American Airlines Group Inc. (NASDAQ:AAL) Q2 2023 Earnings Call Transcript

American Airlines Group Inc. (NASDAQ:AAL) Q2 2023 Earnings Call Transcript July 20, 2023

American Airlines Group Inc. beats earnings expectations. Reported EPS is $1.92, expectations were $1.59.

Operator: Thank you for standing by, and welcome to American Airlines Group’s 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. [Operator Instructions] I would now like to hand the call over to Scott Long, Vice President of Investor Relations and Corporate Development. Please go ahead.

Scott Long: Thank you, Atif. Good morning, everyone and 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, and 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. And 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.

Now before we begin today, we must state that today’s call contains forward-looking statements, including statements concerning future revenues, costs, forecast 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, 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. Thank you for your interest and for joining us this morning. And with that, I’ll turn the call over to our CEO, Robert Isom.

Robert Isom: 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. 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. 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 strength is our network, which is uniquely positioned to capitalize on the demographic changes in the U.S. More people have moved to the Sunbelt 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 connect 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. 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 advantage 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.

Now turning to the operations. The American Airlines team has delivered strong operational results over the past year, and it continued as we achieved record second quarter completion factor. We operated nearly 0.5 million flights in the quarter with an average load factor of approximately 86%. In the second quarter, we also delivered 11 more combined zero canceled days in 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. And now I’ll hand it over to Devon who will share more about our second quarter results and the outlook for the remainder of the year.

Devon May: 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.

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. Our young and simplified fleet differentiates American 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 to 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. We’re excited to have these aircraft into 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 Americans credit rating.

This is the first step towards our goal of BB credit metrics by the end of 2025, and 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 and 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. 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. Now turning to our guidance. Bookings remain strong, and we continue to see a constructive demand environment. We saw record revenue for the 4th of July holiday period and 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, and 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% to 6.5% year-over-year on 5% to 7% more capacity. We expect third quarter CASM-ex to be up 2% to 4% year-over-year. Our current forecast for the third quarter assumes a fuel price of between $2.55 and $2.65 per gallon. Based on our current demand and fuel price forecast, we expect to produce and adjusted operating margin of between 8% and 10% in the third quarter and adjusted earnings per diluted share of between $0.85 and $0.95, excluding special items. For the full year, we continue to expect to produce capacity that is 5% to 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% to 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. 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: 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.

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Q&A Session

Operator: [Operator Instructions] Our first question comes from the line of Jamie Baker of JPMorgan. Your question please, Jamie.

Jamie Baker: Hi, good morning, everybody. All I heard was PMorgan but I assume that’s me. So Vasu, you spoke enthusiastically last year about the EMEA. You admitted New York had been a challenge for decades. But you were finally seeing New York RASM outpaced the system. And now it appears that, that all reverses. I’ll admit my earnings model doesn’t 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: Hi Jamie. Good morning, and thanks for the question. First, I would say that we don’t anticipate it being a margin drag. And for full clarity, 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 with the demand on that is the majority of demand in New York was for short-haul day trip business market. Our slot portfolio is better matched Mid-Continental, Transcontinental and Transatlantic market. Well, that’s changed. Short-haul business demand hasn’t recovered to its historical level, but those other markets are much greater.

And so that’s a material change from before. But also our expense base, especially in New York Kennedy has changed. Through co-locating partners and any number of fleet changes, our employment expenses and JFK are materially advantaged to what any other carrier is in New York. So, what that means for us is that is unfortunate that customers don’t get the experience of having a much broader network than what was there before. It was a practical matter for American Airlines. We very much expect preserve the continued margin trajectory that we’ve been on. And 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. And so far, since the NEA has been announced, we’ve seen that.

NEA enrollments in the Advantage program continue to rise. Credit card acquisitions continue to rise, spending continues to rise. So though this chapter is closed, another one might open, but we don’t expect any material change to our financial outlook.

Jamie Baker: Okay. Very helpful. And then, Devon, on the cost side, recognizing there are 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? And also does your full year cash flow guide include retro pay for the pilots?

Devon May: Yes. So 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 pilot 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 1, and 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: 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.