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

Good morning, everybody, and I'm excited to have with us today Vasu Raja, who's the Chief Commercial Officer of American. Given the short 30-minute windowing, do away with the introduction given that American is a household name. And everybody is excited to hear what Vasu has to say so not what I have to say. And did you have any opening remarks, Vasu or should we...

No, I don't. We can jump right into it. Thanks, everybody for being such voluminous attention here today. No, It's great to be here. I'm happy to take any questions you've got, Savi.

All right. Great. Well, maybe what everybody wants to know is just how would you characterize the current demand environment? And just it seems like normal seasonality is back. And are you seeing any hints as to if we can expect that normal business recovery as well?

Yes. Look, I think you kind of hit on it in your question. We're seeing, in many ways, a return to normalcy in many ways, normal travel patterns, a shift from -- it was a white hot summer and the shift that we're seeing as we go into fall really do resemble seasonal shifts in what demand is. And the demand, I mean, predictability in airline demand is like to say, it is the most important thing because when you can predict demand and you can go and build the capacity plan there for the cost base of the airline around that. And so the resumption of predictability is a really big and important thing. And then to that, the other thing that we're seeing is, we call the start of the new normal, which is -- and I've mentioned this on the earnings calls that in historical -- in times past, we could really classify our trips in a very binary way. Somebody who is very schedule-sensitive and traveled for business on their itinerary or some of those very price conscious and traveled for -- and we call that some of you travel for leisure. And there's only about 25% of our trips that were somewhere in the middle that weren't really -- couldn't be classified in that way. Now that number is 50%. And month after month, it remains there. And so that's a thing which, again, the point of predictability is starting to become more predictable. Those customers we're finding want something very different from the travel experience than what they had before. They're disproportionately coming to our website. They're just willing to go and shop for something which is not the lowest fare, the fastest schedule. And we're increasingly realizing that in so many of our distribution channels, there's simply no real means of even showing anything other than the lowest fare and fastest schedule. And so we think that's something which can yet drive a lot of value creation for our customers and for us. And it's becoming a more predictable sort of pattern.

That's -- you lead me to a good question. So you've seen this kind of shift to premium even pre-pandemic, right? Just a lot more premium purchases, post purchase and maybe accelerated a little bit in the pandemic? And just -- so what -- how is American positioned there? And what more can we see to kind of take advantage of that trend?

Absolutely. It's an excellent question. Look, if you think about the pandemic, the last few years, affluent customers have become more affluent. Savings rates have increased. And for many affluent customers, the #1 consumer experience is to be able to travel. And we see that -- we saw it all through the pandemic. Even when airline revenues were at 20% or 30% of historic levels, revenues in our credit cards never fell much below that 60% or 65% of our historical levels. We were continuing to enroll customers in the Advantage program at a time when people weren't even getting on an airplane to fly, right? And that, for us, we've taken, I mean, is a real indication that amongst the affluent indeed, the demand for travel has never been higher, increasing -- and we continue to see people spending more and more on their credit card, acquiring a credit card, trading away from the credit card less. And we -- the more of that we see, the more we do see indication that as for the actual customer, that most affluent customer who tends -- constant 99% of travel demand, indeed, they are willing to go pay more than just the lowest fare, the fastest schedule. They want more out of the travel experience. And that's the thing that really though the -- as we see it, certainly for American Airlines, arguably for the industry at large, really, all we've kind of done is we've offered a lot of binary selections over time. Main cabin or first-class status in the program or not, big travel agency or corporate agency, corporate travel discount or not, and that's just starting to blur. The individual traveler has more choice. They're used to a world where they have so many more choices I mean, you can buy a car from your phone. So there's almost nothing that you can't do in any other industry [indiscernible]. And we think that's a really promising trend because as you think about it from the individual customer, they want so much more. And I'll just do one more example. We've seen through the pandemic that there's been less and less demand for what we call single day business trips, where you leave in the morning, you return in the evening. But interestingly, we've seen more demand for blended trips, where somebody leaves on a Thursday from Dallas to go to New York. They don't return on the Friday. They stay through the weekend, and they come back on Sunday. In some cases, the spouse will meet them. And when you just think about that from the customer standpoint, there aren't very many means through which a customer can easily go and buy that itinerary. It's actually really complicated through most of their travel policy and increasingly business -- businesses are willing to let their employees go and -- yes, and willing to go off platform or out of program just to get people back on the road and go travel. And so that's a really encouraging thing for us. And we think the start is something where as demand kind of settles into a more seasonal pattern and indeed, as demand is starting to effectively be willing to pay more and fly differently, there's a lot that we could do with the airline. We'll capitalize on that, create a lot of value for our customers and ourselves.

Do you -- and I say that loyalty is kind of rolling up to you now as well. What's the -- do you have the infrastructure to address that? Is there something -- are there things that need to change? Or how do you go after that?

Yes. What's interesting is that we have a lot more infrastructure to address it than what one might think. In the history certainly of American Airlines, we haven't necessarily capitalized on the infrastructure. A lot of the ways in which we've been set up in our external programs was to really go and try to distribute the lowest possible fare as well as the best possible schedule. But that was really due just to the technological limitations of the airline space. If you think about our business, we had a product with an infinite number of SKUs in the '70s and the '80s when there was no Internet, no means of being able to actually go get it to an infinite number of customers. And a lot of the things that we did, we simplified the world and the low fares, the fast schedules, and therefore, created a binary choice for customers that worked for the airlines to make it through one crisis after another. But anybody who has dropped into the industry of today, certainly from any other industry out that would not go and think that's the way you go and create value for your customers. So we actually -- and in all the technology we've built over time, let's call it, since the dawn of the Internet has capacity to go and do all that. We find that people come to the .com because the best way to go and get your blended business leisure, New York City trip is actually coming to aa.com or a mobile site. And so we're finding interestingly through this that roughly 70% of all the transactions that come through our .com are actually buying something higher than the lowest fare. They may be shopping. They initiate the search for a low fare, but then they quickly realized. And the major reason for it we've concluded is that through the .com, we haven't necessarily leaned all the way into the technology, but it's one of the few things where you can see as a customer a range of choices and make selections. And something as simple as that, which in so many other -- I mean, for anything you've ever bought online, that's a very straightforward thing. That's a thing that we can do. It's a thing that we haven't done as much as we otherwise should have, and we definitely will.

The .com, are you having any plans like beyond just your platform and kind of partner platforms to do some others?

Yes. Well, look, what we would very much like is -- and as we think about it, the important thing is seeing it through the lens of the customer, right? We want to make it where -- for the actual customer, they can have a 100% digital experience when they shop, buy and service themselves with us. And we find -- we've found that time and time again through the pandemic. We had -- the pandemic happened, and suddenly, we had issues with flight credits and things like that where a customer had to actually call reservations. It's a pretty brutal process where you're subjecting our customers through. But as we started effectively digitize the servicing around those credits, we found that when people actually came to go redeem those credits, every dollar of redeemed credit also brought up $0.25 to $0.27 of incremental cash. Effectively, customers were treating it almost as if it wasn't real in that sense. And they were -- and that drove a lot of things like premium purchase. People wanted to do different things with it. And so for us, what we really see is that a centering point, our north star that we've got to get to the world that so many other industries have gotten to where a customer can entirely like purchase and service their own reservation digitally. And some of that is easier said than done. Some of that -- I mean, there's a lot that's easier said than done, but there's a lot that relates to just the legacy technology of having had to build systems in the '60s and '70s that didn't contemplate the problems of today.

Kind of moving on to a little bit on the other side. American was kind of very early on, you adjusted your schedules. You had a really good kind of start to the year. June, July has kind of gotten rocky, mostly around weather, but it has gotten kind of rocky. So what type of kind of internal or external changes do you think you need to see to kind of really get back to that level of kind of schedule reliability that we saw pre-pandemic? Or maybe even better because you've done improvements.

Yes, that's right. Better is what we are focused on. And the best is what we are focused on. And look, and there's a number of things. In the world of airlines, there's a ton of things that you can't control. And it's easy to go into a long lament about what they are, whether it's weather or air traffic or the vacillations of COVID cases and what that means for employee attendance rates. But the core of what you can always do is that you wake up every day with healthy airplanes and that you have enough resources to go and fly in schedule. And the more of that you do, the more consistently you do it, the more you tend to perform well. And we see that. Those days when we have really low out-of-service airplanes to start the day, and we have everybody like showed up and ready to do their jobs. We have great operating days. We have great operating days and even -- it makes the airline resilient when those external factors come along. Now that having been said, there's a number of things which -- across the industry as what we've found through the summer is even if American Airlines has a plan, if the industry is going through a lot of build back, that can create issues, whether it's fuel supply, catering, the number of operations that carriers are pushing into and out of New York Airport or something like that. So all of those can go and have an impact on us. And as an industry, we'll need to think about how we go and manage things very smartly from here.

So just in terms of -- are you seeing signs where the industry is kind of figuring it out? And do you feel better for summer 2023 or even Christmas?

Yes. Look, I -- what I would say is people will always kind of go and figure it out. And the simplest way in which we're seeing it is that I think everybody -- when you go out and look at forward schedules and marry that to the comments that you hear people making publicly or conferences like this, it's clear that people are -- though people may have otherwise felt they had the airplane capacity to go and fly at level X, they're applying some kind of a risk factor to it to fly at some level less than X. And that alone will create a benefit -- an operating benefit for the customer. And so in so much that we're seeing that, we do see that there's likely to be changes and things are more likely than not to get better.

Yes. That sounds -- kind of switching over to kind of your network structure. Even kind of pre-pandemic, you had kind of laid out this kind of make DFW and Charlotte like much stronger, much bigger. How -- what are kind of -- when you measure success of a hub, like what are the things that you look at?

It's profitability. It's actually super simple. But what -- maybe the...

What makes it profitable?

Yes. I follow you. Now the less flippant answer to that question is the factors that go and drive its profitability. And so there are some things which are what I'll call a little bit beyond your control like the cost structure of the hub, which sometimes you go and carry it over years and years and decades and decades of prior investments. The other thing is the geography of the hub. The hub is the one thing in the airline that you can't just pick up and move. Otherwise, you can move the factors anywhere. And so take that away, the stuff that you get to go and control is the number of flights you operate into the hub and how those flights go and connect and last but not least, the number of seats on each of those flights. And so what we've seen is that we have certain benefits of our geography, most namely the 2 large hubs of DFW and Charlotte. Just naturally, when we fly to almost any city that certainly if you look at the major population centers, the top 75% of places based on demand or population, there's just a natural efficiency from DFW and Charlotte. If we go take your city, Knoxville, and we fly 3 times a day from DFW and 3 times a day from Charlotte, we just spend less in aircraft than what other people do. Fewer planes, fewer pilots, less gas. But importantly, the more of that we do across the system, we create this multiplicative effect where we create more unique markets than what other people do. And unsurprisingly, when you create something unique for the customer, the customers are willing to pay you for it. We find that all the way, certainly through the pandemic indications of [indiscernible] absolutely due to pandemic. But the more we leaned into having as many unique markets as possible, the more customers are willing to go and compensate us to the point where even the most price-sensitive customer in a unique O&D can produce yields that are 90% to 100% of a traditional business customer in an O&D where you have 9 different people who are all trying to swing for your business, right? So for us, being able to build the connecting mass of those hubs and sustain it has been big. And that's why, I mean, to this day, you'll see even when we do have regional jet shortages, any number of issues, the operating scale of DFW and Charlotte like relative to all of the other hubs in North America and even around the world has probably never been greater than what it was. As we come out of it, indeed, probably the connecting mass of our we call our 4 big Sunbelt hubs, Phoenix, DFW, Charlotte and Miami, will remain really, really large. We'll still offer great connectivity in all of our other markets. But increasingly, those will probably start to upgauge, and we'll preserve our big departure footprint in the 4 major ones.