American Airlines Group Inc. Q2 FY2020 Earnings Call

Good morning and welcome to the American Airlines Group Second Quarter 2020 Earnings Call. Today’s conference call is being recorded. At this time, all participant lines are in a listen-only mode. Following the presentation, we will conduct the question and answer session. Please limit yourself to one question and a follow-up. Before we begin, we must state that today’s call does contain forward-looking statements, including statements concerning future revenues, costs, forecasts of capacity, fleet plans, and liquidity. These statements represent our predictions and expectations as to future events, but numerous risks and uncertainties could cause actual results to differ from those projected.

Thanks Sarah. Good morning everyone and welcome to the American Airlines Group second quarter earnings conference call. Joining us on the call this morning, we have Doug Parker, Chairman and CEO; Robert Isom, President; and Derek Kerr, our Chief Financial Officer. Also on the call for our Q&A session are several of our Senior Executives, including Maya Liebman, Chief Information Officer; Elise Eberwein, EVP of People and Communications; Steve Johnson, our EVP of Corporate Affairs; Vasu Raja, Chief Revenue Officer; and David Seymour, our Chief Operating Officer. Like we normally do, Doug will start the call with an overview of our quarter and the actions we’re taking during this pandemic. And Doug will follow with details on our liquidity and cost outlook.

Thank you, Dan. Good morning everyone. Thanks for joining us today. I'm going to give some color on the work we're doing to manage the current environment, ensure that we are well positioned when we come out of this crisis. Derek is going to provide an update on our liquidity and cash burn. And then as Dan noted, we have several Executives in the room, including our President Robert Isom and our Chief Revenue Officer Vasu Raja, here to answer any questions you may have. To begin, I need to acknowledge and applaud the entire American Airlines team. The past five months have been more than difficult, and our team has consistently risen to the challenge, taking care of customers and each other, as the stability of their own employment remains uncertain. Our team does this and much more each and every day. Saying they’re leading through this crisis with grace is an understatement of enormous proportions. And we're all humbled by their work ethic and professionalism. Till now the actions we're taking to face the COVID-19 and the resulting severe reduction in global demand for air travel. In short, the crisis continues. Our team has done an exceptional job of managing through that crisis, as evidenced by the trends we saw throughout the second quarter. And we're prepared to weather the storm ahead and be in a position to succeed when demand recovers. In the near-term, our actions are centered on three pillars: building up our cash reserves, conserving the cash we do use, and adjusting the way we fly so that when our customers return to the skies, they can do so with complete confidence, with confidence that they are safe and it is enjoyable to do so. First on cash, we have the second quarter with $10.2 billion of available liquidity, which included an important net $3.6 billion that we raised during the course of the capital markets. We also have a signed term sheet with the U.S. Department of Treasury for an additional $4.75 billion secured loan under the CARES Act. We expect that loan to close in the third quarter. In addition, we announced this morning two senior secured note transactions with Goldman Sachs Merchant Bank, totaling $1.2 billion. So when those transactions are combined with our quarter ending liquidity balance of $10.2 billion, we would have a pro forma liquidity balance of approximately $16.2 billion. We will have flexibility to raise more if needed and Derek will talk about that in a few minutes. With regard to conserving cash and our cash burn, our daily cash burn rate for the quarter was around $55 million, which was better than our prior guidance of $70 million per day. We were particularly pleased with the rate of improvements. That daily burn was nearly $100 million per day in April, then around $56 million in May, and was $30 million per day for the month of June. That improvement was driven by both aggressive cost management which Derek will discuss in more detail and significant revenue growth throughout the period. As for revenue, demand was at its lowest point in April, of course, and we had a remarkably low system load factor of 15% and a remarkably low passenger revenue price of $1.08. But as several states began to reopen, we began to see demand increase, particularly in some markets where we had a network advantage. By adjusting our aircraft ownership and labor costs, we made a tactical decision to file a larger schedule than some of our competitors, keeping our large connecting hubs in Dallas/Fort Worth and Charlotte larger than the rest of our network. With that larger schedule, we saw increasing loads and unit revenues across the system. Our load factors jumped from 15% in April to 45% in May, and 64% in June. Our passenger revenue per ASM increased from $1.08 in April to $6.09 in May and $10.03 in June. Dallas/Fort Worth and Charlotte performed particularly well, with 80% of our flights operating with over 60% load factors throughout the month of June. Now this rate of improvement is going to slow as we head into a seasonally softer travel season. Certainly, as demand growth is planned to slow due to increasing infection rates and state and city quarantine restrictions, we've modified our schedules accordingly. We now expect our third quarter system capacity to be down approximately 60% year-over-year. As for cash burn trends, we expect our third quarter burn rates to be well below our second quarter rates and our fourth quarter rates to be lower than the third. Our goal is to be cash positive in 2021, as demand for air travel gradually improves. Regarding liquidity, we expect in the third quarter to have approximately $13 billion, and that assumes no additional financing activity in addition to those transactions I already mentioned. As to restoring consumer demand, one of the best things we can do during this crisis is to put our energy toward winning customer confidence. We established a Travel Health Advisory Panel comprised of internal leaders from our operations teams and outside experts to advise us on health and cleaning matters throughout our operation. We've started working with the global Bio-Risk Advisory Council on accreditation for the cleaning and disinfection practices for our aircraft. These steps, along with more generous change fee waivers and rebooking opportunities for full flights, have helped our customers feel good about flying with us. Looking outlook, we're building an even more robust network for our customers. Last week, we announced a new partnership with JetBlue that will provide seamless connectivity for travelers in the Northeast and create more choice for customers across our complementary domestic international network. The JetBlue partnership and the West Coast alliance with Alaska that we announced earlier this year will further strengthen our network and ensure we're positioned for success over the long-term. While we feel good about our management during this pandemic and our prospects for future success, we feel terribly about the impact it's having on much of our team. We know we will be a smaller airline going forward, but we've worked to right-size all aspects of the organization to that reality. Approximately 5,100 management and support staff positions were eliminated this summer, in a manner consistent with the CARES Act. And last week, we sent WARN letters to 25,000 American Airlines frontline team members. We're doing everything we can to mitigate the impacts, and by working with our union partners, we put forward new voluntary leave and early-out programs for our frontline team. There's also an effort underway by our union partners to extend the current payroll support program into 2021. We're proud to support this union-led initiative as we believe our entire industry has a shared goal of keeping hard-working frontline team members employed.

Thanks, Doug, and good morning everyone. Before I begin my remarks, I would also like to thank our entire team and acknowledge what they have endured in recent months. Their continued professionalism toward our customers and fellow team members is a model for all of us, and we are proud to serve alongside them. We reported a GAAP net loss of $2.1 billion or $4.82 per share in the second quarter. During the second quarter, we recognized $1.7 billion of pre-tax net special items, primarily a $2 billion credit resulting from the payroll support program financial assistance. Excluding those net special items, we reported a net loss of $3.4 billion or $7.82 per share. With this historic decline in passenger demand, our primary focus has been to ensure we have sufficient liquidity to make it through a weak recovery. We have moved quickly to raise incremental liquidity and reduced our cash burn. We have also taken steps to drive efficiencies in our operation by further accelerating our fleet simplification plan and aligning our cost structure to the new world we find ourselves in. We will continue to leverage the flexibility we have in our scheduling process, and we'll let demand serve as a guidepost for our future capacity levels. As for the fleet, our fleet simplification plan went into high gear during the quarter as we officially retired the Embraer 190s, Boeing 757s, Boeing 767s, and Airbus A330-300 aircraft as well as a number of regional jets. In addition, we put the A3200s and several of our older Boeing 737s into temporary storage programs. These changes have reduced our active fleet count by more than 150 aircraft and accelerated our fleet simplification strategy. Removing these aircraft will also have a material impact on our cost structure going forward as it means we will avoid significant future maintenance expenses, future training costs, and future aircraft sparing costs associated with operating a more fragmented fleet mix. On the expense front, we have taken a fresh look at how we budget the airline and have taken a zero-based approach to our planning for the remainder of 2020 and 2021. These actions have reduced our estimated 2020 operating and capital expenditures by more than $15 billion. Beyond the fuel and environment-related savings that were achieved through our capacity reductions, we have removed or deferred non-essential expenses throughout the business. We have had great success with our voluntary leave and early-out programs, with more than 41,000 employees stepping up to help by opting into a leave or early retirement. Finally, on liquidity, we have moved quickly to reduce our daily cash burn and strengthen our liquidity position. Using our definition, our second quarter average cash burn rate was approximately $55 million per day, which was down from our original guidance of $70 million per day. We ended the second quarter with $10.2 billion of liquidity. During the quarter, we raised net $3.6 billion through the issuance of $2.5 billion of secured bonds, $1.1 billion in equity and $1 billion in convertible bonds. We also raised $360 million in JFK Municipal Bonds, which the net proceeds are in our restricted cash balance until construction spending occurs. Importantly, we do not have any large non-aircraft debt maturities until our $750 million unsecured bonds mature in June 2022. During the quarter, we received 90% of our allotted payroll support program funds and we expect to receive the remainder in July. Separately, we have reached initial terms with the Treasury Department for the approximately $4.75 billion secured loan, which we expect to close in the third quarter. In addition, we announced in a separate 8-K issued this morning $1.2 billion of committed financing subject to final documentation and other closing conditions in the form of two senior secured note transactions with Goldman Sachs Merchant Bank. While we are happy these transactions have improved our liquidity position, we recognize they have come at a cost of increasing the debt load of the company and diluting our shareholders. However, it is important to note that even after these transactions our weighted average cost of debt is slightly above 4%. Investors should know that we did not take these steps lightly and improving our balance sheet is our imperative once we get through this pandemic. As for future cash burn, given that recent uptick in COVID-19 cases and new quarantine restrictions in some areas, we have adjusted our revenue recovery forecast accordingly. Based on our current forecasts, we expect the third quarter to end with approximately $13 billion of available liquidity assuming no other financing activity in addition to those I've mentioned already. The timing of reaching our goal of cash positivity in 2021 will be greatly impacted by the demand recovery timeline.

Thanks, Derek. Before we get to questions, I want to again acknowledge the amazing work of our team. Although we could not foresee a pandemic like this, here we are living that reality. Moreover, if a pandemic wasn't enough to test us, we've also experienced the stark reality of how far we have yet to go in our quest for inclusion and equality. This summer, alongside the rest of the world, we have seen the brutal murders of our fellow citizens and have been confronted with the reality and persistence of systemic racism in our country.

Thank you. Our first question comes from the line of Helane Becker with Cowen. Your line is now open.

Thank you very much operator. Hi, Doug. I remember the America West Day?

Hi Helane. You're not being a jerk at all. It's a fair question. As you know, we built up a good bit of debt on the balance sheet as we modernized our fleets. The good news is we do have the most modern fleet in the industry and we don't need to continue that work. We're happy with the fleet. We believe the aircraft that we have remaining in our fleet is about the right size for the network we will need as we move into 2021.

We have our debt load, which we had to incur to fund the losses. Our maturity profile is favorable as relates to the crisis. We don't have large non-aircraft debt payments until mid-2022. We will use all cash we generate to reduce debt over time. We expect third quarter cash burn to remain lower than second quarter rates, and we want to be cash positive in 2021.

Hey, good morning, guys. I wanted to ask you a little bit about the sequential trends going into the third quarter and the back half of the year. Should we expect the current $30 million a day estimate to continue at a steady state if demand holds steady?

Yes, the bulk of needed improvement is demand improvement, but we expect sequential improvement in our performance in 2021 as demand unfolds.

Just a little bit more on the cash burn and kind of plans for severance. How much do you expect to execute on those and how should we look at the savings?

It's about $2 million to $3 million savings per day for the severance programs.

Can you just remind us what you can and can't do in regards to JetBlue partnership? What level of coordination is legally permissible?

We'll have extensive code sharing, frequent flyer benefits. The play here is creating competitive alternatives to larger networks.

Can you talk about the willingness of Citi and Barclays to re-engage about extending your contracts?

We have overwhelming interest from both Citi and Barclays and are confident in the value we can create together.

Do you have any updates on the Boeing Max aircraft you were looking to finance this year?

We're in good discussions with Boeing and plan to take all aircraft as they are financed.

This concludes today's conference call. Thank you for participating, and you may now disconnect. Everyone, have a great day.