Earnings Call Transcript - AAL Q3 2020

Operator, Operator

Good morning. And welcome to the American Airlines Group Third Quarter 2020 Earnings Call. Today’s conference is being recorded. At this time, all participant lines are in a listen-only mode. Following the presentation, we will conduct the question-and-answer session [Operator Instructions]. And now, I’d like to turn the conference over to your moderator, Managing Director of Investor Relations, Mr. Dan Cravens. Please go ahead.

Dan Cravens, Managing Director of Investor Relations

Thanks, operator. Good morning, everyone. And welcome to the American Airlines third quarter 2020 earnings conference call. In the room on the call this morning, we have Doug Parker, our Chairman and CEO; Robert Isom, President; and Derek Kerr, Chief Financial Officer. Also on the call for our Q&A session are several of our senior executives, including Maya Liebman, Chief Information Officer; Steve Johnson, our EVP of Corporate Affairs; Vasu Raja, our Chief Revenue Officer; Alison Taylor, our Chief Customer Officer; and David Seymour, our Chief Operating Officer. Like we normally do, Doug will start the call with an overview of our quarter and the actions we’re taking during this pandemic. Robert will then follow with some remarks about our initiative. After Robert's remarks, Derek will follow with the details on our liquidity and cost outlook. After Derek’s comments, we will open the call for analyst questions and lastly, questions from the media.

Doug Parker, Chairman and CEO

Thank you, Dan. Good morning, everybody, and thanks for joining us. So there is no doubt, this continues to be an unprecedented time for our entire industry, our team, and our customers. At American, we continue to take actions so we can manage this pandemic and position our airline for success when demand returns. So I'm going to start with a quick summary of our results for the quarter, which were improved early in the year but still reflecting an extremely challenging environment we're in today. Our third-quarter pretax loss, excluding net special items, was $3.6 billion. Our revenues were down 73% year-over-year. In this environment, we continue to focus on controlling what we can, reducing costs and cash burn are at front and center. In total, we removed approximately $17 billion in costs from our business, and our cash burn rate declined markedly versus the second quarter. We ended the quarter with a pro forma liquidity balance of approximately $15.6 billion, which is much more liquidity than we've ever had before and more than double where we began this year. And customer confidence is gradually beginning to return. We continue to evolve in this new era of travel. The foundation of all this, of course, is our incredible team. These are difficult times for sure, and we couldn't be prouder of how the American team is handling this situation. Our team is out there keeping our company moving, safely transporting hundreds of thousands of people around the globe every day. And we're doing an excellent job of generating revenue in this environment, making a difference both for American Airlines and the United States in general. That's why it’s so difficult to see our October 1st pass without having the payroll support program with the CARES Act extended, both in support of our team and the commercial aviation infrastructure, which is going to be critical to an economic rebound. There’s enormous bipartisan support for an extension, but unfortunately, our elected officials still haven't been able to get it enacted because they've been unable to agree on broader COVID relief legislation. So without the extension, we had to furlough 1,900 of our team members beginning October 1st, and we did continue to service numerous markets around the country. We remain hopeful that our elected officials can come together on this important legislation on behalf of our team, our industry, and working Americans in our economy at large. Elections matter, but there's nothing polling higher than support for a COVID relief stimulus package. And the PSP extension will be an important component of any such package. Robert and Derek are going to talk more about our results and our path forward. We know that every action we took in the third quarter centered around our aggressive plan to bolster liquidity, conserve cash and ensure that customers can fly with complete confidence when they travel with American. On the liquidity front, American, as I said, ended the third quarter with approximately $13.6 billion of available liquidity and $15.6 billion when you pro forma for an additional $2 billion and authorized capacity through the CARES Act loan program, which was finalized just this week. And also this morning, we announced, on top of that authorization, to issue up to $1 billion of equity in an aftermarket offering. As conserving cash in this environment, we're focusing on what we can control. To that end, we've worked relentlessly to right-size all aspects of the airline. This has been done primarily through cost savings resulting from reduced flying and long-term structural changes to our fleet and our infrastructure. We continue to realize the benefits, both financially and operationally, accelerating the retirement of more than 150 aircraft from our fleet. Thanks to these efforts, I look for gradual improvements in the revenue environment. We continue to bring down our daily cash burn. Our burn rate improved by approximately $14 million per day during the third quarter from $58 million down to $44 million, and we expect our fourth-quarter burn rate to be improved even more to between $25 million and $30 million per day, and we expect that number to continue to drop going forward as demand for our travel continues to gradually improve. Also during the third quarter, we continued our focused plan to capture the travel demand that does exist. Remarkably, one in every three domestic passengers flew on an American Airlines flight during the third quarter. If we could say one thing to every American Airlines customer, it is that it’s safe to fly. Others have shared this data as well but it’s certainly worth repeating: IATA estimates that 1.2 billion people have flown so far in 2020 and among that group, there are only 44 cases of COVID-19 in which transmission is believed to have been associated with air travel. So it's clear that our efforts are working as an industry, even with our team members being on the front lines and working through the pandemic to support our communities and serve our customers. Our team has a lower rate of COVID-19 infections than the national average. Notably, we've seen fewer cases among our airborne team members, our pilots and flight attendants than with our other work groups. I’ve personally been flying multiple times every week and I see it everywhere I go: the level of cleaning, the safety measures, and the diligence from our team and our customers. It’s truly incredible, and we are greatly appreciative. So in closing, we know we have a long road ahead of us. But our entire team remains fully engaged and we couldn't be prouder of the amazing work they're doing each and every day. We're focused on not just getting through this pandemic, but making sure we're prepared to succeed as demand returns, and we're highly confident that we're going to adjust that. So with that, I'll turn it over to Rob.

Robert Isom, President

Thanks, Doug, and good morning, everyone. I want to second my appreciation to the entire American Airlines team. Despite this year’s remarkable challenges, they continue to rise to the occasion and deliver for our customers and each other when it’s most needed, and we’re incredibly grateful. Taking care of our team and customers continues to be our top priority. We're taking additional steps in recent weeks to provide customers further peace of mind as they return to the skies. We upgraded our clean commitment by adding SurfaceWise2 to our safety program. SurfaceWise2 is approved by the EPA as a long-lasting product to help fight the spread of the novel coronavirus, and it will be applied to American's entire fleet in the coming months. We've also made travel easier and less complicated by eliminating change fees and allowing customers to stand by on earlier flights on the same day at no charge. These customer-focused initiatives, along with changes to our basic economy product and new advantage leap benefits, give travelers tremendous flexibility when they fly American. Additionally, we launched a new travel tool to help customers quickly see the current COVID-19 travel guidelines for domestic and international destinations. As we entered the third quarter, the U.S. saw an increase in COVID-19 cases, which was followed by a slowdown in demand. We responded quickly and efficiently in a way that maintains scale at our largest connected hubs in DFW and Charlotte. Our approach has paid off as evidenced by our passenger revenue results. Notably, DFW and Charlotte were our best performing hubs year-over-year. Our cargo team continues to do outstanding work driving revenue and supporting the global economy during the pandemic. We more than doubled our cargo-only flying from August to September, operating more than 1,900 flights and serving 32 destinations during the third quarter. To date, these cargo flights have helped our customers move more than 85 million pounds of critical goods around the world amidst the COVID-19 outbreak. Despite a nearly 60% reduction in system capacity in the third quarter, our cargo revenue was effectively flat year-over-year. During the quarter, we started to see signs of a slow but steady recovery in passenger demand. Although domestic net bookings finished the quarter down 50%, this was an improvement from the first part of July when bookings were down 80%. During the month of September, 45% of domestic flights had a load factor greater than 80% compared to just 25% in July. As we look ahead, with one-third of our flights being actively managed by our yield management system, we see improving yield curves in the coming months. And we aren't just waiting for customers to come to us; we're taking steps to reopen markets to travel through pre-flight COVID-19 testing. Testing options are now available to customers traveling to Hawaii and Costa Rica, with Jamaica and the Bahamas following soon. We are engaged in efforts to expand that program across the Caribbean. These testing programs are important because they will ultimately help to reopen markets by further inspiring confidence in travel. The pandemic has changed our business in many ways that we could have never expected, but the American team has reimagined how to deliver a safe, healthy, and enjoyable travel experience for our customers. Pre-flight COVID-19 testing is a great example of that, and it's going to be an important part of advancing the industry's recovery from the pandemic. Our approach to fourth-quarter capacity is straightforward: we'll continue to focus on our large connecting hubs at DFW and Charlotte and to put capacity in markets that are showing positive recovery, such as the Sunbelt, Mexico and the markets that are opening in the Caribbean. We expect our fourth-quarter system capacity to be down slightly more than 50% year-over-year, with long-haul international capacity down approximately 75% year-over-year. While we're encouraged by the trends we're seeing in our net bookings, we'll continue to remain as flexible as possible and let demand serve as our guide for future capacity levels.

Derek Kerr, Chief Financial Officer

Thanks, Robert, and good morning, everyone. This morning, we reported a GAAP net loss of $2.4 billion or $4.71 per share in the third quarter. During the quarter, we recognized $540 million of pretax net special items. Net special items included a $2.1 billion credit resulting from the payroll support program financial assistance, which was offset in part by $875 million of severance costs associated with our voluntary and involuntary headcount reductions, and a $742 million fleet impairment charge. Excluding net special items, we reported a net loss of $2.8 billion or $5.54 per share. With the prolonged decline in passenger demand, our primary focus has been to ensure we have the financial strength for a range of recovery scenarios. We have moved quickly to raise incremental liquidity, reduce cash burn, and become as efficient as possible. On the revenue front, our third-quarter total revenue was $3.2 billion, down 73% year-over-year on a 59% reduction in total capacity. While our revenue was down materially, it was nearly double what it was in the second quarter. We expect fourth-quarter revenue to be down approximately 65%. While our current booking trends are positive, they're still down significantly, and we continue to plan for a slow recovery. As Robert mentioned, we expect our fourth-quarter capacity to be down slightly more than 50% year-over-year. We have worked hard to rebuild our fleet into one of the more efficient to operate and offer our customers a consistent, improved product and experience. Our team has been actively engaged with Boeing and Airbus to provide flexibility in how we manage our fleet, giving us ample opportunity to adjust as demand conditions warrant. As announced this morning in our earnings press release, we have reached an agreement with Boeing to secure deferral rights on 8 of our 2021 Max deliveries and all 10 of our Max deliveries in 2022. If the deferral rights are ultimately exercised, these aircraft can be deferred to the second half of 2023 through the first quarter of 2024. To avoid exercising these deferral rights, we would need to see substantial improvement in the demand environment. During the quarter, we finalized a series of sale-leaseback transactions to finance our remaining A320 aircraft deliveries in 2021. As a result, we now have financing for all of our planned aircraft deliveries through 2021. Our long-held strategy has been to drive efficiencies through the simplification of our fleet. With the permanent retirement of our A330-200 fleet announced this morning, we now have only four aircraft types in our mainline fleet: 737, the A320 family, 787, and 777. These operating efficiencies, along with the scale and fuel efficiencies, provide us with opportunities to improve revenue production and reduce costs now and well into the future. Lastly, we retain inexpensive optionality in our total fleet count as we have 51 aircraft with lease expirations through the end of 2022. Additionally, we have more than 200 older owned mainline and regional aircraft that could be efficiently retired should demand conditions deteriorate. We continue to take a zero-based approach to our expense planning and have moved quickly to better align our costs with our reduced schedule, producing the $17 billion reduction in 2022 expenditures that Doug talked about. As we look to our team members, in addition to the cost reduction efforts we've outlined in previous quarters, more than 20,000 team members have opted for an early retirement or long-term leave. This is in addition to the painful but necessary process of furloughing 19,000 team members. We are extremely grateful for the sacrifices and contributions these team members have made to our airline. Finally, on liquidity, we continue to take proactive steps to reduce our cash burn rate and improve our total liquidity position. In the third quarter, our operational cash burn rate was approximately $36 million per day, and our debt principal and severance burn was approximately $8 million per day. In total, our third-quarter average cash burn rate was approximately $44 million per day, which improved sequentially from the second-quarter burn rate of $58 million per day. During the quarter, we closed both Goldman Sachs Merchant Bank secured notes financings of $1.2 billion, in addition to the CARES Act loan Doug mentioned that provided $5.5 billion of loan capacity. We also received the final payments of our allotted PSP funds, including an incremental $168 million of previously unallocated funds identified by the U.S. treasury. This week, we were able to increase the amount available under the CARES Act loan to $7.5 billion. When combined with our third-quarter ending liquidity balance of $13.6 billion, we ended the third quarter with a pro forma liquidity balance of approximately $15.6 billion. This morning, we also announced the authorization to issue up to $1 billion of equity in an aftermarket offering to further bolster liquidity. We view this as another lever that the company has available at any time. As we look to the fourth quarter, we presently expect to end the quarter with more than $13 billion of total available liquidity, excluding any proceeds from the ATM offering I just mentioned. This has resulted in an average cash burn rate of between $25 million and $30 million per day, including debt principal and interest and severance payments. Our goal remains to get our daily cash burn rate to zero as quickly as possible. The timing of reaching this goal continues to be dependent on the demand recovery timeline, as many of our cost reductions have already been finalized. In terms of our debt obligations, we believe the market is underappreciating our balance sheet flexibility and efficiency. Approximately 40% of our outstanding debt is prepayable without penalty, and we don't have any large non-aircraft debt maturities until our $750 million unsecured bond matures in 2022. Lastly, thanks to the tireless efforts of our treasury team, our weighted average cost of debt is just over 4% despite the higher coupon COVID-related financings that we completed this year. While we continue to be pleased with the outcomes of our recent financings, the incremental debt to our balance sheet, and dilution to our shareholders has been significant. However, with the flexibility that I've outlined, we have the ability to proactively repay debt and deleverage our balance sheet over the next several years when we return to a normalized revenue environment. To conclude, we still have a long road to recovery ahead of us. However, the actions we have taken to conserve cash, bolster liquidity, and support our team members and customers give us confidence that we are well prepared when demand returns. And with that, I'll open it up for analyst questions.

Operator, Operator

[Operator Instructions] Our first question comes from Brandon Oglenski of Barclays. Your line is now open.

Brandon Oglenski, Analyst

Look, I know it's a really difficult environment right now, and a lot of airlines are still burning through cash. But as we look forward, this is a genuine ability for the industry to rebuild itself, and more specifically, American. But I guess, what is the strategy going forward, guys? Because you will have a pretty large debt balance, and I think a competitor down across the city there won't have that much and a lower-cost structure. So in that type of environment, how do you navigate to differentiate and have the ability to pay down debt and be profitable? What's the new American going to look like?

Doug Parker, Chairman and CEO

We're going to be more efficient. That's for certain. We're using this opportunity. It’s really horrific as all this is, but it does provide some amazing opportunities to think about rebuilding the largest airline in the world and effectively shutting it down and building back on what makes sense. We've done things like reduce 30% of our management. We're not going to bring that back. We've accelerated the retirement of 150 aircraft and aircraft types that aren't going to come back. More and more, as we build back our schedule, we're going to do it in a manner that’s profitable and eliminate a lot of what used to exist that was less so. We feel really good about how we will emerge from this, both in comparison to where we used to be and in comparison to our competitive positioning. We do indeed have higher debt levels now than we did before this because we had gone and modernized our fleet, so that's behind us. We don't have, as Derek noted, large amortizations in the near term. We certainly don't think that once we return to generating cash, you will see us needing to do any more in terms of raising additional funds. As we move to cash positive, we will use those proceeds to pay down the debt. And I think you'll see that set us apart from our competitors. We feel really good about our ability to compete in the future as the industry gets cash positive, and as American gets cash positive, we'll use our proceeds to pay down debt first.

Brandon Oglenski, Analyst

And I guess if we are going to be a more leisure-oriented market for a few years, is there a fear that the fare structure in the industry could walk lower? Do you think you're going to have a cost structure to compete in an environment like that?

Doug Parker, Chairman and CEO

Yes, of course. Because we have a route network that can do that. I’m going to get Vasu to expand on that more, or Robert. But the reality is we have a huge competitive advantage in terms of our ability to connect customers around the United States and internationally as that rebound occurs. The sub-and-spoke network that we have is something that many other carriers can’t compete with; a couple can, but not all. That’s a great revenue generator. We, of course, will need to get our cost in line with that. As I said, we’re going to get our costs down through the efficiencies I spoke about earlier. But again, our cash burn number now is similar to where our competitors are. As the industry gradually rebounds, we’ll rebound at a similar rate. You’ll see our cash levels and therefore our earnings -- our cash burn levels and our earnings rebound as the industry does. Vasu, anything else you want to add?

Vasu Raja, Chief Revenue Officer

What I'd just add to that, Brandon, is historically, we thought of business and leisure as having very different yield performance across our system. That is not always the case in this industry. Indeed, the revenue structure within our airline has shown that there are people who do not stay on Saturday nights, midweek travel, single travelers on itineraries account for about a third of our revenue and only about a third of that comes from the large global corporates that are most likely to delay travel. So one, we're actually less exposed historically than what may proceed. But two, the replacement value of that traffic is very different for American Airlines; in our largest hubs, such as Dallas Fort Worth, Charlotte, the non-corporate traffic that's on our airplanes can often produce yields that are between 70% to 75% of the corporates, but indeed, the non-corporate yield, what you might call the leisure yield in these hubs, outperforms corporate yields in some of the big coastal metro areas. So the strength of the American Airlines business is that so much of what we do is create connectivity for customers that wouldn’t exist if it weren’t for American Airlines flying these routes. That is a core attribute of our business model, and it will take us through this crisis and will absolutely power our revenue production on the other side.

Operator, Operator

Thank you. And our next question comes from Mike Linenberg of Deutsche Bank. Your line is now open.

Mike Linenberg, Analyst

Hey, good morning, everyone. Two very quick ones here. Derek, the $25 million to $30 million of burn. What is that number if we were -- or you could just tell us roughly what -- is the piece that's related to debt interest, principal payment, and severance? Just to do an…

Derek Kerr, Chief Financial Officer

In the fourth quarter, it's $8 million. It's the same in the third and fourth quarter, so it's $8 million in principal and interest payments in that $25 million.

Mike Linenberg, Analyst

And then just second, you guys have done a nice job on the cost side, pulling down costs. I think ex fuel profit -- ex fuel and specials I think you’re down about 30%. What do you feel -- where do things shake out for the fourth quarter, given the fact that you will have a bit more people off the table, et cetera? What should we be looking at?

Derek Kerr, Chief Financial Officer

We had reductions in costs as we look at it; it was 40% in the third quarter. And as we add -- we're adding back a little bit of capacity. So we said 59% down in the third quarter and close to 52%. So we should be in a similar range, maybe 36% to 38% range for costs down in the fourth quarter.

Operator, Operator

Thank you. And our next question comes from Joseph DeNardi of Stifel. Your line is now open.

Joseph DeNardi, Analyst

Derek, you talked about balance sheet flexibility and efficiency and your ability to pay down debt; you need to generate cash, obviously, to do that. Part of that is CapEx. So if you want the market to better appreciate your ability to repair the balance sheet, can you provide some visibility around CapEx over the next few years?

Derek Kerr, Chief Financial Officer

Yeah. As we look at CapEx, I mean we've already pulled down '21 and '22. So we were at $1.7 billion and we pulled $800 million out of '21, we pulled $200 million out of '22. So we would be at about $1 billion dollars is the run rate, and we can take that lower also. We just -- right now we're at that run rate and we definitely can take it lower if we need to. From a CapEx perspective, we're sitting at about $1 billion in 2021 and about $1.7 billion in 2022. Now I also said that we have deferral write-down on aircraft and we can push that, which would reduce those two CapEx numbers out in the years. And as you know, we don't have many deliveries in '23 and '24. So the CapEx profile is much, much smaller than we've had over the past years, and we will be able to use that cash that was going to buy aircraft and integrate the airlines for paying down debt.

Joseph DeNardi, Analyst

And then thought, why was American’s earnings power and margins so much lower than peers pre-COVID, and why will that change on the other side of that? Thank you.

Unidentified Company Representative, Company Representative

I think it's a great question, and there are a range of answers for it. But I will at least pick on one that we are experiencing emerging in the trends right now, which is just how we adjust capacity across our network. As you look at 3Q results right now, our relative PRASM performance in the system is strong versus our competitors; this is kind of an empty victory in the environment we're in, but it's an important lesson. What we see right now is that about 75% of our airline's capacity is in our four biggest hubs. And if those hubs were producing basically what we see today 30%, 40% RASM premiums to the industry, our smallest hubs that we see today are 10% of our capacity and still producing around the deficit. While in the old days that was a much bigger mix, the things that weren’t outperforming on a RASM basis were in some cases as big as Dallas, Fort Worth, our largest hub. What that means for us is, as it relates to an earlier question, is that we will produce revenue premiums to the industry as we come out of this. One of our guiding principles is that we will produce a revenue premium to the industry. The way we go about doing that is, first and foremost, we worry more about organic assets in the markets where we can produce an outsized level of value for customers, and as we see today, produce an outsized level of revenue for the airlines. That through many of the partnerships that we’ve created, not just with Alaska and JetBlue but with British Airways, IAG, or JAL, or many others around the world in markets where we can't produce outsized customer value alone, we will work with these partners to produce that value and get the returns that come with it. Third and very importantly, we need to increase across our commercial divisions, giving our customers really good reasons to want to fly more and have some more, which sounds very simple and indeed it is. We think that by doing that there's a real path out of it where American can produce at a higher level than it might have before.

Operator, Operator

Thank you. And our next question comes from Helane Becker of Cowen. Your line is now open.

Helane Becker, Analyst

If on the stimulus program, if nothing's opened and people don't travel by March, won't the industry be in the same place as it is now and need more stimulus money? Isn't it better to work with governors to open, and then get more stimulus money rather than getting it now?

Doug Parker, Chairman and CEO

Helane, again -- let me separate two things. Stimulus of course, the entire COVID relief is to stimulate the economy; I think it’s really important. And I think the sooner the better, I think our country needs it, and that would help in many ways too, I believe. As to the payroll support plan extension, that’s not about stimulus in our view, that's about keeping critical infrastructure in place. That's about the importance of the airline industry to that economic recovery; it’s entirely what the PSP program was put in place to do. What it does is it has airlines keep more people employed than we would otherwise. It basically ensures existing demand has us serve markets we wouldn’t serve otherwise. The concept was that the government, as a pass-through, gives money to airlines to pay those people and to fly those flights that we wouldn’t fly otherwise. So as the economy returns, that critical infrastructure is in place. I think that's good policy; I think it’s been great policy to date, and I think it’s good policy that should be extended. I'm not alone in that, and there’s enormous bipartisan support for that for exacting those reasons. It's not about getting money into airlines; it’s about ensuring that critical infrastructure stays in place. I feel that absent an extension, you will see some of that infrastructure decline, and as the economy looks to rebound, we won't be prepared as well as we should be to facilitate that rebound. So I don’t think it makes sense for us to let that critical infrastructure get harmed or to go lower again; we’re not alone in that assessment. Virtually everyone we talked to agrees this should happen. So I guess part of the question -- there’s another question we sometimes hear, which is, well okay that's all well and good, but if things aren’t better six months from now, you’re going to need it again. I don't think so. I happen to believe we're seeing now, even in this environment, a gradual return of revenues. We expect that to continue. I think six months from now, certainly, you'll see a better environment than we have today irrespective of what may or may not have happened as it relates to the pandemic itself, because people are getting more and more comfortable with travel, cities are opening up, and business is returning somewhat. So I think six months from now, we’ll be in a position where we’re going to need a resource such as PSO to help ensure we’re able to respond to that increase in demand.

Helane Becker, Analyst

And then my other question: How many aircraft are actually being scheduled right now?

Unidentified Company Representative, Company Representative

Helane, the easier way to do it is how many airplanes are we not flying, and that number is on the order of magnitude of about 200 jets. We have a couple of airplanes that fly relatively regularly. It makes some of the maintenance of the operations of the airline easier.

Doug Parker, Chairman and CEO

200 out of…

Unidentified Company Representative, Company Representative

Out of 1,350.

Operator, Operator

Thank you. And our next question comes from Hunter Kay of Wolfe Research. Your line is now open.

Hunter Kay, Analyst

Derek, your revenue in 3Q was like $3.2 billion. What were your cash receipts maybe net of refunds in the quarter?

Derek Kerr, Chief Financial Officer

Revenue was about 75/25 from a revenue perspective. So we did burn some of the store value during the quarter. Our ABL still has about year-to-date about $4.9 billion at the end of the third quarter, and there's about $2.5 billion that is still stored value from refunds and other things that were given out during the early part of COVID.

Hunter Kay, Analyst

And then I’ve had a question for Alison actually. I'm asking you this question given your comment on the importance of TMCs and the press release you put out with the new Sabre deal. How much did you spend on TMC commissions in 2019, just roughly? And how much is your budget -- how much are you being given to spend on agency commissions in 2021 and 2022, relative to what you said about the importance of agencies as business travel recovers and of course obviously the elephant in the room, the competitiveness of the corporate travel landscape that has evolved over the next couple of years?

Alison Taylor, Chief Customer Officer

So, it's a tricky one for our TMCs and our agencies, and we believe in always making sure our agencies are accordant partners for us. But there’s still an importance on new corporate business. We’re still working out what that would be, because as you know, we are still looking at the return of corporate business on the hope of the larger contracts and global accounts being later in '21. So it's a little hard at the moment to predict what those commissions will be. Although, I would say it continues to be important for us, and we believe once again they will be robust partners in the latter half of '21. We are also working with them to open up markets like the cargo between the UK and the USA. They are also facilitating into those markets, which is a major initiative for them.

Derek Kerr, Chief Financial Officer

So Alison, with that kind of charter, we haven't gone through the budget process for 2021, and we will go through that process and determine the right amount we need to achieve corporate recovery.

Doug Parker, Chairman and CEO

Yes, and Hunter, just one thing. Given the scale of American and our ability to serve corporate customers, it is really American that is out there increasing commission rates in an effort to attract business travel. So don't think you will see that be the case in the future for that; we do all the major matches others are doing, and we need to be competitive. But it’s not happening, and Alison's not the only one who is out there increasing commissions in general.

Operator, Operator

Thank you. And our next question comes from Jamie Baker of JP Morgan. Your line is now open.

Jamie Baker, Analyst

A couple for Derek, presumably. First, based on the October 1st furloughs and the accompanying service suspensions, what's the estimated level of cost savings there, either on a quarterly or annual basis?

Derek Kerr, Chief Financial Officer

I think we’ve got -- as we put together how much of savings we have from a management perspective, it was about half a billion dollars that we had on the management side of things. The amount from efficiencies and other things that we got out from some of the labor was about $400 million. So from a headcount perspective, we're right around a billion dollars of permanent efficiencies and headcount from those two areas. So on $17 billion, a billion of it is definitely stuff that doesn't come back. Fleet reductions is another area where we will see significant savings. The other part is as we add back in the cost, as Doug said earlier, as we add back in the flying, how do we do that more efficiently to drive those costs down, while keeping most of our savings from 2020 permanent as we move forward.

Jamie Baker, Analyst

But the aircraft savings, I mean, you're not counting that as part of the PSP exercise. I mean, what I'm getting at is that in the event of another round of PSP, certain costs are going to be added back to the P&L but then effectively taken out by the PSP. So what I'm really trying to calculate is what impact PSP would have on liquidity. So your aircraft comment is helpful, but that's separate. Correct?

Derek Kerr, Chief Financial Officer

Yes, that is separate from PSP. PSP is all headcount-related.

Jamie Baker, Analyst

And we should be assuming, so your net number on that was about a billion annually, correct?

Derek Kerr, Chief Financial Officer

With the amount of reductions from furlough, that's about $1 billion to $1.5 billion annually.

Jamie Baker, Analyst

And then again, so on the planned retirement, I guess you're out of five aircraft families altogether? What level of long-term costs is that permanently removed? And if your estimate net of any revenue inefficiencies -- maybe this is a question for Vasu -- that might occur since you all just have somewhat fewer options in terms of aircraft gauge?

Derek Kerr, Chief Financial Officer

From a cost perspective, I think there's two things. One is from a cost perspective, we should have a permanent reduction in those aircraft coming out, because you have maintenance and other costs coming out. That could be anywhere from -- I mean, we haven't calculated the '20 and '21 plan yet. As we just retired the 330-200s this morning, we still have some 737s that are on the ground depending on whether they come back up as we move forward. But that's half a billion dollars in this year, and that stays next year from maintenance and a cost perspective as we go forward. I know Vasu can add to that.

Vasu Raja, Chief Revenue Officer

Jamie, from a revenue perspective, the nice thing about the retirement is that we've re-accelerated where we wanted to be down the road. So one of the things that we had said before is we were looking for efficiencies just because of the different number of aircraft types and seating configurations; when you take into account regional partners and the number of operators, we have been able to bring that down from 50 different sub-fleet types to about 23. The fleet we have now can serve the marketplace effectively, and we are not losing out on anything in terms of retirements like the 75s. From 787, 788, and 789, we're not losing out on anything from a 767 and 330 perspective. The various fleet types can serve our spectrum of demand needs effectively and will do so in a cost-efficient manner.

Jamie Baker, Analyst

And Derek, just remaining unencumbered assets number and then I’ll be done.

Derek Kerr, Chief Financial Officer

We have about $4 billion of unencumbered assets, and we have $7 billion of first-lien capability. So around $11 billion.

Operator, Operator

Thank you. And our next question comes from David Vernon of Bernstein. Your line is now open.

David Vernon, Analyst

I wanted to ask the post-COVID question in a slightly different way. If you were to take a look at the actions you've taken on the fleet side that assumes some normal level of utilization, how would the gauge shift? If you were to just take a snapshot in 2019, what does our gauge look like pre-COVID? What's it going to look like in the future? And then, if you think about the reduction in hourly operating costs from all the simplification, is there a way that you can frame kind of a cost reduction potential just on the variable hourly operating cost of the new fleet? Investors are really trying to get their heads around this issue of, okay, American's margins were lower before the crisis, what are they going to be after? Getting some tangible data points around exactly what the fleet will look like could be helpful here.

David Seymour, Chief Operating Officer

This is David Seymour, and I will start, and I can have others join in. What makes this a little bit complex is we're still in the process of setting what our 2021 capacity is. So, as Derek mentioned, we have 737s on the ground, we have 50 seaters that are on the ground; depending on how those come back or not will impact our future gauge. So let me give you more of a conceptual answer. But if you think about it: we've taken out roughly 50 wide-bodies from December until June of this year. That means we've taken out some of our lower-gauge airplanes, such as the 757 and 767. Our wider body fleets are now more likely to be higher gauge, higher density products like the 787. But of course, we still see reductions in the narrow-body fleet versus last year and years prior, so there's a material impact in that upgauging First, we have the 190 and the MD-80s coming out, replaced with larger gauge 737s and 321neo coming in. On the regional side, we have dual-class regional jets that will also help upgrade that. So all of that is a pretty material impact, and in the months ahead we’ll get a better understanding of that average gauge year-over-year. But doing the basic fleet math, I think you can probably get a good sense for what that impact will be.

Unidentified Company Representative, Company Representative

We kind of look at over 2019 only because 2020 is so strange. Our average seat in 2019 from a mainline perspective was about 167. As we implement the Oasis projects and other aircraft changes, that should increase by about 5% and five seats, and then, on the regional side, we’ll have a slight increase of about three more seats as we move forward. There will be a significant impact; as we look into 2021, departures should be down and gauge should be up, so that will give us a cost benefit from a CASM perspective as we fly fewer departures at higher gauge at lower cost.

David Vernon, Analyst

And then maybe just as a quick follow-up. Could you talk a little bit about rebuilding the regional footprint and the seater footprint? Is there going to be a shift in the old model versus the contracted model? Or how do you -- are you thinking about how to start to rebuild fleet traffic as you start to look at what the network is going to look like post-COVID?

Unidentified Company Representative, Company Representative

We've done a really nice job over the years of following a strategy that speaks to simplification in terms of fleet types and simplification in terms of the number of operators with PSA and Envoy; we're really down to just a few partner carriers. We feel like we’re in a good spot and with carriers that are established, all fighting on the basis of quality and efficiency. So we feel pretty good about it. In terms of rebuilding, of course, putting the larger two-class regional jets into service is really important. I take a look towards 2021, when demand recovers, and we open up a new regional facility in DCA, and think about the kind of changes we talked about with upgauging and what that means for the airline. It’s going to be positive, not just for our cost efficiency but also for our revenue perspective -- but also for our passenger perspective in terms of quality of service; we’re going to be able to provide a product that they really want.

Operator, Operator

Thank you. And our next question comes from Joe Caiado of Credit Suisse. Your line is now open.

Joe Caiado, Analyst

Derek, quick question for you, and apologies if you answered it in your prepared remarks. But would you consider using some of the billion dollars of the equity raise to retire near-term debt at a significant discount? I think you mentioned your 5% unsecured notes due in 2022 are trading at about $0.70 on the dollar. So is that something you would consider, or do you really want to see cash generation drive the debt pay down?

Derek Kerr, Chief Financial Officer

It is something we consider as we look out to planning for 2021 and see where our cash needs are, but it’s something we would consider.

Joe Caiado, Analyst

And then just one more quick one. Did we say that there is retrofit in aircraft mod activity taking place today as part of the fleet harmonization initiative, so that stuff is no longer on hold? Is that right?

Derek Kerr, Chief Financial Officer

Correct. Yes, for us, we had not put it on hold. When I talked about our CapEx being what it is in 2021, almost 40% of that is indeed that project. We've continued to push it. With aircraft grounded, we've been able to speed it up, which I think is the right decision, to get the 738s done as quickly as possible and the 737s -- sorry, the 7378s done as quickly as possible, and then speeding up the A321s to get that project done. While the aircraft are grounded, we can speed it up, save costs, and get the benefits sooner. So those have been in the numbers and remain in the numbers as we move forward.

Operator, Operator

Thank you. And our next question comes from Duane Pfennigwerth of Evercore ISI.

Duane Pfennigwerth, Analyst

So, you obviously have some improvement in the cash burn level here into the fourth quarter. Another way to say $25 million to $30 million a day is $10 billion annually, which is still a pretty big number. So maybe going back to Jamie's cost questions, all of the OpEx savings that you've realized, how much of that run rate is being reflected here in the fourth quarter? And if it's simply timing, absent revenue recovery which we can model, where would that kind of $10 billion a year cash burn go to based on the cash savings you've realized?

Derek Kerr, Chief Financial Officer

Well, the way -- we've said we had $17 billion of savings throughout the year, and the $16.2 million of that $1 billion is expense. Now some of that is volume. So as we add volume back in, those expenses are going to go back in. Some of the permanent stuff is what we talked about, which is the management headcount, the efficiencies, the fleet -- a lot of the stuff we've done will be permanent as we move forward to reduce that. What we have all said is that to get us back to cash positive, the cash burn to be breakeven needs -- we've all said it's a demand recovery and we need the demand to come back. So we are holding flat expenses from third quarter to fourth quarter. Everything as we add back in capacity while being more efficient; again, the burn difference will come from the revenue recovery. Where we're seeing it exactly today is what we've modeled out as we go into the fourth quarter. As we look into next year and forward, it's the demand recovery that gets us back flying our entire fleet, getting the revenue back and being as efficient as we can to cut those costs out in 2021.

Duane Pfennigwerth, Analyst

Just for a follow-up there. This morning on a CNBC interview, I think it was mentioned that there's nothing more -- we've done virtually everything we can on costs at this point. I guess my question would be, are you at a structural disadvantage for some reason? Or what would you need to see in terms of this recovery for that view to change? Thanks for taking the questions.

Doug Parker, Chairman and CEO

Yes, again, what I said: look, at this point, we haven't done anything we cannot -- we haven't gotten all the cost we can. By now, we sure have showed out. So as you've heard from all the airlines right now, that's where we've gotten to. We've reduced all the costs we can at this point. Clearly, as we ramp back up, as Derek and others have already said, we don't expect you should see the same kind of cost rate going forward. Your question is, of the fourth-quarter estimate of 25, 30 cash burn number, how does that get better? We don't want to create the impression that it’s going to get a lot better because we’re further able to reduce costs for existing cost levels. Just as our other large competitors, these cash burn numbers are virtually exactly the same in the fourth quarter; they aren’t going to be doing much about it as well. Those numbers will get better for all of us when demand recovers, and that is what is required. If it doesn't, we all stay at these burn rates. I don't think anyone expects that to be the case. It hasn't been the case through this year or anything close to it. So we've gotten the improvement in these burn levels from the third quarter to the fourth quarter. Some of that is cost savings due to the furloughs, but our biggest driver is revenue improvement, and that's what will be the improvement as we go forward. If we get back to cash positive again.

Operator, Operator

Thank you. And our next question comes from Andrew Didora of Bank of America. Your line is now open.

Andrew Didora, Analyst

As Derek maybe told -- to ask Duane's question a little differently on costs, maybe put it on the revenue side. So what level of revenues versus 2019 do you feel like you need to be at in order to reach cash breakeven?

Derek Kerr, Chief Financial Officer

I mean, we've said from a revenue perspective, our rebuilding the airline hinges on our getting to loads in the 65% to 75% range; that's kind of where we will be at breakeven. Given that, we will need to get most of our aircraft back in; getting those loads in the 65% to 70% range will drive the revenue recovery and get us back to breakeven from a cash perspective.

Andrew Didora, Analyst

And then just my second question, maybe for Vasu. Can you talk about your discussions with global authorities and how you're thinking about potentially the reintroduction of long-haul international networks? What regions or routes do you think could come first, particularly when you think about your new fleet plan?

Vasu Raja, Chief Revenue Officer

So we mentioned earlier, we are actively working with a number of global regulatory bodies; no more so than with the UK, since our largest international connecting point is indeed our hub in Heathrow. Between ourselves and IAG, we’re closely working with the UK government to create an air travel corridor, which could be the basis for further reopening long-haul services to the UK and indeed the template for how we can do long-haul reopenings more globally. Other than that, while that primarily impacts our European and to some degree our Asian network, our South America network is already coming back. Most of our Miami to South American schedules are in place and doing quite well. By the time we get into December, that will continue. A big part of our long-haul network, which is South America, we expect to be back certainly by New Year’s. We are working in this arena to see how we can reopen travel corridors. This is important for the global aviation community and for customers everywhere, as it helps to create a smart way to get these markets reopened and a template for doing it elsewhere.

Operator, Operator

Thank you. And ladies and gentlemen, this does conclude our Analyst Q&A [Operator Instructions]. Our first question comes from Alison Sider of Wall Street Journal. Your line is now open.

Alison Sider, Analyst

Just curious how you're thinking about sort of changes in the competitive landscape seeing some of your competitors starting to announce plans to go into new cities, including some of your hubs, Chicago and Miami. Just curious how you’re seeing that playing out and how you all respond?

Robert Isom, President

We welcome the competition. We've got an incredibly strong network as we’ve talked on the call today, and assets that will serve our customers really well. So look, we're excited about the potential for the return of demand and can do when it does come back, and we're ready to take on competition no matter where it comes.

Operator, Operator

Thank you. And our next question comes from Leslie Josephs of CNBC. Your line is now open.

Leslie Josephs, Analyst

Just want to ask about the advantage program. Do you have any sense of where revenue is going? Is it recovering? And what's your outlook for co-brand card spend going forward, maybe even in 2021?

Vasu Raja, Chief Revenue Officer

We are indeed -- our revenues haven’t fallen nearly at the rate of overall passenger revenue, simply because people continue to keep spending out there. Indeed, as we look at consumers more broadly, savings are up, people are spending on different things. We were actually one of our major priorities in the year and years ahead; work even more closely with our co-brand providers, Citi, Barclays, and even MasterCard as well, to ensure our card is on top of mind and is driving increasing spend for our customers and revenue for American Airlines.

Operator, Operator

Thank you. And our next question comes from David Koenig of Associated Press. Your line is now open.

David Koenig, Analyst

Can you discuss Thanksgiving and Christmas bookings and what kind of look-back you are expecting for those holidays? And also to clarify, Derek. Are you saying 65 to 70 load factors for breakeven, even with the current mix of business and leisure being heavily in leisure?

Vasu Raja, Chief Revenue Officer

This is Vasu, and I can answer both questions. So for the second one first: Really the simple way to think of it is, maybe 65% to 70% of 2019 revenues, which Derek was giving you, is holding our yield comps and thinking about load factors. To your first question, yes, we do anticipate that the Thanksgiving period and the December second half period will be relatively stronger. We have seen, over the last several holidays, Columbus Day, Labor Day, July 4th and Memorial Day, become sequentially stronger. As consumers start returning to life and resuming spending in full-service restaurants, going back-to-school and things like that, shortly thereafter searches resume and air travel spending resumes. Even with current rates of case growth, we continue to see this in many geographies, specifically those in the Sunbelt that are most critical for American Airlines. We see that as we approach the Thanksgiving week, more than half of our flights are being yield managed, meaning the airline is holding out anticipating higher revenues closer to departure. That’s promising, which we hadn't seen in the past. Now this is a volatile environment; the recovery will be choppy, and we will respond accordingly, but things are better than they were, but far from sustainable.

Operator, Operator

Thank you. And our next question comes from Justin Bachman of Bloomberg. Your line is now open.

Justin Bachman, Analyst

I want to know if you could clarify a bit on the timing around the 737 Max deferrals that you announced. As far as what really is your thinking that sales will come? And are you thinking about any other aircraft deferrals if the business is not returning as you're hoping? Thank you.

Unidentified Company Representative, Company Representative

The deferrals we have for 18 deliveries in 2021, and we have deferral rights on eight of those aircraft. We also have deferral rights on all 10 aircraft that are scheduled for 2022. We will make those decisions down the road when we take into consideration the demand environment as they come back. Those can be deferred to 2023 and 2024. That's where we're at on this. Moreover, we have been working with Airbus to make and spread the delivery stream there. We have moved some of the ones that were coming in 2021 to 2022. So we've pushed a little bit. At this point in time, we are pretty firm on where we are from the delivery schedule with Airbus and Boeing.

Operator, Operator

Thank you. And our next question comes from Edward Russell of TPG. Your line is now open.

Edward Russell, Analyst

I was wondering if you could talk a bit more about the Max return to service; there were some reports earlier this week that you'll be flying it around the Christmas time, but I know those dates have slipped repeatedly. How confident are you about that return timeline?

Unidentified Company Representative, Company Representative

It really just depends on what happens. The aircraft is going to be returned and ungrounded when the FAA says it's okay, and after we and our team get a chance to take a look at it. Based on what we're hearing, that would allow for ungrounding in November. If that holds true, we’ll likely have the aircraft up in service a month or so after that; potentially by the very end of December. But it all remains to be seen, and we're incredibly flexible in terms of any timing as we have done over the last course of the last year or so.

Operator, Operator

Thank you. And our next question comes from Kyle Arnold of Dallas Morning News. Your line is now open.

Kyle Arnold, Analyst

I know that Chicago and New York, New Jersey, Connecticut expanded some of their travel quarantines. How problematic are the travel here domestically? And is there anything that can be done to stimulate travel in those areas on the west coast and the Northeast where it's not as strong as some other areas of the country?

Unidentified Company Representative, Company Representative

Travel will come back when there are things that are open and safe for people to do. Certainly, any type of restrictions or quarantine are not helpful. We’re trying to make things easier on customers where there are any type of difficulties, such as the work we’re doing in the Caribbean and Hawaii and the efforts we are engaged in to open up travel corridors in Europe and the UK. But the key for all of this is having things for people to do. One of the things we have pointed out is that the great indicator is restaurants being open, which is a good sign that people are able to travel to various destinations. That’s a critical key. In that regard, we’ve worked with many of our partners, through the travel association and travel partners, with regional companies as well. Many of us are looking to attract tourism and are working to make sure we’re all on the same page going forward. One of the things to reduce confusion with our customers is we just placed on our aa.com site where you can name a new destination and it can tell you what requirements to travel are in place for those spaces. This is really helping our customers understand and ease their travel as well as helping them with bookings going forward.

Operator, Operator

Thank you, and this concludes our media Q&A. I will now turn the call back over to Doug Parker for closing comments.

Doug Parker, Chairman and CEO

Thanks everyone for your interest. If you have further questions, you can just contact Investor Relations or corporate communication. We appreciate your time. Thank you very much.

Operator, Operator

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