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

Great. Welcome back. And kicking off airlines content at the conference, we are very happy to welcome back American Airlines with CEO, Robert Isom, and CFO, Devon May. Gentlemen, thank you so much for coming back to Laguna.

Ravi, great to see you.

Thank you. So before we kick off, I want to say for research disclosures, please see Morgan Stanley's research disclosure website at morganstanley.com/researchdisclosures or please see our recent research. With that, Robert, plenty going on. So I don't know if you want to maybe open up with a few thoughts on what you're seeing out there.

I would. First off, thanks for having us. But I'll just start with this. A lot of stuff going on in the world, but demand remains strong. That's really great to see, and I know we're going to spend some time on it. From an American perspective, premium Global Airline, we're doing all the right things to make sure that we reinforce that purpose. And the storyline for us is still we're the airline with the greatest potential. And it really is because of the opportunities that we have ahead of us from a revenue perspective. We've talked a lot about the things that we're doing with our four pillars. We're building our network. We have significantly undergrown, since prior to the pandemic, our network. And this is the first year we've been able to really put all the pieces together with pilots and aircraft deliveries and gate availability, and we've done a really nice job of making sure that DFW and Charlotte, Miami, Philadelphia, Phoenix, Chicago back to where we need them to be. So I feel really great about our network. On top of that, we've been doing everything possible to really lean into improving our customer experience. And from that perspective, it's just every week, I think you've seen something coming out of America. It's not just the reconfigurations that have been in place for the last few years, anticipating this drive for premium revenue but it's new flagship suites, and it's new lounge investment. And on top of that, our customers are really telling us that we're doing the right things from an NPS perspective, and there's more coming. You've seen the announcements that we've made about high-speed WiFi, but it's not just that, now it's Starlink and a return to seat-back video. So from a customer experience perspective, really leaning into it and Matt as well. You got a network, you've got an experience, and that allows us to really take advantage of the drive to premium revenues. And from that perspective, we're really pleased with what we see from not just people buying up but also the work that we've done to restore our sales and distribution network. We're finally back to where we were a couple of years ago, and there's just upside from there. And then the final pillar is the work that we've done from a co-brand perspective. We've seen advantage enrollment at record levels. And it's a great way to lead into the first year of a new relationship with Citi, and we're hitting the mark on all those fronts. So I don't like where fuel is today, I know we'll talk a lot about that. But you put fuel aside and the revenue performance that you've seen at American I've never seen in my career outside of recovery after maybe the pandemic or 9/11. I've never seen a revenue environment in terms of year-over-year improvement for -- especially for American. So that bodes well for the future. As fuel stabilizes, it eventually will. I really look to us being back on track, producing much improved margins. producing free cash flow, and we've done a nice job of certainly strengthening our balance sheet and reducing our leverage. There's just more of that to come and much better news for our shareholders going forward.

Got it. That's a great start. Lots to unpack there, which we'll get through. Maybe we can start out with, like you said, kind of shorter-term revenue trends. 2Q earnings call, you guys guided to 16% to 19% revenue growth in that unit revenue should be stronger year-on-year in both 3Q and 4Q than the 2Q result. How has that trend kind of evolved since July? And kind of how does it look like throughout the plan?

Yes. So from a revenue perspective, I feel really good about the guide. And not just -- it's not just from a revenue perspective, our capacity guide, I feel really good about how we got on that and also from a unit cost perspective. feel good about that. What I hope feel good about is the price of fuel. There's been tremendous volatility, but I'll go back to the revenue outlook, and it's broad-based strength. So I like what I see, as I mentioned from a corporate perspective, our indirect share is, again, now above where we had been part of our sales and distribution issues. It's geographically international is still strong domestically, and it's front cabin and coach as well.

Got it. That's all the above. And your career kind of -- have you ever seen me was all of the above, like this?

No. Again, I haven't, but we still have to deal with the price of fuel. So -- and I'll say that, I haven't seen when you really break down, it's not just crude. I think that if it were just a crude oil issue that we're dealing with right now, or $100 a barrel oil that we dealt with at various times in our history, we'd be in much better shape in terms of producing profits. But the fact of the matter is there's a crack spread on that, and that has grown by 3x. And I really haven't seen that in my career also. But I go back from a revenue perspective, yes, when you're talking about 16% to 19% year-over-year increases, I feel good about that. And I do think that, that is going to be durable. Some of that from an industry perspective, obviously, and price of fuel may have been a catalyst to drive some performance. But overall, I believe that the vast majority of that is something that we're going to be able to retain.

So exactly my next question, which is, you kind of highlighted the four pillars of the strategy before. A lot of that was idiosyncratic American. How much of this improvement that you've seen in the yields kind of year-to-date do you think is idiosyncratic to you and you sort of would have got anyway versus fuel pass-through?

Well, I go back to where we started the year. And from a unit revenue perspective, I am really pleased with what we have seen in fourth quarter last year and the first quarter of this year. So I think that some of that strength that hard been built in. It's hard and discern exactly, but I do know this. The kind of -- we're selling too much basic economy. And I know that we've seen a 5 percentage point improvement of buy up from that perspective. In terms of our premium revenue, right, 30% of our seats are now producing 50% of our revenue. And when you talk about our four pillars and what we're doing, those 30% of seats, they're only going to grow in our fleet as the reconfigurations come on board as the new aircraft deliveries come on. So I look at it as, hey, there's a rising tide that floats all boats, but there's a chunk that American is benefiting from. And as -- certainly, as we take a look at into the future, those four pillars, there's so much uniqueness to American and our underperformance that it provides the most upside.

Yes. Your boat is bigger than everybody else's. On that note, kind of you mentioned the sales and distribution changes that you guys have made. A related change there was corporate as well kind of as you guys lean back into corporate managed corporate revenue was up 26% in 2Q, fifth consecutive quarter of double-digit growth. Are you now taking corporate share beyond what you had pre the distribution changes? Kind of what does that outlook look like?

Well, let me break down. First off, I feel great about people talking about numbers that are 6% greater year-over-year. And we're going to produce another quarter of significant gains year-over-year. So I look forward to a sixth quarter. So from a corporate perspective, yes, we've regained where we had been, and that's good news. And look, I still don't believe that we're at our full fair share. And that suggests that there's a lot more upside. Corporate for us, it's part of the whole indirect channel. And yes, we've done better. We're achieving higher than our fair share from the leisure side of the indirect channel. And I feel great about that because there's more upside, but from a corporate perspective, what we've done in terms of rebuilding, putting boots on the ground, getting deals in place that are now just coming to fruition. There's real upside there. And don't forget, from a corporate yield perspective, that is almost double what we see from other channels. So I feel great about the opportunity to do more. And that's the goal for American.

Got it. And just kind of -- you mentioned a few times for obvious reasons. Is there room to kind of push more on price kind of given what fuel is doing or kind of has the industry and you guys done several rounds already earlier this year. Like is there a plan forward if this continues?

Well, certainly, we're going to be in the game to produce the maximum amount of profitability we can over the long run. And when you take into account fuel right now, yes, we've absolutely done a great job of recapturing a tremendous amount of that expense. A lot of volatility as we look into the fourth quarter, I think we've seen fuel prices climb by over $1 billion. And so how quickly you can react to that, that also then comes down to all the things that we're doing, specific to American Airlines, but also from an industry perspective. And on that front, if fuel prices remain as high as they are right now, I think that, that's going to require some adjustments in terms of our capacity planning as we take a look out into the future. But where we stand right now, we've made great trade-offs. We're seeing load factors dip a little bit. But that's been -- when you're taking a look at revenue performance that we've seen in double-digit unit revenue increases, that's a trade-off we're going to make every day of the week. But as we take a look forward, I do view that what we're doing from a product perspective to grow our premium seating, what we're doing from a buy perspective, I think that there's more room to go.

Got it. I'll come back to that in a second. But let's shift gears for a second and talk about those four pillars again. Again, you said that you have the greatest potential of any airline story in the industry. I want to ask you a classic sell-side inning question, but where are we on each of those four pillars? And kind of how much more room do you have to push on kind of each one of them, if you can kind of give us a little bit of a forward look for the price?

Well, from a customer experience perspective, I like what I see in terms of trends, NPS scores improving, people reacting very, very favorably to every new announcement. But let's face it, we've got a lot of work in the pipeline. So from a lounge perspective, you'll see more new lounge openings at America over the next couple of years than we've done in decades. From a fleet perspective, you're starting to see the 319 reconfigurations and 320 reconfigurations come out. 321 XLRs are just now starting to deliver. But that will become the backbone of our TransCon service coming up as well as secondary city in Europe flying or seeing the first of our 777-300 mods come on. And our 777-200s will be moving before you know it. So from the perspective of, hey, the revenue performance we've seen so far that's without premium seating by the end of the decade for us growing by about 50%. So that is something that I think is really notable. All the improvements that we're making from a product perspective, insight amenities. All of those things are relatively new introductions where there's coffee or campaign or new snacks. All that is hitting right now, and I think is gaining a tremendous amount of traction. So I view that we're in the early stages from a customer experience perspective. But there is -- look, seatback video is going to take a few years. We're going to have high-speed Starlink WiFi on a significant chunk of our fleet as we move out through 2027. All that early stages, but that just bodes well for the future. We've got work to do from a reliability perspective. I like this -- what we've done this past year in DFW, the 13 bank operation has greatly improved our ability to service customers during really tough operating conditions. And no matter the operating conditions, we'll have to be smart about it. We've grown -- I'll talk network next. We've grown, I think, to where we have a competitive network. We've already always had the most comprehensive North American footprint that ties into an international capability with partners in our own organic flying that I think is second to none. But we've had some things to shore up. So in Chicago, look, I think we feel pretty comfortable with where we're at right now. We're going to get five new gates as we move into the end of the year, that's going to really allow us to operate that schedule in a better fashion. In DCA recovering from last year and all the disruption that came from that. DCA has returned to one of our top-performing hubs. And I feel good about the work that's being done on the ground to allow that location to perform well. Philadelphia, we've grown in significantly. Miami is the largest schedule that we've ever had. Charlotte is kind of where it's going to be for a little bit just because of aerospace and ground constraints. DFW is, I think, a place that as we bring on the new F terminal as we bring on the new satellite A and satellite Cs. I think there's a tremendous amount of growth. And I think you know, in North Texas, it's an incredible environment. It couldn't be in a better spot and have forecasting the world's largest single carrier hub as we move into 2030 and beyond. Phoenix, we've stabilized. We've got a little bit of growth coming there. And then as you look out into Los Angeles as we moved into 2028, we'll regain, I think, our ability to have the largest footprint of anybody just because of T4 and T5 reconstruction. So from a network perspective, some upside out there in terms of development in all the right places in the country. And so I'd like to underscore that. And while we'll probably not grow. We're not going to grow as much in 2027 as we did in 2026. There's a lot more that American can do over the long run, and we've got a fleet that is really set up to do it. From a premium perspective, I like what I see. We're going to have a new product out there. And so the game of trying to segment and trying to make sure that customers have a product that they value, we're doing the right things from that perspective. And then from an advantage, I mentioned record enrollment. A lot of that is driven by the free Wi-Fi that will ultimately really turbocharge the relationship with Citi as well. So I look at that, the increased enrollments that gives you the opportunity to improve co-brand penetration. And ultimately, that translates into spend. And so where are we at from that this year, we're looking at from a co-brand perspective. We're looking at cash remuneration of about $8 billion. And as we talked about when we kicked off the deal with Citi as we look out into 2030, that number is going to grow to over $10 billion, and we anticipated another $1.5 billion of pretax profitability. So where are we at and all of that. I'd say there's a tremendous amount of upside.

That was incredibly comprehensive. Clearly, there's a lot going on, a lot more to come. Again, to that point, there's -- since your last Investor Day, a lot of change with the industry, a lot of change with yourselves. What does this mean in terms of financial targets kind of just mentioned the $1.5 billion in co-brand alone. But what kind of profitability upside do you see from these levers going forward?

Ravi, again, from where we started the year, I had anticipated...

You are going to $1.5 billion pre tax, yes.

And that was in the second -- in late -- we're approaching earnings in the second quarter. But at the beginning of the year, I had anticipated profitability considerably higher, but for fuel. So I think that we would have shown, again, but for fuel, a huge down payment on what we had talked about at that Investor Day, which was mid- to higher single-digit pretax margins and then mid-teen potentially plus EBITDA margins. I still see that in our future. Fuel is not going to be where it's at forever. But on that basis, you take a look at American, and you have to look out a little bit. You've got to get past fuel. Certainly, we're not valued where we should be. I just -- I think one other important point to note, we've got the most upside from a revenue perspective. And I'd just like to underscore that, that is not going to require just ridiculous investment from a capital perspective. We've got a fleet that's set for the vast majority of things, Devon can speak more to this. We're pretty well set in terms of capital expenditures, and it's fairly smooth. And then as we take a look out beyond just capital expenditures, I really like what we've done from a cost management perspective. We've always had a reputation for being very efficient, that's only grown. And I'll just underscore, I feel really confident about where we're going to come in, in the third quarter from a unit cost perspective. And that's going to be a hallmark. That's what we're going to be able to build on. And that's not a trait that American is going to lose.

Got it. Just on that point, it feels like something has changed with this industry where historically, there was this hyper focus on CASMx with good reason. Investors may have kind of got into that kind of a little bit of a hyper focus on CASMx as well. But with all of these revenue levers that you guys can now pull. What is the right benchmark to judge your success? Is it margin? Is it EBIT growth? Is it CASMx? Is it RASM kind of -- how would you package all that? Are we in a world of higher-than-expected CASMx, but that's more than offset by RASM growth, or how do you see that?

So I'd just say this. Look, at the end of the day, we're about growing our margins and producing profitability. Okay, so plain and simple. I do know this as well. From a revenue perspective, we're making all the right investments. We're not capital constrained in any way. Devon and the finance team has set us up very well. You know what we've done from our our balance sheet. We've improved total debt position from a high of $54 billion, just a handful of years ago to $36 billion. We're -- $35 billion is the target. So we've done the right things from that perspective. And I'd just say this, revenue is our upside. That's our focus, but we're not going to lose our cost discipline. We're not. And so look, we've never been in a position where we have been undisciplined. And as I take a look going forward, we can do both.

Understood. Maybe switching gears a little bit. You kind of -- you addressed premium quite a few times, obviously, kind of a big focus area for you guys idiosyncratically. Big focus area for the industry as well, right? Again, this also feels like a little bit of a change in the industry where historically, it's been -- it was maybe a little bit of a compete with the low-cost guys in an industry 10 years ago. Now the industry is becoming more premium as a whole. Are you comfortable with the entire industry going premium? Do you think there's enough room there for like even the ultra-low-cost carriers introducing lounges and kind of premium seating and such kind of almost like a race to the top and sort of race to the bottom.