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

[Audio Gap] I would like to turn the conference over to Doug Parker, Chairman of American Airlines Group Inc. Please go ahead.

Thank you very much, and good morning, everyone. I am Doug Parker, Chairman of American Airlines Group Inc., and I will be the Chair of this 2022 Annual Meeting of Stockholders. We are pleased to conduct this year's annual meeting virtually, and which will allow a greater number of our stockholders to be included and participate. Joining us today are all members of the Board of Directors, several members of our senior management team. and representatives of KPMG, our independent public accounting firm. Our Corporate Secretary, Caroline Ray, will serve as the secretary for the meeting. I'll start with a brief review of the agenda. We're going to start by taking care of some housekeeping items, and then we'll move to the official business for today's meeting, which is consideration of the proposals described in our proxy statement. At the conclusion of the formal business, our CEO, Robert Isom, will then provide an overview of the state of the business, and then we'll take some questions. So first, on the housekeeping, only stockholders may ask questions in the designated field on the web portal. Out of consideration for others, please limit yourself to 1 question. The answers to any questions that are submitted in accordance with the meeting rules conduct and are not addressed will be posted on the company's website following the meeting. If you encounter any difficulty submitting questions during the meeting, please refer to the proxy statement for information on how to reach our technical support team. So I will now formally call to order the 2022 Annual Meeting of stockholders. We'll now proceed with the formal business of the meeting as described in the notice of annual meeting and the proxy statement. The Board of Directors fixed April 12, 2022, as the record date, determining stockholders entitled to vote at this meeting. An affidavit has been delivered attesting to the facts. The Notice of the Meeting was mailed commencing on April 28, 2022 to all stockholders as of the record date and will be incorporated into the minutes of this meeting. Stockholder list shows that as of the record date, there were 649,513,571 shares of common stock outstanding entitled to vote at this meeting. That list of stockholders and the number of shares held by each stockholder as of that record date is available on the web portal for any stockholder wishing to inspect it. The Board of Directors has appointed Mediant as the Inspector of Elections of this meeting and is represented by Bernard Farragher. His function is to determine the number of shares represented at this meeting and the validity of proxies and ballots, and count all votes and ballots cast as to each matter. The Inspector of Election has been sworn in, and I have his oath. I've been informed by the Inspector of Election, the shares present in person or represented by proxy are in excess of quorum requirements, so we will begin the meeting. The poll is open today, June 8, 2022 at 9 a.m. Central Time for voting. There are 7 proposals to be considered by the stockholders at this meeting as described in the proxy materials. Those are: the election of 14 directors, the ratification of the appointment of KPMG as the company's independent registered public accounting firm for 2022; an advisory vote to approve the compensation of American Airlines Group's named executive officers as disclosed in the proxy statement; a proposal to amend our Certificate of Incorporation to allow future amendments to the Bylaws of our stockholders by a simple majority vote; a proposal to amend our Certificate of Incorporation to allow all other provisions of the Certificate of Incorporation to be amended in the future by simple majority vote; a proposal to approve the Tax Benefit Preservation Plan and a stockholder proposal to provide a report on certain lobbying activity. No other matters will be considered. The first item of business is the election of 14 directors nominated by the Board of Directors. No other nominations complying with the nomination procedures in the company's bylaws have been received and the nominations are closed. Pursuant to the company's bylaws, the company's directors are elected on an annual basis. At this meeting, Jim Albaugh, Jeff Benjamin, Adriane Brown, John Cahill, Mike Embler, Matt Hart, Robert Isom, Sue Kronick, Marty Nesbitt, Denise O'Leary, Ray Robinson, Greg Smith, Doug Steenland and myself, Doug Parker, have been nominated as directors of the company to serve until the 2023 Annual Meeting of Stockholders and until their respective successors have been duly elected and qualified. Board of Directors has recommended that stockholders vote for each of the nominees. The second item of business is the ratification of the appointment of KPMG LLP to serve as the independent registered public accounting firm for the American Airlines Group for the fiscal year ending December 31, 2022. The Board of Directors has recommended the stockholders vote for the ratification of the appointment of KPMG as American Airlines Group's independent registered public accounting firm for 2022. Third item of business is the approval on a nonbinding advisory basis of the compensation of the named executive officers of American Airlines Group as disclosed pursuant to the compensation disclosure rules of the SEC, as described in the compensation discussion and analysis, the compensation tables, narratives of discussion and any related material disclosed in the proxy statement. The Board of Directors has recommended that the stockholders vote for the approval, on a nonbinding advisory basis, the compensation of American Airlines Group's named executive officers. The fourth item of business is a proposal to amend our Certificate of Incorporation to allow future amendments to the Bylaws by our stockholders by simple majority of vote. The Board of Directors has recommended that the stockholders vote for the amendment to our Certificate of Incorporation to allow future amendments to the Bylaws by our stockholders by simple majority vote. The fifth item of business is a proposal to amend our Certificate of Incorporation to allow all other provisions of the Certificate of Incorporation to be amended in the future by a simple majority vote. Board of Directors has recommended that stockholders vote for the amendment to our Certificate of Incorporation to allow all other provisions of the Certificate of Incorporation to be amended in the future by simple majority vote. The sixth item of business is a proposal to approve the tax benefit preservation plan. The Board of Directors has recommended stockholders vote for the tax benefit preservation plan. The seventh item of business is a stockholder proposal from stockholder, John Chevedden. At this time, as chair, I recognize Mr. Chevedden for a period of 2 minutes. Operator, can you please open the line for Mr. Chevedden.

Mr. Chevedden, your line is open, sir.

This is John Chevedden. Can you hear me okay?

Yes, Sir, we can.

Proposal 7 transparency in lobbying. Whereas, shareholders believe in full disclosure of American Airlines direct and indirect lobbying activities and expenditures to assess whether its lobbying is consistent with its express goals and in shareholders best interest. Resolved, shareholders request that the preparation report updated annually disclosing company policy and procedures governing lobbying, both direct and indirect, and grassroots lobbying communications. Payments by American Airlines used for direct or indirect lobbying, grassroots lobbying communications in each case, including the amount of the payment and the recipient. Description of management's and the Board's decision-making process and overview for making payments described above. For purposes of this proposal, a grassroots lobbying communication, is a communication directed to the general public that refers to specific legislation regulation, reflects a view on the legislation or regulation and encourages the recipient of the communication take action with respect to the legislation or regulation. Indirect lobbying is lobbying engaged in by trade associations or other organizations of which American Airlines is a member. This report shall be presented to the Corporate Governance and Public Responsibility Committee and posted on American Airlines website. The management objection to this proposal is a contradiction. Management in effect says that much of the information requested in this proposal can be found by any industrious shareholder with a lot of spare time by hunting through various existing reports, but it's simply too much effort for the management of a $10 billion company to define this information on 1 report for the convenience of shareholders and our directors. American Airlines fails to disclose its payments to trade associations and social welfare organizations or the amounts used for lobbying, including grassroots. Companies can give unlimited amounts to third-party groups that spend millions on lobbying and often undisclosed grassroots activity. And these groups may be spending at least double what's publicly reported. American Airlines serves on the Board of American Airlines for -- boards of Airlines for America and the International Air Transport Association, IATA, and belongs to the Chamber of Commerce and to the Business Roundtable which altogether spent $207 million on federal lobbing for 2019 and 2020. Shareholders are concerned that American Airlines lack of lobbying disclosure presents reputational risks when its lobbying contradicts company public positions or takes controversial positions. For example, American Airlines lobbying against limited baggage and ticketing change fees has attractive scrutiny. American Airlines has publicly committed to a carbon emissions reduction target, yet IATA has lobbied to weaken carbon reduction regulations for international aviation. While American Airlines believes in addressing climate change, the Chamber of Commerce and the Business Roundtable have lobbied against passage of landmark climate legislation. And American Airlines have spoken out against state voter restrictions, yet the Chamber of Commerce lobbied against For The People Act. Shareholders believe that reputational damage stemming from these misalignments could harm shareholder value and urge American Airlines to expand its lobbying disclosure. Please vote, yes, transparency and lobbying, proposal 7.

Thanks, sir. The Board recommends a vote against this proposal for the reasons provided in the company's proxy statement. Stockholders who have sent in proxies or voted via telephone or Internet and do not want to change their vote, do not need to take any further action. Any stockholder who hasn't voted or wishes to change their vote, may do so by clicking on the voting button on the web portal and following the instructions there. Only stockholders of record on April 12, 2022, are eligible to vote at this meeting. We're now going to take a short pause to allow for stockholders who have not yet voted to do so. [Voting]

Okay. The time is 9:11 a.m. Central Time and the polls are now closed for voting. The Inspector of Election has advised me that a majority of the votes previously cast have been voted for all of the director nominees listed in proposal 1, for proposals 2 and 3 and 6, against Proposal 7 and that the required simple majority of the votes previously cast have not been voted for Proposals 4 and 5. Inspector of election will prepare the certificate of the inspector of elections of the company once all those are tallied and the results will be detailed in a current report on Form 8-K, which we will file with the SEC. So this concludes the formal portion of the meeting, and the stockholders' meeting is now adjourned. Before we get to questions, we're going to take a few minutes to highlight some of what we see on the horizon for American. As with most presentations, the following discussion contains forward-looking statements, and the company's actual results may differ materially from those discussed here. Additional information concerning factors that could cause such a difference can be found in the company's annual report on Form 10-K for the fiscal year ended December 31, 2021, and the quarterly report on Form 10-Q for the quarterly period ended March 31, 2022. So I want to bring in American CEO, Robert Isom now to share a brief update on the state of the business. Robert?

Thanks, Doug, and good morning, everyone. It's a pleasure to be here with everybody today. Doug, thanks for your extraordinary leadership of American Airlines over the years. It's honor to have the trust of our team and our Board of Directors to succeed you as CEO, and I'm grateful for the privilege of leading this incredible company. So it's a fantastic time for the airline industry. Travel isn't just back, it's moving. People want to get out there and fly. We're poised to lead the recovery. Thanks to the entire American Airlines team. Their hard work and commitment to customers and each other is truly extraordinary. Our team has worked very hard to position us well for recovery. We simplified our fleet. We fine-tuned our network. We're developing new partnerships, rolling out new tools for our customers and team, modernizing our facilities and hired thousands of new team members, all while flying the largest airline in the world. This year, we remain resolute in achieving 2 key goals above all else, running a reliable airline as an operation and returning the company to profitability. We're making strong progress on both of those initiatives, thanks to the continued efforts and dedication to our team, I'm pleased to say. Running a reliable operation in the summer is critical to the continued recovery and we've taken steps to ensure that we're well prepared. We delivered a strong operating performance in recent months, and we're committed to maintaining that momentum. American has 12,000 more team members in place to support the operation this summer than we had last summer. We've already welcomed in 800 new pilots this year, which is ahead of our goal. And we'll continue to recruit, hire, train across all the departments of the company to ensure that we have the best resource, the best people talent in the industry ready to go. As we work to return to profitability, we remain focused on keeping our controllable cost down to ensure that we are a more efficient airline. We've taken $1.3 billion of costs out of the business and despite really high fuel prices, we expect our unit cost performance to improve as utilization of our aircraft report approaches historic levels. Deleveraging our balance sheet also remains a top priority, and we're committed to significant debt reduction in the years ahead. To that end, we remain on track with our target of reducing overall debt levels by $15 billion by the end of 2025. And demand is as strong as you've ever seen it. People want to get out there and travel. And the American team has done an incredible job of setting up the airline to take advantage of the demand. We set up our airlines to fly where customers want to go. We're growing and establishing new partnerships, adding to those places that people want to fly and also putting efficiency top of mind. Our fleet is the youngest and most fuel-efficient among the U.S. global network carriers and last month, we completed our narrow-body fleet harmonization project, which covers more than 500 aircraft and ensures a consistent product and better experience for our customers. We have also made updates to our fleet order book, the timing of future delivery to better meet the demand strength in domestic and short-haul international market. The future of our industry and the future of American Airlines is really bright. The pandemic has demonstrated the importance of travel and the importance of the work that our team does every day to bring people together. The demand of American Airlines is very strong, [indiscernible] demand are falling, the business and international trends are promising. No airline is better positioned to operate in today's environment than American because of our fleet, our network and everything that our team continues to accomplish. And with that, I'd like to open it up to questions from our stockholders. Caroline Clayton from our Corporate Communications Department is here to help me with Q&A. Caroline?

[Operator Instructions] With that, we will start with some on the future. What are American's main priorities over the next few years that will allow the company to maximize growth, increase revenue and ensure customers choose American when they fly?

Thanks, Caroline. Look, we're focused on 2 goals right now. It's running a reliable operation and returning to profit. That's what we have. Those are the keys to our future. And we made significant progress over the last couple of years getting to a point where we can execute on both of those. So American ended 2021 with the strongest operational performance in our company's history. And we've led in the industry. We led the industry in terms of departures while operating a much, much larger schedule than our competitors and that of course will continue on into 2022, while other carriers have struggled, especially over holidays, American has really held and our recent performance also shows that we're ready. We're 20% larger carrying more customers to more places than any other airline. And as we look to returning to profitability, that strengthen up our network and our partnerships is going to really drive revenue, not just now but long into the future, especially in an environment where people want to get out there and travel. We're really focused on making sure that we're keeping our costs in line. We're going to run an efficient airline and efficiency is going to be something that we continue to focus on each and every day. Over the last couple of years, we're taking $1.3 billion of costs out of our business. We're flying an airline that can produce the same amount of capacity that we had in 2019 with about 10% fewer aircraft. And all that is then adding up into allowing us to make sure that deleveraging is also a primary focus. And so we talk a lot about our commitment to reducing debt and we remain on track with all of our targets. So if we do all this well, American is set up for the future, running a reliable operation, taking care of customers, returning to profitability. I'm really proud of our team.

Thank you. That answers, I think, the near term over the next few years, but some people have asked beyond that, what the future will look like for American Airlines. What are you doing now to ensure that success beyond the next couple of years.

Well, fortunately, we've never stopped planning for the future. So whether it's our fleet and where I know that our aircraft changes or the investments that we've made, I don't know if people were at LaGuardia, and if you are there today, that facility is fabulous. It's really a nice place to visit. I was in Washington last week, Reagan National is a wonderful airport with regional concourse. The same type of investments are being made throughout our network. And I'm really excited about our ability to utilize those assets, those investments in a way that will really make sure that we take care of our customers. To that end taking care of customers we're hiring and training our folks. We've hired tens of thousands of team members that we're bringing hundreds in line is to take care of customers and -- to take care of the customers on a nice journey. So we're set up well for the future, really pleased with the set of assets we have to win.

You just speak about operational reliability a bit, but can you give some specifics of how American is working to improve its reliability?

Look, the key is just simply sizing the airline for the resources that we have available. Our planning horizon has been one that was in the heart of the dynamic was one that was more or less calculated over the course of weeks. We've now extended that planning horizon out to months, and we're getting to the point where we're actually taking a look at years and years in the future that allows us to make sure taking care of customers and we have schedules out there that we can plan for and then customers can rely on. So we brought our schedule back faster. We've been flying for customers, still have an airline that's 20% larger than our competitors, and we're doing that in a fashion that we're producing reliability. We're not taking a backseat to anyone in terms of reliability. And that's evidenced, as I said before, with our year-end holiday performance, and even the most recent early summer holidays were some other carriers quite frankly, struggled. So we're all staffing this together. We're going to add new tools in our largest hubs, DFW to Charlotte will deploy technology that allows us to plan for inclement weather in a better fashion and address them when it happens or if it does happen, and we know that we've got to get better and better, and we will. But that technology is coming into the fold as well. We're giving customers many, many more options to be able to service and help themself really quick and timely basis.

Part of that reliability relies on crews. So someone has asked what are American's plans to address the industry pilot shortage?

Well, it's a fantastic question. Let me just say, first, though, from a mainline perspective, American is not facing a shortage. Quite the opposite, pilots want to work for American Airlines. This is a great place to build your career -- it's a great place to build your career. And what we are doing is making sure that our pilots are taken care of very well. So this year, we're going to hire 2,000 pilots. 800 have been brought on board already. And as I've said before, we're on target and on pace to making sure that we have all the pilots we need to fill our airline from a mainline perspective. What we have to do is actually we can train those pilots and get them out on the line in a really efficient fashion. And so we've invested a tremendous amount in training capacity, bringing on new simulators, upgrading facilities. We have the best training team in the business, and I'm certain that we'll be able to make sure that the pilots that we bring in can get out on the line in a really efficient fashion and surely on the American tradition of having the best aviators in the business. Now that all said, there is a constraint, certainly, from a pilot supply perspective, has been a tremendous number of retirements as pandemic that's going on. And that is leading to hiring, not just with us but others in the industry as well. And that shortfall then is felt by regional carriers -- the regional carrier industry. So to that end, we are doing our part to make sure that our carriers that are protected and dealt with in a fashion where we are aggressively recruiting and bringing people to the business. And on that front, I'm pleased to say American is a real leader with our cadet academy as the mainline and as well the cadet academies at Envoy, Piedmont and PSA. It's a fantastic career. We're going to bring more pilots into the business. It may take some time to work out, but I'm confident it's something that will work its way out over the course of a few years. And to those that are listening in, there is never a better time. Please check in with us at Piedmont, PSA and Envoy, anybody that's a pilot we'd love to talk to you. So with that, it may take a few years to work our way through from a regional perspective, but I'm confident in the long run.

I asked this morning with that in mind, American makes no secret of its commitment to diversity, equity and inclusion, especially as it pertains to hiring. Are those DEI policies also applied to pilot hiring?

Absolutely. Of course, both at the mainline and the regionals. If anybody wants to see proof positive. Take a look at a video that we've put out legacy at first. It's on our website in the newsroom. And it will show you the great work that we're doing from a DEI perspective, especially with bringing black aviators to the business and then seeing their careers really, really prosper especially at American.

On the topic of pilots, maybe 1 more there. American is currently negotiating a contract with its pilot, when will that deal get done? And are there pay increases we should expect for pilots or other employees?

Well, look, on that front, I can't speculate when contracts are going to get done. That's a matter of negotiation. And fortunately, we're negotiating really well with our APA, the union that represents our mainline pilots, and we're all aligned in making sure that we get the best for our pilots. And we're committed to pay our pilots at the top of the industry. Now there have been changes in the industry. We know that United has a tentative agreement. We don't know the details to that. But I know that, that's going to bake into the kind of look that we have to make to determine where that type of the industry is. But we're committed to take care of our pilots. And I'm confident that we're going to make progress and ensure that our pilots have what they need as we make our way through the year.

Switching gears to the customer side, what are you doing to improve the customer experience and make sure that American is consumers' choice when they're flying?

Well, look, American has invested billions of dollars, almost $30 billion in new aircraft over the last 6 to 7 years. We have the newest fleet in the business among the network carriers. We have the best lounges. Go out and travel, you'll see it in LaGuardia, the opening of our Admirals Club, which will be fully open in the next couple of weeks. We're making similar improvements in many, many other places as well. And we have the best frequent flyer program as well. So the best metric for us is likely to recommend and that metric that we track shows that we're doing better than we ever have at the heart of it and whether it's flying a nice plane. Like I mentioned, our fleets have been harmonized. Our new standard are having an industry-leading WiFi or the larger overhead bins, power in every seat. That's all great. But what customers really want is a reliable flight. That absolutely makes sure that people are getting to where they need to go. The food tastes better and the service is a little more friendly and we're focused on making sure that we could deliver that.

Okay. Specifically on profitability, can you outline when American is getting to -- return to profitability.

Well, sure. Again, running a reliable airline, completing as many flights as we can is top of the order. But on top of that, it's running a really efficient airline. Fleet simplification has played a huge role in that. We only have 4 mainline fleet types. We've done a similar rationalization of our regional aircraft. It drives cost savings, but it makes it an easier airline to fly. And it really does help our scheduling team to put the aircraft where they need to go into a profitable fashion. I mentioned before that we've taken $1.3 billion of cost -- permanent cost reductions out of the business, and we've been able to upgauge our fleet as well, deleveraging top of mind. We've got a commitment to commit to reduce overall debt by $15 billion by the end of 2025. And just within the -- we've reduced overall debt by more than $4 billion since last year. So look, we're also making sure that we size the airline appropriate from a fleet perspective, from an airport's perspective and a personnel perspective, as we go forward. You're going to see American with a keen eye to efficiency. And under -- overriding all of that, we're in a marketplace where demand is growing. And that has been certainly something that's well received even in light of higher fuel costs we're confident that we're going to be returning to profitability here in the second quarter.

And looking at the stock price -- American stock performed relative to competitors and what are you doing to improve that?

Look, the best thing that we can do is to produce profit. The last 2 years has been an incredibly hard on the aviation industry. But we made a decision during the pandemic to make sure that we reemerge out of it a much more efficient airline and one that's been prepared for the recovery. So again, I've said it, I said before a couple of times running reliable airline, returning to profitability, we're laser focused on making that we hit our targets. We do that, and we're going to take care of our shareholders as well.

When is the company going to reinstate a dividend?

Well, on that front, look, we have a goal to return to profitability, and I talked about our top priority of reducing leverage, those are our first priorities. Under the CARES Act, we're actually prohibited from buying back shares or paying a dividend through September this year. So look, when we return to profitability, when we've taken care of our leverage and we are in a position of having excess cash, I'm sure we'll sit down with the Board of Directors and determine what's best to do with that.

Several questions before the meeting and this morning on fuel, so American previously identified aircraft fuel as its second highest fixed cost. Is that still the case today?

It's increased, jet fuel has increased considerably in recent months. But as outlined in our first quarter financials, salaries, our wages were $3.2 billion in the first quarter, and aircraft fuel and related taxes were approximately $2.5 billion. So that's based on our most recent financial releases.

And is there a reason why American doesn't have hedges in place to cover fuel price?

Well, we're really large airlines and most U.S. airlines don't have fuel hedges in place. Contract -- head-to-head contracts for an airline our size would be just really expensive and quite frankly, not provide a heck a lot of future coverage and it's not a good time to start hedging when fuel prices are as volatile and rising as quickly as they've had. So we found over history, the best way to have the most cost-effective management of fuel prices is to recover that expense through yield management and making sure that we charge an appropriate amount to produce a return. So to that end, demand is really strong right now. Those strong yields allow for us to be profitable at current fuel levels than we've seen in history that the airline industry and American can be profitable even when fuel is at the levels that we see today. So we're going to careful, continue to be flexible in terms of capacity. We're going to make sure that we are very cognizant of the demand environment, and size the airline and appropriately, we view that we're doing the right things right now.

Looking at the clock, I think we have time for 1 more. So on demand specifically, what are you seeing with demand? What is the outlook for travel as COVID becomes more a normal part of our society?

People are getting back to flying. They want to connect. They hate being cooped up, and that's fortunate right now. So let's face it, since 2019, the economy, the GDP within the U.S. has grown by probably 15%, the airline business today is -- even in American, it's 10% -- almost 10% smaller than it was in 2019. So there's a tremendous amount of pent-up demand. I feel good about where we're headed. We've been led by a leisure recovery to this point. But what we see is small and medium-sized businesses are out there traveling and where those businesses go, we know the larger corporate and government business is going to follow. And so I have great optimism that as we make our way through the rest of 2022 that we're going to see business travel, revenues and past year levels certainly get back to where they were in 2019 even if not higher by the end of the year. And to that as well, I would add that we're seeing great progress in terms of the return of international demand. And so I view that the summer season, especially for big cities in Europe is going to be a time when we're going to take a lot of people. Okay. So Caroline that's it for questions. And with that, that concludes the question-and-answer session, and I'd like to thank everyone for attending our 2022 Annual Meeting of our Stockholders. Thank you.

Thank you. This concludes today's conference call. You may now disconnect your lines.