American Airlines Group Inc. Q2 FY2023 Earnings Call

Thank you for standing by, and welcome to American Airlines Group's Second Quarter 2023 Earnings Call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question-and-answer session. I would now like to hand the call over to Scott Long, Vice President of Investor Relations and Corporate Development. Please go ahead.

Thanks, Scott, and good morning, everyone. The summer is well underway, and the American Airlines team is firing on all cylinders. We continue to build on the strong foundation we have laid over the past year and remain focused on reliability, profitability, accountability, and strengthening our balance sheet. That focus is showing up in our results. Everything we have said we would do at the start of the year, we have done. Our operation is performing at historically strong levels. And this morning, we reported adjusted pre-tax earnings of approximately $1.8 billion for the second quarter. These earnings were well above the high end of our latest EPS guidance range, marking our fifth consecutive quarterly profit. At the start of the recovery, we told you that returning to profitability hinged on running a reliable airline. American continues to run a strong operation in an evolving environment in which we are very well positioned because of the hard work our team has done in recent years. Our sustained profitability is tied to our leading network rewards program and operation. We have a tremendous network and we operate in a reliable and efficient way, and we reward our customers for using it. Now, let's talk more about our financial results. We produced total revenue of $14.1 billion in the second quarter, the highest quarterly revenue in our company's history. This was driven by broad-based demand across all entities with a particular strength in demand for international travel leading into the summer. Throughout the recovery, we have made structural changes to enhance our customers' travel experiences and position the airline for success. We have simplified and harmonized our fleet to create a more nimble and more flexible network that is focused on our most profitable flying. American strength is our network, which is uniquely positioned to capitalize on the demographic changes in the U.S. More people have moved to the Sunbelt region, which is where some of our largest hubs are located. DFW, Charlotte, Miami, and Phoenix are very well positioned now and for the future. Our strong regional network provides service to smaller towns and connects them with our hubs across the country, and our global partnerships are a great complement to our own flying. As a result, we are able to offer customers the most comprehensive network of any U.S. carrier. We continue to adapt our offerings to our customers' evolving preferences. We are taking customers to where they want to go and meeting them where they want to do business. We are servicing more of our customers through our direct channels and driving engagement in our advantage program and credit card portfolio. Our Travel Rewards program is the largest among the U.S. network carriers, and it continues to grow. We are making terrific progress in training our pilots and improving the utilization of both our mainline and regional fleet. Our young fleet and low near-term CapEx requirements enable us to generate free cash flow to reinvest in the business and strengthen our balance sheet.

Thank you, Robert. The focus and dedication of the American Airlines team has resulted in strong operational performance, which is helping to produce solid financial results. Once again, we delivered on our guidance for the second quarter. Excluding net special items, we reported second quarter net income of $1.4 billion or adjusted earnings per diluted share of $1.92. Our strong operational performance resulted in slightly higher capacity production for the quarter and CASM ex performance better than the midpoint of our forecast. Unit revenues remained strong, resulting in an operating margin and EPS that outperformed the high end of our guidance provided in May. As Robert mentioned, American produced record revenue of $14.1 billion in the second quarter, up nearly 5% year-over-year. This revenue performance led to our highest ever adjusted operating income of $2.2 billion, resulting in a second quarter adjusted operating margin of 15.4%. Unit revenue in the quarter was down just 0.5% versus a historically strong 2022 on 5.3% more capacity. Domestic unit revenue was down 1.9%, while international unit revenue was up 18.3% year-over-year. Our unit cost for the quarter, excluding net special items and fuel, was up 3.7% year-over-year. That's better than the midpoint of our initial guidance range due to slightly higher than planned capacity production driven by our strong operational performance. I want to spend a few minutes updating you on our fleet. Our young and simplified fleet differentiates American from our U.S. network peers and provides network flexibility, enhanced efficiency, and an improved customer experience. These benefits are the result of the refleeting we pursued from 2014 to 2019 and accelerated during the pandemic. We are pleased we built our fleet in a low interest rate environment and at a time when the supply chain wasn't as challenged as it is today. In 2023, we expect to take delivery of 23 new mainline aircraft which are all now financed. We took 13 deliveries in the first half of the year and expect 10 more aircraft to be delivered by year-end. For our regional fleet, this quarter, we entered into agreements to purchase seven new Embraer 175 aircraft and seven used Bombardier CRJ 900 aircraft that will be delivered starting in the fourth quarter of this year. We're excited to have these aircraft into service and to further bolster our regional connectivity. Based on the latest delivery guidance from Boeing and Airbus, along with our new and used regional aircraft purchase commitments, our 2023 aircraft CapEx is now expected to be approximately $1.7 billion. Our non-aircraft CapEx is still expected to be approximately $800 million. We anticipate our 2024 total CapEx to be between $3 billion and $3.5 billion. Looking beyond 2024, we continually review our medium and long-term fleet plans. Due to the young age of our aircraft, our fleet replacement needs are very limited. Therefore, we expect aircraft CapEx for the next several years and likely through the end of the decade to average approximately $3.5 billion per year. Moving to the balance sheet. Yesterday, Fitch upgraded American's credit rating. This is the first step towards our goal of BB credit metrics by the end of 2025, and it's nice to see our progress being recognized. We continue to maintain strong liquidity. In the second quarter, we generated operating cash flow of nearly $1.8 billion. Our adjusted net investing cash flow was approximately $550 million, resulting in quarterly free cash flow of $1.2 billion. We have produced $4.3 billion of free cash flow in the first six months of the year and expect full year free cash flow to be approximately $3 billion. We ended the second quarter with approximately $14.9 billion of total available liquidity. We continue to make progress on strengthening our balance sheet in the second quarter by reducing total debt by $387 million. This debt reduction, combined with the improvement in liquidity, resulted in a decrease in net debt of approximately $955 million during the second quarter. We have now reduced total debt by approximately $9.4 billion from peak debt levels in 2021, which is significant progress towards our goal of reducing total debt by $15 billion by the end of 2025. By the end of 2023, we expect our total debt to be approximately $11 billion lower than peak debt levels in 2021. Importantly, we ended the second quarter with a net debt-to-EBITDA ratio of 3.8 times, which is lower than it was at the end of 2019. Now turning to our guidance. Bookings remain strong, and we continue to see a constructive demand environment. We saw record revenue for the 4th of July holiday period and booked load factors for the third quarter are in line with what we saw in 2022. International entities continue to lead the way in terms of year-over-year performance, and we are encouraged by domestic business demand, notably from small- and medium-sized enterprises. As the recovery continues to unfold, the strong unit revenue environment in 2022 represents an increasingly difficult comparison. As a result, we expect third quarter TRASM to be down 4.5% to 6.5% year-over-year on 5% to 7% more capacity. We expect third quarter CASM-ex to be up 2% to 4% year-over-year. Our current forecast for the third quarter assumes a fuel price of between $2.55 and $2.65 per gallon. Based on our current demand and fuel price forecast, we expect to produce an adjusted operating margin of between 8% and 10% in the third quarter and adjusted earnings per diluted share of between $0.85 and $0.95, excluding special items. For the full year, we continue to expect to produce capacity that is 5% to 8% higher than 2022. Our full year forecast for unit revenue continues to be up low single digits year-over-year. We now expect our full year CASM-ex to be up 2% to 4% versus 2022. Notably, our expectations for capacity TRASM and CASM-ex are all consistent with the initial guidance we provided on our January earnings call. That said, our estimate for full year fuel expense has changed. We now expect to pay between $2.70 and $2.80 per gallon, a reduction from our initial guidance.

Thanks, Devon. The American Airlines team is delivering on our commitments. We're on track to deliver on the full year guidance we provided back in January, driving earnings growth, record free cash flow, meaningful debt reduction, and importantly, a strong and reliable operation. We are executing on that plan. We are reliable, profitable, and making tremendous progress strengthening our balance sheet, and I know that our team will continue to deliver. We're excited to share more about our long-term strategy at an Investor Day later this year on our Fort Worth campus.

Hi, good morning, everybody. All I heard was JPMorgan but I assume that's me. So Vasu, you spoke enthusiastically last year about the EMEA. You admitted New York had been a challenge for decades. But you were finally seeing New York RASM outpace the system. And now it appears that reverses. I'll admit my earnings model doesn't model you by hub. But if it did, why shouldn't I assume New York reverts to being a meaningful margin drag from this point forward?

Hi Jamie. Good morning, and thanks for the question. First, I would say that we don't anticipate it being a margin drag. And for full clarity, it's unfortunate the NEA is terminated. Our commitment to the customers in the Northeast and New York specifically hasn't changed. However, the circumstances that gave rise to the NEA have changed. At one point in time, we struggled with really two major things. One, our slot holding didn't match with the demand on that is the majority of demand in New York was for short-haul day trip business market. Our slot portfolio is better matched Mid-Continental, Transcontinental and Transatlantic market. Well, that's changed. Short-haul business demand hasn't recovered to its historical level, but those other markets are much greater. And so that's a material change from before. But also our expense base, especially in New York Kennedy has changed. Through co-locating partners and any number of fleet changes, our employment expenses and JFK are materially advantaged to what any other carrier is in New York. So, what that means for us is that, it is unfortunate that customers don't get the experience of having a much broader network than what was there before. It was a practical matter for American Airlines. We very much expect to preserve the continued margin trajectory that we've been on. And as we go forward, we'll certainly share more, but it's very much our plan and our intention that we continue to see more New York City originating customers flying with us. And so far, since the NEA has been announced, we've seen that. NEA enrollments in the Advantage program continue to rise. Credit card acquisitions continue to rise, spending continues to rise. So though this chapter is closed, another one might open, but we don't expect any material change to our financial outlook.

Yes. The cash flow includes the retroactive pay that is part of our tentative agreement with the pilots. As mentioned last quarter, we are accruing wages agreed upon in May, starting from May 1, and we anticipate the agreement will be ratified in August. At that point, we will implement the new rates and benefits linked to that tentative agreement.

Hi. Good morning, guys. So Robert and Devon, first question for you on the guidance framework you kind of laying out for us here for the back half of the year. It does sort of imply a pretty material deceleration from your earnings level in 2Q to 3Q. And we're hearing from you guys that the demand is good. The team is executing, you're delivering on your cost performance. Can you talk a little bit about the thinking behind how you're laying out the guidance here? You just had a huge beat to your 2Q guide. You haven't missed in a couple of quarters. I'm just trying to understand like are you guys just kind of keeping the bar here where you said it in the beginning of the year, or is there something that's really kind of decelerating here in the back half?

David, thanks for the question. Look, we've set out clearly focused on producing profitability and our reliability as our operating reliability is actually really facilitated that. As we take a look at it over the course of the year, you'll see that we actually raised the midpoint of our full year guide by a quarter. It's indicative of our belief that the economy is strong, demand is strong. And for us, look, there's seasonality certainly involved. But at the same time, we're looking at this over the course of the year, and we're going to stay the course, and we feel really positive about the results that we reported and what's coming. And Devon, do you want to add anything to that?

Sure thing. This is Vasu. Overall, we remain encouraged by the demand we see, particularly in domestic and short-haul markets. Air travel spending as a percentage of GDP has maintained its relationship with revenue, and domestic revenue is also regaining its former connection to demand. It's crucial to note that this recovery is ongoing. When we analyze the domestic market, some of the sequential changes are attributed to unique factors. About one percentage point of the changes from the second to third quarter is due to a calendar shift, and another point reflects our operational performance in the second quarter. The rest is simply a return to normal seasonal trends. Currently, we do not see any signs of demand deceleration. In fact, when we compare it to 2019 or other baselines, the unusual comparisons stem more from the idiosyncrasies of the recovery rather than any underlying business issues. As we approach the fall, we continue to operate in an environment of strong demand, with short-haul RASM significantly elevated compared to 2019. Year-over-year comparisons may appear unusual due to the unique recovery dynamics rather than fundamental business changes.

Hi, thanks. Good morning. Sorry, I lost my voice. But hopefully, you can hear me. I want to revisit the third quarter guidance. We've observed margins changing from 15% to 8% to 10%, which is a decline of 5 to 7 points from Q2 to Q3. Can you provide more insight into what is causing this?

Hi Scott. Again, I'll tack on to both Vasu's comments and Devon's as well. We're looking at our results over the course of the year. The recovery, as we've seen it has been not exactly smooth on a quarter-to-quarter comparison basis. As we take a look at the year, you can depend on us to produce those results. We're really proud of those. And it's indicated by us, again, moving our EPS guide up as we did this morning. Scott, we're not anticipating any earnings impact.

Hi, everyone. Thank you for your time. There's not much discussion about blended travelers or blended itineraries this quarter. I'm just curious if that's because it's now part of your base. Could you also share your thoughts on large corporate travel for the second half of 2023? Thank you.

Hi. This is Vasu and thanks for the question. And you're exactly right. It's less of a novelty now. This is just part of our base, how the business runs for several quarters now. We've seen a mix of 35% leisure style travel, 35% blended style travel, 30% stuff. And furthermore, within the 30% business, there's roughly a 2:1 split between unmanaged travel and managed travel that's there. That's been pretty consistent for several quarters now. It looks to be pretty consistent going into the future. Certainly, that's what our forward book says. So, that's why no commentary. This is actually how the business operates now. We've observed trends in corporate travel. To clarify, when we refer to business travel, we mean trips taken by individuals and companies. There are two groups: those that do not manage or purchase travel centrally, and larger corporations that handle travel management centrally. Customers who manage their travel have returned to 80% of pre-pandemic levels and this has remained stable for several quarters. On the other hand, the demand from unmanaged travelers continues to rise in our system. Overall, business revenues have returned to their 2019 levels. We are optimistic about business demand and are ready to adjust if needed, but there is no change to the current outlook compared to what we've been experiencing. Hi, thank you. And look, we actually view the competitive landscape very favorably. Our network proposition to our customers is creating more origin and destination markets and more unique origin and destination markets than any other airline network. And we have done that really well. We continue to do that really well. That's really been the financial progress that we've seen. And to Robert's comments with roughly 70% of the airline network is located in the Sunbelt in our Latin America network and London Heathrow are in places where we really deliver a lot of outsized value for customers. And there, while we do see competitors come in, we remain encouraged. Take any number of those markets in our short-haul Latin American markets. We've seen something like 20% to 25% industry capacity growth, but the trends are favorable enough where this fall and winter will fly our largest schedule there, not because we're out to chase market share, but because of the marginal performance of those rates.

Thanks very much. So, hi, team. Thanks for the time. Robert, I thought I heard you say on CNBC this morning that you're meeting with your pilots to talk about matching the United contract. Did I hear that correctly, A? And B, do you have to let them vote and reject the contract that they're voting on now? Or can you adjust it and they vote on any changes you might want to make?

Hi Helane, thanks for the question. Look, in terms of how we actually are able to deliver to our products, that's going to be something that we have to work on with them, and we're in discussions with APA right now, as a matter of fact. What I said this morning is something I'm really proud of and that we're committed to. Look, we're going to match the wages that United is proposing. We've got to sit down with to figure out whether or not that is something that they can fit into their TA that can still be voted on a timely basis or if it's something that's going to take more time to figure out. But we're committed to matching those wages. Well, Helane, thanks for bringing it up. We're really proud of the work that we've done over the last year. It's just a tremendous and relentless focus. It's led by David Seymour, our Chief Operating Officer. And every day, our team is out there, including today, in this ridiculous heat and weather, they're just performing. We've done everything from training to adding new knowledge. And when things go awry, we have been really quick to make sure that we have the tools necessary to put things back in place, whether that be aircraft or our crews. And that's going to continue. I anticipate that we're going to get better and better. Of course, that translates into likelihood to recommend scores and Net Promoter Scores that are the best that we have ever seen. And I have great confidence that, that is something that will continue to play out. That relationship between reliability and what customers really want is super evident.

Good morning and thanks for taking my question. Vasu, I want to come back to the unwind of the NEA because it does look like you have quite a bit of international capacity you've added at JFK, but not a lot of domestic connectivity on your own network. And I think JetBlue was part of that answer historically. So, can you talk to what the long-haul strategy looks like out of JFK going forward?

Thank you for the question, Brandon. We encountered two main challenges in New York. One was the level of connectivity support for our long-haul flights, and the other was the significant costs associated with operating from New York Kennedy. As I mentioned earlier, we've implemented various measures to lower our expenses so that they align not just with our other low-cost hubs but are significantly lower than what any other carrier experiences in New York City. The NEA has been beneficial for customers who previously couldn't access our services. However, when examining those international flights more closely, we've found that approximately 35 to 40 percent of the load factor is driven by our international partners, with our NEA partnership contributing only a small portion. Therefore, by combining the expense reductions we've made with some internal changes, we believe we can effectively meet a lot of the demand, especially now that we have a much larger customer base originating from New York City than we did previously.

Hi Brandon. Yes, so the comment was we think we'll have somewhere around $3.5 billion on average of aircraft capital beyond 2024 and probably for a good part of the decade. And where we are different than our competitors is we don't have any fleet replacement needs between now and the end of the decade. So when we are investing in an aircraft that is an investment to grow the network and to grow the airline. What you're seeing from some of our other competitors who just have older airplanes, there's a lot of fleet replacement CapEx required for them. And again, for us, it is just growth aircraft requirements.

Hi, good morning. I'm tempted to ask another question about the NEA wind-down, but we'll put that aside for now. Regarding the fleet, where do you currently see your biggest gap or limitation? Where do you wish you could expand further? Also, could you discuss the regional fleet additions you mentioned? What staffing conditions are enabling you to make those investments?

Thanks, Duane. Just a couple of things. Look, I think as you take a look at the industry and especially our needs at American, we're going to need larger narrow-bodies in a number of places. It just fits with how our hub structure works and all the kind of things that Vasu wants to do. I would add to that, though, that probably our biggest and most interesting opportunity right away. It's getting our regional fleet fully back up in the air. And those aircraft only further our commercial proposition by adding more small markets to what is a great hub and spoke system already. So as we take a look out into the future, you'll see us make sure that we protect ourselves and that we are able to not only replace and upgauge from a narrow body perspective but also have an eye to be able to grow at a rate appropriate for demand levels. Thanks for asking them. Look, and for us, so much of our trans-Atlantic and I'll just speak to the European content at this point, not other things that sometimes get lumped into reporting such as the Middle East or India. But for us, a lot of our concentration is, first and foremost, in London, probably much more so than what other airlines are. And that which is in Southern Europe is really heavily season style flying or as we call it large areas the large capital market things like Rome and Athens, Barcelona and Madrid. So we've done a lot over the last several years to actually further to Devon's earlier point, to really restructure our international network. We used to fly a lot of really marginal flights to really marginal markets, and they work for three months of the year and we had nothing to do with the airplane for the other nine months of the year. So we've used the last three years to go and rebuild the foundation, bottom 5% of our capacity is gone fleet that goes with it is gone and the losses that we took from it are gone. And so now what we're building back to Devon's point, of just moderate growth is adding things that really make sense and are a good use of full year aircraft capital.

Hi, good morning, everyone. First question, Devon, I just wanted to make sure I was clear in terms of what is in your CASM outlook for this year. Does it just include the step-up in pay rates beginning May 1 from the TA? Or do you also factor in a step-up in profit share and work rules? Just want to be clear on what's included there.

Yes. So right now, what's included in our guide is Pay rates from May 1 through the end of July. And then starting in August, we hope to have ratification of the tentative agreement. And at that point, we'll have pay rates and all the benefits that go along with it, including the higher profit sharing.

Thanks, Andrew. We are currently in the planning phases. Based on our fleet, we anticipate mid-single-digit growth for next year. However, there are several factors that we need to consider. First, we need to fully restore our regional fleet, which requires pilots. Additionally, to achieve that level of flying, we need to increase the utilization of our existing aircraft. Lastly, we rely on the airframe manufacturers to deliver, and while they are improving, their track record has not been strong. We will see how this all unfolds, and if everything aligns, that is a reasonable estimate at this point.

Hi, good morning, everyone and congrats on the 2-notch upgrade from Fitch. I guess two questions here. I guess, Vasu, just with the rollout of your new distribution strategy, any early learnings direct versus indirect. I sort of caught the two to one, unmanaged versus managed on your corporate piece. I think if we go back historically, they were probably more evenly divided. So it seems like there's a bit of a shift there. Whatever you can tell us. Thanks, and then I have a follow-up.

Thank you, Mike. That's a great question. I anticipated you would ask it. Firstly, all of our adjustments in selling and distribution are guided by a straightforward principle that Robert highlighted earlier. Our goal is to make it as seamless as possible for our best customers to shop and manage their experiences with American Airlines. Everything we've done is focused on that objective. The results have been quite revealing and have exceeded our expectations. To put it simply, we can categorize our customers into two groups: those who are not part of the AAdvantage program and those who are. In the recent quarter, customers who are not AAdvantage members saw their total travel decrease by 5%, but revenue from this group increased by 5%. Meanwhile, for AAdvantage members, we increased their transactions by 8% and revenues by 13%. These results have surpassed our predictions, and we are particularly encouraged by three key points: First, AAdvantage customers show a strong attachment; for every dollar of flight revenue they generate, they also contribute about $0.10 in additional revenue, mostly from a branded credit card. Second, the selling cost is notably lower for our AAdvantage members. It's not just about paying reduced booking fees and commissions, but we've found that about 25% to 30% of our calls to reservations are actually bookings that originated through a travel agency but then needed to be serviced differently. Therefore, there are significant implicit savings involved. Lastly, and perhaps most importantly, we're optimistic about the sustained demand from these customers. They frequently use our unique network, fly more often within a year, have future bookings planned for the fall, tend to book directly with us, and currently, 70% to 75% of our revenue comes through direct channels. We expect this to grow. Given this positive outlook, we are committed to enhancing these changes. By the end of the year, all our offerings will be available for customers to manage online through our app or website. We will gradually introduce these capabilities for new distribution technology as well, but as we do so, we will progressively reduce the availability of our fare content through traditional methods that don't meet the quality experience our customers expect.

Yes, Mike. A lot of that is TBD right now. And in fact, Priya Aiyar is here our General Counsel. We're still in a process of determining how to wind down the NEA most notably how we transfer back all of the slots to American Airlines as soon as we can.

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