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

All right, folks, moving right along. For any of you that were in the room for the United presentation, I was right. Mike Leskinen is the most recently seated CFO in the U.S. So I stand by what I thought for a moment was a mistake. In any event, the second most recently seated CFO, is joining Robert Isom, the CEO up here and that's Devon May, coming fresh off at Investor Day last week. I suspect some of these slides might look a bit familiar at least to me and Mark and some of the folks in the room. Let me turn the podium or actually, you guys can sit there, whatever you prefer. But ladies and gentlemen, American Airlines. Thank you very much.

Thanks, Jamie, and good morning, everyone. I'll add that Devon May, while somewhat new to his role is incredibly seasoned. So...

[indiscernible] apply...

Right, we feel great about having Devon in charge of our financials at American. So good morning. And as Jamie said, we are relatively fresh off at Investor Day. That was just last week. It seems like a month ago already. And I started off that presentation by saying we hadn't had an Investor Day in 7 years, and I've been CEO now for 2 years. And so some of the questions we're getting is why an Investor Day now? And my simple answer is well we have something to talk about on a number of fronts. And so what I want to do today is take you through why I feel great about American now and where we're headed and certainly open it up to any questions as well that you might have. So of course, our safe harbor statement, read that quickly. So the title of the presentation that we had last week was creating shareholder value. And it's a time for American. Now we're finally through all the integration and pandemic and recovery from the pandemic and American has really positioned well. And one of the things I wanted to make sure is before we came out and started talking about where we're headed is that we had some confidence in where the market is and demand is strong. As we take a look now and out into the future, everything we see from a bookings perspective is solid now. And I believe that it's sustainable. And up to this point, we've been going through the gyrations of recovering from the pandemic. So I feel good about the demand environment. And that's a reason to be talking now. Another reason to be talking now is that American truly is a changed airline. We're different than we were prior to the pandemic. And I'll tell you why as we go through this. But it is namely that we've set commitments and we've delivered on every single 1 of them. And as we look forward to the next set of commitments, we're going to do the same. And as well, I wanted to make sure that it's not just a story of, hey, demands back and Americans recovered with the pandemic. I also want to make sure that we had something to talk about for the future. why this is an opportune time to be an investor with American. So let me just start with this, demand for air travel. Not a lot of new news here, but -- and we have pulled these from the Investor Day deck. But look, we are at a point now where total industry revenues have certainly accelerated and come back and exceeded where we were in 2019, probably haven't kept quite up with inflation, but we feel really good about where we stand overall. And so this slide just shows you the progression from -- in terms of total industry revenues. Next, we have seen, since the pandemic, an interesting shift in consumer behavior. That of more to experiences than to hard goods. And this bodes well for the travel industry because any aspect of hospitality, it starts with airline travel. And I do think that this is a trend that we will see continue long into the future. And it bodes well for those of us that are in a business that look serves this need. And while our business plan doesn't depend on this, we're still not back to the historical relationship between GDP and airline industry revenues. As you take a look at the historical average, which was really built over 10 or 20 years, that was pretty much the standard in which we built our plans. We've recovered since the pandemic, but we're not all the way back and the point I want to bring out here is that every single basis point is worth $2.5 billion in industry revenue and American Airlines is 25% of that if we were to return, and this is -- this potential upside to that historical relationship, there's great benefit to American Airlines in that. Now against that demand backdrop that we feel really good about, and hopefully, there's some additional upside, there's constraints to supply. And we're in a supply and demand business. At the end of the day, the carriers that have the capacity that can deliver in a strong demand environment, I think, are going to win. And those constraints in the business today are really around things that we're all really well aware of. It's -- the aircraft manufacturers haven't been able to really deliver on schedule. Engine issues surround the industry and are going to require a lot of maintenance expense going forward, supply chains as we've rebounded from the industry, it's certainly the OEMs in terms of airframes and engines but it's actually prevalent throughout. And there's also been people shortages as well. So we're dealing with air traffic control shortages right now. We all know that the airlines have actually had to reduce the amount of traffic that we're putting into New York airspace today, I don't think that that's going to really work its way out in the short run. But it's not just shortages there. We've just gotten through a real pilot shortage from a mainline perspective. We've had regional pilot production issues. And so there's also an issue with making sure that we have the people power to do the work. I bring these up not so much to say, look, there's a problem out there. I really bring it up to say, "hey, look, in a supply and demand business, I think that there are going to be continued restrictions on the supply side of the equation. It's going to take some time to work this out." So we're in an environment where American -- look, we've invested in our fleet. We feel really good about where we are. We're not dependent on any big aircraft orders going forward. And so in this environment where demand has returned and capacity is something that American has really delivered well on over the last couple of years, we feel really confident. So that's an industry backdrop. Now let me take you through American Airlines story, at least over the last couple of years. So as we came through the pandemic, one of the things that we identified was a real opportunity for American to not just return to where we were in 2019, but actually to accelerate our progress and to really be best in the business on any number of fronts. But we knew that because of the damage caused during the pandemic, and we borrowed a lot of money. We had a lot of issues in terms of rebound. We knew that we had to prove ourselves to the marketplace. And we started with a very focused plan. A plan back as soon as I took over as CEO 2 years ago, that was based on returning the airline to reliability, reestablishing profitability because we had actually lost a considerable amount of money during the pandemic and then strengthening our balance sheet to address some of the borrowings that we had to take on during the pandemic as well. And that was the singular focus. Of course, we have really long-term goals, but that was a singular focus. And so how did we do on it? Well, American Airlines has never been the best at operating reliability, but we are today. American Airlines canceled fewer flights on a percentage basis than any other airline, including the industry leader that had been kind of entrenched for more than a decade. I feel really great about where we are. And it's a big deal to American because as we go forward and look at capacity production, this is really efficient way to deliver capacity and actually hang on to revenue. And we're seeing right now a 1.5 point improvement in terms of delivering completion factor year-over-year. And on top of that, we know that the best way to serve our customers, the way to move Net Promoter Scores is by delivering on the most basic, which is reliability, getting people from start to finish with their bags on time every time. So we feel great about this. This is not something we were known for prior to the pandemic. We were going through a massive integration between U.S. Airways and American at that time. As we went through the pandemic, we all suffered with start-up issues as we built back. But for the last 18 months, certainly in the last year, American Airlines has been the best in the business at producing capacity our customers. So great work on that front. In terms of profitability, same story. As I take a look at 2023, and producing now 7 consecutive quarters of profitability, 2 straight years of profitability. The one thing I would ask you to note, though, that our profitability now is different than it was prior to the pandemic. And that is different in that we're producing record free cash flow, okay? So it's great news for us, but ultimately, that bodes well for the future for American Airlines. And as a result of all that, we've been able to really pull down the debt that we had taken on during the pandemic, we set a goal end of 2021 to reduce total debt by $15 billion. We're 75% of the way to that goal. By the end of this year, we'll be 85% and on top of that, look, we know that we're being noticed. So we've been upgraded by all 3 major credit rating agencies in 2023, a double notch upgrade. That's great news for American. And as we go forward, really something to build on. So reliability, excellent work, profitability plus producing free cash flow and a strengthened balance sheet. So I'm here today telling you that we, American Airlines, is a changed airline in the sense that we put goals out there, we hit them. So the next point I wanted to drive home is not only do we see demand returning and strong and American well positioned in that marketplace. Not only are we delivering on our commitments, but I see opportunity upside for American as we go forward. And this is the opportunities ahead. So what we've laid out is 5 compelling value-creating drivers. It starts with fleet, and I'll note this because American Airlines, we've invested, I think, almost $30 billion prior to the pandemic in our fleet. We don't have to go through a major fleet order change. And that fleet, while we brought on new aircraft, we've also greatly simplified what we fly. We've gone from 9 different fleet types that serve the mainline down to 4, greatly simplifying what we do and making it easier to operate. And as well, we've adjusted -- of all the older aircraft, we've put them nearly all now through a reconfiguration program that puts them in a common fashion as well and really serves the needs of our customers as well. We've done a nice job of adding premium seating, and I feel great about where we stand going forward. And I'll spend a little bit more time on this because I think within fleet, it's also one of the ways that American can distinguish themselves because we actually have untapped utilization within that fleet. I mentioned operational excellence. And this is just what we're going to be known for. American Airlines is going to continue to really drive home that we operate more flights, complete more flights than anybody. Good days are bad. We recover faster than anyone else. And we're putting technology to bear here. So everything that we do, we're putting a technology mindset first and 1 that really helps with optimizations overall. And over the long run, this is going to be something that we build on. So from a network perspective, there's 2 things that stand out here. One, we have these incredible Sunbelt hubs. It's where all the population is moving to. It's where economic activity within these regions is outpacing the rest of the country. American is very fortunate to have the hubs that we do in Phoenix, in DFW, in Charlotte, in Miami, and of course, we have hubs in some of the largest business environments as well in Chicago, in New York and Philadelphia as well. We feel great about our network but there's an aspect here that is distinct for American as well. It's not just the Sunbelt hubs. It's that we create more origins and destinations, more city payers than anyone else by a long, long -- by a far, far margin. And the way that we do that is by tapping into our regional network. We're able to fly around the world and really serve everyone because of the way that we support our hubs because of this number of cities that we connect, we're uniquely benefited in that respect. And I look forward to that as being a real driver for American as we fully recover from the pandemic and as business travel fully comes back as well. So we use that Sunbelt hub and regional flavor to really drive everything else that we do. You'll see that our partners we have the best partners and some of the biggest business destinations around the world in Tokyo and London Heathrow. They really value that network that we provide and we're able to extend everything that we offer our customers on that. So building on this fleet, operational excellence in this network, I'll speak to next opportunity, which is our rewards program. And this is something that is an untapped asset. We have one of the largest rewards programs in the world, the Advantage program, obviously. But in this, we have a unique opportunity right now to create a real travel rewards ecosystem, where we've, in some sense, lagged some of our competitors but this is an opportunity for us because right now, we have the opportunity to renegotiate our co-brand credit card deals. We have great relationships with Citi and Barclays, but we can be so much more. The underlying theme that we have is that life is better as an advantage member. And we know that what we see from revenue generation today that it truly is not just better for the customer, but it's better for American Airlines as well. And so you'll see a great push to expand, extend this rewards program and to offer compelling opportunities for our customers. And we're seeing the fruits of that right now. But as we go forward, you can bet that this is an area that we will continue to really ensure we deliver on. And the last point here is reengineering the business. I mentioned that leading up to the pandemic, American Airlines was busy with the most complex merger in aviation history, pulling U.S. Airways and American together. We're just finishing that up as we got to the pandemic, and we're finally at a point where we have our hands on the wheel and really can deliver. And this is something that is facilitated by the good work that we've done in putting together new labor contracts with our pilots, our dispatchers, our agents, and we look forward to getting deals done with our flight attendants as well. But in this reengineering, I'll point out a few things. First is our fleet plan. Now I mentioned that we have some utilization, and I'll cover that next. But look, we're at a point right now where we're really certain on our aircraft deliveries now and in the future. If you have that basis, you can plan an airline to be incredibly efficient. So I feel great about this. And one of the things you'll notice is that we have a delivery stream that really is in the 30 to 40 aircraft range as we go out into -- through 2028. And I know that there's a lot of questions about, hey, what's your exposure to Boeing. And I just pointed out right away. On the 737 MAX side, as we go through 2026 then go from 20 down to 10. Those are MAX 8s. And we really don't have any exposure to the MAX 10 until we get out into 2028 and beyond. And of course, the 787s, this is just a modest delivery stream that will be very well managed, I'm sure. So a lot of flexibility here. The point that I would underscore is that our aircraft CapEx is in the $3 billion to $3.5 billion range, very, very manageable as we go through. And then in terms of reengineering the business, asset utilization where we have this untapped capacity, we still probably have in the range of 75 to 90 underutilized regional jets that we'll be bringing back up over the next year. We have -- because of the simplification effort that we've gone through, our mainline fleet will be able to get much more utilization out of it as we work forward. That's great news. It's the easiest way to bring forward capacity to the marketplace, and we feel great about that. And as we grow, one of the benefits as well of putting all the work that we've done in it, we're going to do it much more efficiently. Productivity is going to grow some simple numbers here are easy numbers to understand here. Our growth rate for full-time employees is much less than the capacity growth. It hadn't been that way prior to the pandemic. It is now. And as we look out into 2024 and beyond, we're going to be able to produce mid-single-digit capacity with very little additional head count. And then 1 of the other areas that in terms of fleet utilization and also better utilizing our team, we also know that we have an opportunity with procurement. American Airlines for its history had operated with a decentralized procurement department. We're bringing that into a centralized fashion and more or less just modernizing. This is low-hanging fruit for us. We think that there's working capital opportunities here as well as considerable expense savings. And so from this -- from all of this, we anticipate producing about $1 billion worth of savings as you build in all of the reengineering efforts. So that leads me to our guidance. We published this morning. I'll state it first. We feel really comfortable about demand. Demand is strong. And so the only change to our guidance is really around fuel which for us has increased and to a fashion that we feel it's appropriate to note, we're in a position now where we're going to deliver the capacity we said, we'll deliver the revenue we said. Our CASM ex fuel where we said fuels off a bit, and so that will put us towards the lower end of our range for first quarter guidance. It does not change anything that we've said about the long-term future for American, including our 2024 estimates, we still anticipate producing $2 billion of free cash flow, EBITDA margins of 14%. And as I said, as we get towards the end of the year, 85% of our way on our total debt reduction plan. And as we take a look out into '25 and 2026, we see margins growing. We see free cash flow growing. And that, as you sum it all up, bodes well for American and it bodes well for those that invest in us. So with that, I'd like to thank you. And Jamie, welcome any questions that people have.

Is Mark going to kick us off?

As I said, Devon is up here, he will help as well.

Excellent. A couple of things. Number one, on the industry revenue to GDP slide, 88 basis points, we're at 83 basis points, 5 basis points of upside to get back to the average. Is the average of the goal? Or do you think that industry revenue can exceed the historical average relative to GDP, given the importance of loyalty and so forth?

So Mark, I'll start with this. First off, our plan, what I showed you in terms of 2024, 2025, 2026, doesn't depend on that coming back. We haven't -- there's some modest improvement, but we haven't built that fully rebound into our plan. I think it's upside -- and as you said, I do think that in terms of where we ultimately end up, I think a lot is going to be driven based on consumer behavior. I'll start with the shift of spending to more experiences as opposed to goods. I think that, that bodes well. And I think as time goes on, if there's one thing about the pandemic that it's taught us, people want to travel. They don't like being cooped up and they're going to come back to our products. So I feel really good about where we stand. We know that business travel is not all the way back yet. And look, I think that it bodes well for American overall.

So one thing, Jamie and I are intensely focused on is your push into new distribution channels and what you've done with your corporate sales force, which you've downsized it more so than your competitors. And so how is that -- you referred to it a little bit at the Investor Day. We talked about it on the quarterly -- our quarterly wrap up as well because it looks like so far, so good, we can't necessarily see anything in your numbers that show that -- but we're hearing from others that there may be some share shift. Obviously, I think the corporate travel world is all up in arms about what you're doing and pushing the ball forward. So just maybe you can talk a little bit about your experience with pursuing those new distribution channels and the strategy behind what you're doing with the corporate sales force.

Sure. So thanks for that question. This is something, again, where I look at where American was prior to the pandemic and where we are now. And I'm really proud of us being aggressive in taking some bold moves. It's not without risk, obviously. But there is -- I'm very pleased with where we stand right now. There's nothing that I see in terms of consumer -- customer behavior that would suggest that we're not on the right path. So let me start with this, though, is the rationale. We do better. Our customers do better when they have the opportunity to engage with us directly. Our customers do better, we do better, everybody that we're associated with do better when we invest in modern retailing and servicing technology. And for a long time, we've had issues with getting our -- all of our intermediaries to a point where we can surface and sell what we really think is best for our customers and ultimately for American Airlines. So we're pushing. And that push isn't going to stop. And while you may have seen some changes to our sales force, I feel really good about what I see in terms of cost of sale, and I also feel really good about how we've been able to hang on to our share as well. So as we go forward, everybody -- we want everybody to come with us. And whether it's the GDSs or whether it's the TMCs, there's a place at American where we can all do well, but it takes investment in technology. And it's where the marketplace is going to go anyway. Customers are going to demand being able to service and to shop with how they do everywhere else. And so as we push forward here, I see our customers. I see our partners all engaging in a way that's beneficial for us and ultimately, American Airlines. Thanks.

So building on that, it's been interesting to me because American historically, I would identify thinking back to the Crandall years, quite a maverick an innovator. So I certainly give you guys credit for thinking outside the box. It's nice to have the backdrop that allows you to do that now. The market's response to Investor Day was, I don't know, lackluster for lack of a better term, and it's only been a week. But where have you been getting pushback in the last week? Is NDC even part of the pushback? Is it just that the market has been trained to think of regional jets bad or something like that. But why the lack of embrace considering all the work that went into the event?

Right. Well, thanks, Jamie. And a lot of work did go into the event. As we take a look forward, I think the real issue at hand is that we've got to continue to deliver. And so 2 years while hitting just about every number and delivering on every front is something that I feel like is a pretty good track record. I think what the market is demanding right now is proven to us. I know this that when we produce margins like we've identified in 2024 and free cash flow like we have in 2024, 2025 and 2026, we're undervalued, plain and simple. So I think that there's just a disconnect between what we've laid out as a plan and what the marketplace is willing to accept right now. But we're -- look, we're in it for the long run. And whether it's how we've structured our airline to take advantage of the opportunities ahead of us, how we're responding to customer demand. I feel great about where we're headed. And against this backdrop of others struggling and trying to find their way and having big aircraft orders out there, we're not. And so that's, I think, a differentiating element. And as we take a look at the months ahead, we're going to continue to deliver. And I think that, that is probably the biggest disconnect right now.

Devon, great progress on the balance sheet, exceeded probably everyone's expectations. You and Meghan have done a fantastic job in that regard. I mean one of the takeaways we had and a couple of investors noticed it as well. When you look at the free cash flow guide over the long term, it doesn't necessarily fit with the long-term debt guide. In other words, if you meet the free cash flow guide, your debt guide looks a little conservative in that you should be able to pay down leverage more than that. So you've left some wiggle room in there to consider capital returns. And you've probably got some people in the room here that are a little bit nervous. Is this the old American again? Are you guys going to be buying back stock as soon as you get that balance sheet back to sort of a BB level, when you've got Delta and United here before you talking about getting to investment grade or closer to investment grade, you're shooting a little bit lower or a little bit higher in terms of leverage. So maybe you could just sort of talk about the thought that went into when you were setting the long-term debt goals and the free cash flow goals, how you're sort of thinking about that wiggle room for share repurchases in a couple of years when you get there, but I'm curious to hear what you think.

Yes. We haven't made any calls on exactly how we're going to allocate our capital going forward other than to say, through the end of 2025, all of our free cash flow is going towards the balance sheet. And right now, we have this target out there where we are going to reduce total debt by $15 billion from our peak levels. We feel really good about achieving that. And that's where the focus is right now. Beyond 2025, we did put out a further debt reduction number effectively another $4 billion of debt reduction, taking total debt down to $35 billion net debt would then be in the high 20s net debt to EBITDA inside of 3x. All of those, we feel really good about. We've talked in detail about our goal of a BB credit rating. We'll see what happens beyond that point. But you're right, it does give us some room to decide how we want to allocate capital. That may be further debt reduction. It may be something else. And I look forward to having those conversations. But for the next couple of years anyways, we are totally focused on reducing total debt and achieving our $15 billion target.

Questions from the room.

I just have -- well, do you want to take -- you talked about a little bit at Investor Day the opportunity with renegotiating with their credit card partners that are underway and so forth. So when we think about how to benchmark where you stand versus if we want to say Delta is the leader with American Express, you've got United was just here with Chase and so forth. Is there a way to quantify that opportunity? And just to clarify what was said at Investor Day and sort of level set sort of where you're headed with those credit card arrangements?

Let me start, which is just first. Credit card deals and Advantage program, just an integral part of American Airlines. It's a great way to really deliver benefits and sell seats. And so I'll start with that. And in terms of comparisons versus OAs, we feel that we're at a considerable disadvantage where we're at versus Delta today. And I'll leave it at that, Devon, if you want to put a finer point to it. But I think it's a tremendous opportunity for American going forward.

That's in your margin [indiscernible] presumed step-up in loyalty economics is indigent as part of the...

Yes. I would just say, if we're able to completely close the gap that we have, I think we would find ourselves at the higher end of our margin guide.

Yes.

Just timing on that, just to clarify as well, where we are in that process? That's something you expect this year to have new agreements in place with both partners...

We're working hard right now. It's -- as I said, it's a tremendous opportunity, and it's something that we're very focused on. And fortunately, I know our partners are as well.

Last question. Anything on the regulatory front that gives you pause? And I'm not thinking so much regulatory overview at Boeing and what have you, but some of the narrative on credit card legislation, that sort of thing. And obviously, consolidation doesn't matter to you guys at the moment. But anything on the regulatory front that causes you any concern?

Well, we are a highly regulated business and 1 that I feel good about how we work with our regulators. So I'd start on a couple of fronts. Of course, that we're focused on credit card Competition Act and potential impact. And we know that we deliver great value to our customers. And so we've been advocates of making sure that we protect customers' rights to rewards programs. So we've been vocal on that front. I'll say that as we look forward as an industry, I think that investment within the FAA is going to be a real driving factor consideration that we all have to take into account. It will be great to get to a point where we are able to plan for the long run because much as I've said, that planning the airline over the next 5 years gets a lot easier when you know the kind of fleet you have and the kind of investment capability you have. The FAA needs that same type of mindset. Administrator, Whitaker, has been a wonderful addition, I've spoken to Secretary Buttigieg about where we're headed overall. But we need -- as an industry, we need to drive investment and I look forward to being able to be a voice to that going forward. So thanks, Jamie. Thanks, everybody. I appreciate the chance to talk about American. Take care.