Earnings Call Transcript - AAL Q2 2025

Operator, Operator

Thank you for your patience, and welcome to the American Airlines Group's Second Quarter 2025 Earnings Conference Call. I will now turn the call over to Neil Russell, Vice President of Investor Relations. Please proceed.

Neil Russell, Vice President, Investor Relations

Thank you, Latif. Good morning, everyone, and welcome to the American Airlines Group earnings conference call. On the call with prepared remarks, we have our CEO, Robert Isom, and our CFO, Devon May. In addition, several of our senior executives are present for the Q&A session. Robert will begin with an overview of our performance, followed by Devon who will provide details on the quarter as well as discuss our operating plans and outlook moving forward. After our prepared remarks, we will take analyst questions, followed by questions from the media. Before we begin, we want to mention that today's call contains forward-looking statements regarding future revenues, costs, capacity forecasts, and fleet plans. These statements reflect our predictions and expectations about future events, but various risks and uncertainties could result in actual outcomes differing from those anticipated. Information about some of these risks and uncertainties can be found in our earnings press release and Form 10-Q issued earlier today. Unless otherwise stated, all references to earnings per share are on an adjusted and diluted basis. We will also be discussing certain non-GAAP financial measures, excluding the effect of unusual items. A reconciliation of these figures to GAAP financial measures is included in the earnings press release available in the Investors section of our website. A recording of this call will be archived on our website. The information we provide this morning is accurate as of today's date, and we are not obligated to update it afterward. Thank you for your interest and for joining us this morning. Now, I'll turn the call over to our CEO, Robert Isom.

Robert D. Isom, CEO

Good morning, everyone. This morning, American reported an adjusted pretax profit of $869 million for the second quarter or earnings per share of $0.95, which is toward the high end of the guidance we provided in April. We achieved this in a difficult and evolving operating and demand environment, and we're proud of our second quarter performance. We remain steadfast in our focus on our 2025 priorities, which will continue to shape the long-term success of American. Executing on these priorities will enable us to grow margins, generate sustainable free cash flow and further strengthen our balance sheet. Our priorities this year include delivering on our revenue potential, renewing our focus on the customer experience, operating with excellence and driving efficiencies throughout the airline. We're pleased with the progress we've made on each of these fronts, and we'll share more on them this morning. Let's begin with our performance during the second quarter. In the second quarter, we produced record revenue of $14.4 billion, a testament to the progress we're making on our commitment to deliver on our revenue potential even in a challenging environment. Our year-over-year passenger unit revenue improvement led our network peers for the fourth straight quarter. Long-haul international PRASM performed in line with our initial expectations with all entities producing positive year-over-year results. Driven by continued strength in the premium cabin, Atlantic PRASM was up 5% and Pacific PRASM was up approximately 1% year-over-year on approximately 17% more capacity. Premium demand and spending from higher-income consumers remained resilient in the second quarter. On a year-over-year basis, unit revenue in the premium cabin performed 4 points better than the main cabin. We're well positioned to attract premium customers with plans to expand our premium seating further in the years ahead. The strength in international and premium was offset by domestic leisure weakness. Domestic unit revenue was down approximately 6% year-over-year as softness in the main cabin persisted throughout the second quarter. While domestic unit revenue is expected to remain lower year-over-year in the third quarter, we expect that July will be the low point and that performance will improve sequentially each month in the quarter as industry capacity growth slows and demand strengthens. As shown on Slide 4 of the earnings presentation that we published this morning, the efforts of our sales team to recover revenue from indirect channels beat our expectations in the quarter, with our indirect share now down 3% versus historical levels. We saw the greatest sequential improvement in indirect leisure channels, but we continue to make progress in corporate channels. We remain on track to get back to our historical share of indirect channel revenue as we exit 2025. In the second quarter, we grew our managed business revenue by 10% year-over-year, outpacing broader industry growth. This result is further confirmation that our sales and distribution efforts are being well received by our customers. Our work to grow the AAdvantage program and enhance our partnership with Citi is continuing as we prepare for the start of our new 10-year agreement in January 2026. Slide 5 highlights that active AAdvantage members have grown 7% year-to-date with our highest growth in enrollments coming from Chicago, Dallas-Fort Worth and New York. AAdvantage members are more engaged, generate a higher yield versus nonmembers and are a key driver for premium cabin demand, currently accounting for approximately 77% of premium revenue. Spending on our co-branded credit cards was up 6% year-over-year for the second quarter as customers continue to favor AAdvantage miles as their preferred rewards currency. American remains committed to offering an industry-leading travel rewards program, and we look forward to sharing more exciting updates in the months ahead. The further strengthening of our network remains a key priority for the team. In the second quarter, our growth was focused on Chicago, New York and Philadelphia, three strategic hubs critical to our network and where we continue to see long-term opportunity. We're encouraged by the early results from this additional capacity with share, unit revenue and financial results tracking in line with or ahead of expectations. We'll remain responsive to the demand and competitive environment as we execute our long-term network strategy, and we remain focused on deploying capacity that best serves our customers. Our new customer experience organization is elevating every part of the travel journey. We've continued to make meaningful improvements across all phases of the customer experience. We've announced several exciting updates to our lounge network, including opening a new flagship lounge in Philadelphia. In Miami, we've announced plans for a new flagship lounge and are expanding the Admirals Club lounge footprint. American is proud to offer more premium lounges than any other carrier. Later this summer in Charlotte, we'll open Provisions by Admirals Club, a new, unique and additional lounge concept for customers that are seeking a quick refreshment before catching their next flight. The new flagship suite on our Boeing 787-9 officially entered service last month on select flights to London. This winter, this premium offering is expected to expand to Argentina, New Zealand and Australia, giving more customers the opportunity to enjoy this elevated experience. Customer response to the new aircraft and flagship suite product has been overwhelmingly positive. We want our customers' experience at the airport to be as easy and seamless as possible. In May, we implemented TSA Touchless ID, which significantly expedites the security screening process. Additionally, we're the first airline to test one-stop security for flights into the U.S., starting with American flights from London to Dallas-Fort Worth, allowing customers to bypass baggage reclaim and TSA rescreening upon arrival. We're excited to be the first carrier to implement one-stop security, which will greatly enhance the connecting experience and overall journey for our customers traveling internationally. Thank you to the Department of Homeland Security for its continued partnership and commitment. We've also introduced several additional customer enhancements during the quarter, including an option for customers to use miles as a form of payment for upgrades and improvements to our in-flight food and beverage offerings. We're excited about the momentum we've built, and we're just getting started. Our customer experience team is undertaking a comprehensive review of every phase of the travel journey and making investments that will deliver tangible improvements for our customers and our revenue performance. Turning now to our operation. The team has continued to plan, execute and recover through very difficult operating conditions this summer. Disruptive operating conditions are a reality of our business, and the American team continues to do an excellent job recovering from irregular operations and mitigating the impact to our customers. In the second quarter, there was significant storm activity at our hubs in Dallas-Fort Worth, Chicago, Washington, D.C. and in the Northeast, a 36% increase in disruptive operational events over the same period last year. Thanks to the investments we've made in technology and our operations and our team's continued focus on controlling what we can control, we were able to recover quickly from these disruptions. A big thank you to the entire American Airlines team for continuing to deliver for our customers in the midst of a very challenging operating environment. Finally, I'd like to acknowledge the families and communities affected by the catastrophic flooding in Central Texas. American is a proud Texas-based airline, and we've joined forces with our disaster response partners, the American Red Cross, Airlink and Team Rubicon to aid relief efforts and support impacted families. Now I'll turn the call over to Devon to share more about our second quarter financial results and outlook.

Devon E. May, CFO

Thank you, Robert, and good morning, everyone. Excluding net special items, American reported a second quarter operating margin of approximately 8% and earnings per share of $0.95, both at the high end of our guidance. Our second quarter revenue of $14.4 billion was up 0.4% year-over-year. Second quarter unit cost, excluding fuel and net special items, was up 3.4% year-over-year, over 0.5 points better than the midpoint of our guidance. This is a result of the team's continued strong execution on our efficiency initiatives and a shift in timing of maintenance events to later in the year. This resulted in an EBITDAR margin of 14.2%, a 1.5-point reduction year-over-year, which is similar to the year-over-year margin decline of our network peers. This is a great result considering the current domestic demand environment and our differentiated position, which includes the relative domestic weighting of our network and paying full market rates for all of our largest labor groups. We are committed to running the airline as reliably and efficiently as possible while continuing to improve our revenue performance and enhance the customer experience. These efficiencies are driven by best-in-class workforce management, efficient asset utilization and procurement excellence and are unlocked by investments in technology and process improvements. By year-end, we expect to have driven cumulative savings of over $750 million and delivered approximately $600 million of working capital improvements since we launched our reengineering the business efforts in 2023. During the second quarter, we raised $1 billion through a loyalty term loan financing and used the proceeds to cash settle our $1 billion convertible note earlier this month. American ended the second quarter with approximately $38 billion of total debt and $29 billion of net debt, our lowest net debt levels since the third quarter of 2015. We ended the second quarter with $12 billion of total available liquidity. In the quarter, we produced $791 million of free cash flow and have now produced $2.5 billion of free cash flow in the first half of the year. We anticipate having positive free cash flow for the full year. With regard to our fleet, we now expect to take delivery of 50 new aircraft this year at the high end of our previous range of 40 to 50 deliveries. This is driven by earlier-than-planned deliveries of several aircraft that we now expect to receive in the fourth quarter, a few months earlier than our previous expectation of the first quarter of 2026. Based on these expected deliveries, our 2025 aircraft CapEx, which also includes used aircraft purchases, spare engines and net PDPs is now expected to be between $2.5 billion and $3 billion, and our total CapEx is expected to be between $3.5 billion and $4 billion. We continue to expect moderate levels of CapEx in future years with annual aircraft CapEx averaging approximately $3.5 billion for the remainder of the decade. I'd now like to walk you through our outlook for the third quarter. We continue to be mindful of both the demand and competitive environment as we develop our capacity plans for the remainder of the year. For the third quarter, we expect capacity to be up 2% to 3% year-over-year. Our year-over-year domestic capacity is up by approximately 5% during the July peak, but growth will slow to approximately 2% in August and will be down 1% in September. We expect third quarter revenue to be between down 2% and up 1% year-over-year. We expect July to be one of the year's weakest year-over-year RASM performing months given the higher industry capacity and that the month was largely booked prior to the strengthening demand trends we have seen over the past couple of weeks. But we believe the worst is behind us and year-over-year revenue will sequentially improve each month this quarter. Third quarter nonfuel unit costs are expected to be up 2.5% to 4.5% year-over-year, driven primarily by the collective bargaining agreements we have ratified over the past two years. This performance is in line with the second quarter, but on a lower rate of growth. We expect similar performance in the fourth quarter given the shift in maintenance expense from the second quarter to the fourth quarter. Based on our current demand assumptions and fuel price forecast, we expect to produce a third quarter loss per share of between $0.10 and $0.60. Based on recent demand trends, we expect full year earnings per share of between a loss of $0.20 and a profit of $0.80, with the midpoint being a profit of $0.30 per share. We believe the top end of the range is achievable if demand in the domestic market continues to strengthen, and we would only expect to be at the bottom end of the range if there was macro weakness that we don't see in our recent booking trends. We are proud to be forecasting a profit in a year where we have faced the challenges of a tragic accident, significant and continued ATC delays, unprecedented weather, the full financial cost of new collective bargaining agreements, and a material drop in demand in the domestic market where we produce over 70% of our revenue. It is a testament to the durability of our business and the resilience of our people. I'll now turn the call back to Robert for closing remarks.

Robert D. Isom, CEO

Thank you, Devon. In closing, we're pleased with our second quarter results and the hard work of the American Airlines team. This year has been challenging, but our team has skillfully managed through an uncertain demand environment and difficult operating conditions to deliver a safe and reliable operation for our customers. We're confident that we're delivering on the right long-term initiatives. With our continued focus on execution, we remain on track to deliver for the long run. We believe American is uniquely positioned to benefit as domestic demand recovers in the back half of the year. With that, operator, you may now open the line for questions.

Operator, Operator

Our first question comes from the line of Jamie Baker of JPMorgan Securities.

Jamie Nathaniel Baker, Analyst

So Robert, you and I had a constructive exchange, in my opinion, back at the March Industrials Conference. So I wanted to kind of stick to that theme following some of the more recent OA disclosures. What we heard from a competitor when discussing the industry landscape is that several airlines are operating a double-digit percentage of their flights at a loss. So I guess my question for you, Robert, is twofold. First, can you give us an approximation maybe on a full year basis to adjust for seasonality, what overall percentage of American flying loses money and maybe how that's changed and evolved in recent years? And then second, is there a path towards a more modest percentage of loss-producing flying? How do you accomplish that? What are the upside drivers?

Robert D. Isom, CEO

Thank you, Jamie. To begin with, we do not base our airline operations on how other airlines view our business. We have a strong hub-and-spoke network and excellent partnerships, and we take pride in our achievements. When looking at our performance, the main differences between us and some competitors can be summarized in two points. First, we offer our team members competitive wages, whereas others do not, and this will likely affect them in the long term. Second, our network is primarily focused on domestic routes, which have faced challenges due to economic uncertainty and a hesitance among domestic travelers. However, we believe this will change and become beneficial for us. As demand and capacity align more closely, our strategy will help American Airlines prosper in the long run by maximizing our revenue potential and enhancing the customer experience, with a focus on premium services and international growth. This progress is supported by our remarkable efficiency, and I take pride in our achievements.

Operator, Operator

Our next question comes from the line of Conor Cunningham of Melius Research.

Conor T. Cunningham, Analyst

Two, if I may. You mentioned a sequential improvement in the U.S. domestic market as you think about through Q3. There's obviously been a wider range of outlooks from some of the other players out there. So I was hoping that you could help frame up what you actually see within your U.S. domestic performance from maybe July to September. Does it just track the capacity plans? And the reason why I ask is like, obviously, things changed in July, and you talked about how you were basically fully booked for July. So if you could just talk about where you're booked for the remainder of Q3 and then maybe Q4, that would be super helpful.

Robert D. Isom, CEO

Sure, Conor. I can start. But I just want to note that our Vice Chair and Chief Strategy Officer, Steve Johnson, he's recovering from a case of pneumonia, not with us today. He's fine, but getting some rest and is on the mend. So I'll start and hand it over to Devon. Look, when we take a look at what we've got on the books right now, July has been tough, really hit hard by the uncertainty during the primary booking period for those that wanted to travel in July. And as we take a look through the third quarter, we probably have about 65% of revenue on the books. I think that's probably plus or minus right, and about 20% on the books for the fourth quarter. So there's a lot to go and good reason to have a lot of optimism for some of the trends that we're seeing going from July into August and September and into the fourth quarter. But also, look, we've had a lot of volatility in the business so far, and we want to be mindful of that as we forecast as well.

Devon E. May, CFO

Yes. Not much to add. Like Robert said, we will see sequential improvement throughout the quarter. July is going to look a lot like our second quarter results. But as we get into August and September, we're going to see some nice improving trends there and expect that to continue into Q4.

Conor T. Cunningham, Analyst

Okay, that's helpful. I’d like to discuss earnings baselining. A lot has happened in the first half of this year, and my question is about the current potential of the business now that demand has returned to a level similar to what you anticipated in January. Could you share the headwinds you encountered in the first half of this year and what you don’t expect to repeat next year? That would help as we consider 2026 and beyond.

Devon E. May, CFO

Yes. We're obviously a ways off of run rate earnings right now, and we see a lot of potential for margin expansion as we go forward. And it's everything Robert has talked about, and it's everything we've talked about over time. Like as we look out for the next six months, domestic marketplace is going to improve, and that's a great tailwind for us. As we head into next year, we expect that to continue, and we're going to start benefiting from our new credit card agreement with Citi, which we're incredibly excited about. We continue to invest meaningfully in the customer and the premium experience, which we think is also going to drive nice tailwinds for us. So this year, obviously, a really tough first half. We think we're going to get some nice tailwinds as we head on into the second half and expect expansion as we head into 2026.

Operator, Operator

Our next question comes from the line of Catherine O'Brien of Goldman Sachs.

Catherine Maureen O'Brien, Analyst

Two questions. First one, a bit of a follow-up to Conor's. Can you just speak on how you're thinking about capacity and unit costs versus January? Within the low single-digit and mid-single-digit ranges you're expecting, have things shifted at all? And then I know this is early, but this year, I think you had a couple of points of pressure from new labor contracts. Can you just speak to like headwinds and tailwinds we should be thinking about into next year?

Devon E. May, CFO

Sure. This year is largely unfolding as we expected to start the year. First quarter, we had guided to CASM up 8% for a lot of reasons that we had talked about, mainline regional mix, labor expenses, a reduction in capacity. We came in just inside of that. Second quarter, we had guided to CASM up 4%. Again, we came in just inside of that number and felt good about it. We're executing on all of our different cost initiatives. We did benefit in the second quarter with some maintenance expense that pushed out to Q4. And so we're going to see a similar unit cost trend to what we saw in the second quarter for both the third and fourth quarter. So at the midpoint, unit costs up probably somewhere around 3.5%. As we head into 2026, it's early. It's going to be somewhat dependent on our capacity production. But I'd just say, over the long term, I think we've done an exceptional job managing costs. We spent the last couple of years really focused on reengineering the business for efficiency, and that's across the entirety of our business. And I think we're doing a really nice job with it. So that's the outlook for this year. And I think in '26, we'll continue to perform really well relative to the rest of the industry.

Catherine Maureen O'Brien, Analyst

Okay. Great. And then maybe just one on the indirect revenue share, if I could. I saw that came in better than expected in the second quarter. But on an operating margin basis, the gap to peers is about the same this quarter. It was in the second quarter of last year with indirect revenue much more recovered. Is there an element where revenue share is getting close to historical levels that's more volume driven than it was before the distribution strategy change and there's some element of pricing that recovers over time in those contracts? Or is it the margin pressure is coming from the relatively higher domestic exposure and maybe more market labor rates versus one of your peers you spoke about earlier in the call. Just would love to unpack that.

Devon E. May, CFO

Thanks. You captured it perfectly at the end. It truly feels like a remarkable achievement that our margin performance year-over-year closely aligns with our peers. This is particularly notable in a quarter where our weakest segment was the domestic marketplace, which we are more exposed to. Additionally, as you mentioned, we are dealing with the full costs of new collective bargaining agreements, while at least one of our peers has not yet faced this situation but will in the future. Given these circumstances, maintaining the same year-over-year margin is quite an impressive result. This can also be seen in our unit revenue figures. We have witnessed four consecutive quarters of strong performance in unit revenue. However, it's challenging to translate that into margin or relative margin given these differences.

Robert D. Isom, CEO

And Catherine, I'll just add, one of the other proof points is the corporate managed traffic that's improved 10% year-over-year in a relatively flat business market. We're not done yet. And that's the point, I think, is really important. We've got a few percentage points more to get back to where we were prior to the sales and distribution strategy change. But we've got even more from that because we know that our network and our team is capable of delivering at higher levels. I do believe that the last few percentage points going to be hard. But also, I think that they're going to be the most profitable points we bring in.

Operator, Operator

Our next question comes from the line of Tom Wadewitz of UBS.

Atul Maheswari, Analyst

This is Atul Maheswari on from Tom Wadewitz. Robert, if I heard you right, did you say that you're expecting a full recovery in indirect channel market share as you exit 2025? So if you could please confirm that? And related to that, are you able to quantify what would be the revenue lift that we should expect for 2026 as you run rate the 2025 exit rate to all of next year?

Robert D. Isom, CEO

Well, Tom, I'll start with the first point regarding our historical share. As we exit 2025, we are on track to restore our full indirect channel share. This means that while it won't be reflected in the full year 2025 results, I expect to see it materialize as we move into 2026. Last year, we mentioned this could represent $1.5 billion in revenue, and a significant portion of that is expected to flow through. We are very pleased with our performance in getting back on track.

Atul Maheswari, Analyst

Okay. And then as my follow-up, just following up on some of the questions that have been asked already. But if we look at your profit margins, relative to your network peers, just it would seem based on the outlooks that all of you have provided this year that your margin gap even at the EBITDAR level is likely to widen this year. So really, as you look out over the next few years, what do you think American really needs to do to make progress in bridging this gap? And do you think there are any structural impediments to American actually fully bridging this gap over time?

Devon E. May, CFO

At the end of last year, we had a 2-point EBITDA margin gap compared to United, including Delta's third-party business, and similarly a 2-point gap with them as well. We anticipate closing this gap over time. This year is unique for various reasons, and it's necessary to analyze the situation more closely. We have a larger domestic focus than our main network competitors, and we are at different stages concerning collective bargaining agreements; we have all ours finalized, whereas one competitor does not. Therefore, improvements in margin may not be immediate. However, we do expect to close that margin gap over time. We don't see any structural issues contributing to it. There are several key factors involved, including sales and distribution, which was a challenge last year and continues to be this year, but we believe it will positively impact our margin next year. We also have a significant partnership with Citi that has created a gap compared to our peers, but we are confident in our partnership and expect to close that gap in the future. Additionally, we are pleased with our commercial initiatives and investments in premium offerings, which we believe will support our goals. While there is a gap currently, we expect to address it and see improvements by 2026.

Operator, Operator

Our next question comes from the line of Michael Linenberg of Deutsche Bank.

Unidentified Analyst, Analyst

This is Shannon on for Mike. American recently decided to withdraw its lawsuit against Chicago Aviation authorities. What is your current position on this matter? Additionally, how does this impact your flight schedule for later this year and early next year from Chicago? It seems you expected to have more slots available rather than fewer.

Robert D. Isom, CEO

Thanks for the question. And regarding Chicago, this is a tremendous opportunity for American. We've been slowest to rebuild out of the pandemic our network for a number of reasons, largely because of pilot shortfalls in our regionals. But now that we have full ability to staff, we're in good shape. And so you'll see Chicago hit 485 peak departures, and we're on our way to producing even more than that, over 500 as we take a look into next year. We have the gate capacity we need to fulfill that growth and even more. And in terms of the status of the litigation, we feel really good about where we're at. We worked with the city to design and finance the expansion in Chicago. And all we're asking to do is have them live up to what they said they would do in terms of gate allocation. So we're not concerned. We've got what we need now, and we're going to have what we need going forward.

Unidentified Analyst, Analyst

And if I just may follow up, on the Embraer tariffs, we've heard that some airlines don't have to accept delivery of airplanes. Is that going to be the case with you and Embraer assuming that current tariff goes through?

Robert D. Isom, CEO

Embraer is a terrific partner. And the E175s are just an exceptional aircraft with soon to be satellite-based WiFi and a full first-class cabin. And so it fits really well. We're proud to be the operator of the world's largest fleet of Embraer aircraft, and that's unique to American. We're working with Embraer on deliveries, but we don't anticipate any long-term issues. As a matter of fact, we know that the Brazilian government is working with the administration and Embraer as well. And so over the long run, we know what's best. There's a tremendous amount of U.S.-based content on those Embraer aircraft, and there's a lot that goes into negotiating trade deals. So we stand by ready to help in any way, and we've made sure that the administration and Embraer knows our interest and we're confident we'll be taken care of.

Operator, Operator

Our next question comes from the line of Andrew Didora of Bank of America.

Andrew George Didora, Analyst

So Robert, you've been speaking a lot about your revenue share in indirect channels. When I think about share more broadly, right, like your capacity growth has been trailing your network peers for the past six or so quarters. I guess as we move forward from here, are you content with growing less than your peers and driving that RASM outperformance that you've been getting? Or does there come a time when share matters and you need to maybe at least grow in line with some of your primary competition? Any thoughts around that?

Robert D. Isom, CEO

It's always a balance. We're committed to ensuring our network meets our customers' needs profitably over the long term. We're very pleased with our hub network, which is located in the fastest-growing metro areas in the United States. As highlighted in our recent announcement regarding the new terminal F in DFW, this development will allow DFW to become the world's largest hub. We are confident that our hubs will foster further growth. Specifically, as we look ahead to 2026, we plan to restore our presence in Chicago, continue to enhance Philadelphia, which has been a bright spot, and keep investing in Miami. This strategy aligns with our strong domestic network, which is essential for supporting international growth. Our fleet will enable us to capitalize on these opportunities, including both the international market and premium segments. So, we have positive prospects on the horizon, and we are focused on taking care of our customers.

Andrew George Didora, Analyst

Got it. And for my second question, I know you've mentioned that your corporate revenues are growing 10% in a relatively stable market. Can you provide more details on the recent improvement in demand that gives you the confidence to discuss increased revenue growth, especially considering the tougher comparisons as we approach the latter half of the year?

Robert D. Isom, CEO

Yes. It's just booking trends, and it's especially what we see coming from June moving into July. And then as you move into August and September, we feel really confident in terms of an improving capacity and supply environment and American benefits, and we should benefit more than others given our exposure.

Operator, Operator

Our next question comes from the line David Vernon of Bernstein.

David Scott Vernon, Analyst

So Robert, I wanted to ask you a little bit about the investment in sort of the customer experience. And I want to ask it in kind of two ways. One, first, kind of as you look at yourself relative to your peers, where are the big opportunities for you to improve the customer experience? And as you talk to investors about this, like how are you thinking about measuring this? Is it Net Promoter Scores? How are you going to kind of judge the performance on improving the overall customer experience? Obviously, it will eventually show up in the bottom line. But I'm just wondering how are you thinking about talking about your progress on this journey to improve with investors and analysts?

Robert D. Isom, CEO

Thank you for the question. We'll gauge this based on our customers' perceptions and revenue performance. First, we will assess our Net Promoter Scores, which will be a significant factor. Concerning revenue performance, we aim to enhance premium revenues and overall revenue, focusing on unit revenues as a key metric. We have a longstanding history of improving customer experience, and we're building on that with new flagship suites on our 787s, and soon on our 321 XLRs and 777-300s being reconfigured. Additionally, our premium lounge network is the largest. We recently announced expansions in Philadelphia and Miami, with more to come, which are part of our planned capital spending. Thus, there's not much catch-up required on that front. We will continue to invest in our food and in-flight amenities while enhancing the premium experience. Looking ahead, our focus will be on serving premium customers, especially internationally, and our fleet is well-suited for this purpose. The changes I mentioned will enable us to accommodate nearly 50% more premium customers in premium seating as we approach 2030. From an international standpoint, our fleet will enhance our capability to operate flights by significantly more than 50% as we move toward 2030.

David Scott Vernon, Analyst

And as you consider your position compared to competitors regarding Net Promoter, do you evaluate that at all?

Robert D. Isom, CEO

We do. And we think it's a great opportunity. It's something, again, that is on a front that we take very seriously. It starts with running an exceptional operation. And we've been hit with our share of challenging operating conditions this summer, certainly in June and July, no place has been hit, no airline has been hit as hard as American. So it starts with running a reliable operation. We're making sure that we can recover as quickly as possible, investing in technology on that front. And then moving from there, it really is making sure that we have the basics and those things that are just essential for competition. And then there are some things that you're going to see us play in that we'll look to even outpace the competition. And on that front, it's all designed to improve our customer experience and revenue performance.

Operator, Operator

Our next question comes from the line of Duane Pfennigwerth of Evercore ISI.

Duane Thomas Pfennigwerth, Analyst

So depending upon how we interpret the guide for Q3, maybe there's slight sequential improvement in RASM depending upon how the quarter plays out. But I wonder how would you rank your enthusiasm for sequential improvement by entity, maybe domestic versus Atlantic versus Latin? And do you see a path back to positive RASM for domestic this year?

Devon E. May, CFO

Duane, I'll just say this about the environment right now in Q3 versus Q2. In the third quarter, domestic is going to be better, but it starts with a month of July that's going to look very similar to what we had in the second quarter. But we do expect improvement beyond that point, and that's actually the entity where we expect to see the most improvement. Transatlantic, we had outstanding performance in the second quarter. As the Iran conflict was heating up, that was during a pretty decent booking window for Q3. So we do expect a little bit softer performance in the Transatlantic in July and August. But by September, we think it's going to be performing really nicely again. The rest of the network, I think there's probably some pressure in short-haul Latin, long-haul, Latin and Transpacific will probably perform pretty similarly to what we saw in Q2. But when we look at it in totality, we really like the environment that we're in now versus where we were a couple of months ago. And especially as we get to the back end of this quarter, we think there's some really nice potential for positive unit revenue ahead. That's not baked into the guide. Obviously, we're going to have negative unit revenue this quarter at the midpoint. But we do think as we head out to the fourth quarter, there is potential for positive unit revenue performance.

Duane Thomas Pfennigwerth, Analyst

And then I may have missed it, apologies if I did, but you guys have been pretty good at keeping your capacity in kind of this 3% range, basically for all the quarters of this year, you made some comments about early deliveries. Does that change the trajectory for the fourth quarter? Or do you lean harder on retirements? Or is it just a rounding error?

Devon E. May, CFO

There may be a little bit more capacity that comes in, in the fourth quarter with deliveries. It's not going to be a huge amount, though. Just on retirements, I think you may be aware, we don't have any aircraft retirements that are necessary between now and the end of the decade. So for us, when we're managing capacity, it's really just being tight around utilization during the off-peak periods. And I think we were pretty quick to react here in the third quarter, at least for these periods like August and September, which are traditionally lower demand periods. As we head into the fourth quarter, though, we like the demand trends we're seeing, and I think we're going to put the right amount of supply in the market to meet that.

Operator, Operator

Our next question comes from the line of Savi Syth of Raymond James.

Savanthi Nipunika Prelis-Syth, Analyst

Just a clarification there, sorry. So on the domestic capacity side, with the declines, is that solely related to just taking off-peak capacity out. So as you get into the fourth quarter, you'll see that step up again? Is that how you're thinking?

Devon E. May, CFO

Well, I'll just say fourth quarter capacity isn't finalized yet. But yes, in the third quarter, like we would in a normal year, we pulled capacity down in August and September. This year, just given the trends we have been seeing in demand, as we went into the second quarter, we pulled August and September down more than we normally would. Some of that capacity would naturally come back in the fourth quarter, which is traditional seasonality, and that's what I would expect again this year.

Savanthi Nipunika Prelis-Syth, Analyst

It seems logical. Regarding operations, it appears that there have been significant improvements compared to the pre-pandemic period, but this year there are clearly more challenges. I'm curious if the issues are mainly due to DCA and weather, and if so, since weather conditions may not change, how do you plan to manage this situation? It looks like your performance metrics at American have declined in comparison to your competitors, despite your recovery being stronger.

Robert D. Isom, CEO

Thanks, Savi. I believe American consistently operates in the most reliable and safe manner. I take pride in our team’s ability to recover. Let’s review what we’ve been managing. In June, we saw regular operations increase by over 35% compared to the last couple of years. That trend continued into July, and I mentioned in another call earlier that we experienced nearly 800 diversion events and over 5,500 weather-related cancellations in just the first three weeks of July. This situation is not typical and will likely continue for some time, but we expect things to normalize as summer progresses. We are committed to making American as resilient as possible. This includes investing in schedules to add redundancy, allocating extra resources, and utilizing technology, including AI, to enhance our recovery plans and options for customers. I am confident in our ability to manage through these challenges, but we do need investment in air traffic control. Currently, one challenge we’re facing is specific to a slowdown at DCA, partly due to an aircraft incident earlier this year. I do anticipate a recovery from that situation, which will help. Overall, I expect weather patterns to become more consistent, and I believe that American will emerge strongly from this difficult period. Additionally, despite the irregular operations, our baggage mishandling rates are significantly improving, indicating our success in getting customers back on track when operational issues arise.

Operator, Operator

Our next question comes from the line of Tom Fitzgerald of TD Cowen.

Thomas John Fitzgerald, Analyst

Most of might have already been answered, but I'm curious just how you're thinking about the New York market organically now that seemingly a lot of the inorganic growth options there have been closed off.

Robert D. Isom, CEO

Thanks, Tom. We have a great franchise in New York. We're the third largest carrier with over 260 peak day departures across all three airports. Our largest operation is at the preferred New York Airport, LaGuardia, and we have 150 departures there. The new terminal is great. It does come at significant expense, but we're optimizing our network to adjust to make sure we can take New Yorkers to where they want to go and customers that want to go to New York, we're making sure that we have the ability to do that. And so based on what we're doing, we're seeing margin expansion year-over-year. And our oneworld hub at JFK Terminal 8, which I think is really unique to American. We offer a seamless experience with 125 peak day departures across AA and our partners. We've got a great product, especially from a transcon perspective, London Heathrow to New York, the biggest business market in the world. Yes, our New York is more specialized given our network and complements where we're strong in so many other places. But we have the ability to grow as well. And that growth can be through upgauging, and we're always making sure that we're flying to the right places.

Thomas John Fitzgerald, Analyst

That's really helpful. As a follow-up, could you provide any insights regarding the impact of WiFi headwinds for next year and the advantages from an improved fleet mix as you incorporate more premium-heavy aircraft?

Robert D. Isom, CEO

I’ll get started and Devon can add to it. Regarding satellite WiFi, it’s going to be fantastic. American will be the first carrier to offer satellite-based WiFi across its entire mainline fleet, except for our 50-seat regional jets. The installations are progressing well. We have a strong partnership for our satellite WiFi, which is sponsored by AT&T. This presents a great opportunity for both companies to meet our customers’ needs and find ways to improve our services. Given our partnerships, consumer sentiment, and service usage, I believe we will perform well and not see much impact on the profit and loss statement. I also mentioned earlier the work we’re doing on our premium products. We have an excellent foundation with our facilities, lounges, and the aircraft included in our capital plan. We will enhance that with additional amenities and service, but that shouldn’t have a significant impact either.

Operator, Operator

Our first question comes from the line of Alison Sider from the Wall Street Journal.

Alison Sider, Analyst

I guess on New York, I was curious what you all made of the United-JetBlue arrangement. How compelling do you think that will be? And how much of a step back is it that American wasn't able to come to some other agreement with JetBlue?

Robert D. Isom, CEO

Thanks, Ali. We had a productive partnership with JetBlue for several years that really benefited our customers. Unfortunately, we couldn't continue that into the future, and we haven't had that advantage for a couple of years now. As I mentioned earlier, we value our New York franchise. It's specialized and focused on aspects that are important not only for our network but also for our customers, including transcontinental and international service. We aim to take New Yorkers to their desired destinations and ensure we have a strong schedule from all our hubs to the New York area. New York is one of the markets where we've seen growth, with AAdvantage enrollments increasing even faster than in the previous couple of years. We recognize we have a great customer base there, and we will seek ways to serve them. We also have the potential to grow on our own by upgrading our fleet and leveraging our partner network in our oneworld hub at JFK Terminal 8. I'm confident in our setup and our direction moving forward.

Operator, Operator

Our next question comes from the line of Leslie Josephs of CNBC.

Leslie Josephs, Analyst

Just curious if you could talk a little bit more about this weakness you've been seeing with the consumer. Robert, I know that you mentioned the uncertainty going into July. What is that exactly? And what are the signs of that? And just because it differs a bit from what we heard from Delta and American. Sorry, Delta and United.

Robert D. Isom, CEO

Well, I think that differs from what we've said as well. So the uncertainty that is in July is really due to bookings that were made in the second quarter. As we move from June into July, we're seeing the same uptick in bookings that anybody else is seeing. It's been remarkable, and it's something that gives us great confidence as we look into August and September and the third quarter and the early bookings, we only have 20% of revenue on the books for the fourth quarter. But as we look out into the fourth quarter, it all looks very promising. That benefits us because it's largely domestic rebound. And so given our exposure domestically, I think that, that bodes very well. Now in terms of the drivers of the reduction in uncertainty, I think that comes from more stability, the tax bill. I think it comes from tariff deals being done with the U.K., recently announced Japan, hopefully something with the EU soon. So all of that bodes well for the consumer. Joblessness is trending in the right direction. While GDP has been pulled down a little bit, it's still positive for the back half of the year. And I think that, that all lends to a customer that's more willing to get out there and spend travel and do some things that they want to do.

Leslie Josephs, Analyst

Okay. And just one follow-up. One of your competitors was talking about using AI more for pricing. How do you think about that? And is that something that you're considering or already experimenting with?

Robert D. Isom, CEO

Thank you for the question. I think that some of the things I've heard are not good. For American, we will use AI to enhance our airline operations. This will lead to greater efficiency and make it easier for our team members to perform their jobs. For our customers, this will enhance their experience by allowing them to see more of the amenities we offer and helping them recover more quickly when issues arise. We currently have projects in motion that align with this approach. We discussed operational challenges, and one of our significant AI investments is a project called HEAT, which enables us to quickly rebuild operations going forward. We aim to get our product in front of consumers while ensuring they can trust American. This is not about misleading anyone, and we will not engage in those practices.

Operator, Operator

Thank you. This concludes the Q&A portion of the call. I would now like to turn the conference back to Robert Isom for closing remarks. Sir?

Robert D. Isom, CEO

Thanks, Latif, and thank you to everybody on the call today. We remain confident that the actions that we've taken to deliver on our revenue potential, strengthen our network, operate with excellence and find ways to drive efficiencies throughout the airline position us well for the long term. I want to thank you for joining us, and thank you for your support and interest. Have a great day.

Operator, Operator

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