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

Great. So let's keep cruising on here at a high altitude with American Airlines. Please count how many airline analogies I get through, through the course of the day. Very happy to welcome back to Laguna, American with CFO, Devon May; and Chief Strategy Officer, Steve Johnson. Gentlemen, thanks so much for being here.

Thank you.

Maybe, Steve, do you want to open up with some opening remarks?

Sure. Thanks, Ravi. It's -- we have to start the day by remembering that today is September 11. Obviously a super day -- important day in the airline industry. Sure there are a lot of you who remember exactly where you were when you heard about it and probably a lot of you who can't believe that it's been 24 years. It's obviously a super impactful day at American Airlines. We lost among the hundreds and thousands of people that were killed that day, we lost 23 of our team members. We'll never forget them. I know Mike will be up here in a few minutes, important day for United and Scott and Andrew and Mike, if you're listening, our best wishes to your team as well. But I think it's a testament to the airline industry. If you think about the events of 9/11, the impact that it had on our business and where we are 24 years later, just a real salute to the resilience, the capability, the ingenuity of our team, our industry team and the team at American Airlines as we continue to provide and build and make better just this backbone of the economy and this important product for our customers. So thank you for that. Second, just about the third quarter. We are -- the third quarter is playing out pretty much exactly as we projected during our earnings call. We came off a terrible July. I'm sure a lot has been said about that already, so I won't belabor that point. But as I think we talked about then and others have talked about, we saw bookings start to firm around the 4th of July weekend, and that's resulted in August that was better than July, September that was better than August. And although we're only about 50% booked, it looks like October is going to be better than September. So that same progression that we anticipated is playing out exactly right. That's resulted in our being very comfortable with our third quarter revenue guide. We're going to produce that on slightly fewer ASMs, maybe towards the bottom of our ASM range, but that's what our quarter looks like at this point. And then third, maybe turning to a little longer range point. We feel really good about where American is positioned and we talk a lot about margin improvement, but we don't often talk about revenue, and I'd like to just maybe say a few words about that today. American is a company that has, I think, been noteworthy in it's really terrific management of its cost and cost structure. And that's been the case for years. And we've -- over the course of the last couple of years, we've actually improved upon that with our reengineering the business initiatives, which are going to take by the end of this year, another margin 1.5 points out of our cost structure. That's -- we've had really terrific performance, but we've been less capable at producing revenue. About 15 months ago, I think on the heels of a failed sales and distribution strategy, we made a leadership change in our commercial group and the initial focus and maybe initially, we thought the only focus was sales and distribution recovery. I'm happy to report that continues at pace. It's continued deliberate improvement. We are on track to beat the objective that we've set out in our earnings calls to restore our performance by the end of this year to where it was in 2023 before we actually started the new strategy. But as we looked and with a new set of eyes and new leadership and new perspective, we found that there was lots of opportunity across our commercial operation and in the way we produce revenue. We started to attack that in December. We announced the new credit card deal with Citi, with Citi as our exclusive partner. The way in which that's structured and the exclusivity is going to allow us to grow that business much faster than we have in the past, and we've talked about the impact that that's going to have on profitability. The next thing we did is build a new team, 7 people to oversee the commercial portfolios. I think without a doubt, the best 7 people that we've ever deployed at American Airlines focused on commercial and revenue development and delivery. Those folks have been in office since February. They're already starting to get traction. They're very anxious and excited about the opportunity to improve the performance of their portfolios to world class. But think maybe the most interesting thing for me is how they've come together as a team. Revenue is a team sport for sure. And this group of people, they've known each other for a long time. They work together really well and they've really put -- they really understand that as we perform as a team we'll perform this company. So that's terrific. But that's led to some other initiatives. First, our customer experience effort, the reimagination of customer experience and the creation kind of a new customer-based culture in American. We're off to a fast start on that. That's I think both really interesting from a vision perspective and from a culture perspective, which ultimately is, I think, the grounding for everything we do. But we've also had some quick wins and initiatives. We've talked about free WiFi. We talked about our new app, which is not only more competitive, I think, but has been replatformed into a place -- into an automation structure where we can be very nimble with its continued improvement. We introduced a new airplane, the 787P, which is both, I think, remarkable in its hard product and the soft product that will follow it and very different from the already pretty good product that we had out there. We've had a handful of 787Ps in service now. The feedback from our customers has been terrific. But that's going to be followed by the A321XLR, which we'll put in the market in the fourth quarter on the transcontinental route, but that airplane looks just like the 787P and just like the 787P has much larger premium and premium economy footprint than the airplanes that it will replace on transcontinental. And then, of course, it's going to provide in 2027, a really significant opportunity for us to attack secondary markets in Europe and ultimately, on a seasonal basis in Northern South America. We are participating in the lounge competition, arms race in lounges. We historically have a great lounge footprint around our network. And we were the first to introduce premium lounges in the United States and still today have the most of them. But we recognize that that's a battle that's going to continue to be fought on a number of fronts to make the premier lounges better, to have more of them and ultimately to address capacity requirements as we demand for our premium products grows and our credit card penetration increases. So we're excited about that. We've done some simple things like just changing the boarding priority at American. And I hope that you've all been able to enjoy that. From my perspective, as one of our best customers, the stress level and just kind of the buy as we wait to get on an American airplane, seems very different than and very much better than it was 6 months ago. And we've got some food and beverage strategies that I think are going to be deployed in the short term and the long term. We started last week by making an announcement about some regional experiments that we're trying. So food and beverage that is sort of focused on the place where the flight originates from or its destination. We've got a fun champagne announcement coming next week. The team is going to be mad at me for disclosing that in advance. But -- and then focusing on something simple as having a coffee provider that I think everybody looks at -- looks to as being -- is providing really good coffee. We're continuing to grow and invest in our network. The long-haul aircraft are part of that. We increased the number of long-haul capable aircraft and premium seats to a point where we'll be up something like 20% by the end of the decade. And that the A321XLRs as I mentioned, give us a whole new set of markets that we can serve. We're focused on our domestic network growing. We focused after the pandemic on growing DFW and Charlotte to bear maximum capacity. Now this year, we focused on Chicago. As you know, we grew our gauge in New York as a result of just deploying bigger aircraft there. Philadelphia, we've increased our relative market share pretty significantly. We've seen really good responses and good financial performance in all 3 areas, at least compared to our expectations. As we get into 2026, our growth will be -- we'll continue that, and we have opportunities in Miami and Phoenix to accomplish some of the same things we accomplished in Philadelphia, in particular, by growing our relative market share there. Our partnerships, really important part of our business and providing a global network to our customers. Those retrenched, I think, during the pandemic, and we've spent a couple of years getting those back to where they were in 2019. And our future focus on our partnerships and making those more seamless and making those more expansive are all upside for us. And then even kind of the more routine but really important stuff, we're very focused in taking a comprehensive look at the way we revenue manage on a day-to-day, week-to-week, month-to-month, year-to-year basis focused on how we price, how we compete, how we price in markets that are competitive, how we price and market that are less competitive. The quality of our automation, the opportunities to deploy AI in revenue management, all real opportunities for us in the long run. Now we're definitely playing the medium and long game here. We're able to see some of this already in our third quarter performance and looking ahead to our fourth quarter performance. But we're just getting traction on these things, and we're -- it shows up less in the revenue environment we're in that is still kind of a tougher revenue environment. But as we get into 2026, I think you'll both see it more in the revenue line, and we'll have an opportunity at earnings calls and meetings like this to talk about it in more detail. So I mean it leaves Devon and Neil and me and the team, the American team, I think, really encouraged about the upside for American on the revenue line. As I said earlier this morning, we do have a margin gap to the other airlines, more than 100% of that is accounted for by our revenue -- historic revenue underperformance. So I think really good upside. Some really fascinating things for us to address and achieve, but we're very excited. So thanks, Ravi, for the opportunity.

Got it. No, that was incredibly comprehensive. Maybe just start on that very last point, the 100% of the margin gap being revenue-driven. Is there some kind of switch or inflection point at which you guys decided, hey, we've done, I want to say, enough on the costs, but kind of, hey, let's target this as a real issue or kind of what's driving this kind of shift in focus, if you will?

Well, I can start just by describing the margin gap. And obviously, we're first focused on our own margins, but we do spend a good amount of time looking at relative margins as well. If you look back a few years, look back pre-COVID, American, United had pretty similar margins. When I think margins, I talk on relative margins, EBITDAR. We have different capital structure, different financing decisions. So relative to EBITDAR margins. American and United were in a very similar spot, trailing Delta by probably a couple of points. It was the exact same thing in 2023. American and United, very similar EBITDAR margins, trailing Delta slightly. 2024, more of a margin gap appeared. And we've talked about sales and distribution. We've talked about our co-brand credit card and the opportunity we felt we have there, and we're really excited about the opportunity with Citi. But we have seen really great cost performance over the past 5, 6, 7 years and probably longer than that, just our mentality around cost shifted a little bit from how can we cut cost a little bit to how can we just be more efficient. How do we change process? How do we invest in technology to drive real cost savings. And I think over the last 5 years, we've done a really nice job of that. On the revenue side, though, we did see more of a revenue gap appearing. I think we're focused on all the right things that Steve talked about. And as we get through it, I think we're going to be able to shrink that margin gap pretty meaningfully. I look at second quarter as a proof point of that. Nobody had margins up in the second quarter. We all had margins down 1% or 1.5%. And for American, I think that's a pretty incredible accomplishment that our margins were down about the same as our big network peers in a world where we have market labor rates for almost the entirety of our team members. There's a handful of small groups that we have some work to do on. One of our large competitors does not. And that's a meaningful margin impact when they get to that point, but there is a cost benefit for them in the second quarter. The other side is if you look at domestic versus international right now, international is performing really well. On the domestic side, we obviously see some weakness in domestic main cabin. We're more exposed to domestic. We're happy to be the largest carrier in the United States. It's the most important aviation market in the world. It's just a great position to be in. But for this year, there's an entity mix component that should be driving our relative margins down. But you look at it, we all have the same margin performance. I think there's a lot of traction, probably measured like 2 to 3 points of relative margin differential between this temporary labor cost differential and this -- what I think is going to be temporary entity mix differential as well. So we're making up nice ground. I think you're seeing really nice relative unit revenue performance for 3 or 4 quarters in a row where we're outperforming, and we're focused on continuing to improve.

Got it. So maybe let's just hit some of those topics and maybe starting with the demand environment. Steve, you said that things are tracking pretty much exactly as you expected coming out of 2Q. Can you just unpack that a little bit more, particularly in domestic, where kind of all the focus has been? Obviously, we saw this big weakness in corporate, big weakness in close-in leisure in 1Q. How has that trended? And obviously, like July was a month where I think everybody had to really stimulate RASM to keep load factors up. How have both of those things trended in August, September, October with a particular focus on close-in leisure and corporate?

Sure. I -- we talked about July, I sort of think of July as I said, maybe the worst non-pandemic July in my career, probably between demand and weather. But it was really the last of what looks like 7 months of really challenging revenue environment and things certainly around the 4th of July, things started to inflect and get better. We first of all, our business traffic has continued, I think, to develop nicely. We do have a little bit of a tailwind because we are winning back corporate share as part of our sales and distribution strategy. But nevertheless, you can see that business traffic is staying pretty firm, particularly as you come out of August, which is a slow business travel month. Premium has just been a star throughout notwithstanding the revenue environment, our premium performance, particularly our long-haul premium performances, just been very good and very solid and seems to be continuing. And the demand for premium products seems to be a -- somebody called it earlier, a secular trend, but it seems to be -- I'll just use less fancy word, just say seems to be part of the industry environment now. It is -- we're seeing that demand continue through difficult times. We're seeing lots of feedback from our customers, both directly through surveys and just sort of indirectly as we interact with them, just looking for the opportunity to purchase premium products and willing to pay more for those products to get them and applauding all of the product improvements we do. So that's been great. I think what you're seeing -- a good part of what you're seeing in August versus July in September versus August, et cetera., is actually a firming of main cabin demand. It's just getting a little bit better. But getting better off a really low base. I mean, we're not just joking around about July. It was a really difficult month from a -- particularly from a main cabin demand perspective. And you're starting to see that come back. And I think that makes sense. It was -- it looks like it was economic uncertainty and all the confusion about the tariffs and what that might do that drove July to the point that it was. As some of that's dissipated and I think as the traveling public has become comfortable that the tariffs, whatever they're going to do to the economy, it's going to be around the margin and not catastrophic. And you're seeing that demand pick up. It's, I think, especially noteworthy in that we're seeing demand for future bookings really strong. And that's sort of, I think, an implicit commitment by main cabin travelers that they feel like everything is going to be okay, and they can make commitments to travel, buy expensive airline tickets in the future and they're -- they feel like they're going to be in good shape.

Got it. That's pretty helpful. Delta this morning said that they were seeing some weakness in international main cabin offset by corporate strength kind of are you guys seeing that as well?

Yes. I mean the main cabin, it seems almost like the other side of the coin from the really noteworthy uptick in demand for premium cabin. It seems like at the same time, we're having trouble getting as an industry, I think, filling the main cabin on long-haul international. It's just -- and so we're -- I think all have to look and figure out what the right product mix and price point is for main cabin travel in long haul. The first thing we're doing at American, and I think our competitors are doing as well is simply building airplanes and reconfiguring airplanes with more premium seats, more premium economy seats. That's where the demand is and fewer economy seats. But I think you'll -- over the course of the next few years, you'll see the industry and us come up with new products to try to improve demand for -- and just increase the opportunity to travel to a wider group of people who are price sensitive.

Got it. Just last point on the corporate recovery by year-end. You said you're absolutely on track for that. You should have enough visibility into what that business looks like when it is fully normalized. So if you compare that revenue base today versus what it was before the change in strategy, are you happy with the size of the mix, the margins of that corporate business versus what we were before.

Yes, so far, so good. It's working out the way we planned. So far we haven't had to make any sort of crazy investments in winning back or buying back that business. So it's coming back the way that we like. It's coming back deliberately and incrementally over time. So while we'll be back to our sort of first quarter 2023 levels by the end of the year, it's going to be next year before we actually see the full run rate value in terms of absolute revenue enhancement. But yes, no, it's going well. I think it's important to note, though, that, that opportunity is bigger than just returning to where we were by the end of this year. In first quarter 2023, we weren't in a great place. That was one of the reasons I think why we considered an alternative strategy. And so we're looking not just to finishing the year strong, but also to opportunities to grow our corporate share in 2026 and 2027 beyond that.

Got it. Same thing on indirect that the piece of business when restored looks just as good if not better than...

Yes. I mean again, it's a different revenue environment at a different time, but it's working out the way that we like. It's one point to make is that while the strategy that we adopted in early 2023 was too much, too fast. And on top of that, not particularly well executed. It was an experiment that allowed us, I think the rest of the industry, the TMC community and the people who run corporate travel programs to see some things about the way in which that community and that ecosystem works. And while we never want to go back and we're never going to say that what we did was a good thing. I think one of the outcomes is going to be that, that the intermediation of that business is going to evolve over time in a positive way for the industry. Positive for industry shareholders, positive for airline customers and travelers as the intermediation becomes smaller, probably, it becomes more efficient. The intermediation will be increasingly focused on that, which it does really well for customers and less about just being an intermediary. So I think that there's hopefully, we're past that. We are making great progress in winning back share. We -- I think we have some future opportunities ahead of us to improve beyond where we were earlier, but hopefully, it's -- we're going to have a good impact and make the business all around better and allow us to provide more products and better fares to our customers and better returns for our shareholders.

Got it. Maybe switching gears away from revenue and talking about capacity for a second. You said that you're tracking towards the low end of the ASM guide for 3Q. I don't know if that's just a function of what July was like or if it was a planned decision? Or what do you think 4Q looks like for you guys and very happy with the schedule that's loaded right now?

Yes. For the third quarter, we'll be at the low end, and it's really just because operating environment in July and probably into the first part of August was really difficult. Just a lot of weather hit our hubs particularly hard, still within the range, but probably at the low end. For the fourth quarter, we don't have a formal guide out there yet, but what you will see is a little more capacity growth for American in the fourth quarter than what you've seen in the first 3 quarters of the year. Part of that, if you look at our fourth quarter last year, we didn't have much growth at all. We are adjusting with an oversupply environment in the first half of '24. We probably pulled down a little too much in the fourth quarter of '24. So there's some capacity and utilization to come back there. And partly just continuing to adjust to this new seasonality that back half of the third quarter, a little softer than what it used to be. Fourth quarter, probably a little bit stronger than what it used to be, and we're putting our capacity in at a time of the year where we see more demand.

Got it. So maybe kind of sticking with this point, we're looking on the cost side as well. Kind of obviously, we've focused about all the revenue opportunities here, but you've also been very aggressively focused on cost, $250 million cost savings in '25, cumulative savings of $750 million. Can you talk about what the opportunities might be going forward? Or are you close to the end of the pipeline?

Yes. It's been a long effort for us. I feel we've had the right focus. Like for the longest time, you're just trying to figure out, can you cut a little bit here? Can you ask for teams to do a little bit more there? We took a different approach when we entered into this about 3 years ago now. And it was all around how do we invest to drive real efficiencies in our business. And it's process change, it's technology investment. It's in every part of our business. These initiatives are tracked and measured monthly, reported back to Steve and Robert and myself. It's with every single work group, how do we do things a little better, right, from the decision to staff to training, to onboarding to day of our regular operations, recovery, how do we do things better? How do we rely on more technology and make it better for our customers and for our team members. So that's how we've delivered so far. We delivered probably a lot more early this year, a couple of hundred million dollars. Some of these just take longer. We've got to sit down with our tech ops team. We were in our maintenance operation 2 days ago. And the way they're going to be running tech ops in 2027 is completely different than how we ran tech ops in 2022. It's all digitized. We're able to measure productivity of all of our team members. We're able to ensure they have the right tools to do the jobs at the right time. It's super exciting when you just watch some of this develop, some of it just takes more time. But -- and I can't stop talking about or can end this discussion on efficiency without talking about our procurement team. We started a huge opportunity for the organization a few years ago. We built a team that's led by what I think is one of the top procurement professionals in the world. He's doing an outstanding job, leading an outstanding team to drive real savings. Working capital improvements of over $0.5 billion to date and more to come. So it's a huge effort. The whole organization is behind it, and I think there's still more to come there.

If I could just maybe just add one thing. I've been very impressed with the contribution of our team as a whole, just to the ideation of this. So really I should salute to the team that they're -- they've been so creative and so committed to trying to make the business better. And that's what leads me to think that we're not done. I mean they just continue to come up with ideas about doing things differently that can be built into programs as part of this and it's been really fun to watch.

Got it. Devon, just one nuance on CASM. The maintenance expense has shifted from 2Q to 4Q, kind of that's still on track to meet it, right?

Yes. That's for the year. At the start of the year, we said we were going to grow low single digit, and we have unit costs in kind of that mid-single-digit range. That's probably where it's coming in. The timing of it has shifted a little bit. First quarter came in a little bit better than our initial expectations. Second quarter did as well. There is some maintenance timing that we talked about on the earnings call where we've seen some maintenance expense shift into the third and fourth quarter. But for the full year, expenses are largely coming in as expected.

Understood. Any questions from the audience?

You mentioned a little bit at the top in the opening remarks around AI for revenue management, but I was wondering if you could talk maybe a little more expansively on AI, both on some of the customer-facing things that you guys are working on as well as the operational side.

Sure. I'll start and Devon can do. I think I certainly do, and I think my colleagues all believe that AI is just a revolutionary opportunity for society, but certainly for the airline industry with opportunities to deploy it limited only by our imagination, I think, individually. It's a business that is enormously complicated, and the ability to have automation that can, in effect, produce answers more comprehensively and faster is always going to be valuable for us. So it's just across the board. Applications in the way we run our operations, applications in the way we run our operations when they're disrupted, applications for revenue management, which are just -- I mean, we file -- I mean an uncountable number of fares 3 times a day, all of which we have to make competitive in a super dynamic environment. AI is going to help us do that. We have a customer base that we talk a lot about wanting to respond to our customers. But we think about it and have historically thought about it in sort of the top-down macro way. We have 63 million individual customers each year at American Airlines. AI is going to help us really understand what those customers want and help us produce products that can be tailored for their specific needs and their specific times and to offer them opportunities to travel that they may not have thought of in their own in a way that we just can't do it with humans or present automation. It will deploy certainly, one of the easy and most immediate, I think use cases is disrupted operations and customer relations where AI can provide a big majority of the circumstances can do a better job than a human being can do in managing problems that we see over and over and in organizing responses to disrupted flights or broader weather disruptions. I mean I could probably talk for the rest of the afternoon about it but...

Yes. The only thing I'd add is, structurally, I think we're set up really well for it. And in part because of this transformation office, we set up with reengineering the business that we've now put that on the leader of the transformation office to make sure we are driving investment into AI initiatives that we think are going to drive better revenue, better earnings, more efficiencies and he's partnering really well with the IT team and the business units to make sure that investments are going and that we're putting our money in the right places.

I just want to go back to international really quickly. What are your thoughts on some of the domestic carriers, let's say, like Alaska, JetBlue expanding routes in the transatlantic? And what would that look for American?

Well, generally speaking, the real competition on transatlantic and international as a whole is, I think, competition between the three global alliances or maybe the joint businesses that are built into those global alliances. And our focus is on competing with Delta and SkyTeam, United and Star, et cetera. And we have really great partners that allow us to do that really effectively. Starting with JetBlue, I suspect that JetBlue we will continue it's transatlantic operations. It's pretty small compared to what any of the joint businesses do, but they provide an interesting differentiated product and we wish them well. But again, it's always going to be pretty small compared to the size of those markets. Alaska is maybe a bit more interesting. First of all, they are our partners. So we wish them really well and support their efforts. But they actually are going to operate in a more traditional way with wide-body aircraft with traditional and products with the Alaska touch on those, and they're going to operate from a really fabulous international gateway in Seattle, supported by a pretty solid domestic operation out of Seattle that's helped out by American Airlines. So I feel like, ultimately, in a -- they're going to be ultimately effective in operating internationally out of Seattle. I think both on the transatlantic and transpacific.

Any more questions? Maybe I'll kind of end with a couple here. Obviously, a big announcement for you guys end of last year with a new Citi announcement that kicks in end of this year or early '26. Can you just talk about the discussions you had with them kind of the economics of the agreement and kind of how much benchmark that is for other carriers in the space?

Sure. We -- I think at both Citi and we, a couple of years ago, determined that the underperformance versus Delta and Amex, just to use an example, was the fact that they had figured out a way to grow their program in a way that we had not figured out. And so almost all of the work with Citi in the lead up and during the negotiations was focused on creating an environment where we could both grow the program in terms of card members, card spend, but also the ecosystem for earn and burn and rewards. That -- the first thing -- the first conclusion we reached is that, that was impossible with 2 card providers, but became very possible with an exclusive card provider where we could be -- we could create a partnership that was a lot tighter. And a good part of that is just recognizing that Citi has a fabulous customer base that hadn't been exposed to an airline travel program. And we have a fabulous base of advantage members who are in need of banking services. So we by combining those 2, we were able to expand the overall products that we can offer as a partnership. And, in effect, start the process of -- I wouldn't say combining but sort of cross-pollinizing the 2 card programs, our co-brand program and Citi's proprietary program. So first of all, we can provide benefits to Citi's proprietary program that they hadn't been able to. They have a program where they issue Citi branded cards that aren't affiliated with an airline, and they give points, thank you points. Some of you may be Citi cardholders. But they hadn't -- didn't have access to an airline program in the same way Amex, for instance. So we can now provide that, and that makes the utility of those cards better and demand for those cards better. Likewise, we -- those cards had not had the ability to -- we hadn't had the ability to engage in what the card gang calls points transfer. So at Delta and American Express for a long, you probably are membership rewards members, some of you. You know that you can use your membership rewards points to acquire Delta miles, for instance. And use those to just -- for travel in Delta. Citibank's customers hadn't had that opportunity, and so we introduced points transfer. We also noted that we -- while we had a big set of card offerings between the 2 of us, we had holes in our offerings compared to the Delta and Amex products and even the Chase and United products. So we're working hard and introduced a new product a few weeks ago to, I think, pretty good applause that fills in one of those holes. We'll have another announcement next month about another card like that. But it was all focused on trying to create a program that could grow faster, that could -- the faster growth the program, the bigger you can create -- the bigger the network you can create that increases your ability to attract, earn and redemption partners. Increases the ecosystem, increases the utility of the advantage mile and just allows us to grow the program faster. And that's what gives us the ability to project the 10% annual growth under the new program and ultimately by the end of the decade, getting to something like $10 billion and a $1.5 billion EBIT improvement.

Got it. That is really helpful. Thank you for the comprehensive updates. And yes, we look forward to more in the conference call. Thank you, Stephen and Devon.

Thanks Ravi.