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

All right, folks, moving right along. Happy to turn the stage over now to the third of the big 3, which we had presenting in order this morning. Very happy to have Robert, Devon, Abriell here. I think we're going to start out with the boilerplate stuff, but thanks again for making the trip and taking the stage.

Yes. So just before we get started, I just want to make a reminder that today's presentation contains a number of forward-looking statements that represent our expectation of future events. Numerous risks and uncertainties could cause actual results to differ from those projections. Information about some of those risks and uncertainties is included in our SEC filings. In addition, we'll be discussing a number of non-GAAP financial measures. Definition of these measures are available through our today's presentation. With that, I'll turn it over to our CEO, Robert Isom.

Abriell, thank you, and good morning, everyone. Thanks for making time for us this morning. I'm going to start off with a quick presentation, and then, we'll get into Q&A. Forward-looking statements as we mentioned. And I have to start with this. I've been in the business 30 years. And there's been a lot that's gone on over those 30 years, but I can tell you that from a leadership perspective, none has been more difficult than this quarter. And it's certainly been a difficult time for American Airlines in regard to Flight 5342, the tragic accident that happened at the end of January. And I want to say a few words about this before moving on to anything else because this has been the primary focus of attention for American, certainly since the end of January. Our efforts have been solely to make sure that we take care of the families of those victims, 70 in total, when you include those from the helicopter as well. And that means mobilizing just an incredible force of people. We train for this. And you never think you have to put it into action. But we have been -- we've had 200 and more people that have been deployed through most of February, taking care of all of the victims' families' needs up into -- including travel and funerals and any other type of needs. Those 200 people have been deployed in Wichita. They've been at DCA at our care center. And they've just done a tremendous job. I couldn't be more proud of our team and how we've responded. But it's obviously taken a toll. We now still have some people that are deployed and are bringing those folks back now that families have returned to their homes. But we're going to continue focusing on that. One of the things that we've done because -- go back to 9/11, you go back to the Colgan Air Crash, these events, they stick with us forever. So we've actually set up an office of continuing care. And we've appointed a Vice President that will be in that role making sure that we care for families and their needs going forward. Now that said, there's investigation going on. The NTSB, I think, later today will issue a preliminary report. I've been working almost -- certainly weekly if not daily with Chair Homendy, Head of the NTSB. I want to give a shout-out and thanks to them for the good work that they're doing. We're being cooperative in any way, shape possible. And with Chair Homendy and also Secretary Duffy, we're taking this as an opportunity to make sure that we're doing everything possible to make aviation safe, even safer than it has been, the safest form of transportation. I'm pleased with the efforts that Secretary Duffy has taken right off the bat. And I'm confident and hopeful that there will be some actions taken soon that will further strengthen our air traffic control and certainly prevent incidents like this from happening again. So at the end of this, it is something that has impacted American, I think, more than anyone. That said, our intention has been making sure that we protect American over the long run and our reputation. I believe that we have done that. And I do not believe that this incident will have a long-term impact on the industry or American. Though that said, it has had a real impact on this first quarter. So I'll go from there to the first quarter revenue environment. You've heard a lot about this from others. You're probably not going to hear a lot of new news. Everybody was impacted by the wildfires. Sunbelt weather impacted us in some of our big hubs, DFW and Charlotte, and certainly had an inordinate impact on American, I believe, as well. If those were the only 2 issues, we probably wouldn't be talking about major adjustments. But when you combine 5342 with the uncertainty in the economy right now, and then certainly, the domestic weakness in March, that's the primary -- those are the primary reasons behind our adjustments to revenue. 5342 is a big deal, economic uncertainty is a big deal, and we have really seen some weakness in March. So that has led to the guide that we issued earlier today, and you've seen this. Ultimately, it means that we have extended the projected loss for the quarter on an EPS basis. This is disappointing. We had ended the fourth quarter with a lot of momentum coming into this. And it's something that we're certainly focused on, on addressing as we go forward and improving results from here. And that's where I'll go. Again, the quarter is incredibly difficult, incredibly difficult for American because of 5342 on top of everything else that's going on in the industry. But, for us, no matter the revenue environment, I believe that American is set up very well. And from that perspective, we came into this year with a measured approach to capacity and one that I think was in tune with projected GDP growth. American has had a focus on making sure that we restore our network, and I'll talk a little bit more about that. But we've built ourselves to be nimble and able to adjust to demand environments as they might change. Others have taken some different views in terms of growth. But for us, our growth for this year was estimated to be in the low single digits. And it's something that I believe that we have the ability to adjust as we go forward. Now, American, I believe, has the greatest potential for recovery as we go forward. Because of some of the actions that we took, everybody is very well aware of our sales and distribution missteps. We're doing very well at recovery. And from that perspective, I feel great. As well, American was probably the slowest to build back our network. We prioritized where we were going to build back. It was in DFW and Charlotte, our strongest hubs. But we had probably the largest impact from a regional airline perspective due to pilot shortfall. That meant that we had up until last year almost 150 aircraft on the ground. And before that, I think almost 250 aircraft. But we are working now to get our Northern tier hubs rebuilt to back to where they were and that I'm very optimistic about that plus our sales and distribution work to get us back in line with expected performance. On top of that though, we're set up as well because we've paid close attention to our capital outlays. And from a fleet perspective, we're in really good shape. We don't have extraordinary capital requirements coming up. And on top of that, with the debt that we brought through the pandemic, we've done an exceptional job of making sure that, that is addressable as we go forward. We don't have debt towers or huge payments that are coming that are of concern. So, as we go forward, our focus remains the same, and that is an effort to produce long-term free cash flow. Last year, American produced over $2 billion of free cash -- $2.2 billion of free cash flow, record free cash flow year. I feel really good about that. 2025 is expected to be more the same. That's allowed us to strengthen our balance sheet with some other actions that we've taken. We're a very different carrier than we were from debt peaks of -- total debt of $54 billion. As we came out of the pandemic, we've hit our $15 billion total debt reduction target, and we've set a new target, and I feel really good about that. It's made sure that we're in a position to take care of American going forward. And ultimately, right now, American is focused on margin expansion, profitability. And so as we look into 2025, how is that -- how do we go about that? It starts with building off of what we're really good at. We run a solid airline. American Airlines has been second to none over the last couple of years in terms of operating an airline in any conditions. While other carriers have struggled in recovery from some CrowdStrike and weather issues, look, we all get hit, but American, I think, has built a reputation to be able to manage through all of those and do it very well. I'm really proud of the team and the work that they do day in and day out, no matter the conditions. From reengineering the business perspective, Devon, when he took on the CFO role, embarked on a path that was a multiyear effort to reduce expense, make sure we're as efficient as possible, free up working capital. And from that perspective, we've taken out almost -- over $500 million of operating expense, produced $500 million of working capital. Reengineering the business 2.0 is in the works. And we pride ourselves in being the best in the business at managing our costs. So to drive long-term margin expansion, we build off of that, and it really is delivering on our revenue potential. So we start with getting back from a sales and distribution perspective, the indirect share that we had, had back in 2023. We're making great progress on that. As well, there's opportunities to fine-tune our revenue management, make sure that we're -- revenue management systems that we're merchandising effectively. We have opportunities with our app. All of that is going on right now. That builds a baseline to ensure that we can capitalize on customer experience investments that we've been making. And then ultimately, the other points here that you're well aware of, we're rebuilding our network, and then, the new Citi deal that we inked last year, that comes into play in 2026, and we're well on our path to getting that off to a great start. So delivering on our revenue potential, this is from our year-end earnings report, the progress continues. And I'm pleased with what I see. And as we exit -- as we look to exiting 2025, I anticipate that we will have regained the share that we had lost. That's important. It's important right now. Business has been holding up a little bit better than the domestic. And from a high-end leisure perspective as well, that's beneficial to American right now. That's a game that we play in as well. From a customer experience perspective, we've made great investments over the years, and we'll continue to do so. We have a great international fleet, domestic fleet. We were the first with the Ultra Premium lounges. The investments in those will continue with our Philadelphia lounge that is opening up. There's ways that we can monetize that, and that's the pursuit that we're looking for. It's anchored on having a hard product that people want to fly. And you'll see the investment in aircraft for us coming in terms of growing international capable fleet. But it's not just that, it's also having international fleet that has the right mix of premium economy and business class and in coach seats as well. And so I really feel great about where we're headed with the introduction of our flagship suites, new XLRs coming this year that will first be deployed from a transcon perspective, and then, ultimately, being able to do some short-haul Europe and South America and international overall. We have the new 787-9s that are coming, and we're reconfiguring our 777-300ERs, 319s and 320 aircraft that will put more premium seating available on those aircraft as well. That's all good news. We're definitely in that market and poised to excel. And then from a network perspective, again, American has built our network based on a number of constraints that we had to get through. First was getting our regional fleet back up in the air and also addressing our mainline pilots. And fortunately, we've been able to put in place a contract 2 years ago now that it's allowed us to grow where we need to. And what you'll see is our growth is primarily in 2025 going to be centered on our northern tier hubs, namely Philadelphia and Chicago. I anticipate great things from the growth plans that we put in place in Chicago right now. We see them booking to levels that we expect. And Philadelphia is coming back nicely as well. It's important because American was really hamstrung by the fact that we didn't have a network that was quite capable of delivering to our most premium customers. So I feel good about the growth that we're putting back in place. I've mentioned about the Citi deal, and we've talked about this before, as this progresses over the next few years. And as cash remuneration approaches $10 billion, we anticipate another $1.5 billion of earnings to American. It's something that has been a shortfall for us in comparison to other carriers. And I'm really pleased with the start here. Citi is a fantastic partner and really invested in this effort as well. So I wrap it up with this, that the focus remains the same. From a margin expansion perspective, we're going to continue to operate with excellence from a reliability perspective. That's the best, most efficient way to run an airline. We're reengineering the business. Others that may be come into this game, we've already started. We're great at it. We've built labor contracts that are fully embedded into our cost projections. We don't have anything new coming all the way out through 2027. That cost certainty is a real blessing right now. And from a commercial initiatives perspective, I talked to you about restoring our sales and distribution share, renewing our focus on customer experience and monetizing that, strengthening our network and getting back to having full hub strength and then enhancing the Advantage program and co-brand cards. Ultimately, free cash flow generation, which we talked about, record 2024, anticipate more of the same in 2025. Limited CapEx exposure. Fortunately, we have the youngest fleet among the majors. We invested, up to the pandemic, over the prior 7, 8 years, almost $30 billion in aircraft. We don't have to go through that. Others have a different path ahead of them. And ultimately, we've got a much stronger balance sheet and one that's capable of weathering any type of storm that might be on the horizon. So I feel great about where American is. It's a difficult, difficult first quarter for so many reasons. But we've got a great team and a path that's clear and certain, and we're ready to go and bring this all to light. So with that, I've got Devon and Abriell, and we'll be interested in any questions you have.

I guess I'll start. We have a shy audience this morning. So look, when Mark and I do these conferences, the goal isn't to engage in tit-for-tat, he said, she said kind of stuff. But you were in the room. You heard what Scott had to say. He is still -- Scott Kirby, CEO of United, for anybody listening. He is still of the view that the market can support 2 premium airlines and the implication is that American is not 1 of those 2. I assume you disagree. Why are you right?

So I'll just start with this. I work for Scott and with Scott for a long time. So I've seen him be right on a lot of stuff. He's a brilliant man. I've seen him wrong in a lot of stuff. And in this case, he's dead wrong. And the reason for that is American has been around for a long time. American probably had a weaker hand going into the pandemic. Certainly, we were hamstrung on the way out. We didn't -- again, I mentioned that we had 200 aircraft -- over 200 aircraft that we couldn't fly because of a regional pilot shortfall. I love our regional network. It flies incredibly well. We've got a great fleet. But by the same token, you have to have pilots to fly. You know what, we're back out. Scott says that kind of stuff, I'm sure, because he would like nothing better than to not have American as a competitor. He would guarantee he doesn't like us being a competitor in his backyard in some places. But to that end, we're a premium product carrier. We've got a great fleet. We're not dependent on a lot of the issues that Boeing or Airbus has to deal with. Our growth is fairly metered as we look out. We've grown in DFW and Charlotte. We have an incredible position -- Sunbelt position -- hub position, enviable relationships. I see Luis Gallego here from IAG. Anyone would love to have a partner with Iberia and BA in their network and carriers. The same thing holds true across the Pacific with JAL and our other partners. American is not going anywhere. American is recovering. And I can guarantee you that anything that you hear to the contrary is just concerned that we're actually making a lot of progress.

Robert, can you talk a little bit more about, yes, the bullet there on DCA and your market share? And can you talk a little bit about performance there in light of everything going on in Washington related to travel? That was also obviously where the accident was. And so the weakness that you're seeing there, is some of it attributed to the accident? Is most of it attributed to the government, obviously? And just how should we think about that? And how is that playing out?

Well, a couple of things. Devon can join me here. So first off, yes, the incident had a big impact on DCA shortly after the accident. DCA is also a center to a lot of government activity. And while corporate -- our government contracted business for us is only 1.5% of our total revenues, there is associated impact to that. And whether it's -- 1.5% is just our straight government contracted, but there are government contractors that have been impacted. And anyone as well in that area is feeling the concerns of uncertainty. And so we know that there's some follow-on effect in terms of leisure travel associated with that as well. But I'll note this that DCA historically has been one of our most profitable hubs. We have an enviable position there. And over the long run, I'm confident that it will return to its full share of profitability. But realize that it's actually a fairly small part of our network. Total ASMs is 2%. So about 2%. I'd love to get it back to that profitability level that we had seen. We've taken some actions to address capacity. But over the long run, that's going to work out really well for us. Government travel has a way of coming back.

So -- can we take that and lead us to sort of corporate travel recovery on the network, the Vasu unwind, whatever we want to call it, in terms of your attempts from over a year ago now, right, to just intermediate and sort of bringing back the direct booked corporate revenue. You're recovering. You're not yet fully recovered. Is the expectation that you will get fully recovered? Have you seen any -- is there any sort of -- do you think there's any reason for sort of permanent corporate share shift because of the experience that you've gone through?

The answer to that is no. And the reason is I've been out there as much as anybody else on our team, talking to CEOs and corporate buyers and the travel management companies and to a person, they all say, "Hey, we'd much rather have more competition than less." And so the door is open, right? And you have to come in there with a compelling offering. And from that perspective, we've retooled our sales and distribution teams. You've seen that we've reorganized on that front. And I feel great about the progress that they're making. And the good news on that front is that you can see, as you sign new contracts, as there are new commitments that are made, right, those take some time. So when we talk about what we're seeing right now, the seeds are planted, I know that we're going to harvest in this later on this year. And as we talked about, as I mentioned in my comments, as I take a look at exiting 2025, I think that we'll be back to full share restoration.

And last one for me, and I'll turn it over to the crowd here, hopefully, for some questions. Northeast Alliance, there's obviously some legal activity related to that, that I know you can't speak to directly. But maybe just bigger picture, can you talk about where you stand with that process? How important is it to do something, whether it's what the government allows or whether trying to rewrite what the government said was the path to go forward with that? What sort of thoughts can you add for your presence in the Northeast?

Well, I'll just start with this, the Northeast Alliance, it benefited consumers. Plain and simple, it did. And it's disappointing that we had the outcomes from a litigation perspective, disappointing that we had the judges that were chosen in those cases. I think that different courts, probably different verdicts. But at the end of the day, the reason that we continue to pursue efforts is just simply because I don't like the precedent. It's just -- it's wrong. It doesn't benefit anybody. Consumers had a much better opportunity to get where they wanted to go at the price they wanted to go with 3 really strong competitors in the New York region. For us, in New York, look, we've got a great JFK hub for us from an international perspective. I mentioned, again, the relationship we have with IAG. We've got the premier New York to London, a franchise, and we're going to continue to build on that. LaGuardia will be our largest operation since the pandemic this year. And we've seen some improvement in business there. All carriers have their strengths and others -- and all of us have areas where we need to shore up. We're going to be focused on the Northeast. And we're going to make sure that we take care of ourselves. If there are partnership opportunities, we'll pursue those vigorously. And if not, you'll see us make sure that we leverage the assets that we have throughout the country and our just enviable domestic position, largest among the network carriers, and especially in those places that are growing the fastest in the country.

So the last time I was at your headquarters was fall of last year. So you hadn't inked the new loyalty contract yet, you're still hitting the 2 partners off one another presumably. But one of the questions I asked you at the time was that was whether it was a priority to also be able to improve and expand the disclosures of the program. And you kind of shot me down, you're like economics first, first and foremost. And you've certainly given us high-level color on the improvements to the contract. Were there any changes in terms of what you can ultimately disclose going forward that would better allow analysts and investors to actually begin modeling Advantage returns? I know Chase still puts a lot of handcuffs on what United could say. So my question is, Citi and American, can you give us more, more data?

Yes. Well, I think we gave a lot when we announced the new agreement in December, probably more disclosure than there's been, at least in our business and maybe with any loyalty program. But what we announced in December when we announced a new agreement is a couple of things. One, we expect this to drive a lot of growth in this part of the business. So we'd be growing by 10% a year for that 10-year period. And that's just remuneration. What we also disclosed, though, effectively is the earnings from that remuneration. So for the year ended third quarter of last year, we had about $5.6 billion of remuneration. For the full-year 2024, we're a little over $6 billion. That included a bonus in there. But let's just go up that $5.6 billion base. We said we'd grow that by about 10% a year. And as we approach $10 billion, when you do the math, that puts you around the end of the decade, you'd be at around $10 billion remuneration. That marginal growth would drive an earnings improvement of about $1.5 billion, so 33%, 35% type margin on that remuneration growth. I don't know how much more disclosures need to be on that, but it felt like there was a ton of disclosure at the time, more than anything, I think, that's been done in our business, and it gives people a really good feel for just how valuable these programs are.

Devon, we spoke a little bit with Mike Leskinen, United, before your presentation about balance sheet strategy and the shift at United from non-targeting investment grade to now targeting investment grade. The question I want to ask American about the balance sheet strategy is you've set these deleveraging targets, yet if we run the math on your free cash flow, we've written about this and talked about it a little bit, but there's still some wiggle room in there for capital return to shareholders. So when you think about the industry environment, how you're thinking about when is the right time to sort of flip the switch and -- how are you trying to balance those debt reduction goals? You're going to have a choice whether to tighten those further or to turn that switch back on and return capital to shareholders. So what's the debate like internally? How are you thinking about it?

Well, it's fun to start to talk about it again. Like we have been solely focused on repairing the balance sheet since we came out of COVID. We, in the middle of 2022, had $54 billion of total debt. We set a target that by the end of 2025, we'd reduce total debt by $15 billion. We did that by the end of 2024. The latest target we put out there is that we would reduce total debt by about another $4 billion by the end of 2027. We had talked about that at our Investor Day. At that point in time, we said it would be by the end of 2028. So we've brought that forward by a year. But you're right, if our free cash flow projections are right and we think we're really well set up to produce really nice free cash given our capital requirements, we should have excess cash to do something else with. And we'll have that decision to make. And it's something that Robert and I will talk about with our Board, just do we want to continue to accelerate the deleveraging? Or do we want to do something else with that excess cash? Obviously, first priority is investing back in the business. And we think we've made the right investments there, but if there are great opportunities there, we'll continue to do that. But we like the position we're in. We have the lowest net debt right now that we've had probably since, I don't know, for sure, since 2019. By the end of this year, I think we'll be in the lowest net debt position we've had since 2016. So I feel great about the progress, excited to have more of these conversations as to what to do with excess cash.

And one question we didn't get a chance to talk about with United that I want to ask you because you obviously have aircraft on order from both manufacturers. But with Boeing specifically out of Seattle, for you or Robert, are you reacting favorably to the change of regime there and what you're hearing out of Seattle? Obviously, you've had 787s that have been on constant delay. Are you feeling better about Boeing's ability to deliver airplanes to you on time?

Yes. I think we're seeing progress for sure on the 737s. We gave a range of deliveries this year of 40 to 50 aircraft. That's really going to be dependent on how many airplanes Boeing can deliver. But I think on the narrow-bodies, it feels like they're making nice progress. The wide-bodies, we're still waiting on a handful there. So we'd like to see progress there. We're really excited about the product, as Robert talked about earlier. But yes, I think they're doing a nice job right now. The wide-bodies maybe are a little bit TBD for us.

Given some of the pressure you talked about on the demand environment, would you think at all about accelerating any retirements?

We feel really comfortable about the growth we have planned for this year, and I'd leave it at that. We're building back our Northern tier hubs, Philadelphia and Chicago. We were already very measured in our capacity growth for this year, low single digits. I think the question comes in is what does the economic -- what economic conditions do we face later in the year? And what kind of impact does that have on 2026? And from that perspective, I'll let Devon talk. I think we've got a tremendous amount of flexibility to do to meet whatever demand needs are out there.

Yes. I think that's the greatest part about our capacity plan and our fleet plan right now. If we are heading into a softer demand environment, right now, we're growing low single digits. And if we need to pare that back a little bit, that's pretty easy. It's not like we're growing at some multiple of GDP. As we look out to 2026, we have a fleet that could allow us to grow 5% or 6%. More likely, though, we're going to grow in line with economic growth. And if that continues to come down or if that is showing any signs of weakness, then we can pull back on that growth through some retirement of older airplanes, return of leased aircraft or we can work on our delivery schedule a little bit. But our fleet has a ton of flexibility to meet really any level of demand.

Thanks, everybody. Take care.