American Airlines Group Inc. Q2 FY2022 Earnings Call

Thank you, Olivia. Good morning, everyone, and welcome to the American Airlines Group second quarter 2022 earnings conference call. On the call this morning, we have our CEO, Robert Isom, and our Vice Chair and CFO and President of American Eagle, Derek Kerr. Also on the call for Q&A are David Seymour, Vasu Raja and a number of other senior executives. Robert will start the call this morning with an overview of the second quarter. Derek will follow with details on the quarter and our operating plans and outlook going forward. After Derek's comments, we'll open the call for analyst questions, followed by questions from the media. To get in as many questions as possible, please limit yourself to one question and a follow-up. And before we begin today, we must state that today's call contains forward-looking statements, including statements concerning future revenues, costs, forecast of capacity and fleet plans. These statements represent our predictions and expectations of 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, which was issued this morning as well as our Form 10-Q for the quarter ended June 30, 2022. In addition, we'll be discussing certain non-GAAP financial measures this morning, which exclude the impact of unusual items. A reconciliation of those numbers to the GAAP financial measures is included in the earnings press release, which can be found on the Investor Relations section of our website. A webcast of this call will also be archived on our website. The information we're giving you on the call this morning is as of today's date, and we undertake no obligation to update the information subsequently. Thank you for your interest and for joining us this morning. With that, I'll turn the call over to our CEO, Robert Isom.

Thanks, Scott, and good morning, everyone. Thanks for joining us. I want to start by thanking the American Airlines team, which has done an amazing job of running our airline, especially during very challenging operating conditions in the past few months. They managed significant weather, both thunderstorms and extreme heat in many parts of the country. Customers continue to come back to travel in record numbers. And our team has adapted to one of the busiest summers that we've ever experienced, and they’ve done so with grace, professionalism, and a level of commitment to our customers and each other that is second to none. Every single day, I hear from our customers about something incredible that our team has done. We're so proud of their work and grateful for their support. I also want to thank and acknowledge our key partners in the US government, Secretary Mayorkas, Secretary Buttigieg, and their teams at the FAA and TSA as well as the air traffic controllers at NATCA. They've been right there with us and have worked through these difficult operating conditions. The extraordinary surge in demand for air travel has significantly impacted them as well, and we appreciate their consistency and professionalism. All of us have to acknowledge that there are challenges in the National Airspace, particularly in high traffic locations like Florida and the Northeast, but I'm grateful for the sheer commitment that we have in the public and private sectors and management on the front line to facilitate the efficient return of travel. American served 53 million customers in the quarter, and we couldn't have done that without everyone pulling together. As we have shared previously, we have two primary goals this year: running a reliable operation and returning to profitability, and that's the entirety of our focus. We've made a lot of progress on running a reliable airline, but we still have some work to do, and I'll touch on that more in a moment. The big news is this: we're really pleased to report a quarterly profit for the first time since the start of the pandemic; that's two-and-a-half years, and that's driven by the strong demand environment and the hard work of our team. We're also pleased to have hit our pretax margin guidance despite a challenging end of the quarter and a significant run-up in oil prices. American reported a second quarter GAAP net income of $476 million. Excluding net special items, we reported a second quarter net income of $533 million. American produced revenues of $13.4 billion in the second quarter, and that's an increase of 12.2% versus 2019 and a record for any quarter in the company's history. And let me repeat that: That's a record for any quarter in our company's history. These results were achieved while flying 8.5% less capacity than we did in 2019. Importantly, these results are an indication that our actions are producing the expected results. Early in the pandemic, we made a conscious decision to simplify our fleet and network, focusing our operations where we could create outsized customer value and using partnerships to augment that service. In the second quarter, some 70% of our flying was in American's areas of strength: our Sunbelt hubs, Mexico, Caribbean, Latin America, and London. This flying outperformed the industry as we offer customers more options than any other airline. Our domestic partnerships are also producing for our customers and for us. In fact, our unit revenue performance in JFK and Los Angeles outperformed the system in the second quarter. Customers are flying in different patterns than they have previously, creating opportunities for us. System business revenue is now fully recovered compared to 2019, with revenue from small and medium businesses and customers exhibiting blended behaviors that were traditionally associated with both business and leisure continuing to outpace the recovery of our managed corporate revenue. The majority of this revenue growth has come directly through our website, bypassing traditional channels. Further, leisure demand surpassed 2019 levels in the second quarter, and customers continue to show us their increasing appetite for travel. Enrollments in our loyalty program continue at record levels, and spend on our co-brand cards is growing at a greater rate than ever before. Looking forward, we will limit capacity to the resources we have and the operating conditions we face. We will continue to orient our flying to create value for our customers. And as always, we will remain nimble to ensure that we are best positioned to capitalize on continued demand strength. Now turning back to reliability. After running a solid operation in April and May, headlined by a strong Memorial Day, we had challenges in June. June was a difficult month for the entire industry from an operational perspective, with extreme weather impacting every major hub and air traffic control challenges in certain parts of the country. At American, we encountered significant weather on 27 of the 30 days in June. That weather resulted in ramp closures, ground stops, ground delay programs, and airspace flow programs, which had a ripple effect throughout our operations. Despite the challenging operating environment in June, our D0, that’s departures on time, A14, arrivals within 14 minutes, and completion factor for the full quarter were better than the second quarter of 2019. Our team achieved this while operating a second quarter schedule that was more than 25% larger than our closest competitor on a departure basis. American operated more than 0.5 million flights in the quarter. That's an 8% increase over the second quarter of 2021 with a load factor of 87%, which is 10 points higher than the second quarter of 2021. While June was challenging, we have seen improvements so far in July, including over the busy Independence Day weekend. American finished the holiday period with a combined D0, A14, and completion factor, all above goal and in line with our pre-pandemic performance, while operating a July 4 holiday schedule that was 30% larger than our competitors as measured by total departures. Our operational performance for the full quarter and the results we have delivered in the first few weeks of July give us confidence moving forward, but we still aren't where we need to be. We have a lot of flying ahead of us still in the summer. So we are investing in our operations to ensure we meet our reliability goals and deliver for our customers. We've taken proactive steps to build additional buffer into our schedule for the rest of the year. As I said a minute ago, we're sizing the airline for the resources we have available and the operating conditions we face, and we will make other changes as needed. Even with these adjustments, American still offers customers the largest network of any US airline with an average of more than 5,400 daily departures. I want to close by reiterating that I'm tremendously excited about what lies ahead for American. We're encouraged by the trends we're seeing across the business, and we've built an airline that can be successful in a number of different demand and economic environments. Our second quarter results and strong revenue production despite challenging conditions demonstrates that our plan to return to profitability and deliver a good operation for our customers is working. We have the strongest assets in the industry, and the work that our team has accomplished to build and deliver the most comprehensive network in the business is paying off. And with that, I'll turn it over to Derek.

Thanks, Robert, and good morning, everyone. Before I begin, I want to thank the American Airlines team for their continued dedication to our customers during this busy summer travel season. This morning, we reported a second quarter GAAP net income of $476 million or earnings of $0.68 per diluted share. Excluding net special items, we reported a net income of $533 million or earnings of $0.76 per diluted share. We talk a lot about our goal of returning the airline to profitability, and our second quarter performance is a result of that focus. Profitability in the quarter was driven by record revenue performance. As Robert noted, our second quarter revenue was $13.4 billion, which was 12.2% higher despite flying 8.5% less capacity than the same period in 2019. Leisure demand continued to lead the way, but the acceleration of business and long-haul international demand contributed to the strength we saw in the quarter. Operating earnings improved sequentially through the quarter, in line with the growth in revenue despite rising fuel costs. We continue to reap the benefits of the past investments in our fleet and are well-positioned for the future. In the second quarter, we took delivery of five A321neos and reactivated nine Boeing 737-800s from long-term storage. We continue to work closely with Boeing and the timing of our delayed 787s, and we expect to begin taking delivery of those aircraft this quarter. We now expect to receive nine 787s this quarter and four this year and four in the first part of 2023. Lastly, based on our latest guidance from Airbus, we are now expecting our A321 XLRs to be delivered starting in the first quarter of 2024 instead of the third quarter of 2023. This will shift planned aircraft capacity out of 2023 into future years. Our 2023 aircraft CapEx is now expected to be $1.9 billion. We ended the second quarter with $15.6 billion of total available liquidity. During the quarter, we generated operating cash flow of $1.7 billion and free cash flow of more than $800 million. Total debt reduction remains a top priority. We remain on track with our target of reducing overall debt levels by $15 billion by the end of 2025. In the near term, we will continue to keep our liquidity at elevated levels, with a plan to step down to $10 billion to $12 billion when we are confident the recovery has fully taken hold. At that time, any excess liquidity will be prioritized to reduce debt. During the quarter, we made $1 billion in scheduled debt and finance lease payments, including paying off the remaining outstanding balance of our $750 million unsecured senior notes that matured in June. To date, we have reduced overall debt levels by $5.2 billion from peak levels in the second quarter of 2021. This means that after only 12 months, we have completed more than one-third of our $15 billion total debt reduction target. This progress affords us tremendous flexibility as to when and how we bring down the remaining $10 billion in total debt by the end of 2025. As we have said previously, moving forward, we will continue to balance our total liquidity with the expected demand recovery, debt reduction opportunities, and investment in the business. We expect to make $375 million of scheduled debt payments in the third quarter, which includes the scheduled payoff and unencumbering of 8 CRJ-700 aircraft. As we look to the remainder of the year, we are making targeted investments to ensure operational reliability. With recent schedule adjustments, we now expect full year 2022 capacity to be recovered to 90.5% of 2019 levels. Consequently, we now expect our full-year CASM excluding fuel and net special items, to be up between 10% and 12% versus 2019. The increase in unit cost is driven by lower planned capacity and other investments to support the operation, including wage premiums and regional pilot pay. These unit cost increases represent near-term investments that will drive long-term value. We are confident that unit costs will improve as we increase asset utilization to historical levels. In the third quarter, we expect to be profitable despite the continuation of elevated fuel prices. Pretax margins are expected to be between 2% and 4% for the quarter, based on the current demand trends and our latest fuel price forecast. We currently expect total revenue to be 10% to 12% higher versus the third quarter of 2019 on 8% to 10% lower capacity. On this revenue strength, we expect total revenue per ASM to be 20% to 24% higher in the third quarter versus the same period in 2019. We expect our third quarter CASM, excluding fuel and net special items, to be up between 12% and 14% compared to 2019. Lower planned capacity and the investment in the reliability of the operation that I mentioned previously are driving unit costs higher for the quarter. Our current forecast for the third quarter assumes fuel between $3.73 and $3.78 per gallon, an increase of more than 80% versus the price of fuel in the third quarter of 2019. In conclusion, demand is strong, and we remain focused on our key objectives of operational reliability and profitability. While we've made investments in our operations that will impact near-term costs, we are confident that we're very well positioned as we move into 2023 because of our network, our fleet, our team, and the actions we have taken.

Yeah. Hey, good morning everyone. Hey, good job this quarter and good outlook. I guess, Derek, first to you on the $5.2 billion debt reduction that you've been able to do thus far. Presumably, you're not including any sort of reduction in the pension obligation. And just given the run-up in interest rates and thinking where the discount rate would go, can you just give us a sense of maybe the potential tailwind on that from a deleveraging perspective, where things stand and how you're thinking about that pension obligation? Thanks.

We evaluate the situation at the end of the year. There was some improvement in the pension as we saw a slight decrease in the pension obligation in 2021. As of June 30th, the funding ratio for the pension has increased to around 81%, and liabilities have decreased by over $3.5 billion due to changes in interest rates, which more than compensates for the drop in assets. Overall, the situation is significantly better than it was previously. While we haven't factored this into our 2022 projections, if we did, it would currently mean about a $1 billion reduction in liabilities compared to earlier estimates. We are managing this conservatively as we always do, and monitoring the pension closely. The interest rate changes have greatly reduced the liabilities, much more than the decrease in asset value.

Okay. That's helpful. For my second question, this is probably more for Vasu. Derek, you mentioned that you are expecting to receive nine 787s this quarter. I know there have been multiple delays. If there is another delay, looking at the fourth quarter schedule, it seems you still have the 787 planned. If it were to slip again, how much of a capacity impact would those airplanes have in the latter part of the year? Thanks.

Yeah. Well, two things, Mike, I corrected that, I think, in my comments, but it is nine for the year. We will have two coming in, I think, in early August. The first two will come earlier, and we don't have any of them built into the schedule until the November timeframe. So if those do slip from August a little bit, we have put in almost a two-month pad in those coming in. But we don't think it will impact the fourth quarter a lot. If they slip a lot further, where the impact is going to be into 2023, not a lot into 2022.

And Mike, presuming that all nine do deliver, call that roughly about deploying capacity in a month.

Thanks very much, operator.

Hi, Helane. Good morning.

Good morning. Thank you.

Hi Helane.

So just two questions. The first question, Robert, I saw you on CNBC this morning, and you talked about the pilot contract. And I know you guys don't like to talk about it, but you did present your pilots with an offer that would increase pay by 17% by 2025, I think. Could you just talk about what happens next and the status of that?

Sure. So Helane, thanks for the question. Look, it's really important for us to take care of our pilots. You know that throughout the pandemic, we had put an offer on the table that would have made our pilots the most highly paid pilots in the industry. We never pulled that back even throughout the pandemic. But, look, United went out and put out a better offer. And we thought it was really important to get to the table to make sure that our pilots know that we were going to take care of them. So we've done that. And now we are negotiating very closely and actively. And my hope is that we make progress over the coming weeks and months. Now how that bakes into financial forecast, we haven't put anything in yet. We don't know exactly where we'll end up. And then the point I'd just make is that, with every contract, not only are there changes to compensation and quality of life, but we think that when we get to a contract, we'll have a contract that operates very efficiently for the company as well.

Thank you for the information. I have a follow-up question regarding London. I heard Scott mention that London operations will notify him a day or two in advance if they are canceling flights. I recognize that your flight operations to London may differ from theirs. Are you experiencing similar challenges? Additionally, how can this issue be resolved, or is it mainly a problem with British Air and its partners?

No. Let me start by saying that we have a significant operation at London Heathrow with our Atlantic joint business partner, British Airways. We provide the largest schedule into Heathrow, making it very important to us. One of our accomplishments has been isolating American's operations to Terminal 3, which helps our team ensure we are doing everything possible. However, challenges remain, such as reliance on infrastructure like baggage systems at Heathrow. British Airways is also heavily reliant on Heathrow. Therefore, we are collaborating with our oneworld partners to align our capacity with the available resources, though this process will take some time. To elaborate on the situation and the outlook, I'll have Nate Gatten, our Head of Government Affairs and Corporate Real Estate, provide more details.

Yes, thanks, Robert. Helane, we worked the entire last week on very short notice to cancel departing flights as a way to help manage airport crowding. As Robert mentioned, we found that request to be quite disappointing and frustrating for many reasons, primarily due to the significant burden it places on our customers with little notice and limited options for rebooking. What we did was collaborate with HAL to limit the capacity on our departing flights by capping loads on certain flights; we rebooked passengers through other European points of departure; and implemented measures like limiting non-rev travel, among other things. As Robert noted, we did this in conjunction with our oneworld and joint venture partners. It’s important to understand that these procedures will remain in effect until the beginning of next week when a new process for limiting passengers at Heathrow will be put in place by the slot coordinators. We don’t have all the details on how that will work just yet, but it’s likely that the new arrangement will continue to impact all airlines serving Heathrow through the second week in September. I would simply say we are very disappointed with these circumstances. We have high load factors this summer, and we were informed at the last minute by the airport that they cannot accommodate the passengers and that we need to reduce capacity. On a final note, fortunately, we do not anticipate similar caps in the United States, but we do expect to encounter comparable issues and challenges at other international locations throughout the summer.

Hey Helane, I'll just close with this. Look, we're going to put these measures in place, work with the airport authorities. At the end of the day, we've got to match capacity to the resources that are available, and we're going to push hard to make sure that all of the airports that we work with get the resources they need to serve our operations at the size that it should be. So thanks for the question.

Hey good morning. I guess since Helane brought up London, I flew back on American yesterday, nothing but positive things to say. I'll take that up with Scott offline. First question for Vasu. So last quarter, you brought up a phenomenon of corporate travelers combining business with pleasure, extending trips, bringing the spouse, that sort of thing. With another 90 days of corporate recovery under your belt now, I mean, is the trend any different? And to the extent that this is sustainable, is there a way to actually monetize it, or is it just sort of gravy? If it happens, great, if not, no biggie?

Hi Jamie, thanks for the question. And the topic, which is very frequently on our minds here because indeed, in the last 90 days and over the nine months or 12 months before that, the trends have not abated. In fact, they've grown even stronger. I mentioned in our last call when you asked the question that it used to be as much as 70%, 75% of our revenues could be both identified and would self-classify itself very binary as traveling only for business or only for leisure, and now that's only 50%. And that other 50% that's there indeed is still there. It tends to be higher yielding. It comes directly through our dot-com and mobile. And it’s looking for, and it does that largely because it's looking for travel experiences and journeys and things like that, which the industry hasn't been able to make available through the very antiquated technologies and processes that we've been prone to using. So yes, this really has opened our eyes to creating a lot of value for these kinds of customers who are a growing number. Like all of our advantage enrollments are coming out of that population; they're disproportionately concentrated in places where American has just a lot of natural strength. Think of the Sunbelt, Midwest, the Southeast. So we're really encouraged by what we see. And indeed, it’s proven through the pandemic to be a very durable source of demand that's both high-yielding and wants a lot more in the airline product than just a single transaction. So it is very much on our minds, and it's probably going to shape a lot of views in the months and quarters ahead.

Thank you for that. My second question is for Derek or Robert. The demand data is certainly very encouraging. Although you are smaller than you were before COVID, you are generating more revenue. This seems like a strong strategy for many businesses. However, your margins have not yet recovered, and you were not satisfied with your pre-COVID margins to start with. So, my simple question is, what factors will drive higher margins moving forward?

Well, Jamie, let me start by saying that there's more margin growth at American. We’ve positioned this airline to operate on a larger scale, simply put. We’ve incorporated many redundancies, and even in June, those weren't sufficient. However, we believe that over time we can utilize our assets more effectively than we have until now. Looking ahead at margins, we've adjusted some of our flying for the third quarter, which is a positive step. We have regional aircraft that aren't currently in operation. While we might be short on pilots, we have the necessary resources to operate those aircraft. The main focus for us is to maximize the use of our assets. But Derek, please continue.

No, I was going to say the exact same things. And Jamie, as we look at the second quarter, we talked about 100 regional aircraft being out on the ground, and we had probably about 40 mainline equivalent aircraft on the ground. So you're talking about 140 to 150 aircraft that aren't being utilized. So two things have to happen is, the resources come and we put those aircraft back up in the air. We really want to fly all those. We want to get back to the utilization that we were at, and that is where the margin comes because, as Robert said, we are built from a cost perspective to fly those aircraft. And today, we're not. So that's where it's at, and that's where we believe as we get ourselves back up to ASM levels in 2019, it comes at a much cheaper cost because the assets are here.

And Jamie, just to add one other point, just from even a second quarter perspective. The month of June was really hard on the airline. 27 out of 30 days, we had severe weather that resulted in ramp closures, ground staff, ground delay programs, aerospace flow programs. And in sum, we flew at least a percentage point or more, less than we would have otherwise. June and the second quarter would have been better had we seen a more normal type close to the quarter. So that gives me optimism that there's not only utilization that we can work our way out of, but also more normal operating conditions are going to benefit us as we go forward as well.

Good morning. I'd like to follow up on Jamie's question. Regarding the comparison to 2019, how much of the inflation is factored in? I understand there is some regional pilot pay included. How much of these increases are structural, and how much could be reduced as you return to 2019 capacity levels?

Well, I would say as we look at the cost structure, the cost trading we talked about is built to fly another 150 aircraft. So we did add cost in. So if you take the third quarter over the second quarter, the increase is really driven by three things, which is mainline salaries due to putting in some of the pilot contract issues, the maintenance is up year-over-year just because of engine overhauls and things that we’re seeing throughout the summer. And then the regional plan I would say that’s put into place. So, the regional plan is put into place to get more aircraft up in the air. So, that hopefully that is there, it’s there to stay engine of higher cost to fly regional and the new contract that we would put in place regional is there. That hopefully drives more aircraft back up in the air. We’ll see where that goes. If it doesn't, then that cost doesn't come. So I think those things are built in, they're going to be there as we move forward. So it's important for us to get the utilization back up and get the aircraft in the air.

That makes sense. And if I can ask just a follow-up on that regional pilot pay. The pay was surprising, and I understand that at least part of it is a bonus that supposedly rolls off in 2024. But given how, kind of, much the gap versus mainline pay has been narrowed or, in some cases, even higher than mainline pay, just is that sustainable from an economic standpoint for those markets because you're flying them with small aircraft, fuel is a bigger impact on those smaller markets? Is that sustainable long-term, or is it the right move right now because maybe capacity is out of those markets and fares are high, or you just need to get this capacity back up? I was just kind of curious as the thinking behind that big of a pay increase?

Savi, let me start and then I know some others might want to jump in. The answer to that is yes. Look, the regional network to American Airlines is incredibly important, and whether it's 50 or 65 or 76-seat aircraft, being able to serve those markets in a way that connects to our hubs and then unleashes the breadth of the rest of our network, that's a really compelling offering that achieves higher yields. And so even though pilot expense for those regional aircraft will be going up, we're confident that the yields that will be introduced we'll take that into account. But one thing I want to make clear, though, is as we take a look at regional pilot pay, it costs quite a bit of money to become a pilot. And the expectations for a pilot coming out and taking that first job have changed over time. So as we look forward, I do think that as an industry, pilot wages are going to increase. And that's something that the industry as a whole is going to have to digest. Ultimately, that will show up through our cost structure and be a factor in terms of how we try to monetize our product.

Sure, I'll add to what Robert mentioned. For our airline in particular, a significant part of how we generate value and enhance margins is by maximizing the number of unique origin and destination pairs we can offer. Over several quarters, we've managed to operate more capacity in the market that can achieve higher nominal passenger revenue per available seat mile, comparable to or even surpassing our network competitors, especially domestically and on short-haul routes. A key factor in this success is the regional jet. In the last quarter, we operated 20% more unique origin and destination pairs than our nearest network competitor. In those markets, we are observing yields that are 25% higher than the overall system average. This is truly what is driving the yield growth we see. Many of these markets also reflect the high-value blended demand that Jamie inquired about earlier. Therefore, this approach is not only sustainable but also a distinctive aspect of our business strategy that we intend to maintain.

Appreciate that. Thank you.

Thank you. Good morning. Let's start with what Savi mentioned earlier. It seems anyone could replicate your approach on the pay side, making it difficult to identify a distinct advantage. Historically, on the regional level, the pay arbitrage was a key factor in profitability. So, why are these pay increases the right move for profitability? I see how they could benefit small market share, but why are they a superior choice compared to your competitors when it comes to margins?

Duane, I'll start. First, the days of attracting pilots with annual salaries of $40,000 are over. I don't believe we'll go back to that kind of compensation for regional pilots. The situation has changed significantly. While we're still not offering excessively high salaries, it's clear that all carriers will have to deal with the challenge of increasing pay for pilots. However, American Airlines has a distinct network that enables us to utilize our regional network and pilots in a way that generates higher yields. This is what sets us apart. It's not just about having a small difference in pilot wages that will impact our company’s margin. Vasu, would you like to add something?

Yes, I'll just add to it very simply, Duane, an industry that has struggled for a long time to be able to pass its cost into revenue, at least for us, what we've seen time and time again with the regionals is, anytime there has been a cost increase, that is the one part of the business where we can most consistently pass it through to revenues. We do it because of what it does. It creates a unique product for customers that increasingly nobody else but American Airlines can go and do. When you look through our system, there are many of those markets that you simply couldn't upgauge. Even if you did upgauge it, flying to large cities, Birmingham, Alabama, Wilmington, North Carolina, once a day in a 737, doesn't create a lot of utility for big metro areas in the US. So for us, this is actually a place where by doing it, and frankly, by doing it through our wholly-owned regional jets, which themselves are massive airlines, it creates a lot of unique value for our customers, which turns into revenue for us.

Appreciate that perspective. And then, just one thing that's a little confusing to me, can you clear up the difference in characterization on corporate? A couple of your peers call it sort of 80% recovered. Perhaps you carried kind of less of that premium traffic going in. Maybe differences in hub geography explains it. But why do you see it as sort of fully recovered versus the 80%? And if much more of it is coming through your own distribution, how do you know it's corporate? Thanks for taking the questions.

Thank you, Duane. I think it's important to clarify this because there are different interpretations of similar terms in the industry. Specifically, when we refer to business, we are discussing a business trip type. We can analyze the data to determine if it was a single person on the itinerary, who didn't check a bag and likely completed a day trip for business purposes. Historically, business revenue has represented 40% to 45% of our overall revenue. This has included a 60/40 split between unmanaged or small businesses and managed businesses, which are typically large corporations that travel globally and work with major travel agencies to manage their programs. Currently, we see that business revenue has recovered to about 40% to 45%. However, the nature of that revenue has significantly changed; unmanaged business is recovering at 125% to 130%, while managed corporate business is recovering at around 75% to 80%. This aligns with what you may have heard from others in the industry. We have observed a consistent trend that suggests an increasing prevalence of unmanaged business. Even among contracted corporate accounts, as we move beyond the pandemic, fewer of them are enforcing travel policies or adhering to the agreements established earlier. We expect this trend to persist, and I hope this provides more clarity on the matter.

It does. Thank you.

Hi, good morning guys. So Robert and Derek, I want to talk a little bit about the rate of recovery in either pre-tax or operating margins. You were down on pre-tax, sort of 390 basis points close to 2019 in the second quarter. It looks the same on a September level. And I'm just trying to get a sense for when we should start to expect to see those pre-tax margins recover. And is that all 100% driven by volume recovery, or is there something to do on the revenue side or the cost side to accelerate the rate of change in the profit margin?

Well, I'll just start. David, look, this gets back to the question that's asked earlier. We have a lot of redundancy built into the business, and utilization isn't where we need it. I think that as we take a look to the future, we're depending on a couple of things. One is, fortunately, we're in a really strong revenue environment. As we're looking to the third quarter, anticipating revenue increases. From a cost perspective, that's where we would like to see unit costs come in lower. The big driver to that is making sure that we fly a more fulsome schedule and take out the redundancy that we have built in. And it gets back again to how quickly we can get these tests back up, from a regional perspective, and get the 787s back in. My view is that, that's the name of the game for us as we go forward. As we take a look into the rest of 2022 and 2023, our goal is to make sure that we're utilizing our assets as hard as we possibly can.

Yes. I'll add some numbers there, David. In 2023, we've got 95 lease renewals; 2024, 72 lease renewals. We have unencumbered aircraft of over 200 aircraft. We have deliveries coming in. In 2023, we have 31 and 2024, 47. So that is exactly right. What you said is what we would do. We're not there yet because we believe that the demand is there to get more of these aircraft up. But if we see that, then that is what we would do is not renew leases, push deliveries like we have in the past. You saw us last quarter push out some deliveries on the 787s and make sure that we right-size those. We would take some of the unencumbered assets, and we would move those and sell those and not put them back up in the air. So that's where we would go. You're exactly right.

Hey. Good morning. Thanks, guys. Going back to the commentary of more margin growth over time, setting aside market expectations for a recession, and just putting a finer point on the prior commentary, all else equal, based on what you see today, are the initiatives in place to offset the structurally higher costs in this next cycle? So just putting a finer point on getting back to margins in the last cycle or actually exceeding those? Because in the past, the commentary seemed pretty bullish for doing a little bit better than what you've done on your historical margins.

Thank you for your question, Daniel. I'd like to emphasize that our primary focus right now is achieving sustained profitability. We reported results within our guidance this quarter, despite facing very challenging operational conditions. We anticipate achieving profitability as we head into the third quarter, and our main goal is to remain profitable. While the environment is still uncertain as we recover from the pandemic, we see that demand has returned strongly. However, we are facing constraints regarding aircraft deliveries and staffing, including pilots. We believe that we will be able to enhance our revenue performance and improve asset utilization, which looks promising for the future. That said, I am cautious about predicting specific margins for 2023. I'll stop here unless anyone else has something to add.

No. But I would say, yeah, that is our goal and that we know where we were in 2019. We know what those pre-tax EBITDA margins are. Getting the asset utilization back up where the demand environment is, would get us back to those levels. So, it is all about moving forward, getting the asset utilization where it needs to be to get the aircraft back up in the air, and we can reach those levels for sure.

And Dan, let me continue from where Derek left off. If you consider American Airlines before the pandemic, we had a larger capacity than many of our competitors, but our nominal PRASM was lower than that of the industry leader at the time. During the pandemic, we made several changes. This is really related to Robert's comments. We not only simplified our fleet but also focused our operations in locations where we can provide significant consumer value, such as the Sunbelt, North Carolina, Los Angeles, and Heathrow. We made strong efforts in partnerships to enhance value where organic growth was not feasible. Now, we are positioned to operate 5% to 15% more capacity than in 2019 while maintaining PRASMs that are quite similar. When we talk about increasing asset utilization, it is significant. However, it's important to note that this does not mean reverting to our 2019 operations. We will not return to flying at a loss for strategic reasons or complicate our operations. Instead, we have identified more unique origins and destinations, which will translate into real revenue for the airline. This foundation allows for further growth opportunities.

Yeah, understood. Thanks for that. I have a question about the regional operation. What do you expect it to look like in one to three years? Will it be the same size or smaller? Also, what percentage of the regional network is currently competing against mainline aircraft, and where would you like it to be? Is that an opportunity for driving margin expansion?

Daniel, it's absolutely been an opportunity to drive margin expansion. First goal is to just get all the aircraft that we have back up and flying. And so our fleet is about 600 regional aircraft. Love to get those back up. Over time, there will be changes in the mix to that fleet, but it will be based on how effective it supports our hubs and the rest of the mainline operation too. The first goal and one that I think will take the next couple of years for sure is to get to all 600 back up and flying.

Hi. Good morning, guys and thank you for the time. I echo Jamie's comments. I don't know if you guys were screening for airline analysts going into Heathrow, but my experience on American was pretty good.

All right. That’s I’d like to hear.

Maybe just talking to your other large hubs. If you could talk about unit revenue in JFK and LAX, you mentioned in your prepared remarks it's outperforming the total system. Can you maybe provide some color on that? Is that relative to 2019 or on an absolute unit revenue basis across the system?

Thanks for the question. This is Vasu. The answer is both. To address Robert's point, this is in comparison to our system overall. Historically, in New York, particularly at JFK and in L.A., American Airlines usually generated unit revenues that were approximately 90% of the industry's domestic system. Now, however, we are starting to achieve unit revenues that align more closely with the domestic system in both New York and Los Angeles. This is significant for us because our largest hubs, where we have substantial capacity, are now producing unit revenues that provide a real competitive advantage. This allows us to serve these markets with higher unit revenues as they materialize. We are closely monitoring this development. What is most encouraging about New York and L.A. is that this improvement is not solely due to cutting flights or boosting RASM. We have enhanced the consumer experience. In New York, for instance, our Northeast Alliance with JetBlue has restored more capacity faster than anyone else. We have introduced new routes and have re-entered the market with American Airlines in areas like India, which would have seemed unlikely a couple of years ago, and consumers are responding positively. We are capturing originating market share through this partnership and with our West Coast collaboration with Alaska, taking share from our larger network competitors. Overall, we are optimistic, as this consumer focus is positively impacting our unit revenue results, which is the most encouraging part.

Great. Thank you for that color, Vasu. And then, maybe, just following up on the regional questions. Is there any way to think about the current impact of subdued regional operations on the mainline operation and the traffic you're missing out on?

I'm sorry, could you repeat the question, Sheila? We missed that part here.

Can you provide any insights on how much traffic is being lost due to the weak performance in regional operations?

Because of subdued regional operations, got it. It's really difficult to do. We've actually taken a couple of cuts at it because the reality is that this is such an unprecedented time in the industry where there are so many constraints on the infrastructure, so many issues with aircraft deliveries, resources, things like that. But it's hard to really isolate what effect it is. In fact, when we look at it, what we find is through the pandemic, we've been able to sustain a lot more of the connectivity of our system through the regional jets. And those places where we've sustained the connectivity are really what's driving our yield growth. It's bringing in new customers that are not in large coastal metro areas. So it's hard to kind of isolate it just because there are so many variables at play, but for Robert and Derek's commentary, the regional jet, especially the wholly-owned regional jet is really key to helping our mainline fleet grow and recover its utilization.

Hey good morning, everyone. Vasu, just a question on your 3Q revenue guide. When I look at other airlines, I think you guys are now the one that's not pointing to a sequential acceleration in total revenue growth 2Q to 3Q. Why do you think that is? And are you just trying to be a little bit more conservative given what's going on out there in the macro environment right now?

I'm really encouraged by the demand for our product, which has been historically high and continues to be so. The way demand is returning is both motivating and somewhat different from previous trends. When comparing the second quarter to the third quarter, there's primarily a change in our production capacity. We're taking a more cautious approach in sizing our airlines and resources, which significantly affects our strategy. Additionally, we see a broad range in unit revenue production due to the positive trends we're observing. However, we've learned in recent quarters that conditions can change rapidly. Currently, we feel optimistic, and there's nothing that gives us reason to doubt this optimism.

Okay, understood. I've been thinking about the operational challenges across the industry. Do you believe this will affect corporate travel willingness come the fall? Have you or Robert discussed this with your major managed corporate clients who might have concerns about operational reliability? I'm curious about your thoughts on it. Thank you.

I'll start, and others can chime in as well. One observation is that large corporations are beginning to adopt different tools than those they used previously. Before the pandemic, if companies wanted to manage travel behavior, they could implement detailed travel policies and hire various consultants to assist. However, during the pandemic, video conferencing became standard, and workplace flexibility increased. Now, we notice that many corporations may not be enforcing their travel policies as strictly as they did in the past, allowing for greater flexibility. Customers sometimes opt for services outside their travel policy and may spend more, yet they might also be traveling less due to concerns about issues, for instance, at London Heathrow. Overall, we remain optimistic about what we're observing, but the way companies manage travel moving forward is likely to differ significantly from before. Our data shows a decrease in the number of people strictly following travel policies, and it’s unclear how this might change. However, this doesn't have to be viewed negatively, as we continue to see demand and are hopeful about future trends, even if they manifest differently than before.

Hey, Andrew. I'll just add one other point. Travel is returning in record numbers, which is fantastic. We have set very high standards for ourselves regarding operational reliability. We start each day striving to get every passenger on every flight to their destination on time. However, if you examine the second quarter, we're not far off in overall operating performance compared to our historical data. In fact, American performed better in the second quarter than in 2019. When looking back at past quarters, we're not significantly different from other periods either. It's important to be mindful of the operating conditions we face. Unfortunately, we cannot control the extreme weather that impacted 27 out of 30 days at several of our hubs, leading to flight cancellations that affect operations daily. When we refer to weather issues, it's crucial to understand that it's about safety. Whether it's related to air traffic control programs or severe weather, we prioritize the safety of our staff and customers, as well as those on the ground. When ramps close, it's due to weather risks, which we always consider. We expect some seasonal variability in our operations. Everyone is putting in a strong effort, including our government partners and airlines. The rest of the world will catch up to the progress being made in the United States, which is performing well compared to other countries.

Good morning, everybody and thanks very much for taking my question. I just wanted to go back to something you mentioned earlier about investments that you've been making that have affected your near-term cost. I think people are pretty aware that you guys are making a big effort on the pilot side, and that makes sense. But could you elaborate maybe outside of crew, whether you're making digital type investments or other processes that can improve your throughput? Thank you.

Hi. We're very enthusiastic about the various digital improvements we've been implementing. I'll break them down into our primary objectives of operational reliability and profitability. On the reliability front, we've made significant strides in how we manage irregular operations to better coordinate our crews. Additionally, we've placed a greater emphasis on how we handle operations at larger airports like Dallas and Charlotte. By improving this aspect, we can reduce taxi times, which saves fuel, enhances turnaround time, and optimizes our asset usage. We've also developed algorithms to assist us, particularly in markets like Charlotte, where we face sudden thunderstorms. This allows us to adjust operations more effectively rather than resorting to mass cancellations. While this may lead to slight flight delays, it ensures that flights still arrive compared to our past method. On the profitability side, we've introduced new products like the option to upgrade to a higher cabin, which provides us more pricing flexibility and purchase options. We've made numerous advancements in our overbooking technology. In a landscape where change fees are eliminated, we face increased volatility from cancellations, closing cancellations, and no-shows, necessitating a more refined overbooking strategy. You've heard Vasu emphasize the significance of our partnerships and how they contribute to revenue generation. We aim to create a smoother experience for customers traveling on our airline, for example, with JetBlue or Alaska. Finally, Vasu has also mentioned our loyalty program, which we’ve leveraged to boost our co-brand spending; enrollments are up, and customer engagement with the program is significantly increasing. Those are just a few initiatives we're currently pursuing.

Thank you. And I will now turn the call back over to Mr. Isom for any closing remarks.

Thank you so much. I am so proud of our team after fighting through this global pandemic for the last 2.5 years battling every step of the way, persevering, caring for customers and each other every single day. We set a couple of goals. One is to return to profitability and to run the most reliable airline we could. I am so pleased to report that we have returned to profitability. We intend to stay that way. I know that our team is intent on making sure that we produce the kind of products that we're all proud of and that our customers want to fly. Thank you for listening in, and we'll talk to you next quarter.

Ladies and gentlemen, that does conclude our conference for today. Thank you for your participation. You may now disconnect. Good day.