American Airlines Group Inc. Q3 FY2021 Earnings Call

Good morning, and welcome to the American Airlines Group Third Quarter 2021 Earnings Conference Call. Today's call is being recorded. At this time, all lines are on a listen-only mode. Following the presentation, we will conduct a question-and-answer session. Now, I would like to turn the conference over to your moderator, Head of Investor Relations, Mr. Dan Cravens.

Thanks, everyone, and welcome to the American Airlines Group Third Quarter 2021 Earnings Conference Call. On the call this morning, we have Doug Parker, Chairman and CEO; Robert Isom, President; and Derek Kerr, Chief Financial Officer. Doug will start the call with an overview of our quarter and we'll discuss the actions we've taken during the pandemic. Robert will follow with remarks about our operations, commercial, and other strategic initiatives. After Robert's remarks, Derek will provide details on the quarter and our operating plans going forward. After Derek's comments, we'll open the call for analyst questions, followed by questions from the media. Before we begin, I must state that today's call contains forward-looking statements, including statements concerning future revenues, costs, forecasts of capacity, and fleet plans. These statements represent predictions and expectations as to future events, but numerous risks and uncertainties could cause actual results to differ from those projected. Information about some of these risks and uncertainties can be found in our earnings press release issued this morning and our Form 10-Q for the quarter ended September 30, 2021. In addition, we will be discussing certain non-GAAP financial measures, which exclude the impact of unusual items. A reconciliation of those GAAP numbers to the financial measures is included in the earnings release and can be found in the Investor Relations section on our website.

Thank you, Dan, and thank you all for being with us. Good morning. Our third quarter started out very strong. Our domestic business revenue, which declined from 27% of our 2019 levels in March to 52% in June, jumped even more in July to 64%, as companies began to return to work and employees began to return to the skies. As a result, we at American produced a profit in July. But then the spread of the Delta variant led to a rebound in pandemic fears, and companies deferred return to work plans, causing domestic revenue to fall back to 57% of 2019 levels in August and 47% in September. I know some people will find that kind of discouraging, but we actually think it's encouraging. Despite the decline in business revenue in July, it showed that business travel wants to return. There's enormous pent-up demand, and once this pandemic is behind us, it should resume its prior rapid trajectory to recover. Regarding our financial results, we reported a net profit of $169 million on a GAAP basis. When we exclude net special items, we recorded a net loss of $641 million. While we obviously don't like reporting losses, this is our smallest quarterly loss since the pandemic began in early 2020. Our team at American Airlines has performed incredibly well through this pandemic. Nobody is managing through it better than us, and that shows in the results. We flew over 80% of our 2019 capacity in the third quarter, while our large competitors have restored only 70%. This led us to fly 13% more seat miles in the quarter than our next closest competitor. Our team safely transported more than 48 million passengers. Our strong performance has generated notable customer acceptance, as evidenced by our industry-leading passenger counts and revenue trends. For the quarter, revenues improved significantly over 2020 and were down 25% compared to the third quarter of 2019, whereas they were down 37.5% in the second quarter. Notably, our passenger unit revenues in the quarter were down 10% versus 2019, compared to 12% declines from other large international US carriers, despite our higher capacity production. On the cost side, we have reshaped our network, simplified our fleet, and incorporated operational cost efficiencies that will benefit us for years. We have also made more than $1.3 billion in permanent annual cost reductions through our initiatives. As we navigated through the crisis, we made sure to think and plan long-term. We announced a series of strategic relationships with other airlines that strengthen our network and provide additional value to our customers and long-term value for our shareholders. We feel confident about American's positioning moving forward. The fourth quarter may be challenging due to deferred business demand and rising fuel prices, but we are encouraged by the potential demand for business and international travel. We are excited about the future for American and our team. With that, I'll turn it over to Robert.

Thanks, Doug and good morning, everyone. I want to start by thanking the entire American Airlines team for their efforts in the third quarter and throughout the pandemic. Our airline continues to succeed thanks to the hard work of our team. This summer represented the largest operational ramp-up in the history of American. As we built back our operation, we have managed through supply chain constraints, vendor and staffing challenges, and constantly changing travel restrictions. Through it all, we operated more flights and carried more customers than any other US airline, more than tripling our daily departures from May 2020, which was our low point. We recorded our most reliable September since the merger, based on completion factor and on-time metrics. We will continue to focus on delivering safe and reliable operations as we welcome back more customers. I also want to acknowledge the efforts of our team in the third quarter in support of the US Civil Reserve Air Fleet program. It was an honor to aid in the effort to bring more than 5,000 evacuees from Afghanistan to the US, as well as hundreds of members of the US military. Our third quarter total revenue was approximately $9 billion, up $1.5 billion from the second quarter, driven by our recovering passenger revenue. Domestic leisure revenue has returned to pre-pandemic levels at 98% of 2019 levels. Our largest corporate customers are returning to work and traveling again as we move out of 2021. We expect demand for business revenue will fully rebound to 2019 levels by the end of 2022. Our international travel is also improving significantly with easing cross-border requirements, and we are encouraged by the US government's easing of international travel restrictions starting in November. Following the White House announcement, we saw immediate increases in bookings across our key international markets, demonstrating significant pent-up demand for travel to and from the US. Looking into the fourth quarter, we expect total revenue to recover to approximately 80% of 2019 levels, with the strongest performance in domestic and short-haul international markets. Our partnerships with JetBlue and Alaska are delivering tremendous benefits and connecting more customers than before. We are excited about our new loyalty program offering for customers, which also saw acquisitions in the third quarter exceed 2019 levels. In terms of sustainability, American became the first North American airline to commit to developing a science-based target for reducing greenhouse gas emissions. We also agreed to purchase more sustainable aviation fuel and are committed to invest $100 million in a collaborative effort to accelerate clean energy technologies. While the Delta variant has shifted our recovery timeline, we remain bullish on demand and feel great about our positioning thanks to the hard work of American Airlines team. With that, I'll turn it over to Derek.

Thanks, Robert. Good morning, everyone. Before I begin my remarks, I would like to thank the American Airlines team for their hard work through the quarter. Their continued resilience in the face of uncertainty due to the Delta variant is commendable. This morning, we reported a third quarter GAAP net profit of $169 million or $0.25 per diluted share. Excluding net special items, we reported a net loss of $641 million or a loss of $0.99 per share. As Doug mentioned, this was our strongest quarter yet since the pandemic began. Despite the Delta variant related volatility and demand, our financial performance improved from the second quarter. Our third quarter pre-tax earnings, excluding net special items, improved by nearly $600 million sequentially. This illustrates that the steps we have been taking over the past 18 months are paying off. We have been able to keep controllable costs down, and we have actioned $1.3 billion in permanent annual cost initiatives this year alone. In the fourth quarter, we expect total revenues to be down approximately 20% versus the fourth quarter of 2019, with a pre-tax margin, excluding net special items, of between negative 16% and negative 18%. We remain on track for significant and steady debt reduction. However, we will keep liquidity elevated in the near to medium term. Looking ahead to 2022, we expect to gradually increase our capacity while letting flexibility in our plans based on demand trends. I will share further specific details on impacts to our cost structure when we finalize our 2022 plan in January. Our team continues to do an amazing job, and we feel well-positioned for the future. With that, I'll open up the line for analysts' questions.

Thank you. Our first question comes from the line of Jamie Baker with JPMorgan. Your line is now open.

Hey, good morning, everybody. Doug, I think a few years ago, you had a slide at our conference that warned investors about certain airline behaviors. Could you help frame the Seattle expansion against that slide? It's not a new hub, but how do you reconcile it in the current environment?

Sure, Jamie. That's not a new hub. There's already a hub there—Alaska's—and we're simply strengthening our alliance with them to provide better services. By utilizing international aircraft, we can complement Alaska’s hub and provide new routes that they couldn't otherwise offer on their own. So, it's not a new hub but an enhancement of existing services.

Yes, and just to add to that, we see Seattle as consistent with our strategy. We're creating value for customers by being relevant in significant markets. The partnership enables us to tap into a broader international network and we've seen strong results. Our codeshare partnership with Alaska Airlines is emerging as one of our largest, benefiting thousands of customers who now have better travel options.

Okay, that's helpful. A follow-up on fuel—why haven't managements adjusted capacity with rising fuel costs? Is there a specific threshold you need to see for this to happen?

When oil prices move quickly, it's challenging to adjust capacity instantly. We're selling all the capacity we have, and historically, adjustments take more time to materialize. In the new normal, we will see capacity adjustments, leading to changes in pricing over time.

As fuel prices rise, there will inevitably be impacts on capacity and pricing in the long run. We're aware of this and are prepared to respond accordingly.

Hi everyone. When I listened to Delta and United's calls, they focused on premium products and structural changes. Could you speak to how your products are performing?

We indeed see a change in customer willingness to buy premium services. Our premium revenue has risen above 2019 levels for significant parts of the quarter, which is positive. However, it’s still early to conclude whether this is a structural change.

We're ready for any environment. We've prepared our fleet for both business and premium service recovery through our various product offerings. Our customers can expect enhanced services as travel recovers.

Regarding our cost structure, we continue to work through inflationary pressures, yet we are also still benefiting from earlier efficiencies and consolidations in our operations. We're focused on maintaining a competitive cost structure as we enter next year.

Can we discuss the transatlantic market? Your revenues are still down about 75%. What is your outlook for recovery?

We're optimistic about the recovery in transatlantic travel. Since regulatory changes, we have seen a spike in bookings that has been sustained. We anticipate a strong recovery in leisure travel in November and December, and corporate travel should follow in early 2022.

Could you update us on the technology advancements American made during the pandemic to enhance customer experience?

Over the past years, we have closed the technology gaps that constrained our operations, such as dynamic pricing and improving customer experience through partnerships. We have ensured that these enhancements will be tailwinds for us in the upcoming year.

Our partnerships have allowed us to provide increased value for our customers. We are focused on strengthening these relationships and anticipate this will lead to uplift across our service offerings.

Is the Oasis Project included in the $1.3 billion in cost savings?

Yes, it is included in those savings. The operational benefits contribute significantly to our CASM reduction and improved revenue generation capabilities as we swap and streamline our fleet operations.

Any thoughts on your pilot pipeline and how you're preparing for retirements in the coming years?

We are attracting new talent to the profession, offering competitive starting salaries and excellent career progression to bring in pilots. The regionals are crucial to our recruitment efforts, and we are closely monitoring this dynamic.

Regarding interest expenses, what does your debt pay down schedule look like over the next few years?

We forecast scheduled debt paydowns of $4.4 billion this year and approximately $2.5 billion next year. We plan to use excess cash to address higher debt payments sooner than later, keeping a keen focus on reducing overall debt levels.

Is profitability a priority for the Board, or is it more about maximizing revenues right now?

Our goal is to maximize shareholder value over the long term. The focus now on returning to capacity, being safe, and efficiently managing operations will ultimately help improve our profitability as we recover.

Are you adjusting your network or staffing plans for the upcoming holiday season with the vaccine mandate on the horizon?

We are prepared for the holiday season and have our people in place where necessary. I am confident we'll have the right staff to accommodate holiday travel demand this year.

How are you dealing with operational risks around vaccine mandates and potential testing requirements?

We believe that our operations will remain unaffected. We expect a small percentage of staff requiring accommodations, and we are absolutely prepared for how this will unfold. We aim to ensure that travel plans continue without disruptions.

Can you provide an update on the DOJ lawsuit regarding your partnership with JetBlue?

We feel strongly about the benefits our partnership brings to consumers and are perplexed by the DOJ's lawsuit. We are not open to concessions; we believe in our position and will defend it vigorously.

Are you making adjustments to staffing levels moving forward into the holiday season?

We are hiring staff to support our operations and will allocate resources as needed to accommodate increases in travel during the season. We are ensuring our team is equipped to deliver the best experience possible.

This concludes today's question-and-answer session. I will now turn the call back to Mr. Doug Parker for closing remarks.

Thank you very much. We appreciate your interest. If you have further questions, please reach out to Investor Relations or corporate communications. Thanks for your time.

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.