American Airlines Group Q3 2021 Earnings Report

American Airlines Group EPS Results

• Actual EPS: -$0.99
• Consensus EPS: -$1.04
• Beat/Miss: Beat by +$0.05
• One Year Ago EPS: -$5.54

American Airlines Group Revenue Results

• Actual Revenue: $9.00 billion
• Expected Revenue: $8.92 billion
• Beat/Miss: Beat by +$81.55 million
• YoY Revenue Growth: +183.60%

American Airlines Group Announcement Details

• Quarter: Q3 2021
• Date: 10/20/2021
• Time: Before Market Opens
• Conference Call Date: Wednesday, October 20, 2021
• Conference Call Time: 8:00PM ET

American Airlines Group (NASDAQ:AAL) is a leading global airline holding company headquartered in Fort Worth, Texas. Formed in December 2013 through the merger of AMR Corporation (parent of American Airlines) and US Airways Group, the company operates one of the world’s largest passenger and cargo networks. Its subsidiaries include American Airlines, which provides mainline service, and American Eagle, a network of regional carriers operating short- and medium-haul routes on behalf of the mainline carrier.

The company offers scheduled air transportation for passengers and cargo to more than 350 destinations in over 50 countries. American Airlines Group maintains a hub-and-spoke route system, with major hubs at Dallas/Fort Worth, Charlotte, Chicago O’Hare, Miami and Phoenix. Its fleet consists of a mix of narrow-body and wide-body aircraft from manufacturers such as Boeing and Airbus, supplemented by regional jets operated under the American Eagle banner.

As a founding member of the oneworld alliance, American Airlines Group collaborates with several international carriers to extend its global reach, offering coordinated schedules, joint frequent-flyer benefits and shared airport facilities. In addition to passenger services, the company provides cargo operations for freight and mail, leveraging its belly capacity on passenger flights as well as dedicated freighter aircraft.

Under the leadership of President and Chief Executive Officer Robert Isom, American Airlines Group continues to invest in fleet modernization, customer experience enhancements and operational efficiency. The company traces its roots back to 1926, evolving through decades of route expansions, technological innovations and industry consolidation to become a cornerstone of the North American and global aviation markets.

American Airlines Group Q3 2021 Earnings Call Transcript

Key Takeaways

• American reported its smallest quarterly loss since the pandemic began with a GAAP net profit of $169 million (ex-special items net loss of $641 million), as Q3 revenues improved 12.5 points from Q2 and were down 25% versus Q3 2019.
• The airline flew over 80% of 2019 capacity in Q3 (versus 70% for peers), carried 48 million passengers, delivered its best-ever September reliability, and saw domestic leisure revenue at 98% of 2019 levels.
• By retiring 150+ older jets, completing its 737 retrofit and accelerating fleet harmonization, American now operates the youngest, most fuel-efficient U.S. network fleet and has locked in $1.3 billion of permanent annual cost savings.
• Strategic alliances with JetBlue in the Northeast and Alaska on the West Coast moved 715,000 passengers across partners in Q3, driving roughly a 0.5 point uplift to system revenues and broadening global connectivity.
• Looking ahead, American expects Q4 revenues at about 80% of 2019 levels with pretax margins (ex-items) between –16% and –18%, while maintaining $18 billion of liquidity and targeting $15 billion of debt reduction by end-2025.

Presentation

[Operator]

Good morning, and welcome to the American Airlines Group third quarter 2021 earnings conference call. Today's call is being recorded. At this time, all lines are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session. To ask a question, you will need to press star then one on your telephone. If anyone should require further assistance, please press star then zero. Now, I would like to turn the conference over to your moderator, Head of Investor Relations, Mr. Dan Cravens.

[Dan Cravens, Head of Investor Relations at American Airlines]

Thanks, Sarah, and good morning, everyone, and welcome to the American Airlines Group third quarter 2021 earnings conference call. On the call this morning, we have Doug Parker, Chairman and CEO, Robert Isom, President, and Derek Kerr, Chief Financial Officer. Also on the call and on the line as well for our Q&A session are several of our senior execs, including Maya Leibman, Chief Information Officer, Steve Johnson, our EVP of Corporate Affairs, Elise Eberwein, our EVP of People and Global Engagement, and Vasu Raja, our Chief Revenue Officer. Like we normally do, Doug will start the call with an overview of our quarter, and we'll update to the actions we've taken during the pandemic. Robert will then follow with some remarks about our operations, commercial, and other strategic initiatives. After Robert's remarks, Derek will follow with the details on the quarter and our operating plans going forward.

[Dan Cravens, Head of Investor Relations at American Airlines]

After Derek's comments, we will open the call for analyst questions and lastly, questions from the media. To get in as many questions as possible, please limit yourself to one question and a follow-up. Before we begin, we must state that today's call does contain forward-looking statements, including statements concerning future revenues, costs, forecasts of capacity, and fleet plans. These statements represent our predictions and expectations as to future events, but there are numerous risks and uncertainties that could cause actual results to differ from those projected. Information about some of these risks and uncertainties can be found in our earnings press release issued this morning and our Form 10-Q for the quarter ended September 30th, 2021. In addition, we will be discussing certain non-GAAP financial measures this morning, which exclude the impact of unusual items.

[Dan Cravens, Head of Investor Relations at American Airlines]

A reconciliation of those GAAP numbers to the GAAP financial measures is included in the earnings release, and that can be found in the investor relations section on our website. A webcast of this call will also be available on the website. The information that we're giving you on the call is as of today's date, and we undertake no obligation to update the material subsequently. Thanks again for joining us, and at this point, I'll turn the call over to our Chairman and CEO, Doug Parker.

[Doug Parker, Chairman and CEO at American Airlines]

Thank you, Dan. Thank you everyone for being with us. Good morning. Our third quarter started out very strong. Our domestic business revenue, which had climbed from 27% of our 2019 levels in March to 52% in June, jumped even more in July. Actually, it jumped to 64% as companies began to return to work and their employees began to return to the skies. As a result, we at American produced a profit in the month of July. The spread of the Delta variant led to a rebound in pandemic fears, of course. Companies deferred return to work plans, and that domestic revenue, domestic business revenues, fell back to 57% of 2019 in August and 47% in September. Now, I know some people find that trend discouraging, but we actually think it's encouraging.

[Doug Parker, Chairman and CEO at American Airlines]

The spike in business revenue in the month of July shows that business travel does want to return. There is enormous pent-up demand. Once this pandemic is behind us, it should resume its prior rapid trajectory to recovery. As to how that all gets reflected in the financial results, that profit in July, followed by larger losses in August and September, added up to a cumulative loss. On a GAAP basis, we actually reported a net profit of $169 million. When we exclude net special items, we recorded a net loss of $641 million. While we obviously don't like reporting losses, this is our smallest quarterly loss since the pandemic began in early 2020. What we're most proud of is how well the American Airlines team is performing.

[Doug Parker, Chairman and CEO at American Airlines]

No one is managing through this pandemic and into the recovery better than the people of American, it shows in the results. At a time when airlines are struggling to build back service in response to demand, no one has built back further and faster than American. We flew greater than 80% of our 2019 capacity in the third quarter, while our large competitors have restored only 70%. As a result, we flew 13% more seat miles in the quarter than our next closest competitor. Our team safely transported more than 48 million passengers in the quarter. Our team did this while doing an excellent job of taking care of our customers. We struggled with growth ourselves as we entered the quarter, but we responded quickly and aggressively.

[Doug Parker, Chairman and CEO at American Airlines]

We ended the quarter flying by far the largest airline in the world with the best September operational performance in American's history. That great performance by our team has led to strong customer acceptance, as evidenced by our industry-leading passenger counts and our revenue trends. For the quarter, revenues were significantly improved over 2020 and were down 25% in the third quarter versus the same period in 2019, whereas they were down 37.5% in the second quarter on the same year-over-two-year basis. Notably, our passenger unit revenues in the quarter were down 10% versus 2019, versus 12% declines at the other large international U.S. carriers, despite our higher capacity production. On the cost front, we've reshaped our network, simplified our fleet, and built operational and cost efficiencies into the business that will serve us well for years to come.

[Doug Parker, Chairman and CEO at American Airlines]

We accelerated the retirement of more than 150 older aircraft, and American continues to operate the youngest and most fuel-efficient fleet of the U.S. network carriers. Importantly, we've actioned more than $1.3 billion of permanent annual cost reductions into the business through our Green Flag initiatives. As we've navigated through the crisis, we've been careful to think and look long-term. We've announced a series of strategic relationships with other airlines around the world that strengthen the American network, adding additional utility to our customers and long-term value for our shareholders. The most notable of these are our Northeast Alliance with JetBlue and our West Coast International Alliance with Alaska, which we continue to implement and grow in the third quarter. Looking forward, we feel great about where American's positioned. Due to the deferred business demand and the recent rise in fuel prices, the fourth quarter will be challenging.

[Doug Parker, Chairman and CEO at American Airlines]

That's a near-term issue fighting a longer-term bullish trend. We're encouraged by the upside that exists in demand for business and international travel, and our confidence is reinforced by the incredible work the American Airlines team has done throughout this pandemic and continues to do today. We're particularly excited about the future that lies ahead for American and our team. With that, I'll turn it over to Robert.

[Robert Isom, President at American Airlines]

Thanks, Doug. Good morning, everyone. I want to start by thanking the entire American Airlines team for their efforts in the third quarter and throughout the pandemic. Our airline continues to succeed thanks to the hard work of our team. As Doug mentioned, this summer represented the largest operational ramp-up in the history of American. As we built back the operation, much like other businesses, we have managed through supply chain constraints, vendor and staffing challenges, constantly changing travel restrictions, and a lot more. Through it all, we operated more flights and carried more customers than any other U.S. airline, more than tripling our daily departures from May 2020, which was the low point of our schedule. We're pleased with where we are. American recorded our most reliable September since the merger based on completion factor, on-time departures, and on-time arrivals.

[Robert Isom, President at American Airlines]

We'll continue to focus on delivering a safe and reliable operation and continuing the momentum as we further scale our operation and welcome back even more customers. I also want to acknowledge the efforts of the American team in the third quarter in support of the U.S. Civil Reserve Air Fleet program. It was a tremendous honor for American to aid in the effort to bring more than 5,000 evacuees from Afghanistan to the U.S., as well as hundreds of members of the U.S. military. That work included working with the Customs and Border Protection to open our Philadelphia facilities as a welcoming center for foreign nationals. We're grateful to our team members throughout the airline and from all over the world who came together to support American's CRAF activation.

[Robert Isom, President at American Airlines]

As we reported this morning, our third quarter total revenue was approximately $9 billion, up $1.5 billion from the second quarter. This improvement was driven by our passenger revenue recovery, which increased by more than 20% sequentially from the second quarter on a 12% increase in available seat miles. Overall passenger revenue in the third quarter was 72% of what it was in the third quarter of 2019, which is up 13 points sequentially from the second quarter. Domestic leisure revenue has now returned to pre-pandemic levels at 98% of 2019 levels in the third quarter. As Doug described, business revenue growth stalled in the quarter and finished flat to the second quarter at around 50% of 2019 levels.

[Robert Isom, President at American Airlines]

Given recent booking trends with the Delta variant subsiding and everything we're seeing and hearing from our customers, we're planning for a robust peak travel period in the fourth quarter, and we're excited about the prospects for 2022. Here's why. We expect that domestic leisure revenues will surpass 2019 levels in the fourth quarter and continue that trend throughout 2022. Short-haul international revenues should follow that same pattern. Recent trends show that corporate bookings month to date have improved significantly and are accelerating like they were earlier in the year before the Delta variant and associated restrictions were imposed. Our largest corporate customers tell us they'll be returning more fully to the office and travel as we move out of 2021. Because of that, we continue to expect a full rebound of business revenue to 2019 levels on a monthly basis by the end of 2022.

[Robert Isom, President at American Airlines]

In speaking regularly with our top corporate customers, almost all have resumed domestic U.S. business travel to some extent. As companies return to the office and lift travel restrictions, we see continued growth in corporate travel. Industrials, healthcare, and professional services continue to lead that recovery. Long-haul international travel, particularly long-haul business travel, while the slowest to return, is starting to come back. Right now, almost 2/3 of our corporate customers are traveling internationally for at least essential business. We expect international travel to improve significantly with the easing of cross-border requirements, and we're encouraged by the recent news about the U.S. government easing international travel entry restrictions starting in November. Following the White House announcement, we saw an immediate increase in bookings in several of our key international markets.

[Robert Isom, President at American Airlines]

Overnight, we saw a 66% increase in bookings to the U.K., a 40% increase to core Europe, and a 74% increase to Brazil. Clearly, there's significant pent-up demand for travel to and from the U.S., and many customers are eager to return to travel when it's permitted. Now, just focusing on the fourth quarter, we expect total revenue will recover to approximately 80% of 2019 levels, up approximately 5 points sequentially versus the third quarter, with the strongest performance in domestic and short-haul international markets. We continue to make significant strides in building the broadest global network in the industry and reconnecting with our customers. Our partnerships with JetBlue and Alaska are delivering tremendous benefits for customers and enabling new flying that otherwise wouldn't be possible. More than 715,000 customers were able to travel across our networks during the quarter, thanks to these innovative partnerships.

[Robert Isom, President at American Airlines]

Together, American and JetBlue will operate more than 700 daily flights from New York and Boston this winter, including nearly 50 international destinations out of JFK. We also continue to create a seamless experience for our customers, including rolling out reciprocal elite benefits for AAdvantage and TrueBlue Mosaic members, and we expect to launch mileage redemption on JetBlue very soon. Our loyalty program continues to demonstrate its attractiveness to our customers and partners. New member acquisitions in the third quarter exceeded 2019 levels, despite the airline flying a significantly smaller schedule. As our customers continue to engage with AAdvantage, our co-brand cash payments were essentially fully recovered at 96% in the third quarter versus the same period in 2019. This is up from just 78% in the second quarter on the same basis. We expect this trend to continue as the network returns to a more normalized level.

[Robert Isom, President at American Airlines]

On the ESG front, during the quarter, American became the first North American airline to commit to developing a science-based target for reducing greenhouse gas emissions by 2035. We also agreed in turn to purchase more carbon-neutral, sustainable aviation fuel. American also became an anchor partner to Breakthrough Energy Catalyst, and we've committed to invest $100 million in a groundbreaking collaborative effort to accelerate the clean energy technologies necessary for achieving a net zero economy by 2050. We're excited about this work and what it will mean for the future of aviation and the acceleration and adoption of critical next-generation clean technologies across all industries. In summary, while the Delta variant has shifted the timeline for the recovery, we remain very bullish on the return of demand, and we feel great about how we're positioned thanks to the hard work and dedication of the American Airlines team.

[Robert Isom, President at American Airlines]

With that, I'll turn it over to Derek.

[Derek Kerr, CFO at American Airlines]

Thanks, Robert, and good morning, everyone. Before I begin my remarks, I would also like to thank the American Airlines team for their hard work during the quarter. Their continued resilience in the face of uncertainty due to the Delta variant is commendable. This morning, we reported a third quarter GAAP net profit of $169 million or $0.25 per diluted share. Excluding net special items, we reported a net loss of $641 million or a loss of $0.99 per share. As Doug mentioned in his remarks, this was our strongest quarter since the pandemic began. As we have discussed in the past, as we always expected, the recovery would be unpredictable, and our third quarter results reflect this.

[Derek Kerr, CFO at American Airlines]

Despite the Delta variant-related volatility in demand and revenue trends that Robert discussed, our financial performance improved from the second quarter but fell short of our initial expectations that we outlined in our last earnings call. While the slowdown in demand was clearly disappointing, it is important to note that the trajectory of our results continues to be positive. In fact, even with the drop-off in bookings from the Delta variant and rising oil prices, our third quarter pre-tax earnings excluding net special items improved by nearly $600 million sequentially versus the second quarter. This makes it even clearer to us that the steps we are taking over the past 18 months are working. As we have navigated the pandemic, we built back our network in a way that would keep our capacity aligned with demand while giving us the ability to be flexible as conditions change.

[Derek Kerr, CFO at American Airlines]

We've also worked to keep our controllable costs down and have actioned $1.3 billion in permanent annual cost initiatives this year alone. Based on our results, it's clear these actions are paying off, as our third quarter CASM, including fuel and net special items, was up just 10.5% versus the same period in 2019, despite flying approximately 20% less capacity. On the fleet side, we moved swiftly to retire older aircraft and accelerate our fleet harmonization project. Our 737 retrofit program was completed in May, and we continue to expect our A321 aircraft to be complete by early next year, a full year ahead of our original schedule. In addition to the customer benefits of larger overhead bins, in-seat power, and streaming in-flight entertainment, these aircraft will generate more revenue and allow us to connect more customers over our network.

[Derek Kerr, CFO at American Airlines]

They will also provide a unit cost tailwind as we build back our network. With respect to our wide-body aircraft, we continue to work with Boeing to finalize the timing of our delayed 787-8 deliveries that were expected to arrive in 2021. In the meantime, due to the continued uncertainty in the delivery schedule, we have proactively removed these aircraft from our winter schedule to minimize potential passenger disruption. I'd also like to note that these delays have had an impact on our fourth quarter CASM since we built the cost structure to fly these aircraft during the fourth quarter. We ended the quarter with approximately $18 billion of total available liquidity, which reflects the $950 million prepayment of our spare parts term loan made in July and approximately $649 million of scheduled debt payments made during the quarter.

[Derek Kerr, CFO at American Airlines]

The scheduled debt paydown unencumbered 20 Boeing 777 aircraft, further our unencumbered asset base to $3.8 billion and our first lien capacity to more than $8.4 billion. As we look ahead, we feel confident we have enough liquidity to allow American to navigate the choppiness of the recovery. Because of this choppiness, we will continue to keep liquidity at elevated levels in the near to medium-term with a plan to step down our target liquidity to approximately $10 billion-$12 billion at some point next year when we are confident the recovery has taken hold and we have returned to sustained profitability.

[Derek Kerr, CFO at American Airlines]

The deleveraging of American's balance sheet remains a priority, and we are committed to significant, steady, and continuous debt reduction in the years ahead. Even with the slower-than-expected recovery observed during the third quarter, we remain on track with our target of reducing overall debt levels by $15 billion by the end of 2025. $10 billion of this will be achieved through amortization of debt and is net of new financing. Importantly, these debt reduction targets are based on a plan that assumes future deliveries are financed. Should we elect to use cash in lieu of financing aircraft, that decision would contribute to deleveraging and further accelerate the timeline to achieve these targets. Of the incremental $5 billion, nearly $1 billion has already been actioned with the prepayment of the spare parts term loan we announced on the last call.

[Derek Kerr, CFO at American Airlines]

As we look ahead, we will continue to focus our efforts on prepayable debt which currently represents approximately 30% of our total debt obligations. In addition to deleveraging our balance sheet, this plan will allow us to smooth our near-term maturity towers and free up high-quality collateral. Assuming this level of debt reduction and continued margin improvement, our plan is targeted to result in the best credit metrics in the history of post-merger American by the end of the four-year period. Looking to the third quarter, the delay in the return of corporate travel and rising fuel prices will put pressure on our margins relative to the third quarter. We expect our capacity to be down approximately 11%-13% versus the fourth quarter of 2019.

[Derek Kerr, CFO at American Airlines]

Based on current demand assumptions and capacity plans, we continue to expect a slight sequential increase in our revenues and expect total revenues to be down approximately 20% versus the fourth quarter of 2019. In total, we expect a pre-tax margin excluding net special items of between -16% and -18%. For the full year, our projected debt principal payments are expected to be $4.4 billion. This includes the $750 million payment of spare parts term loan and the $550 million prepayment of the term loan with the U.S. Treasury that was completed earlier this year. We have $612 million in scheduled debt principal payments in the fourth quarter. With respect to capital expenditures, we expect full-year 2021 CapEx to remain minimal, with non-aircraft CapEx at approximately $900 million and net aircraft CapEx, including pre-delivery payments, remaining an inflow of $900 million.

[Derek Kerr, CFO at American Airlines]

We are still in the early stages of building our operating plans for 2022, and we'll have more to say on what our capacity and cost outlook will look like on our next earnings call. At a high level, based on the demand trends we see today, along with the feedback from our corporate customers, we expect to slowly increase our capacity throughout the year and to have full-year capacity very near 2019 levels. This, of course, is subject to the future demand environment, and we will always retain the ability to adapt if demand conditions warrant. Lastly, I know a lot of investors are concerned about inflationary pressure in 2022 and beyond.

[Derek Kerr, CFO at American Airlines]

We'll know more once we finalize our 2022 budget, but we do see pressures in fuel prices, hiring and training for both new hires and existing crews as we ramp up our operation, including on the regional side, where we recently announced a pilot retention program. We are also seeing increased starting wages for certain regional groups, including vendors. Even with these pressures, our fleet simplification strategy enables higher aircraft utilization and higher average gauge, both of which will help offset some of these unit cost pressures. As I said earlier, we will share more specific details on these impacts to our cost structure as our 2022 plan on our next earnings call in January. In conclusion, our team continues to do an amazing job of managing through the uncertainty, maintaining a strong liquidity position, and driving efficiencies throughout the organization, and we are well-positioned for the future.

[Derek Kerr, CFO at American Airlines]

With that, I will open up the line for analyst questions.

[Operator]

Thank you. To ask a question, you would need to press star then one on your telephone. To withdraw your question, please press the pound key. Our first question comes from the line of Jamie Baker with JPMorgan. Your line is now open.

[Jamie Baker, Analyst at JPMorgan]

Hey, good morning, everybody. Doug, I think it was like three or four years ago, you had a slide at our conference. It was entitled, There They Go Again. It was a list of airline behaviors that you were warning investors to keep an eye out for. It was a cool slide, actually. Two bullets on that stood out. Expanding service to markets that don't touch a hub and establishing new hubs. Could you help frame the Seattle expansion against that slide? It's not like the slide was written in stone and you carried it down from Mount Sinai or anything. I'm just having trouble reconciling it in the current environment.

[Doug Parker, Chairman and CEO at American Airlines]

Sure. I'll do it at a high level and then Vasu can chime in with more details if you'd like, Jamie. Yeah, look, that's not a new hub is the answer. There's already a hub there. It's Alaska's, and they're our partner. We are simply making that hub stronger by having an alliance with Alaska, whereby we can do things they can't do or that they wouldn't be able to do without investment that wouldn't make sense. By flying international because we have international aircraft. They can do things that we can't do, which is feed those flights with their already existing Seattle hub. It's not a new hub. If it were, yeah, if you see that, be concerned. Happy to note that hasn't happened since we put that there. Anyway, that's the distinction.

[Vasu Raja, Chief Revenue Officer at American Airlines]

Yeah. Hey, Jamie, this is Vasu. I'll add to that. Actually, we see Seattle as being really intellectually consistent with that. For us, it's pretty simple. We go create value for customers by being relevant and being relevant in the biggest markets. In order to go create a legitimate, valuable, and profitable international network, we need to be able to launch flights from international markets. For us, historically, in the West Coast, we've had a very, very small presence, most namely in the Pacific Northwest, where we've had almost no presence. With this, which is a very creative deal, what we're doing is we're flying things like Seattle to Heathrow or Seattle to Bangalore, all of which feed off of that huge local market that Alaska has cultivated. It draws from the connectivity of the Seattle hub.

[Vasu Raja, Chief Revenue Officer at American Airlines]

We've been really encouraged with the results, not just across the West Coast, but really across the system. Alaska Airlines is increasingly emerging as one of, if not our largest codeshare partner. We are seeing a huge customer benefit all up and down the West Coast. Actually, as we look at it, we are creating close to about 300,000 customers are now able to experience AA or Alaska, where before they had no competitive option, or they had one or two competitive options in the marketplace. The market's responding. We've set records for AAdvantage enrollments, but the two markets where our enrollments are growing the most are all the markets in the West Coast Partnership, everything from San Diego north to Seattle, and the other ones are New York and Boston.

[Vasu Raja, Chief Revenue Officer at American Airlines]

We see it as actually being really consistent and a really effective and wise way to go and develop a level of network comprehensiveness that would be too impossible to do on our own.

[Jamie Baker, Analyst at JPMorgan]

Okay. That's really helpful. Then a follow-up, this one, a quick one on fuel, maybe for Robert or Derek. A question I repeatedly receive is why haven't managements adjusted capacity to account for $2.50 jet kero? I know you can't speak for the industry, but for American, is there a certain period of time that you need to be convinced that higher fuel is going to be sustained? Is there just too much uncertainty around 2022 revenue to be making capacity decisions today? Just looking for some color on how you would answer the question that I'm getting every day, and I imagine my competitors are as well. Thanks in advance.

[Doug Parker, Chairman and CEO at American Airlines]

Again, Jamie, I'll go first, just a high level because you and I have been doing this a long time. Look, when oil prices move this quickly, it's really hard to have responses. That's what's happened here. It's run up very quickly, and we're already selling all the capacity that's out there. What I know is, what I believe is, and it's been the history in our business, is if this is the new normal, you will see adjustments. You'll see adjustments in capacity, which will result in changes in pricing. They just don't happen that quickly. It also takes a while for everyone to come to the conclusion that this is real. I don't know, 2014 was a pretty good year in the airline business, and Brent averaged $100 a barrel. We'll adapt, if this is the new normal. Right now, in the very near-term, it's hard to adapt. Robert?

[Robert Isom, President at American Airlines]

This will come into balance and fuel prices run up very, very quickly. As we take a look at things, there must be an impact on capacity and pricing in the long run. Yep.

[Jamie Baker, Analyst at JPMorgan]

Got it. Thank you, all three of you. Take care.

[Doug Parker, Chairman and CEO at American Airlines]

Thanks, Jamie.

[Operator]

Our next question comes from the line of Conor Cunningham with MKM Partners. Your line is now open.

[Conor Cunningham, Analyst at MKM Partners]

Hey, everyone. Thanks for the time.

[Doug Parker, Chairman and CEO at American Airlines]

Hey, Conor.

[Conor Cunningham, Analyst at MKM Partners]

Hi. When listening to Delta and United's call, a huge portion of their script is about premium products and how they think there's a structural change happening. I don't think you guys mentioned much about that. I was wondering if you could just speak to how your different products are performing right now, and do you actually agree that there is structural change happening where leisure travelers are trying to book up more towards premium seats?

[Vasu Raja, Chief Revenue Officer at American Airlines]

Yeah. Hey, Conor, this is Vasu. I can start that one, and others may chime in, too. Look, we certainly, as the most, definitely see a change where there's customers who are much more willing to buy premium than before. Indeed, our premium revenue across our domestic system for much of the quarter was actually higher than what it was in 2019, which is pretty promising. We spent a lot of time looking at this, and there's a component of it which certainly seems very promising, but it still seems early to say whether this thing is structural or not. At least in our own system, we took a lot of wide bodies out of international flying, and we deployed them into domestic.

[Vasu Raja, Chief Revenue Officer at American Airlines]

We were really encouraged by what we saw, where there are a lot of customers with a lot more disposable income who would travel on leisure trips, and they would not only pay for the lie-flat product, they would pay a premium versus other non-lie-flat products in the marketplace. That's certainly been an encouraging thing. What we don't know is so much of that trip behavior also, it was people leaving on a Thursday, coming back on a Monday. We do think that with more disposable income, there will be some interest in the consumer to have more experiences, to pay more for those experiences. What we don't know is how to size the magnitude of it because there's a lot of things that certainly, speaking for American Airlines, that we did that was very unique to the last several months.

[Vasu Raja, Chief Revenue Officer at American Airlines]

We don't yet know how much of a structural change that is. To the earlier point, the beauty of the airline, and this pandemic has proved it over and over again, is that we can change where the airplanes go very, very quickly. With that, we can also change the product design pretty quickly, too. This is something that we're looking at. It is a similar trend that we're seeing. Time will tell how structural it is, though.

[Robert Isom, President at American Airlines]

Thanks, Vasu. I'll just add, we're, hey, look, we're ready for it. We've been preparing for a long time, not just in selling the product, which Vasu's talked about, but the hard product as well. The fleet is ready from a cabin configuration perspective, whether that's the business class cabins or premium economy that we put in to all of our wide-bodies. Just as we look at travel recovery and ways to service, you're going to see that we're adding back amenities that will allow us to sell and bundle in different ways. Everything from our five-star service that's come back to the opening of our Flagship Lounges, which are best in the industry. We have a way to sell and to service every customer at every end of the spectrum in terms of demand.

[Robert Isom, President at American Airlines]

We feel really good about how we're set up to whatever environment that we find ourselves in.

[Conor Cunningham, Analyst at MKM Partners]

Okay, appreciate it. Just on the cost structure, investors are trying to get comfortable with the stories on the cost side for the airlines in general. Clearly inflationary pressures, but curious if you can talk to any of the tailwinds that you might be having that happened in 2022 outside of just bringing back capacity to 2019 levels. The reason why I ask is I would've thought, given some of the structural changes you had within fleet simplification and so on, that 4Q would've had a little bit more leverage to it. Any details would be helpful.

[Robert Isom, President at American Airlines]

Yeah, I think Conor, in the fourth quarter, the story, and I touched a little bit of it on here is, we built the airline to fly more in the fourth quarter, without a doubt. Two of the issues, one is the Boeing 787-8s, which are not here. We had assumed they were going to be in the schedule, we have 787 pilots, we have crews ready to fly those aircraft. We unfortunately had to pull them out of the schedule in the fourth quarter and the first quarter. The other thing from a capacity perspective that we're all dealing with right now is on the regional side, is pilot supportability on the regional side, which will resolve itself over time, as the mainline is hiring up, a lot of places they go to get pilots is on the regional.

[Robert Isom, President at American Airlines]

We're probably not flying as much regional as we would've flown. I think from a CASM perspective, that's what drove it a little bit higher in the fourth quarter without a doubt, versus where we had planned. We're not flying exactly what we would've flown and where we'd have got in the cost structures there. As we go forward, the tailwinds are really. The $1.3 billion worth of cost reductions is permanent. It's going to be in there. As we look into next year, we haven't done the plan yet, so that's why it's really hard for me to give any kind of guide on a CASM for next year.

[Robert Isom, President at American Airlines]

We do see these inflationary hits too, mostly from a salary perspective, a vendor perspective, those kind of things, and fuel, as I talked about, that we'll have to overcome as we look at the plan for next year. We'll do that as we dig through the process. We'll have the tailwinds of the cost coming out that we did from an efficiency standpoint and also the number one, getting out of the aircraft types, and modifying the aircraft to be the same all across from the Project Oasis will benefit us a lot as we go into 2022.

[Doug Parker, Chairman and CEO at American Airlines]

Conor, just nodding again, just because we haven't talked, we didn't spend a lot of time talking about the $1.3 billion gets, we talked about it a lot, just for others who may not have been following as closely, those are real. They're in the airline. The way we look at this is, we go back and fly the 2019 schedule today, increase the same number of ASMs, and save that amount. It's a combination. It's a lot of things, the largest ones are $500 million or so in management payroll. As Derek said, all the efficiencies you get from eliminating so many sub fleets, training and otherwise. Those are in there as the tailwinds to offset the inflationary pressures you and Derek were talking about.

[Conor Cunningham, Analyst at MKM Partners]

Okay. Appreciate it.

[Doug Parker, Chairman and CEO at American Airlines]

Thanks, Conor.

[Operator]

Our next question comes from the line of Sheila Kahyaoglu with Jefferies. Your line is now open.

[Sheila Kahyaoglu, Analyst at Jefferies]

Hi, good morning. Thank you for the time, guys. Maybe if you could talk about the transatlantic market. It's begun to open up a little bit more and maybe heading into 2022, but your passenger revenues are still down about 75%. How do you think about the cadence of that recovery?

[Vasu Raja, Chief Revenue Officer at American Airlines]

Hey, this is Vasu. I can take that one. Look, we've been really encouraged by what we've seen over the last, let's call it three or four weeks, at international at large, especially in transatlantic. Certainly after the regulatory restrictions changed, we saw a big spike in bookings in the two or three days after it, which is not that surprising. What's been more encouraging to us is that it's really sustained itself. What you see from us right now is a little bit of cautious optimism. In November and December, we are absolutely seeing bookings coming in at a greater rate than what we saw in 2019. A lot of that, though, is a pent-up demand effect. As we get into next year, with every passing week, we see our bookings step up more and more across transatlantic.

[Vasu Raja, Chief Revenue Officer at American Airlines]

We're really encouraged by that. The big variable will be when corporates start returning back to office and start traveling again for business, which we anticipate being more in the Q1 timeframe than in the Q4 timeframe. All the more so for us, our transatlantic network is really concentrated around London. We don't anticipate as much of a business recovery in Q4, but we are seeing a really, really meaningful leisure recovery, and all the more so as British Airways builds back its connecting schedule. In Heathrow, we anticipate taking an increasing amount of demand as Q4 goes along. Though you see that number in aggregate, we see that something is changing a lot from where we are in October to November to January and beyond.

[Sheila Kahyaoglu, Analyst at Jefferies]

Great. Thanks a lot, Vasu.

[Operator]

Our next question comes from the line of David Vernon with Bernstein. Your line is now open.

[David Vernon, Analyst at Bernstein]

Thanks, operator. Thanks guys for taking the question. Doug and Robert, we sat down a little bit before the pandemic, and you had sort of laid out a picture where American had been lagging on some of the customer-facing and information technology stuff that was kind of constraining the operation in ways like not letting you book up to a higher load factor because of the denied boarding practice, the ability to kind of pay for upgrades, dynamic pricing on frequent flyer tickets, all that stuff. A lot of it sounded like IT-driven initiatives.

[David Vernon, Analyst at Bernstein]

I was wondering, kind of coming out of the crisis as we start to look out over the next couple of years, is there still catch-up work you need to do to bring yourself at parity with peers in terms of the way they're monetizing capacity, or have you kind of closed that gap through this crisis?

[Maya Leibman, CIO at American Airlines]

Hey, this is Maya, I'm proud to say that over the last several years, we really have closed the gap on a number of our technology initiatives, including some of the ones that you rattled off, like dynamic pricing and allowing sell-ups into higher load factors and a lot of standby on day of departure activity. We've really used the pandemic as an opportunity to really identify those gaps and to close them and really focus on a lot of the other things that we've been talking about that will be tailwinds for next year, like our seamless partnerships and making that a better customer experience for our customers with our West Coast and Northeast alliances.

[David Vernon, Analyst at Bernstein]

Is there a way to frame what that uplift might be in terms of load factor or sort of ancillary revenue growth? It looks like the other revenue line is performing pretty well, but is there a way to kind of put a number around some of these things?

[Vasu Raja, Chief Revenue Officer at American Airlines]

Hey, this is Vasu. We're in the early stages of doing that as we build next year's plan. I'll say at least probably our top-line initiative is making sure that all of these partnerships are really integrated and seamless for the customer that a lot of the long-standing issues that have existed in code-sharing relationships really get alleviated pretty quickly. Look, we're pretty pleased with that. We've made a lot of progress with Alaska and JetBlue, and what we're seeing is very encouraging. To my earlier comments, we're seeing a lot of customers come in at a meaningful amount of revenue production that's there too. As we looked at it in Q3, it was a massive benefit to customers.

[Vasu Raja, Chief Revenue Officer at American Airlines]

We estimate it's a benefit in about a 0.5% to a percentage point of system revenue, but something which is a lot more meaningful to a New York and Boston and West Coast network, which was operating at 50% of historical levels. We think there's a lot of uplift to the whole thing without a lot of investment further.

[David Vernon, Analyst at Bernstein]

All right. Thanks a lot, guys.

[Operator]

Our next question comes from the line of Dan McKenzie with Seaport Global. Your line is now open.

[Dan McKenzie, Analyst at Seaport Global]

Oh, hey, thanks. Good morning, guys. The first question here is just a housecleaning question from a prior question. Project Oasis, is that included in the $1.3 billion of structural cost savings, or is that above and beyond? Just related to that, if that had been fully implemented in 2019, how much would that have contributed to pre-tax income?

[Derek Kerr, CFO at American Airlines]

Yeah, it is included. It added more seats on some of the aircraft, and from an operational benefit, it will help out a lot because as we swap the aircraft, they will both be in that. It is in that because we reduced the aircraft types, but it's included in that number. What it's going to do is benefit, number one, from a CASM perspective because we'll have more seats and from a revenue perspective because we'll be able to sell more seats.

[Dan McKenzie, Analyst at Seaport Global]

Yep, understood. Okay. Second question here. What is the aggregate wallet spend, say, a Fortune 1000 accounts in the Northeast that American can now access for the first time as a result of the Northeast Alliance? Accounts that really where you had no shot at winning pre the relationship with JetBlue versus now you walk in and you sit down with the corporate travel managers, you can actually put together a competitive network solution. Just related to that potential aggregate spend, what would American JetBlue's fair share be of that?

[Vasu Raja, Chief Revenue Officer at American Airlines]

Hey, Dan, this is Vasu. Thanks for the question, and I appreciate what you're trying to get at, which is effectively how much more market can we access than what American could access on its own. I don't have specific numbers. In some cases, we've got to be a little careful in what we share about it. For us, as we see it, in New York, historically, we might have been a 25% player. We were competing for something which was actually like 10%-15% of the available business travel market at large, not just the corporate market. In large part because though we had a really great product in Heathrow or in the transcon markets, if we couldn't get you very effectively to Toronto, at some point, customers, especially larger accounts or power travelers, business style customers just stop flying us.

[Vasu Raja, Chief Revenue Officer at American Airlines]

Now as we see it, we have the best network between AA and JetBlue. We've gone from a world where we had four trips a day to JFK, San Francisco, to one where we'll have 12, 13, 14 trips a day, where all of our transcon product is full flat. We've taken the 50-seater RJ out of New York altogether. When you think about New York, it's a business travel market, which is not 2x or 3x larger than the next biggest market, but several orders of magnitude more than that. That's all now a market that we get to compete for. When we get to compete for it, we see in New York, whose RASMs, instead of underperforming the system by 10%-15%, can perform in line with the system.

[Dan McKenzie, Analyst at Seaport Global]

Okay. Thank you.

[Robert Isom, President at American Airlines]

Hey, Dan, I just want to go back and just add one more point. Hey, regarding the fleet harmonization project, which we're almost done with. We only have, I think, 60 of the 321s that are remaining, and we'll be complete by the first quarter. Derek mentioned that in the $1.3 billion, so much of the savings, in terms of actual commonality and what we can take out in terms of reduction of fleet sizes and being able to operate the airline more efficiently, that's included in the $1.3 billion. What's not, though, is look, we are adding seats at very, very low marginal cost. Going from 160 seats on the 73s up to 172, and then on average, adding a few seats to the 321s as well. That's a benefit that we'll be seeing in run rates going forward.

[Dan McKenzie, Analyst at Seaport Global]

That actually was my question.

[Robert Isom, President at American Airlines]

From a revenue perspective, yeah.

[Dan McKenzie, Analyst at Seaport Global]

Yeah, the incremental revenue that you gain, that was actually my question. That's what I was trying to get at. Thanks for the time, you guys.

[Doug Parker, Chairman and CEO at American Airlines]

Thanks, Dan.

[Operator]

Our next question comes from the line of Stephen Trent with Citi. Your line is now open.

[Stephen Trent, Analyst at Citi]

Good morning, gentlemen, and thanks for taking my question. I just had a quick one looking at your investment. You guys committed to invest in JetSMART and GOL in South America. You, of course, have this tie-up with JetBlue in the United States. When you think about other international corridors, do you see any opportunities for similar kinds of tie-ups, for example, outside of the oneworld Alliance?

[Vasu Raja, Chief Revenue Officer at American Airlines]

Hey, this is Vasu. Stephen, I can start on that one. Ultimately, what we want to do is create the most comprehensive network for our customers. Whether it is a code share, an investment, a joint venture, whatever it is, we don't see them as ends in themselves. Those are just simply means through which we can create something really comprehensive for our customers. In many parts of the world, we would love to be able to do it all just organically with American Airlines metal. That's not always possible for regulatory or other reasons. Based on that, we may employ different mechanics, whether it is an investment, a code share, a loyalty partnership. It'll change out there. For us, the true north is creating the most comprehensive global network, and we see that.

[Vasu Raja, Chief Revenue Officer at American Airlines]

We've seen the benefits of it for consumers in the Northeast, in the West Coast. As we look at South America, really it has less to do with investments and more that the one thing we can't do for the South American customer is carry them within South America. We're always on the lookout for partners that can help us do that and create more value for the customer. How we go and stitch partnerships together is a sort of second-order issue.

[Stephen Trent, Analyst at Citi]

I appreciate it, Vasu. Just one very quick follow-up. How are you guys thinking longer term about your pipeline of pilots and when you think about retirement in the next five to seven years and what have you?

[Derek Kerr, CFO at American Airlines]

Stephen, I'll take that one. Look, pilot profession has never been a better time to get into it. What I'll tell you is we will attract people to the profession given the kind of starting salaries that we're offering right now, and then ultimately what pilots top out at. I do see this as ultimately an economic issue that will be solved. You've seen us do some things recently with regional pilots to make sure that they stay in position and progress onto American Airlines, and we'll continue to monitor that. Over time, just as we saw a few years back, this will be brought into balance just simply based on economics. People will want to come into the profession.

[Stephen Trent, Analyst at Citi]

Okay. Appreciate that. Thank you for the time.

[Operator]

Our next question comes from the line of Chris Stathoulopoulos with Susquehanna. Your line is now open.

[Chris Stathoulopoulos, Analyst at Susquehanna]

Thank you, and thanks for taking my question. Good morning. On headcount, how should we think about FTEs in 2022 and if possible, 2023? Could you run your network at or above 2019 capacity on fewer FTEs relative to 2019?

[Derek Kerr, CFO at American Airlines]

Yeah, I think we have taken out a significant amount of headcount out of the company. That's mostly what the $1.3 billion of cost reductions, permanent cost reductions are. As Doug alluded to, $500 million of that is management headcount. $600 million of it is productivity at the other areas throughout the company. Yes, I don't have a number for the 2022 plan because we haven't put that together yet. That is the significant portion of what the $1.3 billion worth of permanent cost reductions are. It's mostly in the headcount and the personnel side of things at American Airlines.

[Chris Stathoulopoulos, Analyst at Susquehanna]

Okay, the second question on the corporate side, so you mentioned a full recovery by year-end 2022. Just curious what the mix of users is here. I know you mentioned industrials, healthcare, and I think one other group, but are your surveys showing a mix similar to pre-pandemic travel, or has it shifted, and is your outlook contemplating the same type of travel, meaning both in user type and frequency? Thanks.

[Vasu Raja, Chief Revenue Officer at American Airlines]

Hey, this is Vasu, and I can help with that. Look, as we see it, you're exactly right. Certain industries and verticals are traveling more than others. We do anticipate there being a rebound across all of them, because at this point, all industry verticals are improving. They're just at different points in the improvement curve. More critically and more importantly to your question, what we see is that even in sectors where travel is less back, the rate of progress we're seeing is mirroring those sectors where travel is relatively more returned. We have some real confidence that indeed, corporate travel is likely to come back. As Doug and Robert mentioned earlier in their remarks, there is an immense amount of pent-up demand, and we find that once people start to travel, they continue to do so.

[Vasu Raja, Chief Revenue Officer at American Airlines]

Very importantly, though, for us and our system, we have a lot of our business style demand is small and medium-sized business, really across the Southeast and the Southwest. Already, we're seeing on a traffic basis that is very well-recovered. On a revenue basis, that'll start to recover as people come back and pay us more and fly us more, frankly.

[Robert Isom, President at American Airlines]

Hi, Vasu. I'll add this. Alison Taylor just held our corporate customer advisory board meeting down in Miami. I was able to attend as well for a part of it. That brings together our top 50 corporate customers and those that are responsible for procurement of travel at those companies. I was really pleased to hear just over and over again about, look, we have to get back to the office, and once we get back to the office, travel is going to come. It's not surprising that the industrials and healthcare and pharmaceuticals are leading us right now. They're back in the office. They've got to take care of us and put food on the table. That's happening. What's going to come next is some of the other banking and financial services, entertainment.

[Robert Isom, President at American Airlines]

As those get back into the office in the start of the new year, they're going to come back, too, just as we're seeing in some of these other sectors.

[Doug Parker, Chairman and CEO at American Airlines]

And just-

[Chris Stathoulopoulos, Analyst at Susquehanna]

Thank you.

[Doug Parker, Chairman and CEO at American Airlines]

Hey, Chris, it's Doug. Just data around just to support some of what Robert just told you. I talked about how in July, we were up to 64% of our 2019 levels in terms of business revenue. There's a big difference between large companies, those that we have on corporate discount programs, and our small and medium business. In that 64%, the large corporates are at 35% on a year-over-two-year basis, and the small and medium business is at 83%. Anyway, what that says to me is what Robert just said. People that are back at work are traveling. When the large corporates get back to work, they'll travel. It's less about sectors, more about people just getting comfortable bringing people back to the office. Those companies that don't have large headquarters and large HR departments are out flying because they need to across all sectors.

[Doug Parker, Chairman and CEO at American Airlines]

Those companies that are larger organizations and need to worry about those things more aren't yet back. They were starting to come back, but they'll get up into those same ranges. That's where business wants to be.

[Chris Stathoulopoulos, Analyst at Susquehanna]

Great color. Thank you.

[Doug Parker, Chairman and CEO at American Airlines]

Thanks.

[Operator]

Our next question comes from the line of Helane Becker with Cowen. Your line is now open.

[Helane Becker, Analyst at Cowen]

Thanks very much, operator. Hi, everybody. I hope you are all doing well.

[Doug Parker, Chairman and CEO at American Airlines]

We are, Helane. How are you?

[Helane Becker, Analyst at Cowen]

I'm okay. I guess I'll see you tomorrow night. By the way, congratulations.

[Doug Parker, Chairman and CEO at American Airlines]

Thank you.

[Helane Becker, Analyst at Cowen]

Here's my question, really for Derek. Interest expense, I think, in the third quarter was $476 million, I want to say. Can you just talk about debt paydown and the cadence of that and how it's going to look over the next couple of years in the context of you going from $15 billion, I think you said in the press release $15 billion of debt paydown by 2025.

[Derek Kerr, CFO at American Airlines]

Yeah. Well, I can give you what our scheduled debt paydowns are over the next few years. We said we're going to pay down $4.4 billion this year. Next year is $2.5 billion. The year after that, I would just say it's around $3 billion-$3.5 billion each year as you go forward. We do plan, just as I talked about on the call, we do plan on financing aircraft in this environment going forward. The net debt will be a little bit different than that. The $10 billion will come off, let's just call it $2 billion a year over the next five years that will reduce that. What we do on the other five, we had talked about $1 billion already went in 2021. We did the paydown of the spare parts loan. We also, because of the recovery, it slowed a little bit.

[Derek Kerr, CFO at American Airlines]

We are going to hold onto cash and hold onto cash where we're at today. Once we feel we're comfortable with that, I think we will quickly use the excess cash to pay off most of the remaining $4 billion. It just depends on where our cash balance is. It depends on how it will grow over time. I would expect it to be sooner than later, as long as the recovery happens, business comes back, and the earnings are there to do that. The prepayment would be upfront. The debt paydown over time, the $10 billion, will be ratably over time. I don't think we have any big, huge debt payments. There's a $750 million one in 2022 that we have. Nothing huge going forward. I would look at it that way, is pretty ratably the $10 billion over the next four years.

[Derek Kerr, CFO at American Airlines]

We would try to attack the other $4 billion as soon as we feel comfortable and have excess cash that we can take it down to that $10 billion-$12 billion. We're at $18 billion today. We would most likely do it early. Or as I said in the comments, we could use cash to pay for aircraft and just not add the debt instead of paying off any pre-payable debt. That's the plan that we have today.

[Helane Becker, Analyst at Cowen]

Okay. That's very helpful. Thank you. On the 787s, I think those were going to be leased-in aircraft from BOC Aviation. Does the delays change any of the financing arrangements for those aircraft?

[Derek Kerr, CFO at American Airlines]

No, it does not change the financing of the aircraft. Still leased in.

[Helane Becker, Analyst at Cowen]

Okay, perfect. Thank you.

[Operator]

Our next question comes from the line of Duane Pfennigwerth with Evercore ISI. Your line is now open.

[Duane Pfennigwerth, Analyst at Evercore ISI]

Hey, good morning. Question for Doug. I thought it was interesting in the prepared comments that more capacity versus peers and more revenue versus peers was called out. Is that the main goal of the company at this point, more revenue? Do relative margins matter? To what extent is profitability a priority for the board at all? Does it not even come up in conversations given how high liquidity is? What is the board trying to solve for?

[Doug Parker, Chairman and CEO at American Airlines]

For relative margins, Duane. We feel really good about that. The reason I talk so much about the absolute growth at this point in time is because we're all working to add back capacity and to get to where we can meet the demand that we know is coming. We're really proud of what the team's done to get back more capacity than others, to take care of more customers than others, and to do so obviously safely and efficiently, and to do so in a way that has us running a really great operation right now. Of course, that's not the goal of the company, is just simply to be larger. The goal of the company is to maximize shareholder value over the long-term. The way we'll do that is producing returns.

[Doug Parker, Chairman and CEO at American Airlines]

What we feel very good about is our ability as we come out of this to improve our relative margins, certainly versus Atlantic, and I think probably versus everybody as you compare them back to 2019 or other years.

[Duane Pfennigwerth, Analyst at Evercore ISI]

Just a quick housekeeping, I appreciate you taking the questions. Just looking into the fourth quarter, do you expect the operating cash burn to be larger than the $1.7 billion burn in 3Q? I'm not sure if you have the calc, but can you speak to the daily cash burn estimate? Are we going to head back to there? Thanks for taking the questions.

[Derek Kerr, CFO at American Airlines]

We- Go ahead.

[Doug Parker, Chairman and CEO at American Airlines]

No. Please.

[Derek Kerr, CFO at American Airlines]

No, I was going to say, we're not heading back there. The fourth quarter is a, seasonally, you do burn cash in the fourth quarter.

[Duane Pfennigwerth, Analyst at Evercore ISI]

I hear you. I go back through every fourth quarter since you guys merged, and there's no negative operating cash burn. Understand revenue's depressed, fuel's a little bit higher, but operating cash flow is typically positive in the fourth quarter.

[Doug Parker, Chairman and CEO at American Airlines]

Duane. I don't know the operating cash flow number, the seasonality does, in profitable years, has cash declining, and we're exceptionally comfortable where the cash is. That operational cash flow will track with the earnings estimate that Derek gave.

[Duane Pfennigwerth, Analyst at Evercore ISI]

Thank you for taking the questions.

[Doug Parker, Chairman and CEO at American Airlines]

Thanks, Duane.

[Operator]

Our next question comes from the line of Andrew Didora with Bank of America. Your line is now open.

[Andrew Didora, Analyst at Bank of America]

Hi, good morning, everyone. As American keeps ramping up capacity, maybe a little bit quicker than your network peers and with your vaccine mandate upcoming, just curious, are you planning your network or staffing any differently into peak holiday season? And how do you think about the operational risks around that?

[Robert Isom, President at American Airlines]

Hey, Andrew, it's Robert. We're getting ready for the holiday season. We expect a lot of passengers, tremendous pent-up demand, especially as vaccinations take hold and infection rates decline. We're going to be ready. Look, we have to get ready for the holidays always. This year, we're doing our best to make sure that we have the right people in the right places at the right times. That's the effort, and we're taking the appropriate precautions where necessary, but we're flying a full schedule as we go into the holidays and looking forward to it.

[Vasu Raja, Chief Revenue Officer at American Airlines]

Hey, Andrew, this is Vasu. One important thing to note, just to clarify on your question also is. The absolute ASM production of American Airlines in any month in the fourth quarter is actually less than the absolute ASM that we were producing in July, right? For us, very much, for where we have been, being able to go and get these big pools of demand that have been out there in geographies that are really favorable to us has really worked out. As things shape up, what we are very much managing to is the relative profitability of the airline. Just to clarify that, some of that gets lost in the year-over-year or the versus 2019 comparisons.

[Andrew Didora, Analyst at Bank of America]

That's a fair point. Thank you. Just second, maybe to ask the fuel question a little bit differently. I think I know the answer to this, but over the past year-plus, did you ever consider introducing a hedging policy? Do you think that this is an option you could rethink going forward? Thanks.

[Doug Parker, Chairman and CEO at American Airlines]

Yeah. Andrew, it's never say never. We've been quite happy being unhedged now for however many years.

[Derek Kerr, CFO at American Airlines]

2008.

[Doug Parker, Chairman and CEO at American Airlines]

2008. Yeah, 2008 that we stopped hedging. That feels right to us. What we find is what I said, is over time, the industry adjusts. What generally happens is we end up paying a premium for the hedge without much benefit at all. Anyway, like I said, I don't want to say we won't ever do it, but it's not something we've begun to look at in this run-up, I can tell you that. We prefer, actually, we think we have a reasonable economic hedge in terms of what happens with fuel prices and the economy as well. All those things come together and have us tell you that not right now.

[Andrew Didora, Analyst at Bank of America]

Got it. Thank you.

[Operator]

Our next question comes from the line of Mike Linenberg with Deutsche Bank. Your line is now open.

[Mike Linenberg, Analyst at Deutsche Bank]

Oh, yeah. Hey. Good everyone. Good morning, everyone. Hey, Derek, you talked about the delayed 787s as providing or creating a bit of a CASM headwind in the fourth quarter. Can you just remind us how many airplanes, how many incremental 78s were you supposed to have in the 4Q, and how many percentage points of headwind is that, just roughly?

[Derek Kerr, CFO at American Airlines]

Well, it depends on when we were thinking, but earlier, we were supposed to have all 13 in 2021. That schedule has changed weekly. If you go back to last quarter, we probably had six of them built into the schedule. Six ASMs, probably a point of ASMs that we had to take out of the schedule. That's really what's driving a lot of this. As I said, the regional, we have had a pull-down in ASMs from a regional perspective just to some pilot supportability, which we're getting all under control right now. Both of those have caused a reduction in ASMs that we would have flown in the fourth quarter, primarily driven by the 788s.

[Mike Linenberg, Analyst at Deutsche Bank]

Okay. My second question, and this is either Doug or Robert. Can you be willing to share with us where you stand on vaccinations across your employee workgroup? Any thoughts on the testing, which it seems like every carrier is going to have exemption issues, and they're going to have to test. We're hearing that the costs are high, you don't have guidance from the government. Is it a meaningful cost headwind that we have to worry about? Anything that you can share on that topic would be great. Thanks.

[Robert Isom, President at American Airlines]

Hey, I'll start. It's Robert. Look, the vast majority of our team members are vaccinated, and we're working through the process. We've set a November 24th deadline for vaccination or accommodation request to be provided. We don't expect anybody to leave American Airlines, and certainly, they're going to be out there helping us during the holidays, so no issues there. We don't know what exactly an accommodation would look like for the minimal number of people that actually apply for that. It's likely to be some combination of masking, self-declaration, and testing. That testing we don't know the details of. We're working through that, and as time goes on, we'll be able to fill you in.

[Doug Parker, Chairman and CEO at American Airlines]

Thanks, Robert. Mike, look, I certainly wouldn't be adding any cost into your forecast for this. To the extent there will be testing going on, it would be for those who have chosen still not to be vaccinated, that have a religious or medical exemption, and that we are accommodating while they're still at work. I don't suspect that'll be an extremely high percentage of the employees, and I can't even imagine that that's a material cost to test those individuals.

[Doug Parker, Chairman and CEO at American Airlines]

The OSHA standard's once a week, I don't know where we'll end up. We're working through the accommodation process with our unions. Yeah, first I've heard of this cost issue, I would do everything I could to try and let you don't have to worry about that piece. Again, back to reinforce what Robert said, and I think it was part a little bit of Andrew's questions.

[Doug Parker, Chairman and CEO at American Airlines]

Certainly, when this was first announced, I think there were concerns about what it was going to mean for airlines and TSA and others. We've all gotten extremely comfortable with that. Was happy to see yesterday the comments from the White House, from Jeff Zients about which of course includes the TSA, about how their goal of this is to get everybody vaccinated, not to punish anyone. They're going to have people, if people have religious or medical exemptions, they'll be accommodated, and they'll be able to work. That's something you're going to hear from all the airlines. Again, we're all well-prepared to meet all federal mandates and meet all the customers that are coming through the holidays.

[Mike Linenberg, Analyst at Deutsche Bank]

Very good. Thanks, guys.

[Doug Parker, Chairman and CEO at American Airlines]

Thanks, Mike.

[Operator]

Thank you. We will now take questions from the media. If you are with the media and would like to ask a question, please press star then one on your telephone. Please standby while we compile the Q&A roster. Our first question comes from the line of Alison Sider with The Wall Street Journal. Your line is now open.

[Doug Parker, Chairman and CEO at American Airlines]

Hello, Ali.

[Alison Sider, Reporter at The Wall Street Journal]

Thank you so much. Hi. On the vaccine question, just curious, I know you've talked a lot about the exemptions, but I'm just curious what sort of planning or strategizing you guys might be doing, if there does end up being some portion of the workforce that just doesn't get vaccinated or has to be terminated or something like that? Is there a kind of a plan B or a backup plan for how you'd handle that?

[Doug Parker, Chairman and CEO at American Airlines]

Well, again, first off, let's start with what we know, which is, again, the vast majority of employees are already vaccinated, and we're seeing that rise every day as the mandate's been put in place. We're highly confident by the time we get to November 24th, certainly by December 8th, when the mandate comes in place, we're going to be down to a very small number of people, if any, that are either not vaccinated or don't have a valid medical or religious exemption. I understand your question as what if that's not true? First off, I don't think that's going to be the case, and we know that based on the data we're seeing. However, again, that's where I think the answer is.

[Doug Parker, Chairman and CEO at American Airlines]

Even in the case that that happens, we'll continue to work with those employees that have chosen to get to that point. Again, I think it's going to be a really small number. Whatever that number is, we'll continue to work to accommodate those employees and make sure that we're working together, again, as Jeff Zients suggested they'd be doing with government employees, we'll be doing the same with ours. We have that flexibility, but I don't think we're going to need that.

[Alison Sider, Reporter at The Wall Street Journal]

Okay.

[Robert Isom, President at American Airlines]

Ali, I'd add.

[Alison Sider, Reporter at The Wall Street Journal]

Oh, sorry.

[Robert Isom, President at American Airlines]

I'd just add that, of course, we're working with the team, and we're working with our labor unions as well to get everybody vaccinated right now. You see us that we continue to provide an incentive for team members to get vaccinated, turn in a record of their cards, and we're working with the entire team to collect that information as we speak. Fortunately, every day, we see good signs that word is getting out and people are turning in vaccination status or accommodation requests. As Doug said, we're really confident that we'll be in great shape as we come into the holidays.

[Alison Sider, Reporter at The Wall Street Journal]

Got it. I mean, your pilots have been saying that sort of the whole debate and controversy is becoming a distraction and leading to some potential safety issues. Are you seeing that in your data at all?

[Robert Isom, President at American Airlines]

Well, look, we have an obligation to make sure that we're focused on flying. Any type of distraction, whether it's vaccine or anything else, we want to jump on. To that end, again, we're working closely with our labor unions to make sure that we're on top of anything that is a potential safety concern. We're flying a schedule, flying it very well, and flying it incredibly safely. We set very, very high standards, not just for the industry, but especially for American Airlines.

[Alison Sider, Reporter at The Wall Street Journal]

Okay, thanks.

[Doug Parker, Chairman and CEO at American Airlines]

Thanks, Ali.

[Operator]

Our next question comes from the line of Leslie Josephs with CNBC. Your line is now open.

[Doug Parker, Chairman and CEO at American Airlines]

Hi, Leslie.

[Leslie Josephs, Reporter at CNBC]

Hi, everyone. Hi. I'm just trying to square this idea that you don't expect any employees to leave American Airlines, but this week you told them again that they could be terminated if they don't comply with the mandate, either getting vaccinated or the exemption. How come the mandate doesn't apply to your wholly owned subsidiaries? Can they fly those government contracts?

[Robert Isom, President at American Airlines]

Hey, Leslie, I'll just start. First off, look, we have an executive order, and so there's not a lot of debate or argument. We're trying to find the best ways to comply. All efforts are making sure that our team members get vaccinated. To that end, as we've said, we're seeing the kind of results that we want. We have no desire to see anybody leave American. Through getting vaccinated, which we're making very available and easy for folks to get done, or the small number that apply for accommodations, we will continue to work with people to encourage them to make sure that they take care of themselves. We're working cooperatively with our labor unions as well.

[Robert Isom, President at American Airlines]

We have different agreements that we have to follow in accordance with our collective bargaining agreements to make sure that we're doing everything possible to make sure that people stay with American. We're working through that and we're committed to taking care of our team.

[Leslie Josephs, Reporter at CNBC]

And on the-

[Doug Parker, Chairman and CEO at American Airlines]

I'll take Leslie in a second. First of all, and again, just the distinction, I think, Leslie, between where early on in this process, there was concern about not having enough people, and where you're seeing everyone get now is, I think there was a view that those, at least at some airlines or at TSA or other places, those who could not get vaccinated or chose not to get vaccinated would be on unpaid leave or something like that. That's not where we're going. That's what gives us the comfort. We do know there will be some people at American Airlines who have a reason they can't get vaccinated. They will have exemptions. When they have exemptions, we're going to work to accommodate them, so that they also can do their jobs.

[Doug Parker, Chairman and CEO at American Airlines]

If anything, between a few weeks ago to now where you're hearing extreme comfort around our ability to do it versus where we might have been when we first heard this, that's the distinction. The exact same distinction, by the way, as I said that we heard yesterday from the administration about TSA and other agencies. That's what gives us the comfort. That's why we think we're not going to see anyone leaving American. I don't think anyone's going to want to leave American because they can't get vaccinated, because either they choose not to get vaccinated or they don't have a religious or medical exemption. On our subsidiaries, just like every other airline, the regional carriers are not subject to the mandate. They have to work through that themselves to see whether or not they deem themselves federal contractors.

[Doug Parker, Chairman and CEO at American Airlines]

To the extent they're not, they're not subject to the mandate. They will be subject to the OSHA requirement when it's effective for companies that have 100 or more employees. At that point, they will need to respond accordingly. I certainly don't think between American, Delta, and United, none of the regional carriers that any of us use are working toward a vaccine mandate at this point because they've concluded they're not covered by the mandate.

[Leslie Josephs, Reporter at CNBC]

Okay, for the exemptions, do you expect to approve all of them?

[Doug Parker, Chairman and CEO at American Airlines]

Oh, no, of course not. Again, what I really believe is whatever is left in the exemption is going to be a small percentage of our workforce. Everyone will need to get vaccinated. Certainly, there are religious and medical exemptions, and to the extent people have valid religious and medical exemptions, we're not going to put them on unpaid leave. We're going to make accommodations for them, as we should, so that they can continue to work.

[Robert Isom, President at American Airlines]

For those that don't receive approval for those exemptions, we fully expect them to get vaccinated.

[Doug Parker, Chairman and CEO at American Airlines]

Correct.

[Leslie Josephs, Reporter at CNBC]

Got it. Thank you.

[Doug Parker, Chairman and CEO at American Airlines]

Thanks, Leslie.

[Operator]

Our next question comes from the line of David Koenig with Associated Press. Your line is now open.

[Doug Parker, Chairman and CEO at American Airlines]

Hey, David.

[David Koenig, Business Writer at Associated Press]

Good morning. Good morning, Doug. I have two follow-up questions, but I'll try and be quick. First, sticking with the vaccination theme, United and Delta have put numbers out there, why can't you tell us how many or what percentage of your employees are vaccinated? Secondly, this goes back to something that came up a couple of times on the analyst section about flying a fourth-quarter schedule that's pretty close to 2019 levels and how you're going to do that with your current headcount. Why shouldn't passengers expect to see the same kind of disruptions that you had over the summer?

[Robert Isom, President at American Airlines]

Look, David, I'll take that. Look, we have done a tremendous job of making sure that we're set to fly the schedule. As we've said in our comments, we flew the most reliable September in our company's history, and that's the kind of performance that you can expect from American going forward. We did a tremendous ramp-up to get to where we were during the summer. Oh, by the way, as Vasu mentioned in some of his comments, the kind of schedule we're going to fly around the holidays is actually no larger than what we had flown during the summer. All we've done since that time has been able to add more resource to make sure our partners are better positioned and that we're better equipped to handle whatever may come our way. We feel really confident on that point. In regard to-

[Derek Kerr, CFO at American Airlines]

I would add to that, Robert. This is Derek. The hiring we're doing now is for the summer of next year. We're very confident having enough resources to run Thanksgiving and Christmas. We already have those people on board.

[Doug Parker, Chairman and CEO at American Airlines]

He was asking about the next year, though.

[David Koenig, Business Writer at Associated Press]

Yeah.

[Doug Parker, Chairman and CEO at American Airlines]

Next summer, again, at any point, though. We're ramping up that. Look, again, the disruption we had at the turn of June was due to us just not having as many pilots through the training process as we'd expected. We've rectified that issue, and we're going to make sure that as we expand, that we have the right number of employees. That's not an issue at all. To answer your first question, yeah, I guess those two airlines have released their numbers. Our number is still moving every day as more and more people are getting vaccinated. In the case of one of them put in place a unilateral mandate for their team so that they're through with that. The other one put in place a requirement that if you're not vaccinated, you're going to pay more for your medical benefits, and it's already in place.

[Doug Parker, Chairman and CEO at American Airlines]

I don't think any other airlines have talked about exactly where they are, and probably for the same reason we have, which is we had a voluntary program in place, and now we have a mandate in place.

Participants

Executives

• Vasu Raja, Chief Revenue Officer

Analysts

• Alison Sider, Reporter at The Wall Street Journal
• Andrew Didora, Analyst at Bank of America
• Chris Stathoulopoulos, Analyst at Susquehanna
• Conor Cunningham, Analyst at MKM Partners
• Dan Cravens, Head of Investor Relations at American Airlines
• Dan McKenzie, Analyst at Seaport Global
• David Koenig, Business Writer at Associated Press
• David Vernon, Analyst at Bernstein
• Derek Kerr, CFO at American Airlines
• Doug Parker, Chairman and CEO at American Airlines
• Duane Pfennigwerth, Analyst at Evercore ISI
• Helane Becker, Analyst at Cowen
• Jamie Baker, Analyst at JPMorgan
• Leslie Josephs, Reporter at CNBC
• Maya Leibman, CIO at American Airlines
• Mike Linenberg, Analyst at Deutsche Bank
• Robert Isom, President at American Airlines
• Sheila Kahyaoglu, Analyst at Jefferies
• Stephen Trent, Analyst at Citi