American Airlines Group Q2 2023 Earnings Call Transcript

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Provided by Quartr
July 20, 2023

Key Takeaways

  • American reported $1.8 billion in adjusted pre-tax earnings for Q2, beating the high end of guidance and marking its fifth consecutive profitable quarter.
  • Record quarterly revenue of $14.1 billion—driven by broad domestic and international demand—was the highest in company history.
  • The airline generated $4.3 billion of free cash flow in H1, expects about $3 billion for the full year, and has cut total debt by $9.4 billion since 2021, earning a two-notch Fitch upgrade.
  • In Q3, American forecasts TRASM down 4.5–6.5% year-over-year on 5–7% more capacity, CASM ex up 2–4%, and adjusted EPS of $0.85–0.95 amid challenging comps.
  • Management pledged to match United’s pilot wage increases under its tentative agreement, potentially raising labor costs once ratified.
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Earnings Conference Call
American Airlines Group Q2 2023
00:00 / 00:00

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Operator

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

Scott Long
Scott Long
VP of Investor Relations and Corporate Development at American Airlines

Thank you, Latif. Good morning, everyone, welcome to the American Airlines Group Second Quarter 2023 Earnings Conference Call. On the call this morning with prepared remarks, we have our CEO, Robert Isom, and our CFO, Devon May. A number of our other senior executives are also in the room for the Q&A session. Robert will start the call this morning with an overview of our performance, Devon will follow with details on the second quarter and will outline our operating plans and outlook going forward. After our prepared remarks, we will open the call for analyst questions, followed by questions from the media. To get in as many questions as possible, please limit yourself to one question and one follow-up. Before we begin today, we must state that today's call contains forward-looking statements, including statements concerning future revenues, costs, forecasts of capacity, and fleet plans.

Scott Long
Scott Long
VP of Investor Relations and Corporate Development at American Airlines

These statements represent our predictions and expectations of future events, numerous risks and uncertainties could cause actual results to differ from those projected. Information about some of these risks and uncertainties can be found in our earnings press release that was issued this morning, as well as our Form 10-Q for the quarter ended June 30th, 2023. In addition, we'll be discussing certain non-GAAP financial measures this morning, which exclude the impact of unusual items. A reconciliation of those numbers to the GAAP financial measures is included in the earnings press release, which can be found on the investor relations section of our website. A webcast of this call will also be archived on our website. The information we're giving you on the call this morning is as of today's date, and we undertake no obligation to update the information subsequently.

Scott Long
Scott Long
VP of Investor Relations and Corporate Development at American Airlines

Thank you for your interest and for joining us this morning. With that, I'll turn the call over to our CEO, Robert Isom.

Robert Isom
Robert Isom
CEO at American Airlines

Thanks, Scott, and good morning, everyone. The summer is well underway and the American Airlines team is firing on all cylinders. We continue to build on the strong foundation we have laid over the past year and remain focused on reliability, profitability, accountability, and strengthening our balance sheet. That focus is showing up in our results. Everything we have said we would do at the start of the year, we have done. Our operation is performing at historically strong levels, and this morning, we reported adjusted pre-tax earnings of approximately $1.8 billion for the second quarter. These earnings were well above the high end of our latest EPS guidance range, marking our fifth consecutive quarterly profit. At the start of the recovery, we told you that returning to profitability hinged on running a reliable airline.

Robert Isom
Robert Isom
CEO at American Airlines

American continues to run a strong operation in an evolving environment in which we are very well-positioned because of the hard work our team has done in recent years. Our sustained profitability is tied to our leading network, rewards program, and operation. We have a tremendous network, and we operate in a reliable and efficient way, and we reward our customers for using it. Now, let's talk more about our financial results. We produced total revenue of $14.1 billion in the second quarter, the highest quarterly revenue in our company's history. This was driven by broad-based demand across all entities, with a particular strength in demand for international travel leading into the summer. Throughout the recovery, we have made structural changes to enhance our customers' travel experiences and position the airline for success.

Robert Isom
Robert Isom
CEO at American Airlines

We have simplified and harmonized our fleet to create a more nimble and more flexible network that is focused on our most profitable flying. American's strength is our network, which is uniquely positioned to capitalize on the demographic changes in the U.S. More people have moved to the Sun Belt region, which is where some of our largest hubs are located. DFW, Charlotte, Miami, and Phoenix are very well-positioned now and for the future. Our strong regional network provides service to smaller towns and connects them with our hubs across the country, and our global partnerships are a great complement to our own flying. As a result, we are able to offer customers the most comprehensive network of any U.S. carrier. We continue to adapt our offerings to our customers' evolving preferences.

Robert Isom
Robert Isom
CEO at American Airlines

We are taking customers to where they want to go and meeting them where they want to do business. We are servicing more of our customers through our direct channels and driving engagement in our AAdvantage program and credit card portfolio. Our travel rewards program is the largest among the U.S. network carriers, and it continues to grow. We are making terrific progress in training our pilots and improving the utilization of both our mainline and regional fleet. Our young fleet and low near-term CapEx requirements enable us to generate free cash flow to reinvest in the business and strengthen our balance sheet. Turning to the operation, the American Airlines team has delivered strong operational results over the past year, and it continued as we achieved record second-quarter completion factor.

Robert Isom
Robert Isom
CEO at American Airlines

We operated nearly half a million flights in the quarter, with an average load factor of approximately 86%. In the second quarter, we also delivered 11 more combined zero-cancel days than the same period of a year ago. The summer peak started strong, with our team delivering our record Memorial Day weekend mainline completion factor, while operating our largest mainline Memorial Day weekend schedule ever. The momentum has continued into July. We delivered the best Independence Day holiday operation in our history, with traffic levels we haven't seen since July of 2019. At American, we're focused on taking care of what we can control. Our purposeful approach to planning, along with our investments in our team, fleet, and technology, has set us up for success during the busy summer travel season and beyond.

Robert Isom
Robert Isom
CEO at American Airlines

Now I'll hand it over to Devon, who'll share more about our second quarter results and the outlook for the remainder of the year.

Devon May
Devon May
CFO at American Airlines

Thank you, Robert. The focus and dedication of the American Airlines team has resulted in strong operational performance, which is helping to produce solid financial results. Once again, we delivered on our guidance for the second quarter. Excluding net special items, we reported second quarter net income of $1.4 billion, or adjusted earnings per diluted share of $1.92. Our strong operational performance resulted in slightly higher capacity production for the quarter and CASM ex performance better than the midpoint of our forecast. Unit revenues remained strong, resulting in an operating margin and EPS that outperformed the high end of our guidance provided in May. As Robert mentioned, American produced record revenue of $14.1 billion in the second quarter, up nearly 5% year-over-year.

Devon May
Devon May
CFO at American Airlines

This revenue performance led to our highest-ever adjusted operating income of $2.2 billion, resulting in a second quarter adjusted operating margin of 15.4%. Unit revenue in the quarter was down just 0.5% versus a historically strong 2022 on 5.3% more capacity. Domestic unit revenue was down 1.9%, while international unit revenue was up 18.3% year-over-year. Our unit cost for the quarter, excluding net special items and fuel, was up 3.7% year-over-year. That's better than the midpoint of our initial guidance range due to slightly higher than planned capacity production, driven by our strong operational performance. I want to spend a few minutes updating you on our fleet.

Devon May
Devon May
CFO at American Airlines

Our young and simplified fleet differentiates American Airlines from our U.S. network peers and provides network flexibility, enhanced efficiency, and an improved customer experience. These benefits are the result of the refleeting we pursued from 2014-2019 and accelerated during the pandemic. We are pleased we built our fleet in a low-interest rate environment and at a time when the supply chain wasn't as challenged as it is today. In 2023, we expect to take delivery of 23 new mainline aircraft, which are all now financed. We took 13 deliveries in the first half of the year and expect 10 more aircraft to be delivered by year-end. For our regional fleet, this quarter, we entered into agreements to purchase seven new Embraer 175 aircraft and seven used Bombardier CRJ-900 aircraft that will be delivered starting in the fourth quarter of this year.

Devon May
Devon May
CFO at American Airlines

We're excited to have these aircraft enter service and to further bolster our regional connectivity. Based on the latest delivery guidance from Boeing and Airbus, along with our new and used regional aircraft purchase commitments, our 2023 aircraft CapEx is now expected to be approximately $1.7 billion. Our non-aircraft CapEx is still expected to be approximately $800 million. We anticipate our 2024 total CapEx to be between $3 billion and $3.5 billion. Looking beyond 2024, we continually review our medium- and long-term fleet plans. Due to the young age of our aircraft, our fleet replacement needs are very limited. Therefore, we expect aircraft CapEx for the next several years and likely through the end of the decade, to average approximately $3.5 billion per year. Moving to the balance sheet. Yesterday, Fitch upgraded American's credit rating.

Devon May
Devon May
CFO at American Airlines

This is the first step towards our goal of BB credit metrics by the end of 2025. It's nice to see our progress being recognized. We continue to maintain strong liquidity. In the second quarter, we generated operating cash flow of nearly $1.8 billion. Our adjusted net investing cash flow was approximately $550 million, resulting in quarterly free cash flow of $1.2 billion. We have produced $4.3 billion of free cash flow in the first six months of the year. We expect full-year free cash flow to be approximately $3 billion. We ended the second quarter with approximately $14.9 billion of total available liquidity. We continue to make progress on strengthening our balance sheet in the second quarter by reducing total debt by $387 million.

Devon May
Devon May
CFO at American Airlines

This debt reduction, combined with the improvement in liquidity, resulted in a decrease in net debt of approximately $955 million during the second quarter. We have now reduced total debt by approximately $9.4 billion from peak debt levels in 2021, which is significant progress towards our goal of reducing total debt by $15 billion by the end of 2025. By the end of 2023, we expect our total debt to be approximately $11 billion lower than peak debt levels in 2021. Importantly, we ended the second quarter with a net debt to EBITDA ratio of 3.8 times, which is lower than it was at the end of 2019. Turning to our guidance. Bookings remain strong, and we continue to see a constructive demand environment.

Devon May
Devon May
CFO at American Airlines

We saw record revenue for the Fourth of July holiday period. Booked load factors for the third quarter are in line with what we saw in 2022. International entities continue to lead the way in terms of year-over-year performance. We are encouraged by domestic business demand, notably from small and medium-sized enterprises. As the recovery continues to unfold, the strong unit revenue environment in 2022 represents an increasingly difficult comparison. As a result, we expect third quarter TRASM to be down 4.5%-6.5% year-over-year on 5%-7% more capacity. We expect third quarter CASM ex to be up 2%-4% year-over-year. Our current forecast for the third quarter assumes a fuel price of between $2.55 and $2.65 per gallon.

Devon May
Devon May
CFO at American Airlines

Based on our current demand and fuel price forecast, we expect to produce an adjusted operating margin of between 8% and 10% in the third quarter, and adjusted earnings per diluted share of between $0.85-$0.95, excluding special items. For the full year, we continue to expect to produce capacity that is 5%-8% higher than 2022. Our full-year forecast for unit revenue continues to be up low single digits year-over-year. We now expect our full-year CASM ex to be up 2%-4% versus 2022. Notably, our expectations for capacity, TRASM, and CASM ex are all consistent with the initial guidance we provided on our January earnings call. That said, our estimate for full-year fuel expense has changed.

Devon May
Devon May
CFO at American Airlines

We now expect to pay between $2.70 and $2.80 per gallon, a reduction from our initial guidance. The full-year update further highlights the positive environment we are operating in. Based on our demand and fuel cost assumptions, we expect to produce a full-year adjusted operating margin of between 8% and 10% and adjusted EPS of between $3 and $3.75. We are very proud of the progress the American Airlines team has made, but we believe there is more opportunity ahead of us. We will continue to focus on delivering in 2023 and unlocking even more value in 2024 and beyond. I'll now turn it back to Robert for closing remarks.

Robert Isom
Robert Isom
CEO at American Airlines

Thanks, Devon. The American Airlines team is delivering on our commitments. We're on track to deliver on the full-year guidance we provided back in January, driving earnings growth, record free cash flow, meaningful debt reduction, and importantly, a strong and reliable operation. We are executing on that plan. We are reliable, profitable, and making tremendous progress strengthening our balance sheet, and I know that our team will continue to deliver. We're excited to share more about our long-term strategy at an Investor Day later this year on our Fort Worth campus. We look forward to updating you on the business and sharing more about our longer-term strategic priorities at that time. We're incredibly excited about the future of American and can't wait to tell you more. Operator, please open the line for analyst questions.

Operator

Thank you. As a reminder, to ask a question, you will need to press star one on your telephone. Again, that's star one on your telephone to ask a question. Please stand by while we compile the Q&A roster. Our first question comes from the line of Jamie Baker of JP Morgan. Your question, please, Jamie.

Jamie Baker
Jamie Baker
Managing Director and Senior Airlines Analyst at JPMorgan Chase & Co.

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

Vasu Raja
Vasu Raja
Chief Commercial Officer at American Airlines

Hey, Jamie, good morning, thanks for the question. First, I would say that we don't anticipate it being a margin drag. For full clarity, you know, though it's unfortunate the NEA is terminated, our commitment to the customers in the Northeast and New York specific hasn't changed. However, the circumstances that gave rise to the NEA have changed. At one point in time, we struggled with really two major things. One, our slot holding didn't match the demand level. That is, the majority of demand in New York was for short-haul, day trip business markets. Our slot portfolio is better matched to mid-continental, transcontinental, and transatlantic markets. Well, that's changed. Short-haul business demand hasn't recovered to its historical level, but those other markets are much greater. That's a material change from before.

Vasu Raja
Vasu Raja
Chief Commercial Officer at American Airlines

Also, our expense base, especially in New York Kennedy, has changed. Through co-locating partners and any number of fleet changes, our employment expenses in JFK are materially advantaged to what any other carrier is in New York. That means for us is, though it's unfortunate that customers don't get the experience of having a much broader network than what was there before, as a practical matter for American Airlines, we very much expect to preserve the continued margin trajectory that we've been on. As we go forward, we'll certainly share more, but it's very much our plan and our intention that we continue to go see more New York City-originating customers flying with us. So far, since the NEA has been announced, we've seen that.

Vasu Raja
Vasu Raja
Chief Commercial Officer at American Airlines

NEA enrollments in the AAdvantage program continue to rise, credit card acquisitions continue to rise, spending continues to rise. Though this chapter is closed, another one might open, but we don't expect any material change to our financial outlook.

Jamie Baker
Jamie Baker
Managing Director and Senior Airlines Analyst at JPMorgan Chase & Co.

Okay. Very helpful. Then, Devon, on the cost side, recognizing there are, you know, lots of moving pieces in the full-year CASM guide, can you tell us the last time you adjusted the labor accruals that you're assuming? Also, does your full-year cash flow.

Jamie Baker
Jamie Baker
Managing Director and Senior Airlines Analyst at JPMorgan Chase & Co.

... guide include retro pay for the pilots?

Devon May
Devon May
CFO at American Airlines

On the cash flow, it does include the retro pay that was part of our or that is part of our tentative agreement that we have with the pilots today. As we talked about last quarter, what we have for an accrual is, we are accruing wages that were agreed to in May as part of the agreement in principle, starting on May 1st. We expect the agreement or hope the agreement will ratify here in August, at which time we'll go to the new rates and the benefits associated with that tentative agreement.

Jamie Baker
Jamie Baker
Managing Director and Senior Airlines Analyst at JPMorgan Chase & Co.

Okay, very clear. Thank you, gentlemen.

Operator

Thank you. Our next question comes from the line of David Vernon of Bernstein. Your line is open, David.

David Vernon
David Vernon
Managing Director and Senior Analyst at Bernstein

Hey, good morning, guys. Robert and Devon, first question for you on the guidance framework you kind of laying out for us here for the back half of the year. It does sort of imply a pretty material deceleration from your earnings level in 2Q-3Q. We're hearing from you guys that the demand is good, the team is executing, you're delivering on your cost performance. Can you talk a little bit about the thinking behind how you're laying out the guidance here? You know, you just had a huge beat to your 2Q guides. You haven't missed in a couple quarters.

David Vernon
David Vernon
Managing Director and Senior Analyst at Bernstein

I'm just trying to understand, like, are you guys just kind of keeping the bar here where you set it in the beginning of the year, or, is there something that's really kind of decelerating here in the back half?

Robert Isom
Robert Isom
CEO at American Airlines

Hey, David, thanks for the question. look, you know, we've set out clearly focused on producing profitability, and, you know, our operating reliability is actually, you know, really facilitated that. As we take a look at it over the course of the year, you know, you'll see that we actually, you know, raised the midpoint of our full year guide by a quarter. It's indicative of our belief that, you know, that the economy is strong, demand is strong.

Robert Isom
Robert Isom
CEO at American Airlines

You know, for us, look, there's seasonality certainly involved, but at the same time, we're looking at this over the course of a year, and we're gonna stay the course, and we feel really positive about the results that we reported and what's coming. Devon, do you want to add anything to that?

Devon May
Devon May
CFO at American Airlines

I think, same points. We started the year and set out objectives for the capacity we're gonna produce, the unit cost we're gonna produce it at, and our earnings levels. We're really happy with what we've accomplished in the first half of the year. The guide we have in place did increase our full year EPS to $3.00, $3.75, and we feel really good about upping that number.

David Vernon
David Vernon
Managing Director and Senior Analyst at Bernstein

Okay. Then, maybe if you could talk a little bit about sort of, the domestic outlook here in the 3Q. You know, you've got, I think, 34% capacity growth in domestic and short-haul international. How are fare trends kind of moving sequentially? There's a lot of concern, I think, in the market about, you know, deceleration in the domestic travel market. Can you kind of elaborate a little bit more on kind of what you're seeing and what you're embedding into the 3Q guide for domestic?

Vasu Raja
Vasu Raja
Chief Commercial Officer at American Airlines

Sure thing. This is Vasu. First, look, I'll say at large, we continue to remain encouraged by the overall level of demand we see, especially in domestic and short haul. If you look at it, travel spend as a percentage of GDP, it certainly retained its relationship. Revenues, even domestic revenues, as a percentage of GDP, continue to regain their former relationship to demand. For us, what's really important to note is, this recovery is continuing to unfold.

Vasu Raja
Vasu Raja
Chief Commercial Officer at American Airlines

As we look out there in domestic, a lot of the sequential change that you see is really due to some pretty unique things, about a point of the 2Q-3Q changes, just due to calendar shift, and another point is due to our operational outperformance in the second quarter. Everything else is really a return to normal seasonality. As far as a deceleration of demand or things like that, we don't yet see it now. In fact, when you, when you look at it, for us, like versus 2019 or some base where you lose just the strange comparisons to how recoveries have unfolded.

Vasu Raja
Vasu Raja
Chief Commercial Officer at American Airlines

For us, we get into the fall, we will be flying an airline that is bigger than the 2019 airline, producing short-haul RASMs that are 15%-20% higher. There's still. We're still in a world where demand is very strong. The year-over-year comps are a little bit strange, owing more to just the vagaries of the recovery than anything underlying the business.

David Vernon
David Vernon
Managing Director and Senior Analyst at Bernstein

All right. Thank you for that.

Operator

Thank you. Our next question comes from the line of Scott Group of Wolfe Research. Your question, please, Scott.

Scott Group
Scott Group
Managing Director and Senior Analyst at Wolfe Research

Hey, thanks. Good morning. Sorry, I lost my voice, but hopefully you can hear me. I just want to go back to the third quarter guide. We've just never seen margins go from 15% to 8%-10%, you know, down, you know, five to seven points from Q2-Q3. Just any more color to help us think about what's driving that?

Robert Isom
Robert Isom
CEO at American Airlines

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

Scott Group
Scott Group
Managing Director and Senior Analyst at Wolfe Research

Okay. Just to clarify, are we assuming any earnings impact from losing the NEA?

Scott Group
Scott Group
Managing Director and Senior Analyst at Wolfe Research

... Sounds like you don't think we go back to where we were. Is there any earnings impact going forward from losing NEA?

Robert Isom
Robert Isom
CEO at American Airlines

Scott, we're not anticipating any earnings impact.

Scott Group
Scott Group
Managing Director and Senior Analyst at Wolfe Research

Okay, great. All right. Thank you, guys.

Operator

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

Conor Cunningham
Conor Cunningham
Director and Travel & Transports Analyst at Melius Research

Hi, everyone. Thank you for the time. Not a lot of talk on blended travelers or blended itineraries this quarter. Just curious on, is that just because it's in your base now? Maybe you could just level set us on how you're thinking about large corporate in the back half of 2023. Thank you.

Vasu Raja
Vasu Raja
Chief Commercial Officer at American Airlines

Hey, this is Vasu, and thanks for the question. You're exactly right. It's less of a novelty now. This is just part of our base, it's how the business runs. For several quarters now, we've seen a mix of 35% leisure-style travel, 35% blended-style travel, 30% business style. Furthermore, within the 30% business, there's roughly a two-to-one split between unmanaged travel and managed travel that's there. That's been pretty consistent for several quarters now. It looks to be pretty consistent going into the future. Certainly, that's what our forward book says. That's why no commentary. This is actually how the business operates now.

Conor Cunningham
Conor Cunningham
Director and Travel & Transports Analyst at Melius Research

just where are you thinking about corporate? Sorry.

Vasu Raja
Vasu Raja
Chief Commercial Officer at American Airlines

Look, we

Conor Cunningham
Conor Cunningham
Director and Travel & Transports Analyst at Melius Research

The back half.

Vasu Raja
Vasu Raja
Chief Commercial Officer at American Airlines

First of all, I'll clarify this. When we talk about business, we talk about people on business-style trips, and within that, there's two groups. There's individuals and companies that fly, and they don't manage or buy their travel centrally, and then there's large corporations that tend to manage buy their travel centrally. We've seen that those customers who are managed, they buy their travel centrally, has, it's recovered to 80% of historical levels, and that's been pretty much plateaued for several quarters now. However, unmanaged demand continues to grow in our system. Indeed, total business revenues have really regained their 2019 composition in the system. We remain encouraged on business demand.

Vasu Raja
Vasu Raja
Chief Commercial Officer at American Airlines

Should things change, we're prepared to go and adjust accordingly, but no forward change to outlook that's any different than the stuff we've been experiencing.

Conor Cunningham
Conor Cunningham
Director and Travel & Transports Analyst at Melius Research

Okay. Then just on, you know, the competitive environment in the domestic market, you know, the ULCCs and LCCs have been a ramp in capacity in the back half, and a lot of that's hitting your hubs. I'm just curious on how you view the competitive landscape right now, as you think about the back half of 2023. Thank you.

Vasu Raja
Vasu Raja
Chief Commercial Officer at American Airlines

Hey, thank you. Look, we actually view the competitive landscape very favorably. Our network proposition to our customers is creating more origin and destination markets and more unique origin and destination markets than any other airline network. We have done that really well. We continue to do that really well. That's really been the anchor of financial progress that we've seen. To Robert's comments, with, you know, roughly 70% of the airline network is located in the Sun Belt, in our Latin America network, in London, Heathrow, and places where we really deliver a lot of outsized value for customers. There, while we do see competitors come in, we remain encouraged. Take any number of those markets.

Vasu Raja
Vasu Raja
Chief Commercial Officer at American Airlines

In our short-haul, Latin American markets, we've seen something like 20%, 25% industry capacity growth. The trends are favorable enough where this fall and winter, we'll fly our largest schedule there, not because we're out to chase market share, but because of the marginal performance of those routes.

Conor Cunningham
Conor Cunningham
Director and Travel & Transports Analyst at Melius Research

Thank you.

Operator

Thank you. Our next question comes from the line of Helane Becker of TD Cowen. Your question please, Helane.

Helane Becker
Helane Becker
Managing Director and Senior Advisor at TD Cowen

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

Robert Isom
Robert Isom
CEO at American Airlines

Hey, Helane, thanks for the question. Hey, look, in terms of how we actually are able to deliver to our pilots, that's gonna be something that we have to work on with them, and we're in discussions with the APA, you know, right now, as a matter of fact. What I said this morning is something I'm really proud of and that we're committed to. Look, we're gonna match the wages that United is proposing. We've got to sit down with our pilots and figure out whether or not that is something that they can fit into their TA, that can still be voted on on a timely basis, or if it's something that's gonna, you know, take more time to figure out.

Robert Isom
Robert Isom
CEO at American Airlines

We're committed to matching those wages.

Helane Becker
Helane Becker
Managing Director and Senior Advisor at TD Cowen

Okay, thanks for that clarification. Just shifting gears for a minute, you know, you guys have been delivering a really great operation, for the past, I don't know, at least three quarters, right? As somebody who's shifted from Newark to Philadelphia, I can see it, in my flying. I'm just kind of wondering, are you seeing that also in your Net Promoter Scores? Can you talk about what customers are seeing, and are you seeing any share shift from any of your competitors to yourselves?

Robert Isom
Robert Isom
CEO at American Airlines

Well, Helane, thanks for bringing it up. We're really proud of the work that we've done over the last year. It's just a tremendous and relentless focus that's led by David Seymour, our Chief Operating Officer. You know, every day, our team is out there, including, you know, today in this ridiculous heat and weather, they're just performing. We've done everything from training to adding new technology, and when things go awry, we have been really quick to make sure that we have the tools necessary to put things back in place, whether that be aircraft or crews. That's gonna continue. I anticipate that we're gonna get better and better.

Robert Isom
Robert Isom
CEO at American Airlines

Of course, that translates into likelihood to recommend scores and Net Promoter Scores that are the best that we have ever seen. I have great confidence that is something that will continue to play out. That relationship between reliability and, what customers really want is super evident.

Helane Becker
Helane Becker
Managing Director and Senior Advisor at TD Cowen

That's really helpful. Thank you.

Operator

Thank you. Our next question comes from the line of Brandon Oglenski of Barclays. Your question, please, Brandon.

Brandon Oglenski
Brandon Oglenski
Director and Senior Equity Analyst at Barclays

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

Vasu Raja
Vasu Raja
Chief Commercial Officer at American Airlines

Yeah, thanks for the question, Brandon. Look, there were really two issues that we had in New York. One was the amount of connectivity support that we had for our long hauls. The other was just the huge expenses we had operating out of New York, Kennedy. As I mentioned earlier, we've done a lot of things to go and reduce our expense base to where it's not just more in line with our other low-cost hubs, but it's materially lower than what any other operator has in New York City.

Vasu Raja
Vasu Raja
Chief Commercial Officer at American Airlines

Also, and this is meaningful to it, look, the NEA was a great outcome for customers who got to go and experience our product, who weren't there before. Actually, when you look at those international flights, roughly as things have settled out and markets recover, roughly 35-40 points of the load factor that's on them is actually being generated by our international partners. Our partnership within the NEA was actually a very small amount of the onboard load factor that's there.

Vasu Raja
Vasu Raja
Chief Commercial Officer at American Airlines

That's why when we couple both the expense reduction that's there, and some changes that we can make ourselves, we believe that we can go and really replace a lot of the demand, especially now that we've got such a larger New York City originating customer base than what we had before.

Brandon Oglenski
Brandon Oglenski
Director and Senior Equity Analyst at Barclays

Appreciate that response. I guess maybe a quick one for Devon, 'cause I think you mentioned, aircraft purchases out in the future could be around $3 billion-$3.5 billion annually, if I heard it correctly. Do you think strategically that's the right level of, you know, reinvestment in the business, especially given that some of your competitors might be spending a bit more than that?

Devon May
Devon May
CFO at American Airlines

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

Brandon Oglenski
Brandon Oglenski
Director and Senior Equity Analyst at Barclays

Thank you.

Operator

Thank you. Our next question comes from the line of Duane Pfennigwerth of Evercore ISI. Your question, please, Duane.

Duane Pfennigwerth
Duane Pfennigwerth
Senior Managing Director at Evercore

Hey, good morning. I'm really tempted to ask another NEA wind down question, but we'll leave that for offline. Maybe just on fleet, where do you think your biggest gap or constraint is at the moment? Like, where do you wish you could be bigger today? Can you talk a little bit about, I think you mentioned some regional fleet adds, what are the kind of staffing circumstances you see that are allowing you to invest there?

Vasu Raja
Vasu Raja
Chief Commercial Officer at American Airlines

Hey, thanks, Duane. Just a couple of things. Look, I think, you know, as you take a look at the industry and especially, you know, our needs at American Airlines, we're gonna need, you know, larger narrow bodies in a number of places. It just fits with how our hub structure works and all the kind of things that Vasu wants to do. I would add to that, though, that, you know, probably our biggest and most interesting, you know, opportunity right away is getting our regional fleet, you know, fully back up in the air.

Vasu Raja
Vasu Raja
Chief Commercial Officer at American Airlines

You know, those aircraft, you know, only further our commercial proposition by adding more small markets to what is a great, you know, hub and spoke system already. As we take a look out into the future, you'll see us make sure that we protect ourselves and that we are able to not only replace and up gauge from a narrow body perspective, but also, you know, have an eye to be able to grow at a rate appropriate for demand levels.

Duane Pfennigwerth
Duane Pfennigwerth
Senior Managing Director at Evercore

Thanks. Then just for my follow-up, could you just remind us, maybe some of the differences in your transatlantic geography versus peers? You know, maybe it's too fine of a point, but could you contrast kind of your Southern Europe exposure relative to Delta and United? Thanks for taking the questions.

Vasu Raja
Vasu Raja
Chief Commercial Officer at American Airlines

Hey, thanks for asking them. Look, for us, so much of our transatlantic. I'll just speak to the European continent at this point, not other things that sometimes get lumped into reporting, such as the Middle East or India. For us, a lot of our concentration is first and foremost in London, probably much more so than what other airlines are. That which is in Southern Europe is really heavily seasonal style flying, or as we call it, the large city or the large capital market, things like Rome and Athens, Barcelona and Madrid. We've done a lot over the last several years to actually, and to further to Devon's earlier point, to really restructure our international network.

Vasu Raja
Vasu Raja
Chief Commercial Officer at American Airlines

We used to fly a lot of really marginal flights to really marginal markets. They worked for three months of the year, and we had nothing to do with the airplanes for the other nine months of the year. We've used the last three years to go and rebuild the foundation. The bottom 5% of our capacity is gone, the fleet that goes with it is gone. The losses that we took from it are gone. Now what we're building back, to Devon's point of just moderate growth, is adding things that really make sense and are a good use of full-year aircraft capital.

Duane Pfennigwerth
Duane Pfennigwerth
Senior Managing Director at Evercore

Okay. Thank you.

Operator

Thank you. Our next question comes from the line of Andrew Didora of Bank of America. Your question, please, Andrew.

Andrew Didora
Andrew Didora
Senior Equity Research Analyst at Bank of America Corporation

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

Vasu Raja
Vasu Raja
Chief Commercial Officer at American Airlines

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

Andrew Didora
Andrew Didora
Senior Equity Research Analyst at Bank of America Corporation

Got it. Robert, I know it's early on, just when you think about 2024, any initial thoughts on how you're thinking about capacity and the way kind of the continued build-out of both your domestic and international networks? Just curious, which entity you think could, you know, between domestic and international, could be growing the most next year, and just how you think about growth. Thank you.

Robert Isom
Robert Isom
CEO at American Airlines

Oh, thanks, Andrew. Hey, right now, it's we're in the planning stages, but, you know, what I'd tell you is that, you know, based on the kind of fleet that we have, we would anticipate mid-single digits, you know, growth for next year. There's a lot of dependencies on that. You know, first off, we have to be able to get our regional fleet, you know, back up, you know, fully, and that requires pilots. To be able to achieve that kind of level of flying, we would have to also get a little bit more out of the aircraft we have in terms of utilization as a whole.

Robert Isom
Robert Isom
CEO at American Airlines

The final thing is we're dependent on the airframe manufacturers to actually deliver. They're getting better. Their track record hasn't been great. We'll see how all that shakes out, if it all comes to fruition, that's probably a pretty good guess at this point.

Andrew Didora
Andrew Didora
Senior Equity Research Analyst at Bank of America Corporation

Got it. Thank you.

Operator

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

Michael Linenberg
Michael Linenberg
Analyst at Deutsche Bank

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

Vasu Raja
Vasu Raja
Chief Commercial Officer at American Airlines

Hey, thanks, Mike. It's an excellent question. I was wondering when it might be asked.

Vasu Raja
Vasu Raja
Chief Commercial Officer at American Airlines

Look, first of all of our selling and distribution changes are done with a really simple lens, really which Robert talked about in his opening remarks. We want to make it as easy as possible for our best customers to be able to shop, buy, and self-service their experience with American Airlines. Everything has been oriented around that. It has indeed been very eye-opening, and it has performed probably above what our expectations are. The simplest way. Mm-hmm. To think of it is like this: If you take all of our customers, the actual humans, you can divide them into two groups, those who are not members of the AAdvantage program and those who are members of the AAdvantage program.

Vasu Raja
Vasu Raja
Chief Commercial Officer at American Airlines

In the quarter, for those customers who are not members of the AAdvantage program, indeed, their total travel fell 5%, but revenue from that cohort grew by 5%. Amongst the customers who are AAdvantage customers, we actually grew their transactions by 8% and their revenues by 13%. That is certainly above what we had expected, but also what we're really encouraged by are three things. For every, there's a high level of attachment, for all of our AAdvantage customers. For every $1 of flight revenue they bring in, they bring in about $0.10 of other revenue, primarily on our brand of credit cards. Two, the cost of sale is materially lower amongst our AAdvantage customers.

Vasu Raja
Vasu Raja
Chief Commercial Officer at American Airlines

It's not just that we're paying less in booking fees and commissions and things like that, but what we've found is something like 25%-30% of our calls to reservations are actually bookings that a travel agency originated and is, for some reason, unable to go in service. There's a lot of implicit savings that we see from it. Last, and most importantly, we're encouraged by what we see is really the durability of these customers' demand. These are customers who tend to use our network where it's most unique. They fly more times in a year. They already have bookings out into the fall. They tend to sell themselves up, and importantly, they prefer coming to us direct.

Vasu Raja
Vasu Raja
Chief Commercial Officer at American Airlines

We're currently intaking roughly 70%-75% of our revenues going through our direct channels. We anticipate that will grow. We're encouraged by this, and we're actually gonna continue to accelerate the changes. By the end of the year, 100% of what we sell, customers will be able to service online through our app or our .com. We'll roll out those features also over time for new distribution technology. As this happens, we'll make increasingly less and less of our fare content available through traditional technology, where customers just aren't able to get that quality experience that they're looking for from us.

Michael Linenberg
Michael Linenberg
Analyst at Deutsche Bank

Great. Awesome response. My second question, I guess, is to you as well. When I sort of look at it in the forward schedules, it does look like, you know, even out to summer of next year, that JetBlue is still maintaining a significant presence in LaGuardia. Presumably, you will still continue to lease those slots to them and maybe maintain a smaller presence in LaGuardia than what you had, you know, pre-NEA, or is that just, are those placeholder schedules and that's TBD? Thanks for answering my question.

Vasu Raja
Vasu Raja
Chief Commercial Officer at American Airlines

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

Michael Linenberg
Michael Linenberg
Analyst at Deutsche Bank

Great. Very good. Thank you.

Operator

Thank you. Ladies and gentlemen, we will now move to media questions and answers. At this time, if you have not already, please press star one on your telephone. Again, that's star one on your telephone to ask a question. Once again, we are now moving to media Q&A. Please stand by as we compile the Q&A roster. Our first question comes from the line of Alison Sider of Wall Street Journal. Your question, please, Alison.

Alison Sider
Reporter of Air Travel Business at WSJ

Hey, thanks so much. Do you have a sense yet of, you know, how much more costly the pilot deal could be, you know, if you have to go back and boost the pay rates and other adjustments to match the United deal?

Robert Isom
Robert Isom
CEO at American Airlines

Ally, I'm looking at Devon. We're working on that right now. Look, one of the things I do know is that, you know, in our TA, there was, you know, significant quality of life and compensation improvements. The vast majority, you know, are very close to what United has supposedly in their TA. While there may be, you know, some adjustments that would be required for wages, it's not an inordinate amount. Devon, do you have any idea on that?

Devon May
Devon May
CFO at American Airlines

Yeah, we're working through the numbers right now. Obviously, the wages are close, but a couple % higher than what we have in our tentative agreement. You know, we're trying to get more detail on other items that we think might be material. What we have with our tentative agreement is really significant improvements for our pilots. As Robert Isom mentioned earlier, the wages is something we're focused on right now to see if we can work with the APA to get something done where we match what United's put forth.

Alison Sider
Reporter of Air Travel Business at WSJ

Great, thanks. I guess, Robert, you talked a little bit about this earlier this morning, but just curious if there's any kind of impact you're seeing from this crazy heat we're seeing in parts of the country, if that, you know, requires any operational changes or different ways of thinking about things for crew and for customers, and how you're dealing with that?

Robert Isom
Robert Isom
CEO at American Airlines

Hey, Ally, and I have David Seymour here to help me. Look, the heat that we're facing this, you know, this year in the country, I mean, these are records, and it is something that impacts, you know, certainly our aircraft, any machinery, you know, they're more active, and run harder and longer. It's also really hard on our people. Fortunately, we have great experience in dealing with hot weather hubs, you know, places like Phoenix and Miami and even DFW and Charlotte as well. We're employing all those practices that we put in place. We're just having to use them more often and longer throughout the year.

Robert Isom
Robert Isom
CEO at American Airlines

I'll give you just a couple of examples, though, of things that we've done on a precautionary basis just because of the trends that we've seen. We put a heck of a lot more work into making sure that we're prepared for the summer on things like conditioned air at our jet bridges. You know, as soon as an aircraft pulls up to a gate, we wanna make sure that we can get air to those aircraft to keep them as cool as possible. Our APUs, you know, little engines that are able to power all the systems when the big engines are off. Those are things that are prone to break during, you know, times like right now.

Robert Isom
Robert Isom
CEO at American Airlines

We're seeing really good results because of the pre-preventative work that our maintenance team has done. You'll see us as well, whether it's making sure that we, you know, only board when, you know, aircraft are, have air conditioning that is appropriate, or, you know, out on the ramp with our team members, making sure that they get a break from the sun and the heat, that there are, you know, things like, you know, ice carts and, you know, electrolyte drinks available to our team members. We're really taking this seriously, and we're gonna have to as we go forward.

Alison Sider
Reporter of Air Travel Business at WSJ

Thank you.

Operator

Thank you. Our next question comes from the line of Mary Schlangenstein of Bloomberg News. Your question, please, Mary.

Mary Schlangenstein
Correspondent at Bloomberg

Hi, good morning. I had just two quick questions. Vasu, on the LaGuardia slots, are you prohibited from leasing those slots to JetBlue for just their own use, for their own flights? Do you have to take those slots back, you can't lease them to them under any circumstances? My second question is on the pilot talks: Are you reopening the whole contract to discussion, or are you limiting it to changes in pay?

Robert Isom
Robert Isom
CEO at American Airlines

I'll handle both. First off, in regard to anything that relates to slots or gates or routes or things like that, look, we're gonna figure that out over time. I'll leave it at that. In regard to our pilots, as I mentioned, we're sitting down with our pilots. We have a real interest in making sure that they're taken care of. That's been how we've viewed all discussions. We'll see how that goes. My hope is that we can get something done pretty quickly. No matter what, over the long run, you know, we're gonna make sure that our pilots are taken care of.

Mary Schlangenstein
Correspondent at Bloomberg

Thank you.

Operator

Thank you. Our next question comes from the line of Leslie Josephs of CNBC. Please go ahead, Leslie.

Leslie Josephs
Airline Reporter at CNBC

Hi, everyone. Thanks for taking my question. Just on the pilot contract, I just wanna make sure that I understand correctly, you are committing to matching the United rates? Just wanna make sure we're clear on that. Just a second question on buyups to premium cabins. We didn't hear a ton of that from you guys, and just kind of curious what you're seeing, especially for premium leisure and international. Are you seeing higher paid loads in premium economy and then in business class? Thanks.

Robert Isom
Robert Isom
CEO at American Airlines

I'll handle the first one, Leslie, and Vasu can handle the second one. Hey, look, again, in regard to your question, we're working with the APA and our pilots. Our intent is to match the wages that we're aware of in the tentative agreement that United has signed.

Vasu Raja
Vasu Raja
Chief Commercial Officer at American Airlines

Yeah, Leslie, we've noted it all through the recovery, but we've continued to see strength in premium cabin style fares. Our total premium seats across the system are up about 5% year-over-year. Our total premium revenues are up about 15% year-over-year. Notably, it's pretty consistent across all of our markets. In London, for example, we've grown our premium seats about 20% or so. Our premium revenues are up over 25%, and that's at a time when so much of the industry is adding back into London. We are encouraged, and we're uniquely encouraged by the trajectory that we're on, different from others.

Vasu Raja
Vasu Raja
Chief Commercial Officer at American Airlines

For the first time in our history, our unit revenue performance in transatlantic will outperform any of our joint venture partners, both for the quarter and for the full year. We do see that strength. It's complemented by our distribution strategies, and we see more opportunity ahead.

Leslie Josephs
Airline Reporter at CNBC

Just 1 quick follow-up. When you get out of the summer season, are you seeing any kind of falloff in either fares or bookings, some of it with the TRASM coming down and then the inflation report showing that airfares are coming down in the U.S.?

Vasu Raja
Vasu Raja
Chief Commercial Officer at American Airlines

Nothing beyond historical seasonality, Leslie.

Leslie Josephs
Airline Reporter at CNBC

Thanks.

Operator

Thank you. Our next question comes from the line of David Koenig of the Associated Press. Your question, please, David.

David Koenig
Business Writer at Associated Press

Okay, thanks. I didn't hear my name. I guess that's me. Hey, Robert, you know, you've talked about matching the United deal, which, you know, APA valued their previous TA at $8.3 billion, and this is gonna add a couple percentage points. Do you plan or do you need to raise fares to cover the, you know, the contracts with the APA, the APFA, your other contracts, you know, and still remain profitable? Should people expect higher fares?

Robert Isom
Robert Isom
CEO at American Airlines

David, thanks for the question. Look, you know, over time, we're gonna run a profitable business, so we have to offer a really compelling product offering to our customers. We're gonna try to find ways to make sure that we can do that in a way that customers will benefit. you know, ultimately, it will take more revenue to pay for, you know, higher costs. We're going to do everything that we can to be as efficient as possible, take care of our team members, but also offer a very compelling and worthwhile product to our customers.

David Koenig
Business Writer at Associated Press

... Okay. Any other areas for revenue besides fares?

Vasu Raja
Vasu Raja
Chief Commercial Officer at American Airlines

None beyond what we've already spoke about through the call.

Robert Isom
Robert Isom
CEO at American Airlines

Sure, Dave,

David Koenig
Business Writer at Associated Press

Thanks.

Robert Isom
Robert Isom
CEO at American Airlines

We're really proud of our incredible network that we're flying reliably, and we've got an industry-leading rewards program. We're gonna tap into those and make sure that customers are really able to benefit from everything that we can do on that front.

David Koenig
Business Writer at Associated Press

All right, thank you.

Operator

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

Robert Isom
Robert Isom
CEO at American Airlines

Hey, Latif, thanks so much. I'll just close out this way. Look, you can continue to hold us accountable for relentless focus on reliability, profitability, and strengthening our balance sheet. I'll just point to the second quarter results. In terms of reliability, no one has been better than American Airlines over the last year. In terms of profitability, you know, this second quarter beat by all analyst expectations is just, you know, proof that our commercial offerings are really registering with our customers. You run reliably, you produce profits, you can strengthen your balance sheet. This two-notch upgrade from Fitch today is, again, indicative that we're doing the right things, we would anticipate further strengthening on that front.

Robert Isom
Robert Isom
CEO at American Airlines

All of it together, this outstanding second quarter for us is proof positive that our efforts are working. We're gonna get back at it. Thank you very much.

Operator

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

Executives
Analysts
    • Alison Sider
      Reporter of Air Travel Business at WSJ
    • Andrew Didora
      Senior Equity Research Analyst at Bank of America Corporation
    • Brandon Oglenski
      Director and Senior Equity Analyst at Barclays
    • Conor Cunningham
      Director and Travel & Transports Analyst at Melius Research
    • David Koenig
      Business Writer at Associated Press
    • David Vernon
      Managing Director and Senior Analyst at Bernstein
    • Devon May
      CFO at American Airlines
    • Duane Pfennigwerth
      Senior Managing Director at Evercore
    • Helane Becker
      Managing Director and Senior Advisor at TD Cowen
    • Jamie Baker
      Managing Director and Senior Airlines Analyst at JPMorgan Chase & Co.
    • Leslie Josephs
      Airline Reporter at CNBC
    • Mary Schlangenstein
      Correspondent at Bloomberg
    • Michael Linenberg
      Analyst at Deutsche Bank
    • Robert Isom
      CEO at American Airlines
    • Scott Group
      Managing Director and Senior Analyst at Wolfe Research
    • Scott Long
      VP of Investor Relations and Corporate Development at American Airlines
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