American Airlines Group Inc. Q3 FY2022 Earnings Call

Thank you for standing by, and welcome to American Airlines Group's Third Quarter 2022 Earnings Call. Today's call is being recorded. At this time, all participants are in a listen-only mode. After the speaker presentation there will be a question-and-answer session. Operator instructions. And now I'd like to turn the call over to your moderator, Head of Investor Relations, Mr. Scott Long. Please go ahead.

Thanks, Latif. Good morning, everyone, and welcome to the American Airlines Group third quarter 2022 earnings conference call. On the call this morning, we have our CEO, Robert Isom; and our Vice Chair and CFO, Derek Kerr. A number of our other senior executives are also on the call for the Q&A session. Robert will start the call this morning with an overview of the third quarter, and 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. Operator instructions. 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 that was issued this morning as well as our Form 10-Q for the quarter ended September 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 in the Investor Relations section of our website. A webcast of this call will also be archived on our website. And the information we're giving you on this 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. And with that, I'll turn the call over to our CEO, Robert Isom.

Thanks, Scott. Good morning, everybody. Thanks for joining us. This morning, American reported a third quarter GAAP net income of $483 million. And excluding net special items, a third quarter net income of $478 million. We produced revenues of $13.5 billion, which sets a new record for any quarter in the history of American Airlines. When I took on the CEO role in March, I told you American was going to do two things this year: run a reliable operation and return to profitability. The second is a bit longer than we would have liked to get where we want on the operations side, but we're pleased with how the airline is performing today, and we know we're on the right trajectory. As far as profitability, we've now delivered two profitable quarters in a row and we're forecasting a profitable fourth quarter with continued strength in demand. We could not have made either of those commitments or ensure we deliver that item if it weren't for the hard work of the American Airlines team. They do a phenomenal job every day taking care of our customers and each other. Their teamwork, resiliency, and determination allow us to continue our focus of running a reliable operation and sustaining profitability. We keep that focus because in our business, reliability is everything. It's the foundation of the service we provide our customers. A predictable solid operation changes the entire work experience of our team. Reliability also enables our long-term profitability and achieving sustained profitability is how we will meet our debt reduction targets and continue to invest in our team and deliver the network products and services our customers want. With that in mind, let's talk more about the third quarter specifically. Our record quarterly revenue of $13.5 billion is a 13% increase over 2019. Notably, we achieved this record revenue while flying nearly 10% less capacity than we did in the third quarter of 2019. And we're pleased to have exceeded our initial guidance on both revenue and pretax margin in the third quarter despite constraints still facing American and the rest of the industry. American's third quarter results, including our record revenue performance are significant, considering the macroeconomic uncertainty facing so many people. Demand remains strong, and it's clear that our customers in the U.S. and other parts of the world continue to value air travel and the ability to reconnect post pandemic. Importantly, many of the demand trends we saw emerge during the pandemic are becoming more consistent and shaping our commercial focus for 2023 and beyond. Leisure and business revenue remain incredibly strong, again, surpassing 2019 levels in the third quarter. Demand for small and medium-sized businesses and customers traveling for a combination of business and leisure continue to outpace the recovery of managed corporate travel. As that revenue continues to build, it will be additive to an already strong base of business demand, led by small and medium business and blended trips. That as well as the return of long-haul international travel leaves us very bullish about overall demand even in an uncertain economic environment. The changing nature of demand provides an opportunity to rework our commercial offerings to better meet the needs of all customers and create a more resilient and profitable business. We continue to develop the most comprehensive airline network in the world. As we have shared on previous calls, over the past few years, we have made the decision to greatly simplify our fleet and network focusing our flying on where we can create outsized customer value and working with our partners to create choices and value in areas where it's cost prohibitive to do so ourselves. This means prioritizing the flying that can best generate a return today, not bringing back flying that was only marginally profitable before the pandemic or that we had hoped would one day generate a return. It also means using our partners to fill in the gaps and deliver a seamless network to our customers. That work continues, particularly with our Northeast alliance with JetBlue, our West Coast international alliance with Alaska and our Atlantic and Pacific joint businesses. To better match our product offering to customers and network, we recently announced enhancements to our long-haul fleet that will give American an unrivaled premium experience among U.S. carriers. Starting in 2024, customers will see new Flagship Suite seats on our Boeing 777-300ER aircraft as well as on our new Boeing 787-9 and Airbus A321XLR deliveries. With these new interiors, premium seating on our long-haul aircraft will grow by more than 45% by 2026. We're working to give our customers better choices and more access to the world's largest and best travel rewards program, and that's AAdvantage. It's clear that customers want more when they shop for travel, more choices, more ways to earn and use miles and more incentives to earn miles even when they don't travel. So turning to our operations. As I mentioned at the outset, operating reliably is critical to everything we do. We have the youngest fleet and the best network and partners in the industry, but we can't take full advantage of those assets if we aren't running reliably. That's why we continue to invest in our operation with additional resources and new technology, and those efforts are paying off. Despite a challenging operating environment with hurricanes in Florida and the Caribbean, and flooding in the Dallas Fort Worth region, we restored our operating reliability to pre-pandemic levels in the third quarter. And we did it while flying a schedule that was 25% larger than our closest competitor. We have delivered record on-time arrival rate and completion factor so far in October and expect to carry that momentum through the upcoming holiday season and beyond. Hurricane Fiona and Ian were devastating for so many, including the communities we serve in the places our team and customers call home. The American Airlines team stepped up in amazing ways to take care of our customers and each other during the very challenging circumstances. Through our AAdvantage program and the partnership with the Red Cross, almost $4 million has been raised to support victims of the storms, and American continues to support our team through the American Airlines Family Fund. The storms moved through quickly, but they had an outsized impact on American given the size of our operation in Florida. We had to cancel more than 1,500 flights the last four days of September, given the impact of Hurricane Ian. And we estimate right now that these storms reduced revenue by about $40 million. As we close out the year and look to the first quarter, we continue to size the airline for the resources we have available and the operating conditions we face. This approach and our strong operational performance in September and so far in October give us a lot of confidence as we head into the busy travel holiday season. In closing, we remain very encouraged by the continued strength in demand and the trends we're seeing across the business. American has the best team and most efficient assets in the industry, and we have built an airline that can be successful in many different demand and economic environments. Looking ahead, we're focused on investing in our operations, our network, and our partnerships to ensure we can continue to deliver for our customers. And of course, we'll do so while remaining focused on achieving sustained profitability and reducing our debt. And with that, I'll hand it over to Derek.

Thank you, Robert, and good morning, everyone. I want to start by thanking the American Airlines team for their efforts during the third quarter. Our airline success during the quarter was only possible because of the hard work of our team during a challenging summer. This morning, we reported a third quarter GAAP net income of $483 million, excluding net special items, we reported a net income of $478 million, both equate to earnings of $0.69 per diluted share. Since the beginning of the year, we have been focused on returning the airline to sustained profitability. We are pleased that our third quarter results build on that progress we made in the second quarter. We beat the high end of our initial earnings expectations due to the continuation of the strong demand environment. The third quarter was our highest quarterly revenue in company history, beating the second quarter of this year. The domestic and short-haul international entities continue to lead the revenue recovery, and we expect further improvement in long-haul international as we continue to grow back our capacity. The investments we have made to renew and simplify our fleet position us well for the future. We continue to operate the youngest, most fuel-efficient fleet among U.S. network carriers. In August, we began taking deliveries of new 787-8 aircraft from Boeing for the first time in 15 months. In the third quarter, we took delivery of four 787-8s, and we expect to receive five the remainder of this year and four in the first half of 2023. Our Boeing 787-9s are still expected to be delivered starting in 2024. During the quarter, we also took delivery of three A321neos and reactivated six 737-8s from long-term storage. In the fourth quarter, we now expect to take delivery of eight A320neos, three E175s, in addition to the five 787-8s I mentioned previously. Based on our latest guidance from Boeing, we now expect to take delivery of 19 737 MAX 8s in 2023 compared to the 27 deliveries that we were previously expected. This change in timing will shift planned CapEx out of 2023 into future years. Our 2023 aircraft CapEx net of leases is now expected to be $1.6 billion. We ended the third quarter with $14.3 billion of total available liquidity, which is $700 million higher than our initial third quarter forecast due to continued forward booking strength seen throughout the quarter. This level of liquidity is more than double the amount we had at the year-end of 2019. Reducing total debt continues to be a top priority, and we remain on track with our target of reducing overall debt levels by $15 billion by the end of 2025. As of the end of the third quarter, we have reduced total debt by $5.6 billion versus the 2021 peak. And as I mentioned last quarter, we expect further benefit from a reduction in our pension liability that will be reflected at the end of the year. In the fourth quarter, we expect to make approximately $540 million of scheduled debt and finance lease payments freeing up additional collateral in the process. We maintained our elevated liquidity position throughout the third quarter and continue to balance appropriate target liquidity levels with the expected recovery, debt reduction opportunities and investment in the business. We'll continue to target $10 billion to $12 billion in total liquidity in the medium term and intend to utilize excess liquidity above that level to accelerate our deleveraging initiative at the appropriate time. Looking forward, our next term loan maturity is our $1.2 billion term loan, which does not mature until December of 2023. Looking to the fourth quarter, we expect to produce an operating margin of between 5.5% and 7.5% based on the current demand and fuel price forecast. We currently expect to produce total revenues that are 11% to 13% higher than the fourth quarter of 2019 on capacity that is 5% to 7% lower than 2019 levels. This continued strength in demand is expected to result in total revenue per available seat mile that is 18% to 20% higher than 2019. Our fourth quarter CASM, excluding fuel and net special items, is expected to be up between 8% and 10% compared to 2019. These higher unit costs versus 2019 are primarily driven by inflationary pressure and lower relative asset utilization. Our current forecast for the fourth quarter assumes fuel between $3.51 and $3.56, which is approximately 70% higher than 2019 levels. Finally, while we are still in the process of building our 2023 operating plans, I'd like to share a few thoughts on our approach. We continue to believe that 2023 demand for air travel will be robust. We currently see no signs of demand slowing as we move into the new year. But as always, we will continue to keep a close eye on the macroeconomic environment and will adjust these plans, if necessary. Importantly, we will continue to size the airline for the resources we have with a focus on reliability and profitability. As we move into 2023, the constraints facing our business today will remain. Those constraints are slower than planned aircraft deliveries and lower utilization of our fleet largely driven by regional pilot constraints. Therefore, based on our preliminary plans, we expect our 2023 capacity will be between 95% and 100% of 2019 levels. We believe this approach to capacity will produce strong profitability and free cash flow, reliable operating performance and allow appropriate levels of flexibility in this very fluid environment. In conclusion, demand for our product is strong and we remain nimble in our planning and execution to ensure we optimize for the environment we're operating in. As we close out 2022 and move into 2023, we're confident in our ability to continue to deliver on our stated objectives of operational reliability and sustained profitability because of our world-class network, efficient fleet and incredible team. With that, I will open up the line for analyst questions.

Thank you. Operator instructions. Our first question comes from the line of David Vernon of Bernstein. Your line is open.

Thanks for the time. I was wondering maybe if you could talk a little bit about how the fleet changes you guys have made through the pandemic are sort of impacting operational performance. Obviously, it's going to have an impact on reliability. But also when you think about sort of scheduling the network, maybe getting better utilization, maybe taking some peaks out of the schedule being unconstrained by the directionality of some of the equipment constraints that are in there. Can you just talk a little bit about how those fleet changes have impacted overall productivity and the early signs there?

Hey David, thanks for the question. And we're really proud of what we were able to do over the pandemic. A bunch of different projects went into place. You know the story about rationalizing the fleet, getting down really from a mainline perspective to two types of narrowbodies and two types of widebodies. We did the same thing in our regional fleet as well. But during the pandemic as well, we accelerated our Cabin Consistency project, that Oasis project where we were able to upsize the 737 and then also make sure that our A320 family were consistent in terms of seating as well. All that work is done. So it's freed up a tremendous amount of resources. But then just in terms of operating, think about everything from not having to carry as many spare parts in inventory to pilot training and what's required from going from a first officer on one equipment type to another and the simulators that are required for that, the training that's required for that. So look, as we get back to full utilization of our resources that's going to be something that I think pays dividends. You'll start to see it as we get back really to full utilization. And I think that that's something that plays well long into the future. We see it already. I know it's producing better reliability. It's easier for our team. And from a revenue perspective, I'll hand it off to Vasu. I can tell you, it's making his job easier.

Yes. I'll pick up right there, David. I think it's a great question. As we went through the pandemic, a major principle in how we've been planning the airline is to build it in a way where it is as nimble and responsive to demand and is as resilient in the face of crisis. And as you look at that over time, really the wide-body fleet for American Airlines was a strange kind of liability because that's the most volatile part of our business. It's a part of our business that our customers have just valued a lot less than our short-haul network. And so for us, as you look out there, we took jets out. So look at the fourth quarter schedule, we are a 15% smaller long-haul airline. But very importantly, what we've also done right is when we have such a big fleet of narrowbodies, we have a lot more flexibility in how we send them. So we've changed our capacity mix pretty materially from pre-pandemic. As we were entering the fourth quarter in 2019, we were about a 70/30 short-haul, long-haul airline. As we enter the fourth quarter now, we're a lot closer to an 80/20 short-haul, long-haul airline. And that airline that we have is something which is a lot more dynamic. There are fewer fleet types like Robert said; if demand changes, we're much more able to adjust. And quite frankly, the short-haul business is and has been for the last 20 years a much more durable part of it. And frankly, you see it right now. Right now, long-haul is doing well. At some point in time, it will come down, but short-haul remains pretty consistently strong across the business cycle.

And as you think about that plan to get back to 95% to 100% next year, is that going to get you the full benefit of utilizing the new fleet? Or are we still going to be carrying some additional sort of productivity headwinds from training or resourcing or just underutilization from an hours per aircraft per day kind of thing?

David, I'll start. Derek can chime in here, too. It's a good question, but we look at it as upside for the airline. We know that we can find more out of the assets that we have. There are constraints out there, notably pilot constraints, both for the regional side and just the massive amount of training that we have to do on the mainline side. Those constraints are going to be out there. Over time, they'll break free. But we're confident that we can actually get more utilization out of the current fleet to actually get us beyond flying at 100% of 2019 levels. And that's where I think the cost story as the airline gets really interesting. But it's going to take a little bit of time to get to that point.

David, I'll add, it's a good question. There are constraints, notably pilots and training. Over time, those will be worked through. We're confident we can get more utilization out of the current fleet and potentially fly beyond 100% of 2019 levels, but it will take some time.

All right, thanks a lot for your time guys.

Thank you. Our next question comes from the line of Savanthi Syth of Raymond James. Your line is open, Savanthi Syth.

Hey, good morning everyone. Could you please talk a little bit more on the hiring and kind of training side on the mainline, where you are on that and kind of expectations as you head into 2023?

Sure, Savanthi. I appreciate the question. Look, we're hiring more pilots this year than we ever have in our history in a given year. So we're looking at hiring almost 2,000 pilots. We're on track to actually accomplish that from a mainline perspective. So I feel really great about that. But let's face it. Training that many pilots is something we've never done before coming out of the pandemic. We've had to make sure that resources are all in the right spot whether that's additional simulators, resources like that or even things like instructors. So that's all working its way through, and we feel very confident that over time, our pilot pipeline for the mainline is very strong and our training resources are absolutely going to match the needs that we have going forward. The regional side of the business is a little bit different. We didn't hire — and let's face it, we didn't hire for two years during the pandemic at all. And then not only that, people didn't come into the business. And so we've got to work our way through that. You've got a supply issue that I think is coming back online. I feel really confident about it. We're facilitating that through things like our cadet program and creating financing vehicles for people that want to get into the business. That's all going well. But then the other issue is when you run short, you actually have issues of getting pilots from the right seat to the left seat and there are hours requirements that you have to fulfill. We're working our way through that. That's going to take a little bit longer in my opinion. That's maybe two to three years to work out versus the mainline side, which I think is something from a training perspective we really get fully caught up over the course of the next year.

That's helpful. If I might, just a following up on that. So I appreciate the thoughts on where capacity could be next year. Any way you could help us think about the cost side of things and how much of the headwinds that you're seeing today, we might see kind of go away as you kind of get through next year?

Well, Savanthi, we're still going through our planning process. So we gave the guide for the ASMs, but we're not ready to guide costs yet. We will in the January call. We're working through our budget. We're in that today. So the CASM will depend on what we fly, but we will go through that on the January call.

Understood, thank you.

Thank you. Our next question comes from the line of Jamie Baker of JPMorgan. Jamie Baker, your line is open.

Good morning everybody. Two quick questions for Derek and then a follow-up for Vasu. Derek, why the pivot from pretax to operating margin guidance? And second, what's the increase in interest expense year-on-year at the current forward curve for your floating rate debt?

Okay. Just no reason for the pivot. I mean we're just being consistent with the rest of the airlines from an operating perspective. That's what we're focusing on. And then on the interest rate, our cost of debt has probably gone from about 4% to 5% and our fixed-floating is 70-30. So as we look into next year, our interest expense — this quarter was around $494 million. So that goes up in the fourth quarter to about $530 million. So it's probably about $40 million from the third to fourth quarter on an interest expense basis. But that's totally offset right now with the cash levels we have on interest income. So it was offset in the third quarter; interest income depends on where cash is in the fourth quarter. And you can see that our guide for non-op is pretty even quarter-over-quarter.

Yes, okay. That's why — I have to appreciate that. So Vasu, as I continue to think through how American needs to adapt to new travel patterns. And look, maybe you don't aside from just shifting some capacity to certain days of the week, maybe Thanksgiving return peak shifts a bit. But I keep thinking there's more that can be done: fare fences, promotions, AAdvantage. Just to better capture these new travel patterns out there or is it just as simple as adjusting the dayality of schedules? Not sure if dayality is an American term, but I trust you know what I mean.

I think you just made a term, Jamie. That's fine. Keep going. I think it's a great question. And let me start with some context setting for just how indeed the world has changed. First of all, we are in general really encouraged by what is happening with aggregate demand. As we say, the demand for travel and for air travel, in particular has never been higher and remains strong in the future periods. But the shape of that, the composition has changed a lot. Now we're in a place for the quarter where 45% of our revenue came from blended trips, about 30% from discretionary or what we historically called leisure trips. And the remaining 25% from nondiscretionary that we've historically called business trips. Importantly, within business, about 17 to 20 points of that is coming actually from noncontracted unmanaged businesses. The remaining kind of five to eight points are from contracted corporations. That's meaningfully small, call it four to five points smaller than historic. And that is the thing that is actually really encouraging for us for a couple of reasons. That big category of blended demand, which is growing. First and foremost, that unmanaged business is coming in at yield values where their gross yields are similar to the corporate contracted transactions that are not there. But very importantly, their net yields, after their cost of sale is actually very often higher than what we spilled off. But two, and kind of more directly related to your question, what we find is that that indeed, this blended demand uses our airline network in a very economical way. Almost half of that demand is using O&D markets in our system where American's network is uniquely advantaged. But additionally, we've seen across our system, not just for blended demand, two points of traffic shift from what we'll call the peak business periods in the day — pre-0800 and post-1600 — and into the body of the day, the 0800 to 1600 window. So if you think about that, historically, we've done a lot to kind of peak our schedules for the ends of the day, but now we're seeing a lot of really high-yielding demand in the places where it's most economical to frankly go and run the airline. And that takes me to the third point, which is where you're starting to go. As we start to segment, and we've done a lot of this, when you look at the transaction and the customer behind it, what we're finding is that a customer who has a blended trip in their profile is twice as likely to enroll in the AAdvantage program. They are three times more likely to sign up for one of our co-branded credit cards if they don't already have it. Those who have a credit card spend 40% more than a typical business customer. And these customers are overwhelmingly going to aa.com because it's the only place where you can go and price and shop for a blended trip. So that is very much influencing how we're thinking in a couple of meaningful ways. First and foremost, the value that we can deliver to these customers through our loyalty program and our currency partnerships with people such as Citi are of paramount importance to our customers, and therefore to us. And then there's a lot about the selling and distribution model that the airlines have operated under, certainly that we've operated under, that warrant some change so we can better meet customer demand.

That's super helpful. My risk is acing the right thing down at both the type and I hadn't thought about the loyalty angle. So thank you very much for that. I appreciate it.

Thank you. Our next question comes from the line of Duane Pfennigwerth of Evercore ISI. Duane Pfennigwerth your line is open.

Thank you. And my compliments on that pronunciation, better than many earnings calls. On the 95% to 100% for next year, I wanted to ask you how that might compare to a theoretical upper limit. How much of this is conservatism just given fuel and macro uncertainty versus just your modeling of the staffing constraints. So if you really wanted to step on the gas, if the environment warranted, how much higher could you push than that 100%?

Hey Duane, thanks for the question. Look, for us right now, we're going to size the airline for the resources that we have and the demand environment that we face. There's a lot of variability in just about everything that we deal with right now. But the thing that I think Vasu will tell you, Derek and our finance team will tell you, the best thing we could do is make sure that we have a predictable, stable airline, something that we can point to in the future. That's what we're trying to do, given all the constraints that we face right now. So from the perspective of what is a limiting factor, we probably could try to fly a little bit more. We've got pilot constraints that are going to take a while to work their way through. Notably, we talked about what's happening on the regional side of things. So in terms of an upper bound, I don't have a number there. I don't know if we've actually gone out and calculated the max level.

No, Duane, as we talked about on the last call, we do have some unsupportable aircraft at this point in time. As things change on the regional side, it's all dependent on pilot hiring and how much the mainline hires from the regionals. So we're just trying to be prudent in what we do as we saw in the summer; making some of those assumptions was not easy. If there is more capability for us to fly from a regional and a mainline perspective because those constraints fall, then we'll be able to fly more with the fleet that we have. So is that a couple of percent? Probably. If we flew everything, we could get somewhere in the 5% to 10% range from the fleet that we have. But I think those constraints are going to be there. As Robert said, the regional constraints are going to be there for a longer period of time. We're working through them, and hopefully, there's other options that we have to bring that flying back up.

That's helpful perspective. And then just for a quick follow-up on ops. Can you quantify the savings or the assumed savings from running a better operation in your 4Q guide? And it's an American question, frankly, it's an industry question. What have we learned or institutionalized from this summer that gives you confidence that these better ops will sustain? Maybe in fourth quarter, it's just less peak, it's fewer ASMs, maybe that's the driver and the confidence. But if you can help us understand what's been institutionalized from this summer. That would be helpful.

Duane, that's something we talk a lot about. We talk about utilization and getting more out of it, but there's always an offset to that utilization with running an airline that is potentially less reliable. So what we've done right now is we've taken a look at, given that the pandemic brought so much variability in just about every input to the business — everything from partners at airports to aerospace limitations to Boeing and Airbus delivering aircraft, our pilots and flight attendants — what we're trying to do is build in at least a little buffer in a number of areas right now. And that is absolutely something that we're carrying into the fourth quarter. Where does it show up? It shows up in higher reserve levels for pilots and flight attendants. It shows up in terms of maybe not running even some of the aircraft that we could have. It shows up in terms of making sure that we're taking into account restrictions that we have in the airports and with aerospace as well. So we're putting that all in. My hope is that as the airline gets up to speed and our other partners and vendors get up to speed, that's something that we can slowly take a look at. But to the point that you brought up, this airline, American Airlines, and the industry as a whole, we need to get back to reliability levels that we had pre-pandemic and even higher. That's the focus, and you're going to see that in terms of putting in degrees of safety factor and making sure that we fly the airline appropriate for demand and operating conditions.

Okay. Thank you very much.

Thank you. Our next question comes from the line of Michael Linenberg of Deutsche Bank. Your line is open, Michael Linenberg.

Yes, good morning everyone. I want to touch on this as a follow-on to Jamie's question about structural change. Robert, you talked about 45% more premium seating in your fleet. When I look at some of the numbers, it looks like on the 787-9 and 777-300ER premium seats are going up by a lot. I'm just thinking this feels like a bet and maybe more of a secular shift to have that much premium seating. What is the potential downside risk and how do you think about that? Also it looks like we're going to see retirement of first class on the 777s. Is that right?

Thanks Mike, for the question. I'll answer your second one first. Yes, first class will not exist on the 777 or, for that matter, at American Airlines for the simple reason that our customers aren't buying it. The quality of business class has improved so much and, frankly, by removing first class, we can provide more business class seats, which is what our customers most want and are most willing to pay for. To your first question, it starts with the structure of the network now versus pre-pandemic. We've run a long-haul business that is about 15% smaller than pre-COVID. Furthermore, of that, about 70% of our capacity is in our core hubs. What's not there is really in some international markets that are very premium-heavy — Heathrow, long-haul South America, eventually Tokyo — or in very long-haul markets where, through the strength of our partnerships, we're able to make a larger premium cabin work. Because of that, the airline has arced itself to a place where there's a lot more demand for premium seats. The long-haul profitability for American Airlines is better than what it was pre-2019 on a margin basis in some cases on an absolute basis. It's being driven not just by the premium cabin but by blended customer demand. It used to be that large contracted corporations were as much as 50% of what filled those seats. Now between 40% and 50% of that is blended demand and the rest is leisure demand willing to pay more for the quality of business class. All of that is coming at higher net yield values than before. So we're really encouraged about what the future holds. That's a lot of context behind some of the bets we're making with the long-haul configuration.

Very helpful, Vasu. If I can sneak in one other. On the regional side you seem to be adding more regional service, including 50-seat aircraft. Historically those markets have been high yield. But with rising regional labor and other input costs, how does that square? Is the offset that you have a unique network position among carriers that makes it work?

Vasu, let me start and then you jump in. First off, in terms of 50-seat aircraft, we've reduced the number we had in place over time. We have a network ideally suited to service many regional markets, and so 50-seat aircraft will remain part of our system where it makes sense. Right now the big focus is getting the aircraft we have back flying. It's not a doubling down for the sake of it; it's about serving markets that made sense before and still make sense. Vasu, go ahead.

Yes, I'll add that we're encouraged because when we moved from the summer into September, historically a weaker month, we found that in 2019 only about 20% to 25% of our revenue was coming from O&D markets where our network was advantaged. In September of this year it was between 30% to 33%. We make 30% more O&Ds in markets where we're advantaged — either the only carrier serving it or with the most convenient schedule. For us, the way our network is structured, we are the best at serving many small cities of the Western Hemisphere and connecting customers to the global marketplace. Others are better at long-haul to Asia or other points. There are unique things to American where we have a lot of value across equipment types from the smallest 50-seat RJs to a 200-seat narrowbody, whereas others may focus more on multiple flavors of a 300-seat widebody.

Mike, the only thing I would add is we have three wholly owned regionals; Piedmont will fly 50-seat aircraft — that's what they have today. We're growing those back for sure. Boeing is getting out of some 50-seat types over time; we'll fly some next year as they move. You're probably referring to the Air Wisconsin transaction. In a market with pilot supply difficulty, Air Wisconsin has a great network and pilot supply, and it's an opportunistic transaction.

Great. Thanks for the explanation everyone.

Thank you. Our next question comes from the line of Conor Cunningham of Melius Research. Your line is open, Conor Cunningham.

Hey everyone. Thanks for the time. Just on the pilot hiring standpoint. I don't think you actually gave a number on 2023. Is there a stated goal from a pilot standpoint? The only reason I ask is your headcount, I think is down 2%, you're talking about capacity being flat to down 5%. So basically, are you there from a hiring perspective or what are we talking about into next year?

Conor, we're going to have the schoolhouse full all next year. So my assumption is if we hired 2,000 this year, we'll be hiring the same amount next year as we bring back the mainline fleet. So I would expect the schoolhouse to be full and us to train about as many pilots in 2023 as we are in 2022.

And Conor, I'd just add some of that as well is offset by retirements. We still have considerable retirements due to age 65. We're at peak levels. So while we're hiring 2,000, it doesn't mean there's a net incremental 2,000 pilots by any means.

I think we retired somewhere in the neighborhood of 700 to 750 pilots this year. So a lot of that's retirements.

Okay. Thank you. And then the progress being made on profitability is obviously great to see. But I think the question a lot of folks have is just around profitability with new labor deals. I'm not trying to get you to cost that publicly, but how do you think about profitability into 2023? Is it just more of like the demand picture is so much better that we can absorb a lot of the pilot pay increases or labor deals and all that stuff? Any high-level thoughts would be great. Thanks.

I'll start: anything we do with pilots, flight attendants or other team members that we're negotiating with, we do with a mind to taking care of our team and the company. When we think about deals, we'll make sure they fit economically and allow us to make money. I'm confident we can do that. It's in the best interest of our people. We look at travel coming back and how customers are spending. The airline is still smaller than in 2019 and travel remains a relative bargain compared to many other categories. As we get the fleet back up and address constraints, there will be efficiencies from upgauging and incremental utilization. Also, Vasu's points about network and loyalty deepen the relationship with customers and create revenue opportunities through things like co-brand cards. I feel confident we can cover increased labor expenses and still make appropriate margins.

Appreciate it.

Thank you. Our next question comes from Helane Becker of Cowen. Your line is open, Helane Becker.

Thank you. Can you hear me now?

Yes. We can hear you now.

Okay, good. I'm not sure exactly what happened there. One question for clarification. What's the paid load factor in business versus upgrades in business class?

Hey Helane. Off the top of my head I don't have the exact number, but I'll say our paid loads in business are growing as a percentage of what they've been historically, and it changed a lot between July and September. A major part of that is simply changes we've made with our upgrade program. We used to have a lot of different cottage upgrade concepts through different certificates in our loyalty program. We've been simplifying that for customers, digitizing more and offering fairer products. We're now getting to a place where paid percentages are much higher. Historically they could be as low as 60%; now in the domestic system we're closer to something like 80% paid.

Okay. That's very helpful. Thank you. And then if I could follow-up on aircraft deliveries and the schedule. Derek, you talked about fewer deliveries than previously planned for next year. How are you scheduling the airline given uncertainty in deliveries? Are you assuming a lower level of deliveries in your planning?

As we look into 2023, we didn't have a lot of deliveries anyway — probably about 32. We know the four 787-8s are coming in and those dates, so we can plan. The Neos have known dates. For the MAXs, we've worked with Boeing and now expect 19 aircraft instead of 27. We have a delivery schedule we believe Boeing will meet. The uncertainty is more on the regional side. We're being conservative and plan three months out for regionals. We'll put a full-year plan at the level we gave you — 95% to 100% — which assumes the MAX push to 19 aircraft. We can change the schedule every three months if constraints improve.

I'll add that consistent with our principle of making the airline nimble and resilient, network and operations have figured out ways to build what we know and add lines of flying on top of it, whether regional jets or mainline. Instead of building to a fictitious delivery plan, we build to what we have and add incrementally. In a time when many airlines cut capacity, American has been able to add capacity back in published schedules. That approach helps us manage operationally and financially through infrastructure uncertainties.

That's hugely helpful. Thank you very much.

Thank you. Our next question comes from Stephen Trent of Citi. Your line is open, Stephen Trent.

Good morning everybody and thanks very much for squeezing me in. Most of my questions have been answered. I just had one quick question about fleet. Any high-level view what's optimal for American with respect to owning versus leasing versus sale-leaseback, when you consider interest rates and aircraft residual values? We'd love some color on that.

Stephen, we're very happy we did our fleet replacement under rates where we could finance aircraft at the low 3% level. As we look forward, we don't have many aircraft in 2023 so that's good news. We already have five financed of the near-term deliveries. We look at all markets: the WTC market, sale-leaseback, mortgage market. We are getting attractive pricing today. Our focus will be on financing the back half of 2023 deliveries. We're positioned well from an aircraft financing perspective.

That's super helpful. Thanks very much.

Thank you. Our next question comes from Sheila Kahyaoglu of Jefferies. Your line is open.

Maybe if we could talk about revenue trends. Q3 was the first quarter where international passenger revenue outperformed domestic. Any color on how you think about that trend going forward and potentially the impact of U.S. dollar strength?

We mentioned earlier the long-haul business is more volatile than short-haul, but we're encouraged by where things are now. There's demand for the long-haul product and it's taking shape differently than pre-pandemic, often at higher levels. Many markets are still opening up — Japan only recently opened up — so there are inefficiencies that remain, which can be a drag. Over the long run, we're excited. We're still taking 787s and have an order for A321XLRs because we believe long-haul will come back and be beneficial to us.

There's things the country can do to help international recovery. In 2019, 43% of international visitation into the U.S. came from countries where travelers needed a visa. The visa process today can be over a year in some countries like Brazil, Mexico and India. That slows inbound travel and affects not just airline revenue but the $120 billion those visitors spent in the U.S. We are working with the State Department to encourage more efficient visa processing to help unlock international demand.

Thanks. One follow-up on the loyalty program and credit card spend: how are you thinking about the AAdvantage program given many people are getting cards, high spend and accruing lots of miles? How do you balance redemptions and the ability to deliver product that entices continued engagement?

Short answer, yes — we've changed how we view the program. As people blend travel, they enroll more in AAdvantage and spend more on co-brand cards. We made changes like counting credit card spending toward status and that has been well received. Burn begets burn — people need to be able to use their miles. We experimented this summer expanding award redemption availability and saw promising take rates. There's a lot of upside through AA and partner opportunities. Compared to a major competitor who runs about 90% of our airline size, they generate roughly $1 billion more from their co-brand card program. We're focused on growing our strategic partnership with Citi to capture more of that value.

Great. Thank you.

That concludes the analyst Q&A. We will now take questions from the media. Our first media question comes from Alison Sider of the Wall Street Journal. Your line is open.

Thank you. I'm curious, you've been talking about different travel patterns — more blended travel and different types of leisure trips. Do those trends fully offset the loss of managed corporate travel that you're still seeing? If corporate recovery stalls, do the new leisure or blended bookings make up for it?

Absolutely. It has more than offset it. Contracted corporate travel is about 80% recovered, but revenues are at record levels because of blended demand and unmanaged business-related demand coming in at higher yields and attaching to high-margin ancillary products like premium seats and credit cards. Managed corporate hasn't come back fully yet, but so far the other demand has more than made up for it. And as more countries open up and visa inefficiencies are resolved, that can unlock even more demand.

Got it. And what gives you confidence these are permanent shifts and not temporary summer spillover, especially if inflation reduces consumer spending later?

Great question. First, we've been observing this shift for a couple of quarters; it's consistent and meaningful. Second, we see it in customer-level data: blended trip customers who enrolled in AAdvantage in 2022 are producing about 10% higher revenue than 2021-2022 travelers who didn't enroll. Card spend correlates with flying more. Third, airfares in real dollars are still lower than in 2019, so air travel remains a relative bargain. That combination supports the durability of the shift.

Thanks so much.

Thank you. Our next question comes from Leslie Josephs of CNBC. Your line is open.

Good morning everybody. How are you thinking about the AAdvantage program with so many miles out there? Are you concerned about the sheer number of people with lots of miles and whether you can deliver products that entice continued use? And second, in 2023, if you do have the aircraft, do you want to fly more? Or is there a concern that would drive down fares and revenues?

Leslie, burn begets burn — people earning miles should be able to burn them. We're looking at ways to make status more rewarding and allow more opportunities to use miles. We experimented with expanding award availability this summer and found strong customer take rates. We'll announce more in the future. On the second question, Robert can add.

Whether AAdvantage membership growth outpaces our ability to serve members is why we're investing in premium seats, lounges and overall product to better accommodate a broader base. We're creating world-class product — LaGuardia's flagship is an example — and will continue to invest. Regarding flying more in 2023, if constraints weren't there we'd fly more, but our priority is schedule certainty and matching flying to resources like aircraft deliveries and pilot availability so we don't outpace our ability to operate reliably.

Thank you.

Thank you. Our next question comes from Mary Schlangenstein of Bloomberg. Your line is open.

Thanks. Vasu, for a long time the thinking was the domestic market was mature and growth opportunities were abroad. That seems reversed for you. Was that prior view a misreading or has something changed? And on the 80/20 short-haul, long-haul mix, is 20% a base or could it fall further?

The second question: it's unlikely to fall materially lower than 20% going forward; how we build it back remains part of 2023 planning. Regarding the first, North America as an originating market is mature but it's the highest yielding market, and we're seeing more demand and economic growth outside large coastal cities — places like Phoenix, Austin, Oklahoma City — and people want to travel. American connects them to the global marketplace. For many small and medium cities in the Western Hemisphere, we provide unique value. So yes, domestic opportunities remain strong and are a focus.

Thank you.

Thank you. Our next question comes from Kyle Arnold of Dallas News. Your line is open.

Good morning everyone. Can you talk about how the blended travel trend will play into the holidays? Are you seeing shifts earlier in the week or different cadence in winter versus summer?

Hey Kyle. Yes, we do see a day-of-week shift. Beyond the time-of-day shift into the 0800–1600 window, we're seeing growth on Wednesday evenings and Thursday mornings — times that historically had less demand. We expect that not only will Thanksgiving weekend be peak but the days around it may see higher demand. If you look at our Thanksgiving schedule, there's less peak-to-trough variability than in prior years.

I've looked at the worm charts that show booking patterns: bookings are strong compared to 2019. Seat availability will be a key constraint, so you'll see movement in where people can fly based on availability.

Thank you.

Yes, that was our last question.

I'll just close with this: we're pleased with our results. It's been a tough few years, and it's great to report consecutive profitable quarters and look forward with optimism. Demand remains strong and American is in a position of strength because of our network, partnerships and fleet. We're focused on reliability — metrics like aircraft out of service at the start of the morning are at record lows due to our technical operations team — and on reducing debt over time while investing in the business. We're going to keep working hard to deliver profits and reliability for customers, communities and shareholders. Thanks to everyone for joining us this morning.

This concludes today's conference call. Thank you for participating. You may now disconnect.