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

Thanks us here at Bernstein's 39th Annual Strategic Decisions Conference. We are privileged to have such a great group, privileged to have American Airlines joining us here on stage. Robert Isom and Devon May, recently appointed CFO, is joining us today. So we're going to do a fireside chat here. You guys should know the drill by now. You should have access to a pigeon-hole link in the written materials or the e-mails that have came to you with your meeting schedules, where you can go in. That will show up on the screen here as long as it's not -- as long as it's ready for work time, we'll try to work it into the Q&A. So maybe as we're kind of just kicking the discussion off, do you want to give us an update on this morning's earnings update and kind of the state of business travel or state of travel right now?

So David, first off, thanks for having us. It's good to see you. If you remember, it was just a year ago, and I think I had just taken on the CEO job. And at that time, we talked about what American's priorities were going to be. And at that time, we had come off some really, really tough times. And we hadn't produced profit. And so it's great to be here with you today not only because of the 8-K and the guidance update, and I'm really pleased with that. Any time you can come out and say that, hey, the midpoint of your second quarter guidance is improved by almost 20%, that's a good way to start the day. But I'm really pleased with how the company is performing on the things that we set out to do. So first off, we said we're going to be a reliable airline. We had to do that because, let's face it, during the pandemic, it was hard. And even going into the pandemic, American wasn't known for its punctuality. And so we set off to do that. And look, as we've gone through the year, we certainly learned some lessons as the supply chains got back in play last year, as we got all of our staffing in place, some rough lessons learned last summer. But now here we are. And from that time last summer, we've seen continued improvement up to this Memorial Day weekend where we had the best performance over a holiday weekend, Memorial holiday weekend that we've ever had, right? You can count the number of flights that we canceled over the entire -- the really, really busy weekend on almost less than one hand. So it's -- it feels like we're in a really good spot from that perspective. If you establish that baseline and running a reliable airline, it really does improve your efficiency overall as well. And so that operational performance, and it's not just, hey, we've improved, its we've improved relative to others. I don't think there's any other airline that has operated the way we have certainly over the last 6 to 9 months. So I'm really pleased with that. We also talked about, hey, look, it took on a lot of debt over the pandemic, and we lost a lot of money, $20 billion of losses, and it was pretty sobering. But since that time, we've now had 4 consecutive profitable quarters. And you may say, well, hey, the economy has rebounded, and that's true, but we were ready. And I think that the decisions that we made prior to the pandemic, as we led into the pandemic, I think people are going to take note that, look, we did the right things for our fleet, we did the right things with our network. And ultimately, we're going to be in a position where that profitability, it translates into free cash flow. We talked about free cash flow production being used to strengthen our balance sheet. And we're in a position to be able to do that now. I like our progress that we've made in terms of reducing total debt by $15 billion. We're 60% of the way through. I think that there's going to be more opportunity as we go through this year. And as I take a look forward, look, it's all coming together. We've got assets that are not quite yet fully utilized. I would put them out there today if I could. We've got some pilot sourcing issues that we still have to do with on our regional aircraft, training issues that we've got to get through on our mainline aircraft. But as I look to the future, it's really positive. Revenues have been at record levels on a quarterly basis for 4 quarters in a row. We anticipate that for another quarter coming up in the second quarter. And there's more to come. So I come here today with a lot of optimism for the future and a lot of pride for the kind of things that we've done, but also the knowledge that, look, every day in this airline business, it's competitive -- it's hypercompetitive, and we're subject to what's going on in the world, and we've got to really make sure that we stay focused. So American Airlines today, okay, it's going to be a similar message, maybe a little bit better foundation that we have, but we are going to be reliable, we're going to be profitable, and we're going to hold ourselves accountable to delivering on what we say we're going to do.

All right. Thanks for kicking us off with that.

Yes.

I guess if we start digging into a little bit of the demand outlook.

Sure.

We had the CEO of Hilton earlier today, and I had a chance to sit in on that fireside chat. His message was we haven't seen any cracks in demand looking out as far as we can see. As you're sort of sitting there looking at how demand trends have developed maybe from where you thought we were going to be at the beginning of the year to where we are today, how is that demand picture sort of shaping up for American?

Well, I'd just tell you that there's -- look, people want to travel. I think it's an innate desire, and the pandemic and coming through it is just showing that as a country, as a nation, as a world, we want to get out there and explore. We want to go make connections. We want to go do business deals. And that's coming to fruition. But demand, as I take a look at it, prior to the pandemic, we had basically operated an industry that garnered 0.9% of GDP into airline revenues. That's the right number, right? We're not recovered to that level yet, okay? And I think that, that's upside. But what I do know is this, is that the economy since 2019 has grown considerably. But where we stand at American today, let's face it, we're not quite yet to the capacity levels that we were flying in 2019. And so I think that there's a lot of positive coming in that I do think that we will return to the historic relationship between airline industry revenues and GDP. And I think that there are a lot of constraints out there right now that are affecting certainly American Airlines capacities and probably the industries as well. And that bodes well for creating a business that can make a profit in a supply-and-demand imbalance.

Okay. I want to get into these constraints in a second, but I just also want to ask a similar question on the demand side to the cost performance. Obviously, today, you didn't -- you kept your ASM guidance, your CASM guidance, your unit cost guidance relatively flat. As we've kind of gone from the beginning of the year to now, how are you seeing the underlying performance in the key cost buckets that aren't fuel? Because obviously, the guidance lift today is mostly the lower fuel price, but as you think about how you're controlling what you can control, what's kind of working in your favor? What are you most concerned about on the cost side right now?

Well, hey, I'll start. Devon can help me out. Look, we thought we're going to run a reliable airline. That's what we built into our plan, and you'll see that benefit. Now where I look going into the future, look, in that cost profile, it's American, again, we made a lot of decisions prior to the pandemic, during the pandemic to make sure that we had rationalized our fleet, to make sure that we had commonality among our aircraft configurations. And that has allowed us to actually upgauge the airline. So we're benefiting from that, and I think that that's going to show -- it kind of will carry forward as well. But under that, I talked to in my opening comments, I mentioned that I -- we do have underutilized assets today, okay? We have about 150 regional aircraft that we would deploy, that we would deploy properly to markets that aren't being served. We would do that today. It's just we don't have the pilots. When we get the pilots over the course of the next 18 to 24 months for our regional network, those aircraft are going to be redeployed, and they're going to be redeployed in a fashion that is going to produce unit revenues that are very favorable. And from a mainline perspective, I think that we probably have another 2%, 3% level of utilization that we can work out of our current existing fleet as well. So from a cost perspective, and you said put fuel to the side, look, we've just recently negotiated an agreement in principle with our pilots. We've built that into our guidance. We've had provisions for contracts that will be eventually negotiated with our agents and with our flight attendants, and we are absolutely including that as we look into the future. We've done a really nice job of being efficient. But I'll tell you, at American, there's also one other thing that we have opportunity and upside with. And that is we've gone into the pandemic, and that was a period of time in which we had just linked together the last remaining work groups that were in separate contracts. And we're really working as separate airlines almost. Our mechanics and our flight attendants, we're just now getting to the point where we can optimize those resources on an airline that is operating at scale. And it's really exciting to be able to go back and say, okay, what can you do in a supply chain? What can you do in terms of how you use your people throughout the airline? What is it that we're doing with technology that we're just getting to? What are we doing with purchasing? All those kind of things, I think, are upside that, look, we're going to explore and will help us offset from a cost perspective. Devon, do you want to add anything?

Yes. Well, first, I agree, 2024 and beyond, there's a lot of opportunity to become more efficient. Specific to 2023, our unit cost forecast that we started the year with is the exact same unit cost forecast we reiterated today. So there's been no change in our expectations. That really starts there with capacity production. We started the year saying we were going to grow capacity by 5% to 8% in 2023 versus 2022. We're now 5 months into the year. We're still saying we are going to grow capacity by 5% to 8%, 2023 versus 2022. So I feel really good that we are delivering on the capacity guidance we started the year with. That's really helpful for our unit cost is -- our unit costs are also coming in line -- or coming in very much in line with the capacity or with the forecast we started the year with. But it really starts with capacity. In terms of buckets of expense, there's been no real surprises. The agreement in principle we got recently with our pilots is very much in line with the guidance that we have out there, so really no change to our second quarter guide and no change to our full year guidance with that AIP.

Okay. One of the great things about this conference is we also get to hear from some of your suppliers. GE in particular was talking about constraints around engine maintenance. Is that something you're concerned about in the next sort of 12 to 24 months as you think about some of the backlogs that you're building out there? How do you think about solving that issue around?

Yes, no, I'll start with that. Look, we have the world's largest commercial aviation overhaul base in Tulsa, Oklahoma. We have, what, 4,500 mechanics based there, probably the largest collection of mechanics. We run our own engine shops on some of the narrow-body engines. And we've had long-standing agreements with GE and other suppliers. And look, we're the world's largest airline in many respects. And on that front, we're going to be taken care of, whether we do it on our own or we do it with others. Certainly, we have a great relationship with GE. We operate the CFM56s, the LEAPs, the GE90s, the GEnxes. And I know that in our discussions with Larry and the GE team that they plan on taking care of us. So I feel good about where we stand. And that is probably a constraint out there for others but another one where, hey, look, it's something that we built over time in terms of having the capability to service engines on our own, and we're going to really make sure that we leverage that capability.

Okay. Just as we're kind of considering you talked a little bit about the near term, we had a question from one of the participants here around the schedule reductions in September. How much of that is just adapting to maybe the plan you're actually going to fly versus maybe starting to tweak down in response to demand signals? So I think the point of the question is really, hey, you took 10,000 flights out of the schedule, is that because you're seeing demand falling off? Or is that because...

Anything. Again, what Devon said, I think, is really important to note. We're delivering on the capacity we said we're going to produce at the beginning of the year. And we intend to do that throughout the remainder of the year. Anything that you see in terms of schedule change is just -- it's seasonality. Devon, anything else you want to add?

No, that's all it is. It's just a cleaning up of some of the sell-in files. So as schedules go final, we replace whatever is out there selling with the final schedules. But certainly, no change for capacity production for us, and that's what we reiterated this morning in the guidance.

And so there's no read-across from that schedule change to something in the domains and all your responsibilities?

No, absolutely not.

So let's talk about the pilot constraint you mentioned. Yes, I think you said 18 to 24 months you're going to be able to solve that.

From a regional perspective, okay?

Okay. Is that just getting the check pilots to get the pilots certified? Or how should we think about what that bottleneck is and what brings that out?

Yes, so it's interesting, Devon has managed our -- overseeing the regional operations, so he can chime in here, too. But look, what we face now, at one time, it might have been having the appropriate level of check pilots to handle all the training, but we've made contractual changes. American Airlines was, I think, an industry leader in getting regional pilot wages to a level that it can really attract new talent from a broad set of communities that had been really never really in the airline business. We did that, and it's produced -- and others have followed. And it's produced the kind of interest in aviation that we had hoped. So we're seeing a tremendous interest and an increase in the supply of new pilots that will become first officers. But one of the things you have to do, though, is make sure that you can match up first officers with captains, obviously. You can't become a captain until you have 1,000 hours as a first officer. So there was an imbalance between the number of captains that were flowing out of the regional airlines, okay, because they were being recruited for mainline airlines, and the number of first officers. But what we've done is we've put in contractual provisions for check airman and incentives for captains that have allowed us to build both of those. And over time, and that's why I say kind of 18- to 24-month time frame, I think that we're going to be able to match up much better captains with first officers that will get all of these aircraft back up in the air. From a mainline perspective, it's a different story. It's just really they've been through the pandemic. And where we were with just planned retirements, we had a lot of pilots, very senior pilots leave the industry, and we're just replacing those. There's been so much. We're -- at American, we're training double the number of new-hire pilots that we've ever had in our history. And the training resources, whether it's check pilots or simulators or whatnot, they just take some time. And for the mainline side of things, the new agreement in principle with the APA, that will absolutely address any of the check pilot issues that we have been constrained with in the past.

Okay. So as we think about the industry's ability to get back to that traditional sort of percentage of a larger GDP, how big of an issue is going to be pilots to bring demand to that level for the industry level? And then how does that differ for maybe American Airlines relative to some of your competitors in the market?

Well, I just think the overall pilot supply, it's a matter of economics. It's a matter of quality of life. And I think the kind of things that have been done both from a regional perspective at American and a mainline perspective with the new agreement in principle, they address those kind of issues, so I think that there's going to be tremendous demand. And then for American, look, we're a great place for pilots. So whether it's the regional airlines flying the E175s or on the mainline, look, we've got the youngest fleet, and we've got growth in 787s. And we're going to be taking the 321XLR. Those are all really good things. And that is -- it makes for a good career for pilots. And so I think that at the end of the day, American is going to be able to offer best quality of life and a really competitive compensation as we take a look going forward.

Okay. So do you think that other -- the rest of the industry is going to have it as easy or do you think it's going to be a little tougher in some parts of the industry?

I think -- here's what I think. I think in a constrained world with pilots, I think American wins. American wins because of the aircraft. American wins because of the type of compensation and quality of life and also the airline that we are, where we fly. And ultimately, people that want to have a career that lasts 35, 40 years, you can get a 40-year career as a pilot, right? The retirement age is 65. If you want to have that kind of career, American is the place you're going to come.

Okay. One of the other constraints that's popped up beyond just engine and equipment, which isn't a big issue for you right now given where you are in CapEx, air traffic control, right?

Yes.

We've seen -- and this is relatively new for me. I've been a very frequent flier in my history. I've never really seen instances where the FAA is actually rerouting flights to get them into Miami, reducing capacity in New York. Is this a temporary issue from your perspective? Or are we just at the point where there's just an awful lot of planes and not a lot of spread in the population density, and we're running into some real structural barriers to capacity?

Well, look, over the long run, okay, if we -- we need to invest in our air traffic control capabilities, we just need to. And so I know we've got FAA reauthorization discussions going on right now, and I'm sure that we'll end up in a place that we can operate effectively in the short run. But over the long run, we have to be able to invest in the industry and the FAA in a manner that is over the course of decades, okay, not, hey, funding for a year because the kind of systems overhauls that we're talking about are things that, let's face it, they've served us all really, really well. We run the safest form of transportation, the safest airline industry here in the United States and anywhere else in the world. But it's been developed over years and years and years. And the reinvestment that's necessary to take advantage of technology and take advantage of the technology that's actually in the aircraft and on the ground at airports, that is something that will take time. It will take a longer-term vision. And so we're working with the DOT and FAA. And I know Secretary Buttigieg is really interested in that as well. And I'll just take a chance to say, hey, look, the Memorial Day weekend results were not a fluke. It's because, at least in American, we really planned for it. And it's because whether it was the FAA or the TSA or any of the other supporting agencies, is that they made it a priority to make sure that we are set and ready to go. And I have all the confidence that we'll have that same type of attitude as we go forward. Now some of the points that you mentioned about, hey, is it air traffic control, is it a temporary issue, is it a long-term issue. I think we face the same issues that we face with pilots and other technical positions. To become an air traffic controller, that's a -- it's an investment. It takes time. And then it takes experience once you get put into a center. And all of that is something that is -- it's not measured in days. It's measured in months and, in some cases, years. So we do have an issue with getting air traffic controllers trained, deployed and then experienced. And that's something I think that we're going to have to work through. And I think it's a result of the same type of things that we've all been dealing with, which is you had a lot of retirements, and we've bounced back so much quicker. So -- but they're known problems, and I'm confident that we can work through them, but it will take a longer-term mindset to it.

So I'm hearing in the intermediate term as a consumer in New York that there's not going to be much growth from what the capacity we have running right now.

I'm not going to comment on that. But what I'll say is we need to make that investment. And just, David, a couple of other issues. So we are doing work with the DOT to take advantage of everything that we possibly can. So I don't know if you saw that there was some recent communications by Secretary Buttigieg that said, hey, look, we're just going to constrain or control rocket launches where possible so that they don't have an inordinate impact on air traffic. And we're not going to be -- put ourselves in a position where we delay, quite frankly, hundreds of thousands of passengers in a way that could be avoidable. So I'm really pleased that everybody seems to be engaged and really addressing problems in the short run and also with a mindset for the long run. But we've got to get to longer-term investment.

Okay. So last couple of weeks have been big. You've got the pilot deal. That's in the guidance.

Yes.

You also heard from the DOJ that the Northeast Alliance with JetBlue has to be unwound in 30 days.

Right.

Can you help us understand at a high level for generalists, if we have to unwind the JetBlue -- the Northeast Alliance, what does that do near term, long term from a growth and capital standpoint? And then what are your next steps as you think about the decision of the court?

Okay. Well, I'd just take a step back.

In any order.

Yes. Well, right. Well, no, and for me, this is -- look, I'm disappointed and I, quite frankly, disagree with the ruling. But take a step back. The reason for the NEA, at the end of the day, was to provide consumer benefit, to provide more competition, stronger competition in an area that has entrenched carriers and that could use it and a place where both American and JetBlue, quite frankly, couldn't operate in a way that was going to offer that really viable alternative over the long run. The NEA was a creative way to take a look at that problem, strengthen our positions and offer our customers more options, more cities and a level of competition that wasn't there prior -- previously. So I think it was -- we entered into it for all the right reasons, and I think it was producing all the right benefits, quite frankly. So based on that, look, we were sued by the DOJ, and the judge's ruling said that, hey, the NEA can't go forward. But on that, look, we've got a legal system that allows for appeal, and we're going to do that. And as we look forward, I think that the kind of benefits that we've proposed will ultimately prevail. But in the meantime, yes, we're going to have to work with the DOJ, work with JetBlue to find out exactly what we do in the interim. And we're going to do that. It's just a lot of work that's going on right now.

Okay. So if we think about the -- getting it down to brass tacks, revenue, I don't know if you can get to EBIT on -- or share any of this stuff. Like is it a material hit if you had to just turn the thing off in 30 days?