to it. That's why we have that excess cash now. We'll hold on until then. And then when we're ready to go, we'll use all that excess cash to pay off the debt. And we'll be smart about what we pay off. The reason we paid off the spare parts loan is because that is a very good collateral that can be financed again, right? Aircraft is [Audio Gap]

I think we lost her.

I'm here.

All right. There, we got you.

No, I am here. Somebody's screen froze. But what I was going to ask you about this big cash balances is do you -- you've got an open contract and some other open contracts that are coming up. Do you also have to be in aware that your employees are going to want a bigger piece of the pie?

Sorry, Helane, you're going in and out, and we can't hear the question.

I'm sorry. I don't know why. What I was going to ask -- is this better, maybe?

Yes. It's good.

Okay. What I was going to ask about it is you've got some open labor contracts. And when you have big cash balances, you also have to weigh debt paydown against employee expectations of higher wages. So how do you balance those 2 seemingly not necessarily going down the same path?

Well, I think we have a 5-year plan that projects out what the earnings are, what cash is going to be, what capital is going to be. And we have assumptions in those plans as to we know that labor contracts are up and we're negotiating them. So we're in contract talks now with the flight attendants, with the pilots and our groundworkers are going to -- or the airport workers are going to be in contract negotiation pretty soon. So we have an assumption that that's going to happen. We know it's going to happen. We want to get deals done with those groups. The timing of those deals is dependent on the recovery and how quickly we can get deals done. But we have an assumption that that's going to happen. So that will increase the labor cost as we go forward. So that built into our plans and have that into our cash flow for what is going to happen in 2022, '23.

Got you.

'24, '25 of the debt and doing the $4 billion to $5 billion. Those are all in that number as we look forward to it.

Got you. Okay. That's very helpful. So Vasu, let's talk a little bit about the Northeast Alliance and Alaska Air. I know it's really early days for the Northeast Alliance. But are you happy, surprised, anything? Maybe any comments you can make about it would be helpful.

Yes. Look, we're really happy with the Northeast Alliance and with our West Coast Alliance, I'll speak briefly about both. Look, in the Northeast, I mean, you see us adding flights and no airline is growing back in New York faster than AA and JetBlue in part because of what we see there. For years and years, American had a declining share of originating New York and Boston customers. And now we're seeing that start to arc, especially as we look out into Q4 and people are starting to fly back bigger schedules. And a lot of what's changing that is frankly one thing, which is jetblue.com, that where we have actually haven't enabled a lot of our connections between domestic and international just because we want to get the customer experience right. But we are selling -- like AA flights are being sold on that website and vice versa to positive effect. We are putting more and more people on JetBlue market such as New York to the transcons. Our Tel Aviv flight, our Athens flight are increasingly filled people booking through jetblue.com. So we're really excited for that and see a lot of opportunity on the other end of it. Similarly, on the West Coast, so much of that alliance has been really at the behest of the [ COVID restrictions ] across Pacific. We have plan to fly Heathrow, Shanghai, Bangalore. And Heathrow is out and running and increasingly getting better as the partnership grows and expands, and we're seeing more connectivity come from the Alaska network and frequent flyer program. Shanghai, we haven't been able to do just through getting regulatory authorities. Bangalore is one where it's really heavily dependent on a few corporates who aren't back to office until January. So that may impact its timing a little bit. But by and large, we're really pleased with it in Seattle. And surprisingly, very pleased with it in Los Angeles, where Suddenly, we're seeing a lot of connectivity and originating Los Angeles customers that we haven't seen really in years.

And the 2 teams work.

Yes, the teams are working together extremely well. We're increasingly at a place where like already by October, we will have a greater level of integration between Alaska, American and American JetBlue than with any of our existing -- our preexisting partners. So it's been a lot of progress all these companies have made through the pandemic, and it's going to be great for our customers and team coming out of it.

Got you. And then in line with that, is there -- are there opportunities to expand oneworld? It seems to be the smallest alliance among the 3. So are there opportunities to grow that to?

Yes. There are some potential opportunities to grow it, too. But as we see it in our partnership network at large, most of the major geographies are covered out there. What our biggest focus is, is really integrating the partnerships that we've got. If you look at it through many, many years, lets call it, 25, 30 years of airlines doing some form of code share, it is still not seamless to customers in the same way that taking an all American Airlines flight is or Envoy connecting to American Airlines or whatever the case might be. And to really reap all the value of these things and produce all the value for customers, we create a level of integration that hasn't existed yet. From everything that is simple and obvious as being able to get a seat assignment back and forth, to getting an upgrade back and forth, to harder problems like co-locating our equipment and things like that. So we are looking at it because for us, we see it as a great means of growth for our customers and our team.

Got you. Also in the area of sustainability, I'm not sure if it's you Vasu or Derek, it's you to answer. What surprised me, I guess, the most in the last 1.5 years is that in 2018, nobody really talked about the sustainability question, climate change or things like vertical aerospace, which is something that you're, I guess, pondering an investment in or have agreed to buy aircraft from if there's an aircraft to buy at some point in the future. And I would have expected in 2020 for that kind of go to the back burner. And instead, it's in the front burner and it's on everybody's mind. So how are you thinking about getting to your net carbon neutrality by 2050?

Well, I'll start, and Derek can add in. There's -- I think there's ways that are probably more fundamental and then ones that are more kind of experimental. For us, the more fundamental thing is just how we think about the fleet, right? Being able to upgauge the fleet, operate more fuel-efficient airplanes, things like that is a fundamentally good and a big thing. Also, greatly having a connecting network because that enables us to go and provide a lot of market for customers. We can serve a lot of demand without having to go fly -- 50,000 markets without flying airplanes 50,000 to go and do it. So operating that and doing that well actually has a lot of efficiencies, not just for the airline but for our long-term sustainability footprint. And then through the pandemic and even leading up to it, what we have looked at are things such as vertical take-out vehicles, things like that. And it may be a long time before somebody is getting on one to go between New York and Boston. But as we see it, the only way that technology is made available on big airplanes that there's real investment around smaller airplanes, where the technology could be proven out. And so though it feels experimental now, we see it as a pretty easy and low-risk bet on what's going to be really critical for us in the future.

Yes. And Helane, I mean, it's something that's out there. I mean it's serious. We have investors that ask questions about it. There is a focus and we need -- it's a challenge for all of us, and we need to put a lot of focus on it. We've hired a director that really focuses on it. It keeps us -- keeps our feet to the fire. It's a board issue -- topic now everywhere that we need to do. For us, sustainable aviation fuel, SAF, is something that we, as an industry, really have to focus on. There just isn't enough of it out there for us to get where we need to be and there's a lot of focus with all of the airlines and the A4A and how do we grow that grow that fuel and what do we do as we go forward. So it's going to remain a focus. It's going to stay a focus. It's a serious challenge to us as a country, and we need to be in the forefront of it to make sure that we're doing our part. But one of the biggest things for us as airlines is sustainable aviation fuel and making sure that we have enough as a country to help power the aircraft.

Well, thank you. I would love to talk more, I could talk to you guys all day about this stuff because I still think there's something pretty cool about waking up in New York and going to sleep somewhere not in New York like Amsterdam or Bangalore or Cape Town or whatever else is on my bucket list of places to go over the next I don't know the rest of my life, however long that may be. But anyway, I have to say goodbye. So thank you very much. Thanks for supporting the conference. I am -- nobody is sorrier than me that we're not together in Boston, but I appreciate your being with us this afternoon. So thank you.

Thanks, Helane.

Thanks for having us.

Bye.