American Airlines Group Q2 2024 Earnings Call Transcript

Quartr
Provided by Quartr
July 25, 2024

There are 16 speakers on the call.

Operator

you

Speaker 1

for standing by, and welcome to American Airlines Group's 2nd Quarter 2024 Earnings Conference Call. At this time, all participants are in a listen only mode. After the speaker presentation, there will be a question and answer session. I would now like to hand the call over to Scott Long, VP of Investor Relations and Corporate Development. Please go ahead.

Speaker 2

Thank you, Latif. Good morning, and welcome to the American Airlines Group's 2nd quarter 2024 Earnings Conference Call. On the call with prepared remarks, we have our CEO, Robert Isom and our CFO, Devin May. In addition to our Vice Chair, Steve Johnson, we have a number of other senior executives in the room this morning for the Q and A session. Robert will start the call with an overview of our performance, and Devin will follow with details on the Q2 in addition to outlining our operating plans and outlook going forward.

Speaker 2

After our prepared remarks, we'll open the call for analyst questions followed by questions from the media. 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. These statements represent our predictions and expectations of future events, but 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 30, 2024. In addition, we'll be discussing certain non GAAP financial measures, which exclude the impact of unusual items.

Speaker 2

A reconciliation of those numbers to the GAAP financial measures is included in the earnings press release, which can be found in the Investor Relations section of our website. A webcast of this call will also be archived on our website. The information we are giving you on the call this morning is as of today's date, and we undertake no obligation to update the information subsequently. You for your interest and for joining us this morning. And with that, I'll turn the call over to our CEO, Robert Isom.

Speaker 3

Thanks, Scott, and good morning, everyone. This morning, American reported an adjusted pre tax profit of $1,000,000,000 for the 2nd quarter, driven by record quarterly revenue of $14,300,000,000 We finished the quarter in line with our revised guidance with 2nd quarter adjusted earnings per diluted share of $1.09 despite the impact of significant weather events on our operation in May June. Before I get into more detail on our Q2 results and outlook, I want to first acknowledge that our current revenue performance is not where we want it to be. In May, we made a sizable adjustment to our revenue and earnings expectations for the Q2, driven by an imbalance in domestic supply and demand and our prior sales and distribution strategy. We know we can do better and we will rise to meet this challenge.

Speaker 3

I'll begin with an update on those two key areas that are impacting our results, the softness in the domestic marketplace and our sales and distribution strategy. I'll also outline the clear and decisive actions that we're taking to course correct. First, on the softer domestic revenue environment. In the Q2, we saw the impact of too much industry supply in the domestic market, especially in regions of the country where we have larger operations. That excess capacity led to a higher level of discounting activity in the quarter than we anticipated.

Speaker 3

As we said we would, to address the domestic softness, we pulled down our planned capacity growth in the back half of the year. To better align our growth with demand expectations, we now plan to grow capacity by approximately 3.5% in the second half of the year. 2nd, our sales and distribution strategy. In late May, I said our sales and distribution strategy was not working and we needed to make a change. We're taking actions that will improve our performance, but a reset will take some time and we will continue to feel the impact of our prior sales and distribution strategy on revenue and earnings through the remainder of this year, which is reflected in our updated full year guidance.

Speaker 3

Let me outline the 3 key parts of our plan in leadership and organization, in working with the travel agency community, and in addressing the needs of our corporate customers. With regard to our commercial organization, we immediately took action and changed senior leadership. Steve, our Vice Chair, 2nd in command and most seasoned and accomplished executive has taken charge of our commercial efforts, reorganized the team, completed a deep dive on issues and opportunities and laid out a recovery plan that we are executing on quickly. We have also strengthened our revenue forecasting processes. Our near term actions are concentrated on winning back customers and our share of revenue in agency and business channels.

Speaker 3

To that end, in June, we reinstated fares in the distribution channel traditionally used by travel agencies and corporate managed travel programs. Approximately $14,000,000,000 of our annual revenue was booked through this system in 2023. This action ensures our product is available wherever customers want to buy it and removes the most objective to pain point of our previous distribution strategy. Next, we engaged our large TMC partners to put in place new incentive based agreements to restore our share in those channels. Those efforts have been well received.

Speaker 3

We are having good conversations with companies including Amex GBT with which we have a long standing relationship. We expect agreements with TMC soon and we will then work to reengage the broader business and leisure agency community. Additionally, we have eliminated plans to differentiate how customers earn miles based on where they book their travel, removing another significant obstacle impacting booking behavior and business relationships. Our products need to be attractive and easy to engage with. A significant piece of that is our advantage business program, which replaced our previous unmanaged programs for business travelers.

Speaker 3

Those previous programs generated more than $2,500,000,000 in revenue in 2023, nearly 75% of which was booked through travel agencies. With recent changes, we have now expanded the Advantage Business Programs benefits so that participating companies will earn miles and end travelers will earn loyalty points wherever they book, including through travel agencies. Several more improvements are on the way to make the program easier for travel managers to use and we have established a dedicated help desk for advantage business customers. Our agency and corporate partners have made it clear they want additional support as they do business with American. We have prioritized adding resources to our sales and sales support team and have made good progress already.

Speaker 3

In addition to the dedicated advantaged business desk, the team has hired new account managers for our corporate customers with more to come as we evaluate the appropriate level of staffing going forward. In August, we will significantly increase resources dedicated to sales support to give customers the assistance they need. The agency and corporate customer response to these changes has been positive, and we are starting to see share shift back to American. Our partners are incredibly important to American and we recognize we have a lot of relationships to repair. I've spoken with more than 30 of my counterparts at our largest corporate customers to get honest and candid feedback.

Speaker 3

And these meetings and calls are occurring in parallel with our team's efforts to engage with customers at the travel manager level. The feedback we've heard demonstrates that changes we have made are focused on the right areas and that agencies and corporate customers want to work with us as we continue to adjust our strategy. We will continue to listen and further refine our plans as needed. All of these actions and more to come are a sign of our commitment to win back any customers we have lost. We've made a lot of progress from where we were in late May, but we still have a lot of work ahead of us.

Speaker 3

Success will ultimately be measured by improved revenue performance and earnings, but it will take time. In the near term, we will measure success by tracking our agency and corporate share performance and the adoption of Advantage Business and by the feedback we are hearing from our agency partners and corporate customers. I'm confident we'll regain the standing in the agency and corporate channel. And that, combined with our direct distribution strength, will put us back on track to producing revenues that will meet and exceed our long term financial targets. Now, I want to spend a few minutes discussing our 2nd quarter revenue performance in more detail.

Speaker 3

Our unit revenue was down 5.6 percent year over year in the Q2, in line with our revised guidance. Domestic PRASM in the 2nd quarter was down 6.4% year over year. Both short haul and long haul international PRASM performed in line with our initial expectations with transatlantic unit revenue up year over year on 6.3% higher capacity. Revenue from our large managed corporations was up approximately 3% year over year in the Q2. This performance is not reflective of our fair share of corporate revenue and we are addressing it with the actions we're taking.

Speaker 3

We have work to do to get our distribution strategy back on track. But as a global network carrier, we have access to premium and loyalty revenue streams that will continue to perform well. Demand for our premium product and overall engagement with the Advantage program remains strong. In the Q2, premium revenue or revenue from customers seated in First, Business, Premium Economy and Maiden Cameron Extra increased 9% year over year. Paid load factor in our premium cabins remains historically high and was up more than 6 points year over year with strength in both domestic and international.

Speaker 3

With the planned refresh of existing aircraft and the expected deliveries of new aircraft, premium seating on American's fleet is expected to grow by more than 20% by 2026. Advantage program membership continues to grow. Loyalty revenues were up approximately 8% year over year and Advantage members are responsible for 74% of premium cabin revenue. Total spending on our co branded credit cards was up double digits year over year in the Q2, once again highlighting the value of American's loyalty program. Turning now to our operation.

Speaker 3

In the Q2, the American Airlines team produced strong operational results despite some of the most difficult spring weather conditions we have ever faced and continued challenges with several of our suppliers. Spring is always a good test for our summer preparedness and the weather we encountered in May June tested us like never before. Just as we'd ramped up to summer level capacity in mid May, we were faced with severe weather that affected operations at multiple hubs and impacted our operational performance, and the volatility continued into June. By mid June, we've regained our operational momentum and it's clear our underlying resilience is strong and we've made further strides in our ability to recover swiftly from these events. We've done an outstanding job of managing through unexpected weather disruptions and our frontline team deserves tremendous credit for their efforts to get the airline back on track again and again.

Speaker 3

And speaking of disruptions, I'd be remiss if I didn't take a moment to applaud the entire American Airlines team for their work last week to quickly recover from the global CrowdStrike outage that hit businesses and governments worldwide. By Friday evening, American's operation had recovered and was set up for a strong weekend. On Saturday, we ran a near 99% completion factor and were fully recovered, the best operational performance among U. S. Network carriers over the weekend.

Speaker 3

American recovers from irregular operations better than anyone in the industry and that was certainly the case following Friday's unprecedented disruption. Finally and importantly, we're pleased to have reached a tentative agreement on a new contract with our Association of Professional Flight Attendants. Upon ratification, this contract will provide immediate financial quality of life improvements for American's flight attendants, one that we're proud of and one our flight attendants have earned. I'll come back in a few minutes for some final thoughts, but now I'll turn it over to Devin to talk more about our Q2 financial results and the outlook for the Q3 and full year.

Operator

Thank you, Robert. Excluding net special items, we reported a 2nd quarter net income of $774,000,000 or adjusted earnings per diluted share of $1.09 We produced record revenue of $14,300,000,000 in the quarter, up 2% year over year. Unit revenue was down 5.6% year over year on 8% more capacity. Our adjusted EBITDAR margin was 15.7% and we produced an adjusted operating margin of 9.7 percent. Our unit cost excluding net special items and fuel was down 0.1% year over year.

Operator

On our fleet, we now expect to take delivery of 20 new mainline aircraft this year, down slightly from our previous estimate of 22 aircraft. The remaining planned aircraft deliveries this year include 11 Boeing 737 MAX 8s, 3 787-9s and 3 Airbus A321neos. We've taken delivery of 6 Embraer E175s this year and expect to take delivery of 6 more E175s through the remainder of the year. With these adjustments to our aircraft delivery schedule, we now expect our 2024 aircraft CapEx to be approximately $2,000,000,000 and our total CapEx to be approximately $2,900,000,000 We continue to expect these moderate levels of CapEx to remain through the end of the decade with aircraft CapEx planned to be between 3,000,000,000 dollars $3,500,000,000 per year from 2025 through 2,030. In the second quarter, we produced approximately $850,000,000 of free cash flow and ended the quarter with $11,700,000,000 in total available liquidity.

Operator

We reduced total debt by approximately $680,000,000 in the 2nd quarter, and we have now reduced total debt by $13,000,000,000 from peak levels in mid-twenty 21. We remain on track to reduce total debt by $15,000,000,000 from peak levels by the end of 2025. Now, I'd like to walk you through our outlook for the Q3 and provide an update on our full year guidance. In addition to commercial execution, our focus continues to be on delivering a reliable operation, maximizing profitability and reengineering our business to drive savings and greater productivity and a better experience for our customers and team members. As we have stated in the past and shown with our recent capacity reductions, we will remain nimble in our planning to ensure our growth is in line with our expectations of demand.

Operator

As Robert mentioned, we lowered our planned capacity growth in the back half of the year and now plan to grow capacity by approximately 3% in the 3rd quarter, with August up approximately 2% and September up less than 1% year over year. With these adjustments, we expect to produce 3rd quarter TRASM to be down 2.5 percent to 4.5 percent and full year TRASM to be down 3% to 5% versus 2023. Our work to reengineer the business is progressing well. We are ahead of plan and expect to deliver approximately $400,000,000 in cost savings in 2024. Additionally, we continue to find opportunities to improve working capital.

Operator

By the end of this year, we now expect to have achieved more than $300,000,000 in incremental working capital improvement, which is in addition to the $100,000,000 we achieved in 2023. 3rd quarter CASM ex is expected to be up approximately 1% to 3% year over year. We expect our full year CASM ex to be up approximately 1% to 3% consistent with our prior guidance despite lower planned capacity growth. Our current forecast for the Q3 assumes a fuel price of between $2.55 $2.75 per gallon. Based on our current demand assumptions and fuel price forecast, we expect to produce an adjusted operating margin of between 2% 4% in the 3rd quarter and approximately breakeven adjusted earnings per share.

Operator

We now expect to deliver a full year operating margin of between 3.5% 5.5%. This guidance is based on our current demand expectations and assumes a fuel price of between $2.65 $2.75 per gallon. At the midpoint of our full year guidance, we now anticipate producing adjusted earnings per diluted share of approximately $1 and free cash flow of approximately $500,000,000 These results are not good enough. Our team is focused on commercial execution and delivering results, and I'm confident we can close our relative margin gap with our peers and achieve our long term financial targets. Now, I'll turn it back to Robert for closing remarks.

Speaker 3

Thanks, Devin. Our airline is designed to deliver results, results for our shareholders, results for our customers and results for our team members. We have not met our expectations this year and our entire team is focused on working with urgency to get us back on track, improve results and deliver on our commitments. That will drive value for our shareholders and all of our stakeholders. As we take a step back, the foundation of our business remains strong and our priorities remain the same.

Speaker 3

Our operational reliability continues to perform at historically strong levels. Our fleet is the best among U. S. Network carriers and drives enormous value for the airline. With this fleet, we have stable and moderate CapEx through the end of the decade.

Speaker 3

We've made great progress in strengthening our balance sheet and remain on track to reduce our total debt by $15,000,000,000 by the end of next year. Our network is well positioned and we are working to finalize our co branded credit card negotiations. We're ahead of plan in reengineering our business to operate more efficiently and productively and we're managing our costs better than anyone in the industry. We're committed to delivering on a strategy that maximizes our revenue and profitability and importantly, one that makes it easy for customers to do business with American. We remain committed to deliver margin expansion, free cash flow and continued debt reduction over the long term.

Speaker 3

When we return to the level of revenue production we know we can achieve and couple that with our operational reliability and best in class cost management, we will unlock significant value. Operator, you may now open the line for analyst questions.

Speaker 1

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

Speaker 4

Hey, good morning everybody. Hey, Robert and Debit, appreciate you giving us the full year TRASM guide. So we actually have Q3 and Q4. And just based on that, by inference, it would suggest that, that 4th quarter is still going to be under pressure. In fact, it could be negative.

Speaker 4

And yet when I think about the decel and your own capacity growth and what we're seeing around in the industry, As we look into that Q4, is it that the corporate disruption or your strategy, your sales and distribution strategy and the impact that it's had on the corporates that it's going to take a lot longer or embedded in that are there other factors like maybe more moderate demand, demand sluggishness, whether it's U. S. Or international? That revenue forecast does seem a bit anemic in the Q4. If you could drill down into that, that would be great.

Speaker 4

Thanks. And I have one more.

Speaker 3

Hey, Mike, I'll start. Hey, look, the forecast that we produce is based on what we see in the marketplace today. We all know that there's a supply and demand imbalance, And we're taking swift action to make sure that we are reducing our planned capacity growth in the back half of the year. But it's still a murky environment from that perspective and we're going to have to see where the industry settles. A lot of our problem is caused by our sales and distribution strategy that we put in place in 2023.

Speaker 3

We think that it's had about $0.75 billion impact in the 1st 6 months of the year. And we've more or less assumed that that is going to be what happens in the back half. But I'll say this though, it doesn't take into account what we're going to be doing to try to win back our share. We don't know how long it's going to be it's going to take. You've heard about some of the things that we've done.

Speaker 3

We've seen modest improvements in terms of capturing share in the indirect channel based on just making sure that we're fully available within Edifact. From a content perspective, we're renegotiating our agency contracts right now and getting new agreements in place. We're reaching out to our corporate. So our intent is certainly to do everything we can to get back on a better pace. But right now, we're building in what we see in the marketplace.

Speaker 4

Okay, great. And just my second, just with respect to leadership, you talked about leadership changes. Presumably, Steve's move over to commercial is a temporary one. Have you identified someone or is there a search to actually bring on a Commercial Officer Chief Commercial Officer and or in your sales side of the business, plans to not only rebuild it, but bring back someone like an Allison Taylor, make it someone within a more senior position and a bigger operation? Just comments on that.

Speaker 4

Thank you. Thanks for taking my question.

Speaker 3

Hey, Mike. Hey, I'll just start with this. We know we have to get done. And I've asked Steve to take over the commercial team and he's doing just that. As I said in my comments, he's our most seasoned and He knows the business really well.

Speaker 3

He knows our people. He knows the business really well. He knows our people. He's reorganized his team. He's done an immediate dive into what we need to take it to take care of right away.

Speaker 3

We're doing that. We're moving incredibly quickly. And Steve is going to take care of this until we get the job done.

Speaker 1

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

Speaker 5

Hey, thanks. It's Scott. So I know you guys are slowing capacity growth, but we're still growing off of a base of a lot of growth in second half last year. So I guess why aren't we being more aggressive in reducing capacity? Should we potentially be shrinking capacity right now?

Speaker 5

And then I guess we're not. So maybe can you talk a little bit about the capacity plans for 2025? And if I can, I just want to sort of marry that to some of the CapEx views? Just given the current earnings run rate and implied sort of cash burn, I guess, can you more materially can we is there opportunities to sort of cut the CapEx that I think is set to go up a bunch next year?

Speaker 3

Scott, thanks for the question. Just first off, in terms of capacity, again, reason for adjusting capacity, supply and demand imbalance and it's led to pricing weakness. From that perspective, we take an action as quickly as we can. And from that perspective, you'll see that our total growth in our total capacity in the Q3 is now planned to be actually a little bit less than where we were in the Q3 of 2019. The capacity adjustments that we've made, Devin can help me with this, in August, is we pulled down to 1% growth.

Operator

Yes. And July capacity was effectively set as we went through and updated guidance in May. But we now have August capacity growing by about 2% and September will be growing by less than 1%.

Speaker 3

Scott, as we take a look at into the Q4 and then beyond, we're going to react to the marketplace and making sure that we're competitive, but at the same time, doing what's right for profitability. So as we take a look at into 2025, we're going to be very diligent in assessing and making sure that we're certainly not outgrowing demand.

Operator

Scott, just on your second question around CapEx and where we're at with cash, we still are expecting to produce free cash flow this year, while modest, we expect around $500,000,000 of free cash flow in 2024. As we look out to next year, we do have a step up in CapEx, but it's not that significant. It's just one of the great things about our fleet and where we're at. We have pretty modest CapEx going forward. We've talked about CapEx being in that $3,000,000,000 to $3,500,000,000 range for aircraft from 2025 through 2,000 and 30.

Operator

I expect 2025 is going to be at the low end of that range and possibly even slightly below that guidance.

Speaker 1

Thank you. Our next question comes from the line of Jamie Baker of JPMorgan Securities.

Speaker 6

Hey, good morning everybody. So in a perfect world for Americans, so let's just ignore aircraft constraints for the moment. If you could just snap your fingers, what do you think Americans' optimal domestic to international balance would be? I mean, it seems like part of the problem, at least from my perspective is that you're oversized domestically, undersized internationally, perhaps you don't agree with that, but just wondering your thoughts in this regard?

Speaker 3

Hey, Jamie. Thanks for the question. Look, there's no perfect world. And in terms of snapping fingers, we all know that we're the product of years years of building our network and our system. I really like where we are from a network perspective.

Speaker 3

One of the things everybody needs to be mindful of is that regional differences in terms of growth and profitability are going to happen. They happen every year and there's differences in terms of international demand versus domestic. When you take a look at our network and where we're strongest, it fits very well with where both population growth and economic demand is forecast now and long into the future. The basis for international traffic is our domestic network and our ability to fly into our partners' hubs and into secondary cities in Europe and Asia and South America, it's built on the strength of our North American network. And we're really pleased with what we've built over time, short haul international and MCLA.

Speaker 3

We're really pleased with what we've built in terms of our hub structure. Where demand strength where demand strength around the world is going and how it's going to change, we're going to build off of

Operator

the we've

Speaker 3

put so much time and energy in over the years.

Speaker 6

Okay. Thanks for that perspective. And second, as we think about Advantage, given some of the profit challenges, do you think that that alters your hoped for improvements in loyalty returns? I'm just putting myself in, let's just say, Citibank shoes. For example, if Delta and Amex returns are the gold standard for loyalty, I just have to wonder if Citi would take your profitability into consideration as you renegotiate.

Speaker 6

Is that a flawed assumption?

Speaker 3

I think it is a flawed assumption. Look, loyalty revenue has been one of the bright spots in terms of our revenue performance year over year. And I think Devin helped me out. Loyalty revenues grew by 8% year over year. We think that we can do a lot better than that.

Speaker 3

And it's based on not only what I see in our loyalty program and how attractive it is to our customers, but also by our partners. Citi is certainly at the forefront of that. They absolutely want to get involved in more and deeper ways. We're going to take advantage of that. And the opportunity for us is actually making up some of the ground versus where our other network peers are.

Speaker 3

And I have great confidence we're going to be doing able to do that because I know that in terms of the negotiations that we're pursuing, that it's going to be a better deal in the long run and produce results that I think will be very positive.

Speaker 1

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

Speaker 7

Hey, good morning, everyone. Just kind of wondering on the cost side, the execution has been better and wondering how what's driving that and as you kind of build back your sales force, do you see any changes there or do you expect to continue outperforming on the cost side?

Operator

Well, we are really proud of our cost performance over the past several years. We have been industry leaders in our unit cost performance and it's just been focused across the board. It starts with a really strong operation, but we've been talking a lot about how we are reengineering the business for efficiency and leaning into technology to drive better productivity and a better experience for our team members and customers. So we're continuing on that. I feel we're progressing really well.

Operator

I do expect some amount of cost pressure as we rebuild the sales staff. There's going to be some cost pressure as commissions go up, but I think we're managing cost better than anybody. And as we get into 2025, we'll have the same focus that we've had for the past several years.

Speaker 3

Savi, I'll just add to that. That's one of the things that gives me great pride in what the company has done. But also it's the basis on which we're building back. We've managed cost better than any It's not as its name. We've run the most reliable airline in terms of completion factor over the last year or so and is evidenced by what we were able to do with the CrowdStrike issue.

Speaker 3

We've got a great fleet, low CapEx. As I mentioned earlier, we're going to be renegotiating our co brand credit card relationships. And I do think that there's even further things that we're going to be able to do from a cost perspective. What we've got to focus on right now is regaining the share that we ceded, from an agency and a corporate perspective. When we get that back, which we will, and you add that to the strength that we have in the other areas that I mentioned, we're going to get back on track, margin expansion, free cash flow production and then a continuous path to improving our balance sheet strength.

Speaker 7

That's helpful. And if I may, on the capacity side, just kind of follow-up Scott's question there. What's your domestic capacity kind of growth run rate here versus international? Because I'm guessing with the fleet delays, it's still a lot more domestic capacity growth where you're seeing more of the pressure as well.

Operator

Hey, sorry about that. The domestic details year over year, we do have domestic capacity up in the Q3 by about 3.5%. It will be probably closer to 3% as we look out to the Q4 as we sit here today. But as Robert mentioned earlier, 4th quarter schedules aren't finalized and we'll continue to adjust based on the demand environment that we're seeing.

Speaker 1

Thank you. Our next question comes from the line of Connor Cunningham of Melius Research.

Speaker 8

Hi, everyone. Thank you. You mentioned that you're starting to win back some share from the lot on the business side. I'm just curious on how you're doing that. And is there a cost headwind associated with it?

Speaker 8

And just I'm just trying to understand the margin profile as it's kind of won back from others out there. Thank you.

Speaker 3

Hey, Connor. I'll start with, look, the actions that we've taken so far have been really straightforward. And that is making sure that Americans' content and product is available to any channel that wants to access it. And that's just that alone has resulted in us winning back passenger share. Now the next steps to that are then going to be making sure that we reestablish productive relationships with the travel management companies and agencies.

Speaker 3

We're doing that. And I believe that, that will unlock further share growth. And then on top of that, as I mentioned in my comments, I've talked to dozens of corporations. And after getting content available and then also making sure that we have appropriate relationships or agreements in place with travel management companies. The next is to make sure that we're doing everything that we can to have the right agreements in place with our corporate customers and to support them in a way that they feel valued.

Speaker 3

I know that we've started down that path and everything that we're doing is about winning back that share. I'll just be frank. We over indexed on direct and we've got to find a way to play in the richer pool of indirect revenue. And that starts with having content, having relationships, positive relationships with travel management companies and agencies, and then, supporting our corporate customers in ways that they feel valued.

Speaker 8

Okay, helpful. And then I get that you're making changes to distribution and your network orientation isn't one for 1. But in the past, you've talked about how you're pleased with the network product, the omnivore experience. You mentioned that you plan on closing the margin gap. I just struggle to see how that happens without a more wholesome look at the product and networking.

Speaker 8

The reason why I ask is there continues to be an ongoing concern just around liquidity for you guys as cash burn kind of continues to be where it is today? Thank you.

Speaker 3

Thanks, Connor. Look, I'll start with this. Up until through 2023, we had been closing the margin gap with our top competitors. The one thing that we did differently than others in 2023 is we put in place a new sales and distribution strategy. We've recognized that that's not working and we're making immediate adjustments to that.

Speaker 3

I've sized it for you in terms of the impact, which is very which is large. And that is I think it's had an impact of about $750,000,000 in the first 6 months of the year. That is something that we know that we can reverse and get back on the track of where we had been, which was up until Q1 of this year, 7 consecutive quarters of profitability, really doing a nice job of hitting guidance and closing margin gap. That is something that's still all in front of us. Our product is our network is certainly well positioned.

Speaker 3

Our product is as well. That said, just like the rest of the industry, there's a supply and demand imbalance. We're taking action. I think that's going to help considerably. But you'll see us get back on track as we capture our share to, as I said before, margin expansion, free cash flow production and making sure that we have a solid balance sheet.

Speaker 3

Devin?

Operator

Yes. Connor, just on your question on where cash is and you mentioned cash burn. As we talked about in the script, we don't have cash burn this year. We're producing free cash flow. We ended the 2nd quarter with over $11,000,000,000 of liquidity.

Operator

We have reduced total debt by $13,000,000,000 from peak levels. Our net debt is lower today than it was at the end of 2019. So from a cash perspective, we feel we're in really good shape. We expect to continue to delever as we go through 2025, and we expect to hit our 2025 target of total debt reduction of $15,000,000,000

Speaker 1

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

Speaker 9

Hi, everyone. Thanks very much for the time. Could you talk about the PSP loans resetting to a much higher variable rate in the coming 18, 20 months? And just how you're thinking about balancing those needs?

Operator

Yes, sorry. For the PSP loans, they do reset as we're going forward. I think they're so far so far plus 200. So still a pretty good rate for us, but we'll continue to watch the market. And if the marketplace allows for refinancing at better rates, we'd look to do that.

Operator

But for now, we'd see them remaining outstanding until maturity. Okay. Thanks very much.

Speaker 3

Go ahead, Tom.

Speaker 9

I was going to ask for a follow-up. So if you have more to go there, Robert, I'm happy to pause.

Speaker 3

No, go ahead.

Speaker 9

Okay. I'm just curious on the network side, how you guys are thinking about the hub structure and whether you need to maybe pull back in any of the coastal gateway markets or how you're thinking about the Fortress hubs, I think CLP or DFW. There's talk about one of your neighbor in Dallas expanding more in DFW. Just curious how you're

Operator

thinking about your network strategy overall? Thank you.

Speaker 3

We're very pleased with our positions in both the DFW and Charlotte. You'll see that the majority of our growth this past year has been in those hubs. We really look forward to reestablishing as we are able to as we're bringing our regional network fully back up to speed. We're very much looking forward to filling out our presence in both Philadelphia and Chicago as well. I like what I see in DCA, Reagan National, and how that is coming back.

Speaker 3

And again, while there's been pressure in short haul Latin, Miami and Phoenix have all done fairly well for us us as well. So in regard to our system, we're making sure that we're flying where we can produce the greatest level of profitability. And one of the things that I'll just underscore again is that business traffic is something that travels throughout the country, throughout the world. We're poised with our network to serve, I think, almost 90% of the places that you might want to go in the world. We've got a network that is going to appeal.

Speaker 3

And right now, we've got to go back and win back our business share. So, Tom, thanks for the question. But what I wanted to say though was, I want to just take a quick moment to recognize your predecessor, Helane Becker, for her accomplished career and the valuable work and contributions to our industry over the past 40 years. And I'm pleased to say that I've known Helane for a lot of those 40 years. So from all of us at American, Helane, we'll miss working with you.

Speaker 3

We wish you the very best in your new advisory role. And Tom, best of luck to you as well. Thank you.

Speaker 1

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

Speaker 10

Hey, thanks. Just on the, I guess the mismatch of domestic supply demand, if we could track back to earlier this year, maybe to Investor Day, what was the thinking on 9% domestic growth in 2Q? It feels like at any point that would have been really out of sync with the GDP, even stable GDP and trying to better understand what the company was solving for. Was it CASM goals or share goals? And with the change in leadership, do you now have an opportunity to put more of a weighting on what the economy may actually be doing from a network planning perspective?

Speaker 3

Duane, thanks. I'll start and Devin certainly can fill any blanks. Look, we anticipated obviously a more a stronger, more robust demand environment, plain and simple. There was tremendous growth in 2023. And as we entered into 2024, we simply anticipated that demand would perform and allow pricing to perform a lot better than it did.

Speaker 3

As we've taken a look from that time, we certainly understand that we're in a marketplace that couldn't absorb all that capacity. And so as we've said, we're making those immediate adjustments. But you'll see us be very, very conscious as we go forward. But I'm going to underscore again, the biggest issue that we've had in terms of disappointment was our misstep in our sales and distribution strategy. That would have accounted for a considerable amount of additional revenue, and it's something that we're going to make sure that we gain back.

Speaker 10

Okay. I mean, maybe just to come at it from a different perspective, the margins are what they are over the last 12 months. As you analyze your own network, even with this distribution change, do you have similar margins hiding somewhere in your network? Are there portions of your network where you say, geez, we're at least as profitable, maybe more profitable in portions of our network? And if so, why isn't the answer to cut more unprofitable capacity?

Operator

Hey, Duane, it's Devin. I just maybe we'll start by following up on your first question as well. The first half capacity was at least in part the rebuild still of our 2019 capacity. We had added less capacity back than anyone else. We had some hubs that were still far below their historic capacity levels.

Operator

That slowed in the second half as we've got the product capacity. On your second question around unprofitable components of the network, this is something that we're always looking is to move capacity into our most profitable parts of the network and to improve on areas of the network that are softer. But we have a fantastic hub network. There's always going to be best performers and performers at the other end. We think all of our hubs can be solidly profitable.

Operator

And while there are some laggards today, we have a revenue team that has a strategy to improve on.

Speaker 1

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

Speaker 11

Hi, good morning, everyone. I guess just touching on demand, given what transpired with the promo environment over the last few months, have your thoughts around the demand backdrop changed at all? And are you seeing any areas of demand softness? Or are there any geographies where maybe the promotional environment did not stimulate demand the way that you would have thought?

Speaker 3

So I'll start, Andrew. So look, from a regional perspective, a lot of the capacity that has come in to the industry has been in places that we've been traditionally strong. But I also expect that as we take a look going forward that the adjustments to capacity will likewise be in places that potentially benefit us as well. But as you know, we've seen significant pressure in parts of our network that have been profitable and continue to be quite profitable, but just less so. So things like our short haul international MCLA.

Speaker 3

We've seen some pressure in other places. A lot of it, again, due to the fact that we've missed out on a pool of premium revenue and business traffic that we're going to win back. As I take a look overall, I don't see a lot of variability in terms of impact throughout our system other than what I've noted.

Speaker 11

Okay. Thank you for that. And then, Devin, just a housekeeping question. Can you remind us, is the new flight attendants deal in your guide? And have you been accruing for that over the first half of twenty twenty four?

Operator

There has not been an accrual for it through the first half of twenty twenty four. It is in the guide starting in September when we assume ratification, and then it's in our 4th quarter outlook as well.

Speaker 1

Thank you. Our next question comes from the line of Sheila Kahyaoglu

Operator

of Jefferies.

Speaker 12

Hi, this is Kyle and Chloe Yac on for Sheila. Thanks guys. I wanted to ask the cash picture question a little differently as free cash was down $1,500,000,000 on the year. And if we look into $25,000,000,000 the guide was greater than $2,000,000,000 which is presumably handicapped and was on a like for like basis, the amount of debt that was supposed to come out next year. So just wondering how you bridge that given you reiterated the sub $35,000,000,000 in the out years here?

Operator

Sorry, a little bit of trouble here in the question, but around cash and cash outlook for 2025, yes, we had been projecting greater than $2,000,000,000 of free cash flow in 2025. We're not updating our 2025 outlook right now. Obviously, we expect to perform better on top line, but we'll give guidance as we get into next year. As it relates to our total debt reduction expectations, we were tracking ahead of our $15,000,000,000 plan before. We have a lot of liquidity.

Operator

We have the ability to go ahead and raise additional debt if we need to. But right now, the expectation in 2025 is that we will produce free cash flow. We will meet our $15,000,000,000 debt reduction target and we'll have solid liquidity as we get through the year.

Speaker 12

Okay, thanks. And then just my follow-up is on the commercial strategy, given your large Texas peer today announced some changes around what will be more premium like seeding. So maybe just initial impressions as it relates to the commercial strategy and the share changes that you guys are hoping to see. Thank you.

Speaker 3

Well, I'll just start with, look, premium business is important to us. And as I mentioned, it's one of the bright spots that we've seen year over year and we anticipate that, that strength is going to continue. It's going to continue. We're going to invest in it. We're going to invest in it with real product, real hard product.

Speaker 3

And it's not something that we have to talk about. It's something that we have and will continue to grow in our fleet. So, not only do we have the most premium seats of any carrier in the marketplace today, but we anticipate growing those by 20% as we go out into 2026. Headlining that is new 321 XLRs that will come in 2025. That will be a great product for things like short haul Europe as well as augmenting our transcontinental fleet our operations.

Speaker 3

We're going to be redoing our 7 77300s that will add premium seating, new flagship suites and then add to that deliveries of 787-9s as well with flagship suites. So overall, I feel really good about what we can do. And I'll just say as well, look, we've been operating a premium network, a worldwide network for decades, all the way back to our early days. We feel really confident about our ability to operate against any type of competition. And I really like where our fleet, our product and our ability to service that stands right now.

Speaker 1

Thank you. Our next question comes from the line of Stephen Trent of Citi.

Speaker 13

Good morning, everybody, and thanks very much for taking my question. The first, if I may, I know and sort of follow-up to Jimmy's earlier question, I can appreciate that you guys sort of hit the reset button on your co branded card agreement. And from a high level, when we think about the timeline and when you can finalize the agreement, to use a baseball analogy, are we in kind of the 2nd inning or the 5th inning? Just would love your color on that if I may, please. Thanks.

Speaker 12

Steve?

Speaker 10

Sure. Thanks for the question. We've been in discussions with our partners about our next co brand arrangement for a while now. Maybe the 5th inning is probably a pretty good analogy. But long enough to know that we and they are really enthusiastic about what we can do next.

Speaker 10

And so we're really excited about getting to the 8th and 9th inning and getting it wrapped up.

Speaker 13

Okay. I appreciate that. And also just kind of a follow-up, we had, of course, Friday, the global network outage and what have you, where you guys didn't seem to be much impacted at all. And I'm curious if you might be able to give a little color on what you guys are doing technologically that perhaps led you to avoid the issue or is it something for 2 it is you just have a different supplier or would just love to understand? Thank you.

Speaker 3

Thanks, Steven. Yes, I'll hand it off to our Chief Operating Officer, David Seymour. But I'll just say this, we're super proud of our ability to really react to any type of disruption. This was notable and I think it just shows how strong we are in terms of our operating prowess. David?

Speaker 14

Yes. No, thanks for the question. And like Robert talked about, really proud of what the team did. But just like other airlines and crowd psych, many of our operating systems did be were taken offline. But within an hour of that outage, we assembled the right operating teams and IT experts to develop and execute a plan to get our systems back online and the aircraft moving again.

Speaker 14

And that allowed us to return to normal operations by the end of Friday. Our key differentiators really become the hallmark of our operation and that is swift recovery from any significant disruption that the airline feels. As Robert talked about, we see a lot of weather. And you've seen us focus on that and lead the industry in recovery for the last several years, and we're going to continue to do that.

Speaker 1

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

Speaker 15

Hi, thanks so much. On the sales strategy, sales and distribution, I'm curious if you can share anything about what you were hearing from partner airlines, British Airways, other One World Airlines, kind of during all this. Were you getting negative feedback from them and kind of how are those conversations now?

Speaker 3

Thanks, Ali. Look, our partners, look, we go to market with them. And so the feedback that we're hearing from them is similar to what we're hearing from our customers, which is they want us back and available in every place that we can be sold. They want to participate in a richer mix of business. They want to certainly be attentive to the way our product is sold in the U.

Speaker 3

S. And so from that perspective, they are encouraging us, number 1, to get content back out. 2nd, to make sure that we have agreements in place that facilitate the sale of our product through travel management companies and agencies and that they want to have great relationships with corporates. They're incredibly supportive. We're in it together.

Speaker 3

And in the case of BA, we have a decades long business with them as a joint business across the Atlantic. And I know that they are incredibly interested in us getting back on

Speaker 15

track. And on the CrowdStrike outage, I know you just David, you just touched on some of it and have written about it. But like what was it that kind of allowed you to move so quickly when other airlines seem to not be able to? I mean, did you have system more redundancies or systems that were able to keep operating during the outage or kind of backup plans in place or systems that aren't exposed to Windows? Yes, just curious what you think the differentiator was?

Speaker 3

So Ali, I'll take this. I'll save David from patting himself on the back. Look, David has assembled an incredible team. And I feel like we have more experience from an operations perspective overall than just about anyone in the business. And what we have to go through just in terms of weather across our network, it gives us great experience in terms of disruptions.

Speaker 3

And one of the things that we've learned is that in terms of any disruption, you better keep track of your aircraft certainly, but also your crews wherever they are. And you probably ought to take action as quickly as possible to make sure that you don't lose visibility for the purpose of recovery. We've built technology and we've done the right things to ensure that we take early precautions, early steps, and that ultimately results in a better outcome. All that said, I do think we're also benefited by making sure that we have devices and means of communicating with our team members out in the field. That certainly facilitates.

Speaker 3

But it starts with having people that really know the business and the steps to take. All that said, I just I'd mention technology today, it's something that we're going to have to continue to make sure that we build resilience around and ensure against a patch being put in place that can knock out so much of the world's communications.

Speaker 1

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

Speaker 15

Hey, good morning. I wanted to follow-up just a little bit on Ali's first question. When you said that the feedback you got from your One World and other partner airlines was similar to what you're hearing from corporate customers, did you also hear from them some frustration and displeasure at the results of your change in corporate strategy?

Speaker 3

We're in communication with our partners constantly and what they are interested in seeing us do is to take quick action when we see any type of issues. We've been alongside them. As I've said, we identified deviation in terms of our revenue performance versus some of our large network peers in the Q1. We thought that was going to reverse itself. It didn't.

Speaker 3

And when we identified that we needed to make a change, we were really quick. And we've kept our partners in touch all along and they know our plans and certainly are supportive.

Speaker 15

Okay. And on the $1,500,000,000 impact that you see for the year, is that an impact to income, to revenue? And do you expect it to stretch out into 2025 as well?

Speaker 3

It's revenue based. And so but it's rich revenue. So it absolutely positively has a big impact on contribution. As I said, we're taking steps immediately to reverse some of the reaction in terms of getting content out. We'll see the benefits of new agreements with travel management companies and agencies in the coming months.

Speaker 3

Work with corporations may take a little bit longer, but we're addressing that as quickly as we can. And so as I take a look out, we're going to try to get in a good spot to kick off 2025, But we'll have our work we'll have work to do. But all that said, I am confident that over time we'll recapture our share.

Speaker 1

This concludes the Q and A portion of the call. I would now like turn the conference back to Robert Eisen for closing remarks. Sir?

Speaker 3

Thanks, Latif. I appreciate everybody's time. We take the situation in terms of revenue production very seriously. As I said before, we've taken immediate action to address the supply and demand imbalance as we look into the back half of the year, and we will be very focused on it as we do our planning for 2025. As in regard to our sales and distribution strategy, we're taking the steps to get back on track.

Speaker 3

We're doing that very quickly. We've talked a lot about that. And I'm confident, that as we look into, the future and American's plans, our network, our fleet, our product, that plus regaining our share is going to put us back on track. And that track is to improve margins, that track is to produce free cash flow and ultimately strengthening our balance sheet and our position in the industry. We're committed to that and we're going to get back to work on it right away.

Speaker 3

Thanks.

Speaker 1

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

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Earnings Conference Call
American Airlines Group Q2 2024
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