American Airlines Group Inc. (NASDAQ:AAL) Cowen 15th Annual Global Transportation & Sustainable Mobility Conference September 7, 2022 10:00 AM ET
Company Participants
Robert Isom – Chief Executive Officer
Derek Kerr – Chief Financial Officer
Conference Call Participants
Helane Becker – Cowen
Helane Becker
Good morning, everybody. This is Helane Becker, Managing Director at Cowen and Airline analyst. I always seem to forget that title. So welcome to the 15th Annual Global Transportation — Cowen’s Global Transportation Conference. And the second time we’re doing Sustainable Mobility.
This morning, we are very fortunate to be talking to Robert Isom, CEO of American Airlines, and Derek Kerr, I think, is here as well, the Chief Financial Officer. So thanks, Robert, for being here, Derek, hi.
Robert Isom
Hi, Helane.
Derek Kerr
Hello.
Helane Becker
Here I don’t know who else is in the room with you guys. But before we get started, is there anything you wanted to say to update the market or anything like that before we go into Q&A.
Robert Isom
Sure, Helane. So, thanks for having us. But, I got to tell you, this is only because of our relationship, going back years and years that we’re doing a virtual, this is it. I’m done, done, done. This is a transportation conference. We should be there were with you. So I’m so happy that this is it. But I can’t wait to see you in-person. These things are so much more effective that way.
Helane Becker
I agree. And I’ll come down to Dallas. In fact, I’ll be in Dallas next month for a couple of days. So I’ll be sure to stop by the offices if you guys are there.
Robert Isom
Okay. We will see you and it is Fort Worth that we’re in, Mara Parker over at [indiscernible] would be really upset with me if I didn’t make that noted. But you’re welcome here any time. Okay.
Helane Becker
Yes. I haven’t been to the new campus yet, and I hear it’s beautiful.
Robert Isom
It is. It’s fantastic. It’s a recruiting tool for us. And during the pandemic, it’s allowed us to be in the office and all working together. So I can’t wait to host you out, and it is really something, I think, special.
Helane Becker
Okay.
Robert Isom
Hey, I’d like to just say thanks again for having us. It’s great to be here as we close out a summer. We started the summer with a really solid Memorial Day performance, and we’ve closed it out with a really solid Labor Day experience as well. In between, there were some rocky patches with a lot of weather and other really, really difficult operating conditions.
But I’m going to give a shout out to our team through at all. They’ve been just amazing. No matter what the challenges they face, they’ve delivered for our customers. And it’s been a really busy summer, even with capacity limited this summer. It’s been hard on the team, but we’ve been focused, we’ve delivered.
And I’m really pleased that the two things that we set out to do, run a reliable airline, we’ve got some work to do, but returning to profitability, we reported a second quarter profit and the highest revenues in American Airlines’ history. So we feel like we’re making really good progress. And reliability and profitability, those are goals that are inextrictibly linked and everybody in our company knows it.
So we’re out there preparing for the future. We’ve sized the airline for the resources that we have. We do have a lot of assets that we could utilize better. We’ve been hiring throughout the summer. We’re making good progress with pilots.
But we’ve buffered our schedule to make sure that we can serve our customers in the way that they deserve. And as we’ve gone through the summer and returned to profitability, focus has been on making sure that we reduce our leverage. So paying down debt has been really important.
In terms of new news, I don’t have a lot. So we issued guidance in the second quarter, and that guidance holds. We continue to see revenue and expense and margins tracking as we expected, and that’s good news.
So as we take a look forward into the future, I’m pleased with how we’ve managed through the summer and rebounded through the pandemic. A lot more work to do, but as we take a look to the future, we’ve got a great fleet, a network, a set of partners that really sets American part. And I’d love to talk to you about it.
Question-and-Answer Session
Q – Helane Becker
Okay. Great. So let’s look that up to different categories and start with operations and reliability. One of the things you mentioned is you’re staffing up. And I noticed from the numbers you report to the DOT, I think the staffing is actually above where it was in 2019 at this point. And I guess, as people get more experience away from – let’s talk not pilots for a minute. But as the rest of the organization gets more experienced, I imagine that customer service improves and stuff like that improves?
Robert Isom
Helane, that’s absolutely true. So I’ll take just a step back. We’ve hired, I think, almost 20,000 people over the course of the last year at American Airlines, that’s a huge number. Now, that’s in terms of net new positions, I think it’s just about 12,000 positions. But that’s run the gamut, pilots, flight attendants, mechanics, agents everywhere. But you’re absolutely right.
As you bring folks on, and with that kind of number of new hires, there is a learning curve to getting people up to full proficiency. Fortunately, we’ve got a great team that helps folks along. But I’d say in a number of areas, we’ve seen that. Within our maintenance operations for instance, when we put new people on different shifts, it takes them a while to use to the aircraft they’re working on, the different facilities that we have and the resources that we have.
But as that maturity comes about and people are really on the job, we see that it’s making progress. And so as I take a look forward, we’re going to have a team that is really well positioned, well trained and able to take care of our customers as we go forward. And my expectation is, is that the customer experience improves.
Helane Becker
Got it. Okay. So that’s really helpful, actually. And then the other question I had with respect to, I guess, I don’t know how to think about the pilots. I know you don’t like to talk about negotiations, and I’m respectful of that. But how do you get – I don’t mean to be punning, but how does they get on board with what you’re trying to do and kind of stop taking their complaints to the public and just kind of like act like adults in the room?
Robert Isom
Well, look, our APA is trying real hard. I think kiosk can be reached when there’s common interest, right? And when there are win-win solutions. And we’re on that right now. American Airlines, right now, the biggest issue we face is utilization of our assets. We actually have the assets in place to fly a much larger airline and that would be a good thing, especially from a cost perspective. And we think that, there’s revenue opportunities to take advantage of as well.
But when that comes back to pilot and flight attendants, and really all groups, being larger and having more pilots being very, very efficient. It certainly makes the company more profitable over the long run. But for our pilots, it creates more captives jobs. It means that more pilots come on board. And with our pilots, it’s – look, we all know it, the best – the biggest type of pay increase you can get is to go from a first officer to a captain right? In some cases, that’s like almost a 40% increase.
So having more captains is a really good thing. And then also just bringing people in from – as new hires, that improves everybody’s seniority as well and seniority is key to quality of life. So our pilots, I know, because I’ve talked to them, and I talked to the APA. I know that they’re really interested in helping us grow, helping us bring on more pilots and getting where we need to go.
Now all that said look, negotiations are always something where you’ve got to find the win-wins. And we’re in that process. We’re still working with our pilots in the APA, and I’m confident that they want to find a deal and we do too.
Helane Becker
Okay. That’s fair. With respect to the — on the aircraft side, now I think you have one of the youngest, most fuel-efficient fleets in the industry. How do you think about ESG in that scenario?
Robert Isom
Right. Well, we do have one of the youngest fleet — we do have the youngest fleet of the network carriers and that’s come about from a $25 billion over the last 6 years of fleet investments. And we actually have some new aircraft coming in now as well. But what we’ve done over the last – throughout the pandemic and even before that, is we’ve worked to really simplify our fleet, and we really have 4 flavors of aircraft.
Two narrow-bodies 73s and A320 family and then 78s and 777s, that’s made — that’s been really helpful for us in terms of overall efficiency. But in terms of age as well. It means that we’re bringing on MAXs, it means we’re bringing on 321neos. It means we’re bringing on triple — on 787s, and we have brought on, before the pandemic, 777 300s. The best way that you can fly your network and achieve sustainability is by having newer aircraft.
No matter what the configuration is on your aircraft, okay, having a newer airframe and newer engines, okay, is the way to burn the least amount of fuel, okay? That’s how you reduce the carbon emissions, no matter what your fleet is, in terms of kind of first-class configuration or premium economy or economy configuration. So, we’ve been focused on that. We’re really pleased.
Every new generation of aircraft and engines brings about almost a 15% reduction in fuel burn for similarly sized aircraft. So that’s a really good thing. Outside of that, though, our focus is on making sure that we fly as efficiently as possible. So, you want to reduce taxi times. You want to make sure that when you fly from DFW to Detroit, that you’re taking the shortest path. And on that, we’re working very hard with the FAA as well to make sure that there is still a mind to air traffic modernization and making sure that on the ground, in the air that we’re as efficient as possible.
Now we’re still in a fossil fuel environment. And one of the ways that we can also better new aircraft and flying efficiently is, by utilizing sustainable aviation fuels and on that front, American is the leader. We were able to use more stable aviation fuel in real flights than anybody else and as we look forward, that effort is going to continue. It’s a cornerstone of really making sure that we do right.
Now I’ll also mention that in terms of technology, American is investing in the right places. So, I mentioned being really efficient in terms of getting from point A to point B. We actually have technology that is helping us to make sure that we fly to the right side of the airports that you taxi [ph] the least amount of time. And on top of that, we’re getting ready to launch new programs with our dispatch that will really, as well improve flight times, arrival fuels and overall length of time in the year.
So, I’m pleased with where American is. It’s a big topic. It’s one that we’re passionate about because it fits the overall greater good in terms of reducing carbon emissions, but that’s also the best way to run the airline. And I think in the long run, most efficient.
And one last thing, Helane, before I get a shout out to the Biden Administration and the work that has been done in some of the recent legislation. It has provided tax credits for sustainable aviation fuel. That’s going to be, I think, a big deal and a game changer for everybody.
Helane Becker
Right. Exactly. So, when you think about the infrastructure, and this is a little off topic, but you’re an industry leader. So, I think it’s a fair question for you. The infrastructure in the US is lagged. And I know there’s been some improvement in places like LaGuardia. DFW has a really big social media presence I’ve noticed and shout out to American actually quite a lot. They do highlight your aircraft.
But when you talk to the Secretary of Transportation, and when you talk to the President, how can you get them to be more supportive of the industry overall? And in — and I guess, invest in infrastructure that we have in this country really hasn’t done? That’s part one of the question. And then I’ll come to part two, which is a little easier.
Robert Isom
All right. Okay. Well, these are all tough questions because, look, we’ve all struggled with them for some time. But first off, I would be amiss if I didn’t say, hey, look, we’re really pleased with the support that we’ve received from the Biden administration and actually going back before President Biden as well.
Where we stand today as an industry without the payroll support program would have been — look, I think you’d be looking at a very, very different industry. As difficult as this summer has been, it wasn’t like what has been faced throughout the world. And American is certainly proof of that in terms of the level of service that we’ve been able to provide, the cities that we’ve been able to maintain service to. So, I’m appreciative that our politicians know the value of airlines to commerce and to everyday life.
Now, when it comes time to talk about some of the things that we struggled with in terms of like air traffic modernization, look, to make improvements in those areas, it takes a vision. It takes a multiyear and potentially multi-decade approach. And that is something that is difficult in our political environment where you got to show something right away or else you’re out of office.
We have to work as a country. We have to work with AFA, our Industry Association, to make sure that we’re identifying where investments can be made and the length of time over which they will pay. I’m confident that because everything is coming together in terms of customer demand, they need to be efficient and also sustainability that, that is going to take a higher profile as we go forward.
But, Helane, I really think it’s about all of us getting together and realizing that to make real improvements it’s not something that happens overnight. And even for instance, our sustainability plan is something that we’re measuring out to 2050. We’ve set goals, science-based targets that we’ve set in 2035. And we’re depending on a lot of things to happen, not only in terms of sustainable aviation fuel, but modernization of systems and potentially new technology.
Helane Becker
Got it. That’s very helpful. Thank you. And then the second part of the question really has to do with Europe and international. I saw — I think, I saw a picture of you the other day on social media or on American’s website in Tokyo. So I guess that’s a…
Robert Isom
I can’t wait to go to Tokyo, but the answer to that is no. You know what, I was out a couple of days with a great friend and the President of JAL, Akasaka San, and he visited for the first time our headquarters here in Fort Worth. And so he was out, and we’re talking about what comes next.
Look, we can’t wait for Asia to open up in general. Japan, I think, is making great strides. And based on my discussions with Akasaka San, he has said that he’s hopeful that as we progress into the new year that there will be a number of restrictions that are pulled down. So some of the things that we face right now, a visa is required, okay? And good news is testing requirements have been pulled down. But I think as time progresses, as COVID infection rates even further decline from where they are, my guess is Japan is one of the first places that you’ll see that opens up in a bigger way.
Helane Becker
Okay. And what about Europe? That seems to be so flat with it’s — I don’t know. I don’t want to say disaster, but there are limitations on how much you can fly into Amsterdam, into London. And, obviously, that impacts you maybe more than others because of your relationship with British Air. I mean, any signs of improvement there?
Robert Isom
Okay. Well, just — let me talk to you about the environment. First off, our transatlantic revenue performance has actually exceeded 2019 levels. So that might be a little bit of a surprise. Of course, that’s fueled by a lot of yield as well. But there have been issues. And I think there’s — again, as tough as things were in the US for a lot of reasons, we were much better prepared than so many other places in the world, including Europe.
The things that we found is that businesses were cut so much, but it’s just so hard to get back up to speed. Whether it’s pilots and flight attendants and the training that’s required, you just — you can’t flip a switch and have people come back. And then, in some locations, the biggest issue has really been those airport workers, right, that are essential, not only airline employees, but also partners that it’s been so hard to get them back. And it’s not just — they went out and found other jobs when things went south for a couple of years.
And so bringing them back, getting them badge, certified, we talked earlier about apprenticing and getting up the learning curve, my view is that, that is all happening. It’s behind the US, a good proof point though right now is what’s happening in London Heathrow. I know before we started, you talked about maybe making some trips over to Europe, maybe even London.
On that front, I’m pleased to report that our operations has stabilized greatly, we’ve done some things with our partner, BA. One, is that we isolated Americans operation in Terminal 3. It took a little bit pressure off of T5. And that has allowed us to provide more resource and as to take a look in the future, BA is catching up, and so when you fly out and I know loads are really heavy. And I’d encourage everybody to take a look at American, because I think as you look at London Heathrow, it’s a much different environment than what was reported earlier this summer.
Helane Becker
Well, I’ll find out early morning.
Robert Isom
Okay. Good. Good.
Helane Becker
Okay. So just in terms of demand, how are you seeing, I mean, normally after Labor Day, you would see a decline in leisure and an increase in business. And I know I’ve seen an increase in conferences, but I don’t know that if — and I know people are being encouraged to return to office, but I don’t know that, a, they’re really returning. And b, I don’t know if business travel is really coming back. So maybe talk to what you’re seeing from a demand perspective?
Robert Isom
So, Helane, on this, not a lot of real new news. I think the points that I would make is that, look, overall, business demand — our business revenue from a domestic perspective is above where it was in 2019, okay? So I think it’s running 105% of where we were in 2019. That has been really pushed by small and medium-sized businesses.
And so you see that, that has really outperformed corporates, what we used to think of as the big corporates, so investment banking and consulting and audit firms and some entertainment, that’s lagged, okay? We’re really only about, in terms of revenue, 75% recovered. That I believe is all upside. And as we get to the fall, we’ll see how that goes.
But I’ll also say that people are traveling differently. We speak about blended trips. I do think a lot of what we would have formerly called corporate travel is actually showing up more in these blended trips. And it’s people working from home, and they’re just saying, hey, look, I’m going to book my travel the easiest way possible. And if I just go into the office one or two days a week, and I’m living someplace else, I’m using alternate tools to actually do the same thing.
So it’s a little bit of a murky picture in terms of the split between corporate and small and medium-sized businesses and blended leisure travel. But I will tell you this that as we get past Labor Day, our leisure bookings remain strong. I’m very pleased with that. That is something that — there was some question about whether that would hold? Our business bookings remain strong. And as we look to the future in the fall, I anticipate being able to build from here, because there are other aspects of the network that really haven’t come back fully online. We’ve got international upside when we talk about Asia and South America. We’ve got upside, I believe, as well as people do return to the office.
And the CEOs that I talk to, okay? They come out and visit us here in Fort Worth. They’re a little bit surprised, especially depending on where they come from because they see how vibrant the business community is here. And I think that, that’s spurring others to say, hey, it’s time. We’re done. We’re not going to lose any more business, and it’s time to think about growth, and that means a lot of face-to-face and going out and winning deals.
Helane Becker
That’s really helpful to know. And the other question I have, you actually just said something that brings something this up. When your salespeople go out to negotiate corporate contracts and the big ones, not so much the small and medium-sized companies who, to your point, if they don’t travel, they don’t get sales.
Robert Isom
Correct.
Helane Becker
But you said that people are living elsewhere like I moved. I live elsewhere. I don’t live in Northern New Jersey anymore, but so I have a different airport I fly out of actually Philadelphia now is my preferred airport.
Robert Isom
Go Philly. We got a great operation in Philly. Love for you to try our business.
Helane Becker
We just need more flights. But the point is when your salespeople go out to negotiate new contracts, do they have to — or are you hearing from corporate travel managers, we need — like me, we need more service out of airports that are non-traditional for our company.
Robert Isom
Yes. And it’s one thing I think our commercial team is identified. Throughout the pandemic, people are living in different places. The trip patterns are different. In our network, one of the things that we’re really proud of is that we can serve more people to more city pairs than really any other airline by a real margin. And that’s key off of our regional network and service to smaller cities.
As we go forward, that’s going to continue to be super important to us. And I think — look, this is a dynamic that we’re going to face, and our network is going to move to where people want to fly. So the answer to your question is, is that I think all corporate travel managers would, first off, like to have more of their team members back in the office. As soon as people get back to the office, the sooner they’re going to get out on the road. You find that, that is a phenomenon that we see.
And then in terms of service, yes, we’re not — the industry and even American is not serving all the cities that we would like to at this stage. Some of that is really due to getting back fully up to speed after the pandemic and addressing the pilot issues that we’ve had.
We talked about the mainline pilots and getting a contract and making sure that we can train all the pilots we need for the mainline. For our regional network, it’s really about making sure that we get pilots into the business, and I’m really pleased with our wholly-owned carriers and our partners and the work that they’re doing to establish that. But then enable them to also get trained, get experienced because the path right now from a regional first officer to a mainline first officer is really pretty quick, a lot faster than it’s ever been in our history.
Helane Becker
Yes. And then just — I will have a few minutes left. So I know Derek is in the room.
Robert Isom
Derek is going to pull over here.
Helane Becker
Have you updated your thought process on where liquidity needs to be and how much cash you should have? I mean, historically, and certainly pre-pandemic American had a bigger cash position because of the decision to buy back stock versus — and borrow money to fund the aircraft purchases, right?
Derek Kerr
Yes.
Helane Becker
So now post-pandemic American, how should we think about balance sheet liquidity and things like that?
Derek Kerr
Yes. I think as we’ve talked about, I mean we had — we ended the quarter over $15 billion of liquidity, which is much higher than what we need. We’ve talked about going down somewhere in the 10% to 12% range at this point in time. So we’re not going to take it all the way back to 7%, which is where we — we had had it at 7% for a long period of time, and we actually thought that was had a lot of about $2 billion in excess versus anything else.
So right now, our target is probably 10% to 12%. We haven’t set the treasury team off yet to go use that cash just as we look forward and the uncertainty going into next year. But if we hold where we are from a cash perspective, you’ll see us use that cash to pay off debt, and it will be hopefully by the end of the year.
The only thing we really have to deal with at this point in time is there’s a term loan that’s due at the end of 2023. Otherwise, we don’t have any obligations other than aircraft coming, which are all financed through the end of the year. We’re looking at the first quarter of next year. So I think what you’ll see, as we go throughout the year, if things continue the way they are, demand continues the way they are, we’ll use that cash to pay — continue our paying off debt. Our goal, what we had said is $15 billion is our target by 2025. We’ve already done $5.2 billion of that. So we’re well ahead of what the target is. I’d like to do it sooner than 2025, if possible, but that’s going to be dependent on the demand environment and earnings as we move forward.
Helane Becker
Right. So as we’re thinking about 2023 just conceptually, from a capacity perspective, does it make sense to kind of keep the airline where it is and just keep fares kind of going up versus getting back to where maybe it was adding more capacity?
Robert Isom
Helane, let me start with that. I think you’re always going to see American manage to maximizing profitability plain and simple. And for us, and Derek can speak more about this, I think the greatest opportunity we have is just really utilizing our assets better, okay? We’ve had some issues with aircraft deliveries and with Boeing that you’re aware of, that put us in a position of having more pilots than we needed in some places. Now we’ve finally gotten those aircraft deliveries back in process. We’ll be able to utilize our pilots better in that way. But then, in other cases, we haven’t been able to really train and get pilots all in position to fly aircraft on the mainline or regional side as well as we’d like. So I think that there’s real opportunity. It’s just something that’s going to take a little bit of time to work our way through, but for me, that’s the biggest key to maximizing profitability. Derek?
Derek Kerr
Yeah. No, I agree. I mean, we talked about this on the earnings call. It’s not a — demand is there. Demand is strong. There’s a lot of demand. It’s the supply that we would like to increase. Just it’s — we have built the airline to fly more, right? And so what we want to do is make sure that we get those aircraft back up in the air. The 78s are now going to go back up in the air. We have the crews to do that. That will come in at nice profitability. The regional fleet, we’d like to get the regional fleet back up as much as we can. So we talked about having about 150 planes on the ground in the second quarter. Our goal is to get those back up and have those fly in as soon as we can. So that will be — we have the CASM headwinds today. It’s really the CASM headwinds are due to utilization of the aircraft not as much the cost structure. So one of two things has to happen. You either got to grow the airline back with that, and it’s going to be very efficient growth, or we’ll have to adjust the assets as we move forward. And I think we’d like to get those aircraft back up.
End of Q&A
Helane Becker
Okay. Well, unfortunately, we’re out of time. And I can’t tell you how much I appreciate you both being here and your time today. Thank you so much. I wish we were in person. That’s my goal for next year.
Robert Isom
You too. We will see you in Boston. You want to be in Boston.
Derek Kerr
In Boston, it’s too hot down here.
Helane Becker
I feel like its continual next year in Boston.
Derek Kerr
No, we’re going to go to Boston no matter what next year, okay? So we’re coming to see you. Got great operation there, too. Thanks, Helane.
Helane Becker
Thanks, team. Bye. Have a great day.
Robert Isom
Yeah. Bye.
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