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

Okay. Good morning, everyone, and thank you for joining us today. My name is Peter Arment. I'm the senior aerospace defense analyst here at Baird. We're very pleased to have with us the management team from American Airlines. This is a formal presentation. We'd encourage anyone who wants to send a question via the web portal. If time permits, we'll try to squeeze those in. And from the company, present today is Robert Isom, the President of American Airlines; also Derek Kerr, Chief Financial Officer and Executive Vice President, is also available. With that, I'm going to pass it over to Robert, and thanks again for coming to the conference. I appreciate it so much. Thanks, Robert.

Okay. Hey, Peter. Good morning. I've got Derek and also Vasu Raja as well. So I really look forward to talking about what's going on at American. Look, we had earnings just 3 weeks ago. So there hasn't been -- there's been a lot going on in the business, certainly, but there hasn't been a lot of new news, although we'll touch on the opening of -- or the removal of the 212-F restrictions on foreign nationals traveling into the U.S. that happened on November 8. That's been something that, I think, is notable. So what I want to do is just take people through a number of slides, recap where we've been and what we're looking at going forward, and then we'll open it up to Q&A. Just first off, third quarter results, they did show strong improvement despite the Delta variant impact. Our total revenue increased by 20%, and that was on just a 12% increase in capacity. Third quarter, net of $169 million, and that, excluding special items, the net loss of $641 million, which is the smallest loss since the pandemic began for -- in a quarter for us. So we're prepared for the recovery, and we're taking aggressive actions. And we're positioning American to not only survive the pandemic, but also thrive as demand rebounds as we get into 2022. And why is that the case? Look, we've taken $1.3 billion of cost out of the business. And a good way to look at that is just go back to 2019 and take a look at our results in 2019 and remove those $1.3 billion worth of cost. We're operating this airline with 10% fewer aircraft producing about the same -- to produce the same ASMs. And we're really pleased with the amount of rationalization that we've done in the business. During that time, it's not just been about reducing cost and getting more streamlined, it's also about making sure that we are taking a look at our network from an organic and inorganic perspective. And to that end, we've done some really nice things in terms of broadening, extending our network, joining up with some other partners that will benefit both us and those partners as well as we go forward into the future, making American very, very competitive in certainly every place domestically and even stronger internationally. The other point I want to make is that we have a clear path of deleveraging by $15 billion by the end of 2025. And we'll talk a little bit more about that. So just first off, in terms of the recovery time line, you've seen us use this chart before. The green dots here are to show our feeling is -- in terms of recovery, and it would be coded as green, yellow, red. And the news, I think that's notable in terms of long-haul international, we've taken that from a red to more of a yellow. So the recovery time line, as you know, we've seen domestic leisure demand strong, all the way from the second quarter on. Short-haul international has behaved much like domestic leisure travel. And domestic business, we'll, again, talk more about this. We saw some really nice recovery as we went through the middle of the year. And of course, the Delta variant did put a little bit of a damper into that recovery. And I want to talk a little bit more about where we see things going forward. And then just long-haul international, just quite frankly, we're restricted from flying. A passenger base that really wanted to get into the network, those are foreign nationals. Again, 212-F being removed, we're seeing really good signs. I talked to our London Heathrow team on November 8. And they had fantastic stories of nearly full flights coming out of London, Heathrow; 40,000 customers coming out of Europe on that first day back. So we're pleased with what we're seeing. So how does that all add up in terms of revenue recovery? Well, as I said, leisure revenue, through July, it recovered to levels that we had seen in 2019, actually, a little bit more than that. And that strength has continued on. What has fallen off is really business travel. That business travel is a lot of different companies, big companies, small companies. The way we break it out is just in terms of those big corporates that represent, Vasu, about 50% of the business?

Correct.

And then smaller, the other 50%. So that 64% that you see that we recovered to in July, actually corporates lagged that by quite a bit. And so from a small business perspective, they were actually rebounded to a much higher level than that 64%. So that gives us great confidence that we were on the right trajectory, the business was coming back. And where small businesses grow, I can tell you, corporates aren't too far from following. The Delta variant definitely put a damper that. And so as we look forward and as we get into the holiday season, we fully anticipate that the strength that we've seen in the leisure business will continue. And what we're hearing is, is that we've more or less delayed the recovery for business travel by 3 to 6 months. And what I'm hearing from CEOs, from our Corporate Customer Advisory Board, which is the top 50 corporate customers we have, they've said, "Hey, we're going to get back to it. At the beginning of the year, we're going to get back in the office." And that trajectory that we had seen growing from virtually nothing in January, up to 64% of 2019 levels in July, we're going to be back on that track as we get into 2022. And we fully expect that business travel will rebound to 2019 levels as we progress through the year and get to the end of 2022. Okay. Some other signs of encouragement in the business. This is our AAdvantage program. Look, it's one of the largest loyalty programs in the world, the largest airline loyalty program. And we're pleased to see that our acquisition numbers have now rebounded and actually surpassed by a considerable amount, those levels that we were at in 2019. And I know many people are interested as well. A big part of the AAdvantage program is also access to our co-brand credit card. And on that front, we've seen spending on those credit cards return to almost the level that they were in 2019. So both on acquisitions and spend, 2 good things. And let's face it. We're still flying a schedule that's considerably smaller than we were in 2019. So revenue performance. We had a -- throughout the pandemic, we've been very proud of the work that American has done to make sure that we are taking AAdvantage demand and where demand resided. And so you saw us throughout the pandemic, 4 quarters in a row, where our passenger unit revenues outpaced those of our big network competitors. As we went into the third quarter, look, we're still really proud of where we're at and find a much larger schedule and 15% larger than the nearest network competitor. Look, we feel good about where we are and our ability to outperform the industry as we all get back up to full strength. As you see, in terms of total revenues, as we look into the fourth quarter, our estimates remain the same that we'll be somewhere in the 80% range of rebound versus where revenues were in 2019. Okay. Liquidity. It's important that we have the resources, again, not just to weather the storm, but also to position American to do what we need to do in 2022 and beyond. So to that point, we ended the third quarter with approximately $18 billion of liquidity. And that includes prepaying $950 million associated with our spare parts term loan. We are focused on significant deleveraging. And with $12 billion of prepayable debt, $7 billion of lease liability reduction and $6 billion of pension contribution, we're confident that these are all numbers that we will manage very well as we go forward. And just to note, the chart on the lower right of our debt, 30% is prepayable; and then 75% of our total debt is amortizing naturally throughout the year. So balance sheet repair. Deleveraging is important to American Airlines. And to evidence that, we prepaid $950 million, as I mentioned, on our spare parts loan. And I want to underscore this, that the Delta variant and the delay of business travel and international travel being impacted by restrictions, all the way until this month, it does not impact, it doesn't change our target of reducing $15 billion in debt by the end of 2025. It doesn't change, again, our intention and our plan to accomplish that. So the priorities, prepayable debt, freeing up high-quality collateral and addressing the short end of the maturity curve debt. Now what I want to point out here is that when I -- when we identified $15 billion of debt reduction, look, we know that there is going to be some aircraft financings we have to do. But that $15 billion of debt, it is -- it includes those financings as well. So I want to underscore that. Now getting back to profitability -- getting back to sustained profitability is our intent. And we're doing -- we are going to do that as soon as possible. Passionately pursuing efficiencies is one of the driving themes of everything that we do here. And that's both on a day-to-day spend and also longer-term projects. So getting our fleet in a position where we have common interiors and not only that, with the amenities that customers want has been something that we've continued to spend capital on. And we're pleased to report that we're going to be done with this refreshment, which adds seats to our planes, which is, I think, a very important note. That project is going to be done as we get into the first quarter of 2022. And overall, capital expenditures. As you can see on the slide from the lower right-hand side, look, we have these well in control. American Airlines has went through and has accomplished our fleet modernization program. We're very pleased with where it is. We have the youngest fleet of the network carriers. It's going to continue to benefit us long into the future. What others have said -- say that they're going to do, American is fortunate to be in a position that we've done it. And as we take a look in the horizon, our capital expenditures are certainly manageable and reasonable for this airline. So as I mentioned, we've spent a lot of time making sure that American can offer our customers the product that they want, when they want it, where they want it. We can do that through flying to different points on our own, but we can also do it by making sure that our relationships with partner carriers are strong and, where possible, we're doing new things. And to that end, the JetBlue and Alaska partnerships, they enhance American's domestic network. The stronger the American's domestic network get, the stronger that we are globally as well. These are fantastic partners. And we've created relationships, which increase demand, help our customers benefit through new product offerings, being able to fly places that they would not before, and we see it in the marketplace today. We're growing our operations in places through by adding international flying that would have not been possible, both on the East Coast and the West Coast. So we're really pleased with the relationships with JetBlue in Alaska and very confident as we go forward about building on that. And that same sense of making sure that we're leveraging our assets and then where we can partner with others, it extends to other parts of our network. And so we're highlighting here some of the new and innovative thinking that we're doing with both Indigo in India and also GOL in South America, 2 fantastic partners. And those will both become bigger parts of our network as we expand flying into India and certainly strengthen our already industry-leading position in South America. And we're not stopping there. I'll tell you that we have the ability to enhance relationships with other oneworld carriers and really strong oneworld carriers that are important in other parts of the world where we don't have quite the presence we'd like to, like the Middle East and like India as well. So I really am looking forward to what comes even on top of the relationships with JetBlue and Alaska. All right. While it is going on as well, look, in terms of commitment to sustainability, I'll just start with this, the best thing you can possibly do is to burn less carbon or to emit more carbon is to fly new aircraft, to have new engines, and we've done that, obviously. But we're not stopping there. You've seen that we have launched a relationship with Breakthrough Energy Catalyst. And that's a group that has a committed set of partners, BlackRock, BCG, GM, Microsoft, and we're proud to be part of that. And our investment in that is to ensure that we are improving our ability to run our fleet, to do it with sustainable aviation fuel and do it in a way that serves our customers and takes care of the planet. So we're really pleased with this. And we know that the relationship with Breakthrough Energy Catalyst is one that will certainly further our desires, but also create new and innovative solutions to all parts of industry. So I'll wrap it up with this. On a GAAP and non-GAAP basis, back in June and July, American Airlines was profitable. And that was with business demand and also long-haul international traffic just at a fraction of what it was in 2019. We've done some really great things to improve the network. We've got a focus on making sure that American is being very mindful of our balance sheet and deleveraging. We feel very good about 2022 and the foundation that we've built. And then our focus is on running a great airline and getting back to sustained profitability as soon as possible. Everything that we do in 2022 is going to be focused on and has to tie back to those objectives. And we're committed to making sure that we both run a great airline and we do get back to sustained profitability as soon as possible. So thank you.

Okay. Can -- Robert, can you can hear me?

Yes, we got you.

Okay. Great. So well, I mean it's hard to believe is a year ago that we were all sitting here and having dinner. But the amount of progress that you just went through is incredible, really impressive American Airlines has made.

Just to clarify, so on your conclusion, one of your bullets had the $1.3 billion takeout of the kind of the cost base. If you look at it from when and if you kind of get back to the 2019 ASM levels or revenue net levels, is that -- should we look at it as incremental? So it's the -- I think you had $3.7 billion back to 2019's. Is that $1.3 billion additive to that when we get back to those levels? Or what's the way -- the right way to think about that?

Yes, Peter, it's definitely additive to that. So it's -- what we did is really took it off of 2019, and we said if we ran the airline like we did in 2019, we could do it at $1.3 billion less. So you can add it to that number. And there are other cost pressures and things that have happened since that time frame. But the best way to do it is to take the 2019 and take the $1.3 billion off.

That's really helpful. I guess one of those cost pressures would be around extra holiday pay, things of that nature. Maybe you could just talk a little bit about kind of the rationale for that? And how you're approaching that in general?

Sure, Peter. So -- and while that may be something that, look, we've got an incentive that we want to certainly encourage and thank our team members for getting out there and doing their work as they always do. That's not something that I view as an issue on a go-forward basis. But I'll tell you, hey, look, it's been a challenge throughout the world in every industry to manage as we build -- as we all get back up to full scale. And with the pressures of everything from not just COVID, but vaccination mandates and then, let's face it, misbehavior on planes and flight attendants being assaulted and things like that. So we thought just a really -- an important gesture and recognition and encouragement to our team to make sure that we have incentive programs out there as we get to the busiest travel days of the year. And to that end, it's -- our flight attendants have been really pleased with that. And I have great confidence that all the things that we're doing are going to make sure that we have the resources in the right place, at the right time to run a great airline over the holidays. And that was the intent. And we're certainly mindful of making sure that when disruptions happen, which they inevitably will, that we have the resources in the right place to recover as soon as we can. So that's the intent, and looking forward to the holidays.

Yes. No, that's helpful. And obviously, I'm sure the broader employee base is onboard with all the things that you're going to help them. Can you talk a little bit more about the network and some of the enhanced changes and some of the enhancements that you've done that, I think, are going to be pretty powerful coming out of the pandemic?

Vasu?

Yes. Peter, I can take that. Look, very simply, I mean, the way we've looked at it is we want to make a network that's really unique for our customers. The more and more we do that, the more and more that creates value to them, and it gets reflected in our P&L. And we've seen that throughout the pandemic and something that we plan to continue. The really easy part of that is what we do with our own, as we call our organic network, where we fly our own airplanes. And we know that where we go and create the most value, which is the most unique creation for customers, the lowest marginal cost for the company are making big hubs bigger, making places that were strong even stronger, something domestic, Latin America, London, places like that. The places where our network is naturally weaker are in large coastal markets, the rest of the long-haul international network. And so we've been very conscious about not just developing partnerships, but developing them in a way where we create that value for customers, where through our partnership with JetBlue in the Northeast, we are -- just this weekend, we'll be loading a schedule, which will offer customers the largest network of any alliance in New York and Boston, almost 100 departures bigger than our competitors, flatbed seats in all the Transcon, fastest-growing international network, most premium seats in many of those markets. And there will be something like 30 cities where we have a frequency advantage. So all of a sudden, through these partnerships, we can provide a level of really unique network, a differentiated product for our customers that we've never been able to do before. And now we know that we can do it on the economics that really reflect well on the airline in the same way that DFW or Charlotte does. So coming out, it's pretty simple being -- we've built the network where almost everywhere we go, except for maybe a handful of cities in the U.S., we can offer customers the very biggest thing. And we're seeing early returns, to Robert's earlier slides, like we're seeing band enrollments grow. They are growing the most in places such as New York and Boston and Seattle and L.A. really on the strength of this new network that we've created for customers.

That's very helpful. And maybe, Vasu, one of the questions for you or not, it's about the kind of the leisure moving to kind of a more premium product. We're seeing that kind of broader trend. What are you guys doing to kind of capitalize that?

Yes. Look, we are -- we've been noticing that trend from a long time, almost for a year now, and it's one thing that we think can be a really interesting and promising development coming out of here. Because as we look forward, certainly, as international is coming back and things like that, we had frankly worried a little bit that some of what we call premium leisure or business-plus-leisure travel would start to deflate. Indeed, we're not seeing that. And there's 2 components to it. Probably not structurally, and the way we're thinking about the network, it used to be that the mid-week days were all very prototypical business days. And on Saturday, it was our biggest leisure day. Well, now we're finding that leisure demand on Thursdays can very often be as big as Saturdays. And so increasingly, the way we're configuring the network in such a way where it's easier for people to go spend 4 days working from one location, travel out on a Thursday, come back on a Sunday night or a Monday. And we're reflecting that not just in where we fly, but even how we build hub structures and things like that. So it's probably the most structural thing that's there. But then beyond that, there's a lot of things that we're doing in how we design both our fare products and our sales and loyalty programs, where we make it frankly easier for customers to go and take what we call them blended trips, that either might be somebody who is -- can work for 3 days from another location. Or even though their company has them flying in an economy seat, they're willing to pay their own money to go and upgrade into a premium seat. And so we're finding more and more ways to do that, and more to come on that in the new year. But we think that's a really potentially promising change that certainly started occurring during the pandemic, but we anticipate continuing beyond the pandemic.

Yes, that's great. A lot of momentum there. And which is why a good place to probably wrap up is maybe, Derek, you describing a little bit why you have the best deleveraging kind of story in [indiscernible] for at least -- maybe at least some of the key components to make everyone kind of understand the path to that 2025 target.

Great. Yes. And as Robert said and showed in those slides, we had CapEx up in the $5 billion range for 5 years since we got here because there was an aircraft order in place when we merged. We're through that. We're through all the CapEx. We're through all the big -- we still have some aircraft coming, but that steady-state CapEx is going to come down to $2.5 billion, $3 billion a year instead of $5 billion, $6 billion a year. So as we look at it and as we go forward, with the $18 billion, we have $10 billion of debt that just amortizes straight through 2025. We've started to pay that. We'll announce it every quarter. That frees up collateral, frees up aircraft. Most of that is aircraft by the way. And so that leaves us with another $5 billion that we said and committed to pay down through 2025. We already did the $1 billion on the spare parts loan. So that's there, and that's complete. The way we're looking at cash right now, you saw the $18 billion number. We used to run the company at $7 billion, which we actually thought was significantly more. It was probably $2 billion more than anybody else did. And so we figured we had a cushion there, not a cushion for COVID, but we had an inflation cushion because of our because of our debt level. So what we'll do at some point in time, we've said that we're going to take cash levels down in a first step to the $10 billion, $12 billion range. So that will enable us to speed up the debt pay down. But we don't want to do that until we know we're out of this, right? So we're not going to let cash go. We talk about green flag around here and everything. But my Treasurer, Meghan Montana, I have not given her the green flag to use cash, other than the $1 billion we've already done today. So we'll hold on to the cash until we see the business recover, we'll see where we are. So hopefully, somewhere in 2022. And then we can use cash to pay for aircraft. We'd use cash to pay off debt. We've got $12 billion of prepayable debt. And then we'll set the plan in motion to do that over the next 4 years. We don't have a lot of pension obligations. A lot of -- and next year, the only pay down we have is $750 million unsecured. So we've got a really good couple of years here with low CapEx, low payments and all of the cash that we have and generate above the $10 billion to $12 billion will be used to pay off debt. And I do think over time, when we get out of this and where we've got the sustained profitability, we can take that down even further. And others, as -- just as you compare others, the Deltas and the Uniteds are going to go through their aircraft replacement. And there's already a big order on the table for United, big orders from Delta. So I think we're going to see a little bit of shift where we're going to be bringing down the debt levels from pretty high levels. I mean we had to take it here to get through COVID. We'll take it down. Every bit of cash, excess cash we have, we'll pay it down, while others are going to go in the other direction because it's necessitated to replace their fleets.

Well, terrific. That's a great way to end. It's an incredible year of progress, and it sounds like you got great momentum going into '22. So thank you, American Airlines. Thanks, Robert. Thanks, Derek, Vasu, Dan. Thanks again for joining us. And hopefully, we can do this in person next year. Appreciate it.

Yes. We're ready right now. We're ready right now.

I knew that was the answer you're going to give. Take care.

Thanks, Peter. Appreciate it.

Thanks, Peter.

Thanks, Peter.