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

So maybe that typical correlation may not be as core or may just happen on more of a lag than maybe we've seen?

Perhaps, yes. And I've always felt there's been a bit of a lag. In this case, you're right, though, that lag may be longer.

You started by saying, "Hey, we're really focused on reliability doing what we said." So I'm guessing you still feel very confident about 5% to 8% ASM growth for the year?

Yes, that's the number. We came out, we hit our capacity guide for the first quarter. We've kept it consistent for the full year. I think we started the year by saying this is something we are really confident we're going to hit. We're not going to get in front of the resources that we have. We're going to make sure we have the right people, the right process to run a great operation and to produce this type of capacity. That's the story you're still hearing today in May. We have run the best operation in the business to this point. We've got the highest completion factor in the business year-to-date, credit to our frontline team, credit to our operations team, and I just think a lot of really nice planning to get here.

Now as we head into summer, right, one of the areas that people have been the most sort of worried about in terms of handling summer has been New York. And now we've got this NEA, right? How does this, right, change, right? Do we need to -- can we still do 5% to 8% given that? Do we have to add in some more buffers? I don't know how do we marry reliability we've got overall industry concerns about New York...

Okay. So just for clarity, NEA is not going to change our capacity plans in New York in the short term. Now if there are adjustments, there'll be longer term. It's not going to impact customers this summer. So any customers that are booked through the NEA will be taken care of. I don't expect the NEA to have any impact on our macro capacity. How we move capacity around over time, that's to be determined, and that changes with any schedule change. We will try to seek to move capacity to our most profitable entities. In this case, though, the NEA doesn't have any real impact on our overall capacity, and it also won't impact our customers in the area.

Okay. I know it's early. Help us think a little bit about how you're starting to plan for next year? How are you thinking about capacity growth? Is this -- do we want to kind of 5% to 8% this year? Is that sort of a good sort of placeholder? Is it last more, I don't know -- how do you think about capacity?

It's early. And we're not doing 2024 guidance right now. I'd just say like a couple of things to be thinking about. For us, we are underutilizing our assets, both mainline and regional. So we think on the mainline side, we should be producing probably, I don't know, somewhere between 2% and at the high end, maybe 4% or 5% more utilization than what we have today. So that's something that we're going to strive to achieve next year. On the regional side, we have somewhere, I don't know, 100 airplanes, 150 airplanes that are either underutilized or parked today. We do expect to have some more of those up next year, but we'll see how exactly our pilot capabilities develop here with all of our different partner airlines in the next handful of months. And those 2 combined, though, like it's hard to say exactly where some of our cost pressures are. Like at a macro basis, the more regional capacity to produce the higher unit costs are going to be. Regional unit costs are higher than mainline unit cost. That's okay because the unit revenue we're able to produce in a lot of these small and medium-sized communities is really significant. So it ends up being a real good guide for profitability. But throughout the rest of the P&L, obviously, we have a new agreement in principle with our pilots. We do expect to reach new collective barring agreements with our flight attendants and with our agents -- our passenger service and reservations agents this year. The run rate on that will drive some cost pressure for next year, but we do think we'll be able to take advantage of our higher aircraft utilization, and that's going to be a nice tailwind for cost next year.

So a couple of follow-ups. So you mentioned utilization. What -- where -- how much of an incremental utilization tailwind would you strive to get?

At the high end, it's probably somewhere around 4%. It maybe 5% if we do really well. At the low end, there's a couple of percent there. So we do have underutilized assets today. They're coming on throughout this year. By next year, I think we're going to approach full utilization. We'll see where it goes, though. And then on the regional side, it's really significant. We need to get these airplanes back up in the air. We're probably not going to have as much regional lift in 2025 or 2026 as we did in 2019, but we should have more than what we're producing today.

And so you said there's a 150?

It's in that neighborhood, somewhere between 100 and 150 regional jets that are either just underutilized or completely parked. And what you're seeing right now, like you don't see many 50 seaters in American Airlines network. They still play a role, but there's just fewer of them. We had something approaching 200, 50-seat regional jets, pre-pandemic. We're now sitting at, I don't know, I want to say around 80, 50-seat regional jets. So that will just become a smaller component of the network going forward. We'll try to backfill that with some larger regional jets over time as pilot availability comes online. But the regional footprint probably does end up being a little bit smaller in the future than it was back in 2019.

But of that 100 to 150 underutilized, you're fully parked, you expect to deploy more of those next year?

Yes.

That's going to -- I understand. That creates a CASM headwind but should be a RASM tailwind.

Exactly.

And that what you're saying is net positive on P&L..

Net positive on the P&L, it is a CASM headwind. Now this is going to get blended across a lot of ASMs. But yes, for sure, it's CASM headwind. It's going to be depending on how many we're able to put back into service. It's probably not all of them, but we do hope to get a decent amount of those airplanes back up and fully utilized.

And do we have the pilot availability on the...

It's stabilized. We feel a lot better about it today than we did 6 months ago. We'll see how fast I think you understand the constraint that there's just not enough qualified first officers that have the hours or the experience to upgrade into the captaincy. But we feel pretty good about the supply of first officers, so 1,500-hour qualified pilots. We feel that the carriers we partner with are the best in the industry. And so they have a proposition where they are experiencing a lot of demand for both 1,500-hour pilots, but also pilots you just want to come across into some of their direct entry captain programs. So we'll see how it develops. But yes, we feel like we're in a good spot there. On the mainline side, we have a lot of training to do. We're training twice as many pilots this year than we did kind of in the pre-pandemic world. There'll still be a lot of training to do next year if we're able to ratify this agreement in principle that we have reached, so I think that's going to be a nice tailwind, and we should be able to increase the number of mainline pilots we have, and it will help us achieve our goal of improving this mainline utilization.

By the way, just reminder if there's any questions, [indiscernible] get you involved. So given all those sort of puts and takes and then it sounds like we'll have 1/4 of the new pilot DEAL spilling over into next year. Directionally, how should we be thinking about CASM next year, higher, lower, stable?

It's early. Give us a little bit of time to work through capacity plans. It's going to be dependent on how much capacity production we have? How much of it comes from the regional side? But yes, you're right. That's where we will see some unit cost headwind, but we see some nice tailwinds on the utilization side. So that's something we'll have more color on as we get through the year, but I think that we're in a pretty good spot in terms of just our ability to produce more aircraft utilization, and that's going to be a nice thing for earnings and a nice thing for unit cost next year.

And are there any other just sort of like discrete positives, negatives, you think, I don't know pension breakage, I have no idea what [indiscernible]. One of the other things that you think are worth just flagging good or bad as we think about either back half of '23 or '24?

Nothing outside of what we've already talked about. Pension, breakage, those types of things, I don't think that's going to be something we talk about as we go into 2024. I think what we are focused on are the big things. We're focused on fully utilizing our assets. We do have some cost pressures in certain areas of the business. Salaries and benefits are going to be higher. Aircraft utilization is also going to be better. So those are the big things. We'll build up a plan, but I don't expect any other lines of the P&L to really pop as we head into 2024.

So operating margins for you guys in 2019 were 8%. Your guidance for this year is 8%. So we're there back to where we're. Can we get back to -- can we start to think about double-digit operating margins for American? Where do we ultimately want to take this?

We're pleased with this year's margins, but it doesn't end this year. We do expect that we have an entity that can produce stronger margins than what we're doing in 2019. I think we've made a ton of nice progress. I think we've made a ton of nice relative progress on our margin performance. But I think there's more opportunity for American Airlines to do better than that. I think it's going to happen on top line. We have a innovative and creative commercial team that's trying new things. I do think we have opportunity there. I think we're going to see it in the expense side as well. So we are going to be more efficient in terms of aircraft utilization. There are better tools. There are better processes. I think on every line of the P&L, we have an opportunity to be just a little bit better. And margins of 8% are nice. I think we have the capability to produce stronger margins than that going forward. And I think we'll talk more about that as we get through this year. The last couple of years, we've been a little hesitant to go out too far in terms of our predictions for financial performance and operating performance. And part of it, we just wanted to understand the environment we're operating in, right? Last summer was a different environment and probably an unexpected environment for many. Demand was still coming back. Early on, I think there were some operational challenges. We figured that out, and we've been running a great operation since then. And at that point, we were kind of providing guidance, 1 quarter out. We started this year feeling much better about what the demand environment was going to look like. And so we went and we produced full year guidance. We think we're going to be able to deliver on that. We're spending a lot of time thinking about 2024 and 2025, and how we're going to operate and how we're going to deliver for our customers and how we're going to become a little bit more efficient. And that's a story we're going to share as we get through this year, and we're excited to share it. We do think there's just more opportunity for stronger earnings for American Airlines.

So at some point, it sounds like maybe like an Investor Day longer-term target?

We've been teasing it for a while. I think it's going to happen this year, and we'll be excited to share the longer-term story.

We've got a nice free cash flow this year, fairly light CapEx year. How should we think about CapEx '24 and beyond? How much of this -- I'm guessing we see some degree of a step up, how much of a step-up do we see?

Yes. Just -- keep in mind, it's a light CapEx year for American this year because we had a lot of heavy CapEx years prior to the pandemic. We invested heavily in the business from 2014 to 2020. And that's hard, right? The balance sheet does change when you're making capital investments like we did over that period. It's hard on the operations team to induct that many airplanes, but we did it and it's behind us, and we feel great about it now, right? We brought all those airplanes in pre-inflation at relatively low interest rates, so really nice financing, and we get to enjoy that right now. So this year, CapEx is a little bit light. We have total CapEx of around $2.3 billion, I think. Next year will step up a little bit. So we've given guidance to next year. We'll take a few more airplanes next year than we did this year. We'll have CapEx stepping up to approximately $3.5 billion. But because of this fleet we have, we have the most efficient fleet, the simplest fleet amongst our network peers. We feel really good about where it's at. It's simplified down to 4 fleet families. And it's the youngest fleet amongst our network peers. So with where we're at right now, I would expect really steady CapEx going forward. Next year's $3.5 billion, we're not going to have years where we have to drive $5 billion or $6 billion or $7 billion or $8 billion of CapEx because we've been through our fleet renewal program. So we'll be much steadier CapEx going forward, which gives us the opportunity to continue to produce really nice free cash flow.

And I'm guessing you appreciate that we're 30 minutes in, and we haven't gotten to the...

That's changed.

So let's -- maybe we'll just wrap the on the balance sheet. So you want to pay down $15 billion of debt, you've got $14 billion of liquidity. What what's the right liquidity target, right, given where we are now, we feel like we're getting better visibility, right? Where are we on the $15 billion? How much of that is pension tailwind and proper debt reduction and all that sort...

You held the balance sheet question, but then you asked a lot of questions, which is okay because we think we have a really good story there as well. So the liquidity level that we have been talking about. So this is target liquidity. It's obviously not minimum liquidity, but target liquidity that we have been talking about is $10 billion to $12 billion. That's something that's probably going to change over time. But for right now, it's $10 billion to $12 billion. And when we say that, that means like $10 billion at the low point. So think December, that's when December 31 is probably our low point for cash for the year. At the high point, which is the end of the first quarter, maybe the end of the second quarter, we should be something closer to $12 billion. As you pointed out, we had $14.5 billion or something close to $14.5 billion of liquidity at the end of the first quarter. That's well above our targeted liquidity. We did want to see just kind of how the year was playing out before we decided to start making some moves and put some of that excess liquidity to work. But that's what we're focused on now is just how do we best utilize this liquidity that we have that's excess in terms of our target. And part of that is just going to be focused on the balance sheet. So what we do with it is something that we'll provide more clarity on as we go forward. But obviously, 2025 debt tower is part of it. We'll choose what of that we want to actually pay down, whatever we want to refinance, but having excess liquidity to start with puts us in a really nice spot. We feel really good about the progress we made so far on the balance sheet. You talked about $15 billion. We ended the first quarter, we had paid down $9 billion of that $15 billion. So I guess somewhere around 60% of the way there. By the end of the year, we expect to be kind of $10 billion to $11 billion of the way there. You're starting to see it in our metrics. We have better net debt to EBITDA at the end of the first quarter than we did at the end of 2019. So we think we're building a really nice strong financial foundation. Obviously, we're committed to $15 billion of debt repayment. That was accelerated slightly as we saw the change in the pension obligation largely with the discount rate, but that's a component of it. We've also made nice progress with total debt paydown. This year, we're amortizing $3 billion of debt. So the free cash flow that we're generating, which we've been talking, that we would be approaching $3 billion of free cash flow is going to be used to strengthen the balance sheet and pay down that amortizing debt.

All right. We're going to wrap there. Thank you so much, Devon. That was great. Appreciate it.

Thanks for the time. Thank you.