American Airlines Group Inc. Q4 FY2021 Earnings Call

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

Thank you, Liz, and good morning everyone and welcome to the American Airlines Group fourth quarter 2021 earnings conference call. On the call this morning, we have Doug Parker, Chairman and CEO; Robert Isom, President and incoming CEO; and Derek Kerr, Chief Financial Officer. Also on the call for our Q&A session are some of our senior executives, including Maya Leibman, Steve Johnson, Vasu Raja, David Seymour, Nate Gatten and Devon May. Like we normally do, Doug will start the call with an overview of our quarter and will update the actions we have taken during the pandemic. Robert will then follow up with some remarks about our operations and initiatives for 2022. After Robert’s remarks, Derek will follow with the details on the quarter and provide guidance for the year. After Derek’s comments, we’ll open the call for analyst questions and lastly questions from the media. To get in as many questions as possible, please limit yourself to one question and a follow-up. Before we begin today, we must state that today’s call does contain forward-looking statements, including statements concerning future revenues, costs, forecasts of capacity and fleet plans. 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. Information about some of these risks and uncertainties can be found in our earnings press release that was issued this morning as well as our Form 10-Q for the quarter ended September 30, 2021. In addition, we will be discussing certain non-GAAP financial measures this morning, which exclude the impact of unusual items. A reconciliation of those numbers to the GAAP measures is included in the earnings release and that can be found in the Investor Relations section of our website. A webcast of this call will also be archived on our website and the information that we are giving you on the call this morning is as of today’s date and we undertake no obligation to update the information subsequently. So, thanks again for joining us this morning. And at this point, I will turn the call over to our Chairman and CEO, Doug Parker.

Thank you, Dan. Good morning, everybody, and thanks for being on the call. We have a lot to cover today, but I am going to start with the big news since last quarter’s call, at least for me, which is that Robert Isom is going to be the next CEO of American Airlines. That change is effective on March 31. I am going to remain Chairman of the American Board, but importantly, I will have no executive duties. Robert will be fully in charge. I will stand as Chairman for as long as Robert and the Board find that a value. This is terrific news for our team. Robert is going to be the ninth CEO in the nearly 100-year history of American Airlines, which we believe is the best job in all of aviation. And we all are excited for Robert and for American. As you all know, Robert is someone I have worked alongside for several decades. He is an extraordinary team builder, who understands the complexities of operating in an airline like American. He loves the people of American and he brings a fresh perspective to the future of American. I know he is going to accomplish great things and I am looking forward to watching that happen along with all of you. Now, what this transition does mean is this is going to be my last earnings call with you all, which is kind of a big deal for me. I have had a speaking role on every quarterly earnings call since I became CFO of America West Airlines in June of 1995. So by my calculations, this makes this my 107th consecutive quarterly call. So, look, I am going to try not to speak as much on this one as I have on the first 106 calls, especially as it relates to the company’s go-forward plans, rather, I am going to let those who are leading American into the future to talk about that future. But before I turn over the stage, I do have a couple of quick thank yous. First is to you all, the sell-side analysts and the reporters, who cover our business. You all have very important jobs covering this crazy industry that we all love and you do it extremely well. I hope you have great respect for what you do and the challenges you face. And I have done my best throughout my career to treat you with the respect you deserve and to give you access to the community you need to do your jobs well. And you have all been extremely fair to me, which I really appreciate. So, thank you very much as a blanket thank you to all of you on the line. It also goes to some of the great people that preceded you, former analysts like Carl Carros, Candace Browning, Sam Bucket; and former reporters like Terry Max and Susan Carey and Scott McCarthy. Thank you, all. The second thank you is to the American Airlines team, which I can’t begin to do adequately on this call. But what I can do to somewhat thank them is to tell you all about the phenomenal job they did in 2021. For the year when growing back to meet a huge increase in demand was the most important and challenging objective for all airlines. The American team grew back faster and further than anyone else. We served about 25% more customers than any other airline in 2020, which is phenomenal in our industry. The last time a U.S. airline was that much larger than the next highest competitor was more than 10 years ago and that was done by merging two existing airlines, not through organic growth. This growth in 2021 led us to hire 16,000 new team members last year. We expect to hire another 18,000 in 2022. And our team managed that growth while taking great care of our customers. We posted the best operating performance in our company’s history in 2021 with the highest on-time performance and completion factor we have ever had. And we were the second highest among the four largest airlines in all of those metrics despite the fact we grew back so much further and faster than they did. We are particularly proud of how we ended the year certainly relative to our competitors. Our team had far more customers than any other airline over the holidays, and we did so with much less disruption than our primary competitors. American was the top-performing airline among all airlines in December in each of the key operating metrics. And as our teams performed as well, our customers have taken note. Our full year 2021 likelihood to recommend scores were the highest in American’s history. That’s an incredible testament to our people, who not only show up every day to operate the world’s largest airline, but they do so in a way that welcomes back our customers with open arms. And all this translated to our shareholders as well in a year of very difficult stock performance for the industry. American stock increased 19%, far more than any other U.S. airline. So, I want to summarize all this to convey my gratitude to the incredible American Airlines team. And I want to thank each of them on behalf of our customers, our shareholders and everyone who counts on them every day. It’s this performance that gives us great confidence and momentum as we head into 2022 and beyond. So with that, thank you all again. I am going to now turn it over to our soon-to-be CEO, Robert Isom, to talk about what lies ahead. Robert?

Thanks, Doug, and good morning, everyone. I want to start by thanking the entire American Airlines team for their efforts in the fourth quarter and throughout this entire pandemic. And I’d like to reiterate how honored I am to be taking on the role as CEO. I want to express my appreciation for Doug’s partnership and friendship over the years. As you all know, that leaves behind an incredible legacy, having opened many doors for our airline and our industry. I look forward to continuing to work closely with him over the coming months to ensure a seamless transition. I am taking on this role at a very important time for American. Over the past few years, our airline and our industry have gone through a period of transformative change that American has made good use of that time, especially in regard to renewing our fleet, facilities and network and making the company as efficient as possible. For fleet, we have dramatically simplified. We now operate just four fleet types. That gives us operating flexibility, reliability and efficiency. American’s fleet remains the youngest among the U.S. network carriers. Our aircraft are equipped with industry-leading WiFi, new interiors and we have added seats to our 737 and A321 fleets, bringing us more in line with the rest of the industry. For facilities, we have expanded the number of gates we operate at our largest hubs in Dallas/Fort Worth and Charlotte. And we have inaugurated a wonderful new regional concourse at Reagan National, which is historically our most profitable hub. We have also invested more than $200 million in lounges over the past five years with new Admirals Club lounges opening at Reagan National and LaGuardia. New and upgraded airport spaces are underway in New York, Chicago and Los Angeles as well. And we have also updated maintenance training and corporate spaces throughout the system to ensure our team can perform at an even higher level. For network, we are flying more to where our customers want to go. Our DFW and Charlotte hubs are prime to operate more than 900 and 700 flights per day, respectively. Our partnerships with JetBlue in the Northeast and Alaska on the West Coast allow us to create an industry-leading presence in markets that have historically been difficult for American. And our proposed investments in South American carriers strengthen our already industry-leading position in that region. As demand continues to recover and we return to full utilization of our assets, American is poised to outperform. We have extracted $1.3 billion of efficiencies and we are operating an economic fleet that will provide CASM-X tailwinds as capacity is restored. Based on our current assumptions, we expect all of this to result in a return to profitability later this year and continued deleveraging as we pay down $15 billion of debt by the end of 2025. And I am excited to hit the ground running in April and build on our momentum to deliver results in 2022. So, let’s get to the business in the quarter. This morning, American reported a fourth quarter GAAP net loss of $931 million and a full year GAAP net loss of $2 billion. Excluding net special items, we reported a net loss of $921 million for the quarter and a net loss of $5.4 billion for the full year. Our results for 2021 were significantly improved over 2020, but the impact of the Omicron variant has affected the timing of a full revenue recovery. We delivered a strong revenue performance in the fourth quarter, despite the rise in infections. We reported fourth quarter revenues of $9.4 billion, our highest for any quarter since the start of the pandemic and a sequential increase of $458 million from the third quarter. Our cargo team continues to do a fantastic job and delivered record cargo revenues of $1.3 billion in 2021, 30% higher than our previous record. As we have seen throughout the pandemic, each new variant and corresponding increasing cases is followed by a faster recovery of demand with fewer regulatory restrictions and changes in travel policies. Based on what we are seeing, we expect Omicron to follow the same pattern. Bookings are recovering quickly after dropping off considerably in early December, though they are still not back to pre-Omicron levels. Leisure travel, particularly in the U.S. and short-haul international market, remains very strong and is approaching a 100% recovery. We expect this trend to continue. And interestingly, we have seen many of our customers that we have historically called leisure travelers are actually flying for reasons beyond just vacations. They may fly to a beach or a mountain destination, but they are actually working remotely for the week. The lines between leisure and business travel are definitely blurred. The recovery of international and business travel slowed late in the fourth quarter, given the Omicron variant, but we remained very bullish on both. The return of international travel is directly linked to travel restrictions around the globe. As the restrictions fall off, we expect international travel to pick up considerably. We still expect business travel to come back in full, but it will come back in a different way. And by that, I mean the overall mix of business customers, how they travel and how we serve them. As we have shared previously, small and medium sized business travel remains the strongest segment. In the fourth quarter, small and medium business travel was roughly 80% recovered, while large corporate travel was only 40% recovered. In addition, small and medium business revenue had sequential month-over-month improvement in December in spite of the impact of Omicron. We are optimistic that as corporate travel returns in a significant way this year and as companies come back more fully into the office and get back on the road, we are going to be back on track. But as we are developing our plans and forecast for this year, we are working to build an airline that can be profitable even without the full return of managed corporate travel. The demand environment has changed a lot through the pandemic. Because of this, we have to be nimble and responsive. We have built agile processes that allow us to deliver the network our customers need and want, no matter the environment. The game has changed and our team is ready. Growing back our network the way we did in 2020 is a feat in and of itself, but to do so while running a reliable operation and achieving strong revenue results along the way make it even more impressive. We entered 2022 with tremendous confidence as a result of the way we finished last year and started the new year. As Doug noted, American had the best reliability of all U.S. carriers in December and the highest annual likelihood to recommend scores in our history. We are very pleased that 97% of our team has been vaccinated or submitted a request for an accommodation, with no one losing their job. We put creative agreements in place with our union partners to support the operation throughout the pandemic and just recently reached new contract extensions for some of our team members to start the year, all of this while flying more flights and more passengers than any other U.S. carrier by a wide margin. To ensure this momentum continues, we have two sharply focused priorities for this year: running a reliable airline for our customers and returning to profitability. Returning to profitability is very much tied to the demand and revenue environment. But as I mentioned, the work we have done during the pandemic has positioned us very well. This includes our cost and efficiency actions, which Derek will touch on momentarily, as well as the work that we have done to refocus our network around our most profitable clients. Enhancing our partnerships around the U.S. and around the world and driving value through the AAdvantage program and co-brand cards has been something that we have done well. And on an absolute basis, new AAdvantage member acquisitions in 2021 outpaced 2019, despite a lower level of capacity and our AAdvantage revenues in 2021 closed in on 2019 revenues. So in summary, we are grateful for the incredible work of the American Airlines team over the past year. We remain optimistic about the return of demand and we are very pleased with how American is positioned, thanks to the tremendous efforts of our team. And now with that, I will turn it over to Derek.

Thanks, Robert and good morning everyone. Before I review the results, I would also like to thank the American Airlines team for their outstanding work during the quarter. This pandemic has been relentless. And despite the uncertainty, our team continued to show it’s the best in the business. This morning, we reported a fourth quarter GAAP net loss of $931 million or a loss of $1.44 per share. Excluding net special items, we reported a net loss of $921 million or a loss of $1.42 per share. For the full year 2021, we reported a GAAP net loss of $2 billion. And excluding net special items, we reported a net loss of $5.4 billion. Despite the impact of Omicron that we saw in this quarter, the trajectory of our revenue recovery continues to be positive and it even exceeded our initial expectations as we outlined on our last call. Our fourth quarter revenue was down 17% compared with the same period of 2019 versus our original guidance of down 20%. This gradual improvement makes it even clearer to us that despite the uncertain demand environment, the steps we have taken over the past 24 months to bolster our network and improve our revenue generating capabilities are working. On the cost side, we remain focused on keeping our controllable cost down and we actioned $1.3 billion in permanent annual cost initiatives in 2021, providing a new and more efficient baseline for our 2022 budget. During the fourth quarter, we made the decision to invest in the operation with a holiday pay program for our employees as well as reducing our peak holiday capacity. These actions did put pressure on our unit cost performance in the fourth quarter, but they led to a strong operational performance over that period. This included an industry leading month of operating performance in December, when it mattered the most to our customers. On the fleet side, I am pleased to report that our fleet harmonization project is now nearly complete, with our last A321 going into the shop this quarter. This is a full year ahead of our original schedule. We are excited to have this project behind us. In addition to a consistent product and better experience for our customers, the operational benefits of having a simplified and streamlined fleet are already being realized. The changes we have made to our A321s and 737s enable us to fly 2% more total capacity than we could have with the old configuration, thus providing a unit cost tailwind as we continue to build back our network. In addition to better unit cost, these reconfigured aircraft will also generate more revenue, allowing us to recover from the pandemic even faster. With respect to our wide-body aircraft, we continue to have productive conversations with Boeing to determine the timing of our delayed 787 deliveries that were expected to arrive last year. Due to the continued uncertainty of delivery schedule, these aircraft remain out of our near-term schedule to minimize customer disruption. We expect to fly 4 aircraft during our peak summer schedule. We ended the fourth quarter with $15.8 billion of total available liquidity, which is the highest year end liquidity balance in the company’s history. As we have said in the past, the deleveraging of American’s balance sheet remains a top priority and we are committed to significant debt reduction in the years ahead. Even with this volatile demand environment, we remain on track with our target of reducing overall debt levels by $15 billion by the end of 2025. In fact, as of the end of 2021, we have already reduced our overall debt levels by $3.7 billion from our peak levels in the second quarter of 2021. During the quarter, we made $706 million in scheduled debt payments, which resulted in paying off the 2013-1 WTC B tranche. In the first quarter, we expect to make $337 million of scheduled debt payments, which will include unencumbering 12 aircraft. For our pension, our funded status improved by 9.2 points to 77.9%, resulting in a $2 billion reduction in the underfunded liability on a year-over-year basis. Lastly, during the fourth quarter, we completed approximately $960 million of WTC financing, and we now have financing secured for all our 2022 deliveries through the third quarter. Our 2022 budget reflects our priorities to run a reliable airline for our customers and return to profitability. Our plan includes ongoing investments that will help build upon the positive momentum we have seen in our operations while leveraging the cost efficiencies and network enhancements we have talked so much about. We believe these actions will provide a solid baseline for both profitability and free cash flow production when demand has fully recovered. Looking to the first quarter, COVID impacted demand and elevated fuel prices will continue to put pressure on our near-term margins. In this environment, we expect our capacity to be down approximately 8% to 10% versus the first quarter of 2019. Based on current demand assumptions and capacity plans, we expect total revenue to be down approximately 20% to 22% versus the first quarter of 2019. We expect our first quarter CASM, excluding fuel and net special items, to be up between 8% and 10%. While we expect to be unprofitable on a pre-tax basis in January and February, we anticipate a material improvement and a return to profitability in March as demand returns. As for 2022 capacity, much of our plans are subject to the uncertain timing of deliveries of our 787 aircraft. As I mentioned previously, we removed these aircraft from our near-term schedule to protect our customers. This reduction is worth approximately 1 to 2 points of scheduled capacity for 2022. With this adjustment, we expect to add back our capacity throughout the year and to have full year capacity recovered to approximately 95% of 2019 levels. This of course is subject to the future demand environment and we always have the ability to adapt if demand conditions warrant. As we look at our costs, like other airlines, we are seeing inflationary pressures in fuel prices, hiring and training for both new hires and existing crews as we build back our operation, including on the regional side. We are also seeing increased starting wages for certain work groups, including vendors. In addition, we are seeing unit cost pressures from the rolling 787 delays as well as the impact from our ramp and mechanic contract that was ratified in early 2020. Even with these unit cost pressures, our fleet simplification strategy enables higher aircraft utilization and higher average gauge, both of which will help alleviate some of these pressures. As such, we expect our full year CASM, excluding fuel and special items, to be up approximately 5% versus 2019, with the second half of the year much lower than the first half as we fly a more efficient schedule. For the full year, our projected debt maturities are expected to be $2.6 billion. This includes the cash settlement of our $750 million unsecured notes that mature in June. Without any additional prepayment of debt, we project our total debt will be down $5.4 billion at the end of 2022 versus our peak levels in 2021. With respect to capital expenditures, we expect full year 2022 CapEx to be approximately $2.6 billion, which is significantly lower than in previous years and versus others as our fleet replacement needs are complete. Net aircraft CapEx, including pre-delivery deposits, is expected to be $1.8 billion and non-aircraft CapEx is expected to be $800 million. So in conclusion, we are incredibly proud of our team for their continued resilience in a very challenging environment. With the bold actions we have taken and steadfast commitment of our team, we are well-positioned for the future. Now before we open up the line to questions, I would like to acknowledge Dan Cravens for a minute. Today is Dan Cravens’ 62nd call, not quite as many as 107, but 62 is pretty amazing and it is his final earnings call as part of our American Airlines, U.S. Airways and America West team. I’d like to personally thank Dan for his two decades of service, his advocacy for both the airline and our investors and for his friendship. The continuity Dan provided over 20 years in his role across multiple airlines, multiple crises and a global pandemic is unmatched. We wish him the best of luck in his next adventure. We will be introducing Scott Long, who will be stepping into Dan’s role from our financial planning organization later this month. So with that, I’d like to open up the line for analyst questions.

Our first question comes from Jamie Baker with JPMorgan.

Hey, good morning. Just quickly, Doug, I loved your prepared remarks. I know the point wasn’t to make me feel old, but Paul, Candace, Sam, I mean, what a throwback. But it really has been a privilege to speak to you on these calls, all these conferences, all these years. I did want to just add my own thanks and congratulations. And obviously, same goes to my friend, Dan Cravens. First question, on the traffic liability, Derek. So sequentially, from the third quarter to the fourth, it declined by about $360 million, granted this is less than the customary seasonal decline, but Delta and United both experienced flat sequential trends. And I’m just trying to understand what the nuances the puts and takes are, whether it’s a network issue, differences in forward bookings, any additional color on the ATL sequential change?

No, there is not really any difference or any special color I think from a stored value basis, though that stayed pretty much the same. Future travel dropped from – I think we were at $6.4 billion in total ATL balance; future travel was $3.6 billion, went down to $3.2 billion, which is a normal seasonality for us. We did see a pickup at the end of the month from normal buying. So I think it’s just normal seasonality for us. And what we didn’t see as much was the stored value being used and some additions because, as you know, some of the issues with the cancellations and things that were out there, we added a little bit to that. But I would have expected it to drop even more, but it held up just because of the fact that from an operations standpoint, we added a little bit in the fourth quarter from issues with the operation. But other than that, I think it’s just seasonality or what we normally see. I’m not sure why others were flat or up other than what they did.

All right. That’s perfect. And just a quick follow-up, and I don’t want to get bogged down in comparing your guides to that of United and Delta, but you all expect to arrive at a pretty similar first quarter revenue outcome, down 20-plus points from ’19. But you have to fly considerably more capacity to arrive at that output. Can you just remind us what some of the seasonal and network factors that drive this? I understand there is more seasonality for you in the first quarter, but I’m just trying to figure out what causes that drag.

Hey, Jamie, this is Vasu. The reality of where we still are in the first quarter is that there is still probably a pretty large variability in first quarter forecast. And so much like Derek, I won’t comment on what our competitors are looking at. But we have taken a pretty conservative view of what revenue production will be in Q1. We’ve been encouraged by recent trends as case growth spikes. We’re already seeing bookings come in stronger. So we will see. But what we see to realize through the pandemic is that we have a lot of levers to play in the airline really flexibly, and we can shift things up and down and indeed move capacity from one market to another far more nimbly than we had in times past. And after so many crises, we thought we were nimble before and we got even faster. So there is still a lot yet to do in the first quarter, and we will see how things come together as demand starts hitting back up.

Okay, that’s great. Thank you, gentlemen. Take care.

Thank you, Jamie.

Our next question comes from Mike Linenberg with Deutsche Bank.

Yes. Hey, good morning, everyone. And yes, really to echo a lot of what Jamie said. Doug, it’s been a privilege really. And I’ve learned a lot going all the way back to the early 2000s and Dan as well. Dan, you’ve been a great friend and you’ve been a great supporter. And so Scott, you’ve got some pretty big shoes to fill there.

Thank you.

Thanks Mike.

Just quickly on to questions. I’m sure you’re going to get some along these lines. I just want to hit on sort of this 5G issue. The FAA was out, I think, yesterday or two days ago saying something like 62% of the U.S. fleet should be fine. Where do you guys stack up? And the way we should think about this, is this going to blow over over the next few weeks or is this going to sort of reappear five, six months down the road, when maybe some of these exemption zones or buffer zones around airports, maybe there is changes there. Like what should we be concerned about? What should we anticipate as this 5G rolls out over time? Thank you.

Okay. They are asking me to take this one even though I was wondering to talk very much, Mike. This has been like my last assignment. Anyway— This is, look—and we’ve all been—every airline, all CEOs were involved over the holidays, it wasn’t our finest hour, I think, as a country to get us to that point. But the good news is we now have what should have been going on for quite some time, which is the manufacturers, the telecoms, the government agencies all sharing information that they need to make sure that this can be rolled out in a way that all Americans get 5G and all Americans know that their flights aren’t going to be impacted by that 5G. So where we sit right now is the way that we’re all able to operate our fleet is because the telecoms have agreed not to fully deploy some of their towers near airports. So with that agreement, everything is fine. Again, I will turn to David. As far as you’ll ever see, everything is totally fine. You see, we don’t expect really any material disruption whatsoever as long as that’s in place. I think that’s not going to stay in place. We need to get to where they can actually—and we want to get to where they actually can deploy all the towers they have in place and that we can still do that. But no one’s going to make—that’s not going to happen until we all agree that it can be done without disruption. So, a long way of me saying, it’s taken a while to get to the right spot, but I feel like we’re in the right spot and the right people are deriving information. I don’t think you’re going to see any material disruption going forward because of this.

Great. That’s what I wanted to hear. And just, Derek, a quick one on the non-op expense, $360 million for the quarter. Because of where your pension is and maybe the potential gains that you’re anticipating and how you book it into 2022, is there going to be a pension tailwind not only in the March quarter, but for the year and any sort of rough estimate on what we should use from a modeling perspective? Thank you.

Yes. I think there is a pension tailwind into the year. So if we ended up the quarter $380 million for this quarter, we’re projecting it to be in the $350 million range from now and slowly declining as we pay off some debt throughout the year. So I would say first quarter should be more in the $350 million to $360 million range and declining to about the $340 million range in the fourth quarter.

That’s great. Thank you.

Our next question comes from Helane Becker with Cowen.

Thank you very much, operator. And yes, Doug, it’s been really nice knowing you, but hopefully, we will continue to stay in touch. And Dan, I mean you’ve been a really good supporter. Actually, your whole team has been a really good support of our conferences over the years. So thank you very much and best wishes to both of you. And I refuse to tell you how many of those conference calls.

I think I know, but thanks so much.

No worries. So actually, I guess, I don’t know, maybe Vasu or Robert. Can you just address two things? There—you guys have said you’re going to hire, I guess, a gross number of 18,000 people this year. And some of those are going to be pilots. We’re seeing United and Delta, rather, cut regional jet capacity because they don’t have enough pilots. Are you going down that similar path? Or are you in a better position from a training perspective?

So Helane, thanks. It’s Robert. Thanks for that question. So we are going to be doing a lot of hiring this year. We did a lot of hiring as well last year. So from a tone perspective, we had a couple of years of the pandemic in which, quite frankly, there weren’t a lot of people being trained. And given the demand, the capacity in the industry fell by quite a bit. So as we all rebound, of course, there is a constraint that we are all dealing with. There is not enough production. I do believe that over time that supply and demand imbalance will be remedied. It’s an incredibly attractive profession when you think about the starting wages and the ultimate compensation for the industry. So we’re doing everything that we can, and I know other companies are as well, to encourage those that are looking for a great profession to come into the business. But in the short run, from a mainline perspective, look, we have—American is a very, very attractive brand. We’re going to have plenty of pilots. The biggest issue that we’re dealing with is the throughput of pilots and getting them through training. We’ve invested an incredible amount of resources and have training assets ready to go. Those are all coming online. And again, from a mainline perspective, we will be able to supply all that we need. The imbalance is really going to be played out in the regional carriers. And on that front, like other carriers, we’re going to have issues as well. We have them right now. We’re working very hard on that. It’s impacting us to a certain degree, but we’re going to do everything that we can to make sure that it’s not a material impact over time.

Okay. That’s very helpful, thank you. And then just my follow-up question, I don’t know who wants to answer this one. But when you talk about small- and medium-sized businesses and those folks who are traveling, because they really have to for their livelihood, can you talk about also whether they got the credit card and if you’re seeing increased credit card acquisition in that category?

Hey Helane, this is Vasu, and I’m happy to answer your question. Indeed, this is one of our increasingly fair topics to talk about. You are correct. We see small and mid-market business growth. But look, the diversity of who that customer is really can’t be overstated: everybody from somebody starting a business to sometimes relatively large companies who are seeing growth through the pandemic and get on the road to drive sales or visit factories or whatever the case might be. And for us, we do very—we haven’t seen growing acquisitions on our co-branded credit cards. Indeed, in Q4, it’s not just that our spend levels were eclipsed relative to 2019. But our acquisitions, even net of attrition, were equal to and very often, for some months and some weeks, greater than what it was in 2019, which means that people are coming to the card. That said, we see a real opportunity within the space of small business, mid-market business because the reality is we don’t actually have a true card product or an entire consumer offering for that segment. A lot of things that we have are either tailored for really large corporate accounts or individual travelers. So we see a lot of opportunity as we come out of this and a lot of ways to go and drive a lot more value to that customer and capture it in our P&L.

Thanks very much Vasu. Thanks everybody.

Thanks, Helane.

Our next question comes from Duane Pfennigwerth with Evercore ISI.

Hi, thanks. Good morning. I wanted to ask you both the same question I asked Gary and Bob at their Investor Day. You have worked together for a long time as a team. But from a change perspective, is there any daylight between the two of you strategically? And do you have any examples of issues where you really constructively disagreed over the last decade?

Hey, Duane. Thanks. I’ll start. Look, Doug and I are different leaders, and we definitely go about how we lead the company in different ways. But I’ll tell you that in terms of the strategic direction of American, I’ve not only worked with Doug, but I’ve been part of every major decision in this company since the merger. And so from that perspective, we’re doing the right thing. I’m excited about the positioning of American. The assets that we’ve put in place, whether it’s fleet, airport, alliances, our network, we’re ready to go. As demand recovers and we can put our assets to full utilization, we’re poised to outperform. So from that perspective, I don’t expect to hear a lot of difference in terms of the way that Doug does things. But right now, I am solely focused on making sure that we deliver a great product for our customers, and that’s running a reliable airline, and getting back to profitability.

Thanks for the thoughts and appreciated. It’s a tricky question. Maybe one for Vasu, how different would March quarter capacity have been if we never had Omicron? Maybe this is an unfair observation, but it feels like Americans’ plans relative to the industry are very static in what is obviously a very dynamic world. Appreciate you taking the questions.

Yes. Absolutely, and I appreciate the question. Look, it’s sort of hard to do hypotheticals. But what I would say is this. Part of the reason why maybe there is probably less volatility in our schedules is where our airline’s naturally positioned. We not only operate a lot more of our capacity in domestic markets, we generate a lot more of our value from domestic RASM. So for most of the pandemic, certainly the last several months, we’ve oriented about 85% of our ASM capacity in domestic and short-haul operations. As we go into the first quarter, it will be about 80% in those, with another 5% or so constituting major international markets like Heathrow, for example. So for us, so much of our network is oriented there. About 65% of our network is in what we call Sunbelt hubs: Phoenix, DFW, Charlotte, D.C., Miami, that have been extremely robust through the pandemic, and any one of those hubs produce unit revenues which are well in excess of what our competitors do. So a little bit of what you see as a network composition difference, quite frankly. As we go out in the first quarter, briefly, we are flying the things where we can most directly create value for the customer and outperform. And we’re not doing the things that don’t. So our long-haul schedules are 70% of what they have historically been. Our short-haul schedules are a lot closer to flat. So what it would be like when demand returns remains to be seen. But for us, the real opportunity as we said through the pandemic is less about driving volume in the capacity base; the cost base of the airline changes only very marginally, whether we fly at 95% or 92% of 2019. The really big thing for us is domestic yield performance. And as we look out, if indeed demand comes back, our focus is less about how we manipulate capacity around the system and more about how we capture yield growth.

Appreciate the thoughts.

Thanks, Duane.

Our next question comes from Hunter Keay with Wolfe Research.

Good morning. Robert, as you think about taking over the CEO role, what are some of the things that you want to accomplish in your first 100 days? Maybe when your ability to put your stamp on things is at its highest.

Hunter, I’m going to just be really clear and focused on that. Our goal right now is to get back to profitability as soon as possible and to deliver a reliable product, plain and simple. As I take a look forward, we’ve got a great opportunity ahead of us. And if everything comes together at the right time, I do think that we’re in a position where demand is poised to react. Everything that we see suggests that there is a pent-up desire for people to get out on the road, whether it’s for leisure or business demand. And for that, I think I’ve got a special opportunity, one that brings together everything that we’ve been working so hard to do throughout the pandemic and bringing that to fruition. So as I take look out to the middle of the year, I do think that we’re going to get back to profitability. I do think that American is going to continue to be a very reliable airline, and I think we’re going to be very, very competitive in all the markets that we serve.

Okay. And I always— we talked about capacity being driven by demand and fuel costs occasionally—but what if you’re not able to hire people? And what if you’re not able to hire the right people that fit the culture that you want to build at American? Is there a decision where you would decide to be smaller as opposed to hiring people that might not be great cultural fits?

So, Hunter, thanks for that question, because look, this is something that I’m really proud of. Last year, as we built back, the entire economy, all industries had struggled with finding the right people, getting them in the right positions. But you know what, American, as we grew back, we really quickly remedied any issues that we had. And what we found is American is a very, very attractive place to work. American Airlines sells itself in terms of attracting people to it. So whether it’s the new flight attendant classes that are now graduating, whether it’s the thousands of people that we’re bringing on to work in our reservations and agent ranks and those pilots and mechanics that we’re bringing in, we at American get a chance to really choose those that get to be part of the team. And that’s a great position to be in. Over time, I think that we are going to have to do a lot of work to make sure that the supply of pilots into our regional carriers is as strong as we need it to be. But you will see us on the forefront of that as well.

Thank you.

Thanks, Hunter.

Our next question comes from David Vernon with Bernstein.

Hey, good morning everybody and congratulations to everybody on their next chapters here. Derek, first question for you on cash flow: if we are looking out at a full year guidance, you have laid out CapEx at $2.6 billion—should we be expecting cash from operations to cover that? I am just trying to get a sense for how secure we should be looking at the balance sheet and the liquidity that you have on there, are we going to be definitive to that from an operating standpoint, are we going to be able to cover that, based on what you see today?

We will definitely be able to cover that.

Excellent. Short and sweet, I like it. Second question maybe for Robert or Derek, as you look at the capacity and the CASM-X guidance you have given for 2022—down 5, up 5—how do we think about in broad brushes 2022 to 2023? If we are up a little relative to 2019 is that just going to be kind of a one-for-one thing or is there more beta to that, like how should we be thinking about the operating leverage coming back into the business as demand gets restored?

Yes, I think exactly what you are saying. I think we are underutilizing our fleet without a doubt at this point in time. I think as we add back our assets—Robert talks about pilot availability and making sure the throughput happens and get the throughput through—so if we do that, and the 787s come, you have two opportunities to grow this airline at a very cheap incremental cost. I think the cost headwind, there is probably 3 or 4 points of cost headwind we have in place right now with underutilizing our assets and making sure that when those aircraft get back and we can use them as much as we can, we do not need to add cost, we do not need to add aircraft. So, in today’s world, we could fly the airline probably 5% more with the cost structure we have today. So it’s pretty close to one-for-one. It might be a little bit sticky in there a little bit, but it’s pretty darn close to one-for-one on the first 5% that we could add back.

Alright. Thanks, guys.

Our next question comes from Dan McKenzie with Seaport Global.

Hey, good morning. Congrats to both Doug and Dan on what an amazing run it’s been. It’s really been a pleasure. A couple of questions here. One housecleaning question, just one follow-up on small and medium-sized businesses. Vasu, what’s factored into the first quarter revenue outlook with respect to the timing of international returning, are you just sort of straight lining current trends or did you factor in some kind of escalation in March potentially?

Hey, great question. And you are absolutely correct. We are straight lining current trends with the exception of our short-haul business. It tends to peak in the March, April time period as North America goes on spring breaks and Easter vacations.

Okay. Very good. Secondly, just following up on Helane’s question on small and medium-sized businesses, I am wondering if you can elaborate on their purchase behavior versus a typical leisure traveler: do they book further out or closer in, it’s presumably higher margin business. I am just trying to get a sense of what that means. And I guess I didn’t in the presentation catch what that revenue from small and medium sized business was as a percent of 2019 revenue and how you are thinking about that turning potentially here in 2022?

Sure. Maybe let me answer those in a slightly different order. First, small and mid-market business was about 80% recovered as of the end of December. Large corporate business—customers who buy on big managed programs—was about 40% recovered, ballpark. Historically, about 40% of our revenues came from business travel: about 15 points of that were from large corporates and the balance were from small and mid-market companies. Due to the pandemic that shifted a lot, where less than 10 points came from managed corporates. As we think about next year, we absolutely anticipate a rebound of business travel. But a lot more, closer to 30 points of that 40 points or so is coming from small and mid-market; managed corporates come back a little more slowly. This is an opportunity we look on very favorably and may in many ways be unique to American, because so much of that small business growth comes from markets that are in the center of the country—Oklahoma City, Austin, San Antonio, places like that. It engages in trip behavior which is very different than managed corporate. People are often willing to stay a Saturday night and fly on a lower load factor flight. But very importantly, it comes in at the same level of yields as large corporate business, but at a fraction of the cost of sales. The cost of sales looks a lot more like leisure. So, we see this as a real opportunity. And indeed, as we look out, and if you think about trends, we see that the nature of this travel is changing: more people are traveling for blended business-leisure purposes, more people willing to buy premium products when a cheaper one is available. So, we have done a lot to reward travel—not just frequency of flying but spending on our credit cards and across the airline—and we think there is even more to do to capture value and drive revenue.

That’s terrific. Thanks Vasu.

Our next question comes from Catherine O’Brien with Goldman Sachs.

Hey, good morning, everyone. And just want to echo my congratulations to Doug and Dan. It’s really been a pleasure working with you the last, I guess, almost 12 years now. So, thanks for the good time. Question, maybe just on your 2022 growth outlook for that 5%, I understand that the uncertainty around the 787 makes it more difficult. But can you share high level what you are thinking the breakout between domestic and international growth is based on your current 787 assumption? And what’s driving the decision on where to allocate that capacity? Thanks.

Yes. Hey, this is Vasu, I can help with that. We anticipate that with the 787 situation, we will be a materially smaller international airline than we would otherwise be, operating probably 75% to 85% of the international scale we had in 2019. But our short-haul network—domestic and narrowbody international to Mexico, the Caribbean and Latin America—will probably be a lot closer to 2019 levels. A couple of important notes: first, we have taken a conservative view about 787 timing and about how international demand recovers through the year. Much of our international flying in published schedules is oriented around markets where we can drive connectivity through partner hubs, whether it’s Heathrow or others. The other thing is we have a lot more flexibility now in how we plan the airline. Due to the pandemic we have become more nimble. Within a few points we have a lot of flexibility on how we allocate flying and move capacity as demand changes. So while the broad strokes are as I described, things may change as demand comes back.

Got it. And then maybe one more for you again Vasu, just to dig into your short-term revenue outlook a bit more. Understand there is a lot of moving pieces, but your RASM performance versus ’19 improved each quarter through 2021. It looks like it’s going to get worse in the first quarter per your guidance—of course you call out impact of Omicron. But can you help us think of the drivers a bit more and anything we should know about cargo or other revenue trends, or is that really just your conservative view as you noted on loads and pricing on the passenger side? Thanks for the time.

Look, it’s very much the conservative view and that’s come from multiple waves of the pandemic. One of the things we have more reliably built forecasts on is the amount of time it takes from cases peaking to demand recovering. That window has shortened through every wave. In the Delta wave, it was about a seven-week spread between case peaking and demand bottoming out and growing again. So a lot of our outlook is based on a slightly shortened version of that occurring. Indeed, what we have been seeing as cases have peaked—wherever they have peaked in the world—it’s often a much quicker recovery. So it’s still early to tell. January and February historically are seasonally weaker months for travel, so we remain cautious for those months. We have been encouraged by recent booking trends, but we built conservatism into Q1 and will adapt as demand materializes.

Let’s go and move on to the next question.

Our next question comes from Andrew Didora with Bank of America.

Hi, good morning, everyone. Doug, just want to extend my congratulations as well. And the same goes to Dan Cravens. It’s been a pleasure working with both of you over the years. Just first question around costs: Derek, does the 5% CASM guide include anything from current labor negotiations? And then just secondly on costs, when we factor in kind of new labor deals, all the inflation in the economy that you were discussing earlier, even as capacity comes back, do you think that getting back to pre-pandemic CASM-X is a realistic expectation over the next few years?

Yes. It does include year-over-year deals that were already done. So any deal that is already done is built in. We did get some agreements done in the past few weeks that weren’t a huge impact on costs but were good to get done quickly with some of our groups. But it does not include any new contract negotiations that are not complete today. Number two, I had expected 2022 to get back to 2019 levels, but with the variant and the 787s not being fully scheduled, and demand not quite being there, we will not get to 2019 levels in 2022. As we get into 2023, it’s definitely possible. It depends on the growth of the airline and other factors. If we don’t get there, we will get very close. Historically I talked about being pretty flat in 2022; that’s not happening. But as we fully utilize assets in 2023, I think we can get to that level or pretty close. We might not get all the way down to 2019 but we will get pretty close.

That’s helpful. And then lastly, for Robert, I guess as you assume the CEO role here, what do you think American needs to do better in this new role post-pandemic to help drive margins back towards pre-pandemic levels?

Thanks, Andrew. We need to put all the pieces together—the investments we’ve made over the last few years—and execute. We must run a reliable operation, which pays dividends in unit revenues, unit costs and customer satisfaction. American has invested in the right places—aircraft, airports, lounges—and that capital is in place. Now it’s time to operate the airline at scale, ensure reliability, capture yield and improve unit costs through utilization and network execution. If we do that, I’m confident we’ll deliver strong results.

Thanks Andrew.

Our next question comes from Alison Sider with The Wall Street Journal.

Hi. I just was wondering if you could talk a little bit more about your expectations for 787 deliveries? And kind of how confident you are, anything that you are hearing from Boeing about what they might expect in terms of the schedule on that?

Yes, Ali, this is Derek. We are still on the same schedule. Mid-April is what we are talking about for our first delivery. That has been locked in on those dates for probably the last couple of months, and we are still planning on that happening. So, we haven’t got any different information in the past couple of months; we are still on target for those and that we would take all 13 throughout the year. But we have conservatively put four in the schedule for the summer. We had originally thought we could get all 13 in the summer but pulled that down to four. We have had really good discussions with Boeing and I think they are on track as of today to hit that mid-April timeframe. We are hopeful that that’s still the case and nothing else comes up.

Got it. And is this a situation where you would seek any kind of compensation from Boeing for the delays, or if there was a further delay, is that something you would discuss?

Yes. We are in discussions with Boeing where we are at. There are delay penalties that are paid and Boeing is paying the delay penalties. Everything is happening as we speak today. If there are further delays and it really does impact the summer much more than what we think it will, then—we have had good discussions with Boeing that they will compensate us for the losses that we have had for the delay of those aircraft.

Okay. Thank you.

Our next question comes from David Koenig with The Associated Press.

Thanks. Hi Doug, well, congratulations as well. I hope you have a great retirement. And you have mentioned 5G in this week’s agreement with Verizon and AT&T. I wondered how long do you get a signal and how long they are willing to delay their full rollout? And why did this have to come down to an 11th hour crisis like this?

Yes. Thanks, David. We get the sense that the telecoms are willing to delay deployments near airports until the technical work is completed and we are certain there won’t be disruption. Again, the right people are talking to each other now. I hope that’s where we will stay. I feel really good because the technical experts tell us it’s not that complicated once manufacturers, telecoms and regulators share information and work together. Why it took this long I don’t know; we can do a post audit later. But we are the end user of this dysfunction—our customers and operations were the ones affected. As it was getting ready to be deployed, we raised concerns and people listened. So that’s where we are. I don’t expect anything to be turned on near airports until everyone is comfortable it can be done safely.

So, are the airlines talking directly to the telecoms, or are you going through the regulators?

It’s much more about the manufacturers and the OEMs talking directly to the telecoms, which is happening. So the Boeings, the Airbuses, the avionics suppliers, etc., are talking to AT&T and Verizon, with FAA involvement. What needed to happen was for those companies to talk to each other and share data. Once they do that, you can get results quickly. Previously, a lot of the conversations were between government agencies, which is less productive than direct technical discussions between the manufacturers and telecoms.

Our next question comes from Mary Schlangenstein with Bloomberg News.

Good morning. Congratulations, Doug and Robert both. I wanted to ask you if you could talk a little bit about how much of a delay you see the Omicron flare up having on the return to more near-normal travel? One of your competitors said it pushes it out 60 days. But I wonder how that ties in with Vasu’s comments about the shortening time between a peak and a bottoming out and then a recovery in demand?

Hey Mary, we don’t see things a lot different. We were recovering nicely after the Delta variant heading into Thanksgiving, but Omicron hit and demand dropped off fairly rapidly. Demand is recovering faster than in previous waves, and we view the impact as more of a delay than a permanent diminution. If you look at a one- to two-month timeframe for the rebound that’s reasonable. We are already seeing strong bookings as of late and are encouraged by recent trends.

Thank you. And if I could quickly ask, in discussing increased wage levels going forward and as you try to hire more people, is American contemplating at all potentially other unilateral pay increases for unionized workers, either any particular groups or maybe on a more broader basis?

As I mentioned earlier, American has a very attractive brand and generous compensation and benefits. We are able to attract people with the compensation structure we have. In certain pockets and roles—particularly at regional carriers—we will take appropriate actions as needed. But overall I feel confident in where we are today and our ability to recruit and retain the right people.

Our next question comes from Leslie Josephs with CNBC.

Hi. Good morning everyone. I was just wondering what you guys think the impact is going to be of the multiple labor negotiations you have going on now. You have seen complaints about issues with quality of life, schedule changes. So curious if that changes how you think about scheduling the airline going forward? And what sort of—like what maybe you are saying with pay increases in 2022 and beyond—how do you see that going?

Hi, Leslie. Here is one thing I know: everyone at American is joined in the goal of running a reliable airline and returning to profitability. Our labor leaders and team members want a profitable and successful American. As we negotiate, that balance—taking care of team members while making sure the company is healthy—is important. That’s something we’ve been able to maintain historically and will continue to do so. We will attract team members and work to improve: better reliability, better service, and a strong, sustainable company.

Okay. Thanks. And if I could just ask one follow-up on the 787, Derek, did you say that Boeing is definitely paying compensation now, and they could pay even more if the summer schedule is affected?

The first answer is yes. There are delay penalties in these contracts and Boeing is paying those penalties. They have indicated that if there are further impacts that materially affect our summer schedule, they are prepared to work with us on appropriate compensation. We are actively negotiating and hope it won’t be necessary, but they have been responsive.

In addition to what they are already paying for the existing delay?

Correct.

Our next question comes from David Slotnick with TPG.

Good morning. Thank you for taking the question and congratulations, Doug. Robert, during your prepared remarks you mentioned something about a blurring of the line between business and leisure travel. I was wondering if you could elaborate on that a bit? Does it translate to higher yields, premium cabin sales, etc.?

Vasu will take that.

Hey David, great to hear from you. Yes, we see a blurring of the lines where trip patterns are changing. Thursday, which is traditionally our biggest business day, is also becoming one of the bigger leisure days. We see more people buying business-style fare products for trips that are leisure-like: people traveling to vacation destinations but working remotely during the trip. This is creating new behaviors: more willingness to pay for premium on leisure routes, very strong premium cabin sales in the Caribbean and other leisure destinations. That behavior is different than typical corporate travel patterns and is an opportunity for us. We’re also rewarding customers beyond flight frequency—through card spend and other engagement—and we see more to do to capture value and serve this blended travel demand.

Thanks Vasu, and just as a follow-up: do you see the impact of inflation leading to any increase in ticket fares, higher prices for customers?

Look, it remains to be seen. This industry has a long history with inflation where it hasn't always flowed cleanly into fares. We will watch and adapt, but we don’t have a specific forward comment on pricing at this time.

Thank you, David.

Our next question comes from Dawn Gilbertson with USA Today.

Hi. Good morning. I have to say, Doug, I am really jealous. This is your last call, but I’m very happy for you and your family.

Thanks.

I have a couple of questions, first for Vasu, following up on Mary’s question about the lag in bookings because of Omicron affecting spring break and summer. I am wondering whether you guys are considering extending the expiration date for tickets and for current travel credits? And my second question is probably for Robert, but maybe not. Your call times are still pretty high; as recently as Friday, it was four hours plus. Can you give any specifics on what you are doing to address this persistent problem and what’s behind it? Thanks very much.

Hi. It’s great to hear from you, Dawn. I will start and others can add in. First, we are assessing different options for stored value, what we do with customers who have credits. We’ve been encouraged by the use of name changes and reassignments; that flexibility has helped customers use credits. We are evaluating options and will have more to share in the not-distant future.

Thanks Dawn. With reservations right now, given so many changes in the environment—travel restrictions, quarantine requirements, schedule changes—the level of calls we are getting has been unprecedented and for good reason. We are investing in additional resources and in digital channels like chat and callback functions to scale. While we have had extended callback times recently, I’m proud of the way we’ve performed through the pandemic. American has consistently performed better than many competitors. As call volumes normalize, we expect to return to reasonable response times.

Just following up on the technologies we’ve implemented in reservations: we have a virtual assistant—an AI tool—that can respond to many routine questions without a customer needing an agent, which is a win for customers and reduces load on agents. Hundreds of our agents are trained to handle chat, which allows them to manage more than one interaction at a time, improving productivity and customer experience. That said, many of the questions we receive are complex—COVID restrictions, vaccination requirements, combining stored value with other payment methods—and in those cases we still rely on our reservations agents to resolve the issues.

Thank you very much.

Dawn, before you sign off, I’ll note for the group here that Dawn has covered airlines a long time—back to when we started at America West. Of all the reporters I’ve dealt with, I’ve kept Dawn on the list more than most. Thank you very much; really appreciate it.

Thank you, Doug. It’s been a pleasure.

I think we are done. Thanks all very much. I really appreciate it. I have enjoyed this immensely. This is maybe my favorite of the 107. So, thank you all very much. Congratulations to Robert. Congratulations to Dan, and we will be in touch. Thanks again.

This concludes today’s question-and-answer session. I would like to turn the call back to management for closing remarks. This concludes today’s conference call. Thank you for participating. You may now disconnect.