American Airlines Group Inc. (NASDAQ:AAL) Q3 2023 Earnings Call Transcript

American Airlines Group Inc. (NASDAQ:AAL) Q3 2023 Earnings Call Transcript October 19, 2023

American Airlines Group Inc. beats earnings expectations. Reported EPS is $0.38, expectations were $0.26.

Operator: Thank you for standing by and welcome to American Airlines Group’s Third 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 Vice President of Investor Relations and Corporate Development Scott Long. Please go ahead.

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

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 September 30th, 2023. In addition, we’ll be discussing certain non-GAAP financial measures this morning, which exclude the impact of unusual items. A reconciliation of those numbers to the GAAP financial measures is included in the earnings press release, which can be found 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.

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. Today American reported an adjusted pre-tax profit of approximately $362 million for the third quarter, an earnings result that was above the high-end of our latest EPS guidance range. The American Airlines team continues to produce strong results, and as we look ahead to the rest of the year, we continue to prioritize reliability, profitability, accountability, and strengthening the balance sheet. We are also focused on taking care of the team. We are very pleased to have finalized a new contract with the Allied Pilots Association in August. The agreement delivers significant compensation and quality of life improvements to our pilots, while allowing us to expand our training capacity to support underutilized aircraft and our future flying.

We’re also working toward new agreements for our flight attendants and agents. We’re running a strong and reliable operation involving our commercial offerings, taking care of our team and customers, producing free cash flow, and strengthening our balance sheet. All of this speaks to our steadfast focus on controlling what we can control. And we are proud to say that we are delivering on our commitments. Now before discussing our results in more detail, on behalf of all of us at American, I want to say how shocked and saddened we are by the horrific attacks in Israel, and we join the international community in condemning these acts of hate and violence. We are devastated by the incredible loss of innocent life. We’re making every effort to care for our team members, who are impacted by this tragedy and to keep our team members safe, while also working with the U.S. Government to help find safe travel options for customers trying to depart the region.

The safety and security of our team members, customers, and their families remains our top priority. Turning now to our financial results. We produced record third quarter revenues of approximately $13.5 billion, driven by a resilient demand environment and record travel rewards program revenue. Domestic demand remains steady, while international demand continues to drive revenue growth, led by the Atlantic, Caribbean, and Central America. During the third quarter, we saw year-over-year growth in corporate and government revenue, with a return to more traditional seasonality trends. We remain encouraged by what we’re seeing with demand and revenue from unmanaged business travel. Importantly, more customers than ever are choosing our Travel Rewards program by acquiring our co-brand credit cards in record numbers, enrolling in the Advantage program, and shopping for our product through our direct channels.

Co-brand mileage sales growth continues to outpace airline capacity and GDP growth, driving increased levels of loyalty and revenue production from card users. In the third quarter, approximately 80% of our bookings came from our own channels and modern retailing technology, which is up approximately 11 points from a year ago. These are the most efficient distribution channels in our ecosystem, and we expect to see these trends continue into the fourth quarter and beyond. Looking forward, our Network and Travel Rewards program will continue to be the primary drivers and value for our customers and for American. And we are focused on operating our business as efficiently as possible. Our simplified fleet remains the youngest and most efficient among the U.S. Network carriers, and we are working to increase the utilization of both our mainline and regional aircraft.

In addition, we are identifying opportunities to drive incremental value across the company. These initiatives and our limited near and medium term CapEx requirements will allow us to continue to generate free cash flow that we can use to reinvest in the business and continue to pay down debt. Now turning to our operation. The American Airlines team delivered another quarter of fantastic operational results. Our team has produced stellar results for more than a year, including a record-setting performance during the peak travel period this summer. American operated more than 515,000 flights in the third quarter, and we produced our best ever third quarter completion factor of 98.6%. American ended the quarter with the best completion factor of the U.S. network carriers, while maintaining our first place standing and on-time departures through the first nine months of the year.

No network airline has operated more reliably than American over the past 15-months. Our operational performance is better than ever and it’s because of our steadfast focus on reliability and strong execution in an increasingly complex environment. Our commercial and operations teams build a fantastic plan each month, we execute on it, and we recover quickly during irregular operations. We’re building on our momentum and we are committed to delivering a reliable operation for our customers as we approach the holiday season. And now I’ll turn it over to Devin to share more about our third quarter financial results and the outlook for the fourth quarter.

Devon May: Thank you, Robert. I would also like to thank the team for delivering another outstanding quarter. During the third quarter, the average price of jet fuel increased sharply. While the rapid increase in fuel prices resulted in lower earnings in the quarter, we continue to stay focused on our priorities. As Robert mentioned, in the third quarter, we delivered a fantastic operation for our customers, we finalized a new contract for our pilots, and we took further action to strengthen our balance sheet. Excluding net special items, we reported third quarter net income of $263 million, or adjusted earnings per diluted share of $0.38. This is above the high-end of our most recent guidance update, driven by slightly higher capacity and better ex-fuel unit cost performance in the quarter.

American produced record third quarter revenue of approximately $13.5 billion. This revenue performance led to adjusted operating income of nearly $730 million, resulting in a third quarter adjusted operating margin of 5.4%. Our strong operational performance in the third quarter resulted in capacity that was 6.9% higher year-over-year at the high-end of our guidance range. Revenue for the quarter was in line with what we had shared in July and unit revenue was down 6.3% versus a historically strong 2022. Unit cost, excluding net special items and fuel, was up 3.3% year-over-year, nearly a point better than the low-end of our prior guidance range. This outcome was driven by higher capacity and some expenses that were pushed to the fourth quarter.

Our significant fleet investments over the past decade allows for relatively modest aircraft CapEx this decade. Year-to-date, we have taken delivery of 17 mainline aircraft, and we expect four more aircraft to be delivered by year end, two narrow body aircraft deliveries have been delayed into 2024, so we now anticipate taking delivery of a total of 21 aircraft in 2023. All of our 2023 deliveries have been financed. Given the continuous supply chain challenges the OEMs are managing, we have been in the used market for younger vintage narrowbody aircraft. We have signed an agreement with Alaska Airlines to purchase 10 Airbus A321neo aircraft that we expect to join fleet in the fourth quarter of this year and the first quarter of 2024. Our 2023 aircraft CapEx is now expected to be approximately $1.9 billion, which includes a portion of the Alaska A321neo deliveries.

Our 2023 non-aircraft CapEx is still expected to be approximately $800 million. We anticipate our 2024 total CapEx to be between $3 billion and $3.3 billion, slightly below our prior guide as we finalize our 2024 delivery schedules. Looking beyond 2024, we continue to review our medium and long-term fleet needs, and we are currently engaged with Boeing and Airbus for narrow-body aircraft deliveries in the latter half of this decade and beyond. Due to the young age of our fleet, we do not have any planned aircraft retirements this decade. As a result, we continue to expect aircraft CapEx to average approximately $3.5 billion per year through 2030. We are very pleased to have 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.

Our relatively low capital requirements, along with our free cash flow production, has allowed for significant progress in strengthening the balance sheet. We’ve now reduced total debt by approximately $10.9 billion from peak levels in 2021, and we’re more than 70% of the way to our goal of reducing total debt by $15 billion by the end of 2025. By year-end, we expect to have paid down approximately $11.5 billion, and we’ll be 77% of the way to our total debt reduction goal. In addition to paying down regularly scheduled debt year-to-date we have proactively decreased our 2025 maturities by $2.3 billion through both the refinancing of the $1.8 billion South American term loan in the first quarter and more than $550 million of open market repurchases over the past two quarters.

All three credit rating agencies recognize our progress with upgrades in the third quarter, and we expect further ratings improvements in the coming years as we continue to reduce total debt levels. We ended the third quarter with approximately $13.5 billion of total available liquidity, and for the full-year, we now expect free cash flow to approach $2 billion. The reduction from our prior free cash flow estimate is due to slightly higher aircraft CapEx related to the Alaska A321 and lower earnings largely due to the recent run-up in fuel expense. Now, on to the outlook for the fourth quarter. Post-Labor Day bookings have been in line with expectations. We have seen steady improvement in business travel with encouraging signs from both managed and unmanaged corporate customers, strong international demand, and historically high premium revenue both domestically and internationally.

Consistent with recent trends, we expect steady demand during the upcoming peak holiday travel season. However, the strong unit revenue environment in 2022 continues to be a difficult comparison. As a result, we expect fourth quarter TRASM to be down 5.5% to 7.5% on 4.5% to 6.5% more capacity year-over-year. We expect fourth quarter CASM-ex to be up 5% to 7% year-over-year. This step up in sequential year-over-year CASM-ex is driven by the shift of some expenses from the third quarter to the fourth quarter and less year-over-year capacity growth. Our full-year CASM-ex guide remains unchanged, up approximately 3% versus 2022. Our current forecast for the fourth quarter assumes a fuel price of between $3.01 and $3.11 per gallon. Based on our current demand assumptions and fuel price forecast, we expect to produce an adjusted operating margin of between 2% and 4% in the fourth quarter.

We continue to expect our full-year capacity to be up approximately 6.5% versus 2022. Our full-year forecast for TRASM is to be up approximately 1% year-over-year, and as I just mentioned, we expect our full-year CASM-ex to be up approximately 3% versus 2022. Our capacity, TRASM and CASM-ex expectations for the year are all consistent with the guidance we provided in January of this year. This result speaks to the planning, focus, and determination of our team. Based on our demand and fuel cost assumptions, we now expect to produce a full-year adjusted operating margin of approximately 7% and adjusted EPS of between $2.25 and $2.50. Looking ahead to 2024, we continue to expect our capacity to be up mid-single-digits year-over-year, largely driven by better overall asset utilization.

Increases in capacity will be oriented to our strengths with our global partnerships complementing our own flying. In 2024, we will have the assets and resources to finally grow beyond our 2019 capacity levels, but we will be nimble and adjust capacity based on the fuel and demand environment we are operating in. We are pleased with the progress the American Airlines team has made in 2023, and we remain focused on delivering results and pursuing efficiencies to unlock additional value in 2024 and beyond. Now I’ll turn it back to Robert for closing remarks.

Robert Isom: Thanks, Devin. We’re incredibly proud of everything the American Airlines team has accomplished over the past 18 months. We told you we were going to focus on reliability, profitability, and strengthening our balance sheet, and we’ve done just that. American had a great summer and has run the most reliable operation of the U.S. network carriers over the past 15-months. We’re consistently profitable and we’ve materially improved our balance sheet by reducing total debt by nearly $11 billion since 2021. We’ll maintain that focus as we move through the fourth quarter and beyond. No matter the macroeconomic conditions we face or the variability of the operating environment, our team is intent on controlling what we can control over the short-term and setting our company up for success over the long run.

I’m incredibly excited by what the future holds for American. Looking ahead, we will be much more efficient as an airline. As an example, even today, we could be flying 5% more with the aircraft we already have in our fleet. We’re eager to restore regional service to the underserved smaller markets that are still feeling the effects of the pandemic. We’re building back and expanding our network in an efficient manner that will lead to stronger revenue production. Our Travel Rewards Program AAdvantage has already undergone significant change that is helping us grow high margin revenue at a greater rate than GDP and we anticipate that to continue as we work to make our co-brand credit cards even more valuable to consumers and our partners. On top of all that, we continue to innovate in creating a leading retailing experience, ensuring that anything we offer our customers can be shopped, purchased, and serviced digitally.

It all bodes well for American, our team members, customers, the communities we serve, and especially our investors as we enter 2024 and look to 2025 and beyond. And with that, 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 Helane Becker of TD Cowen.

Helane Becker: Thanks very much, operator. I’m not used to getting the first question. Thanks, guys. So here’s my question. As you think about your hubs, you’ve talked about, Sue’s talked in the past about New York and LA not really being profitable. You know, Philadelphia seems to me to be a good connecting hub. It looks like you’re putting a lot of international capacity in the market. So it brings up a couple of points. One is, are there enough captains to handle what you’re thinking of doing around the network? Charlotte and Dallas have gotten a lot of attention. What about some of your other markets like Philly, Chicago and maybe your coastal locations?

Robert Isom: Hey Helene, let me start and Vasu can talk to you more about exactly where we’re focusing our network and if we need some real expertise, David Seymour can step in. I’ll start with this, we’re really pleased that we were able to enter into a new agreement with the APA and our pilots back in August. It’s a deal that, well, it certainly comes with increased compensation and benefits and expense, but it also is something that puts it in a position where we can train our pilots in a much more efficient manner and more quickly. So one of the issues with getting our fleet fully back restored has been just our ability to move pilots through the schoolhouse. But right now, with some of the changes we’ve made in the contract, we have much more flexibility to actually grow the airline as we need.

And so I don’t see any issues with being able to support our fleet as we get into 2024 from a mainline perspective. On the regional side of the world, that is something that we’re still working through. We’ve seen a lot of nice progress, but we’re not fully restored. As we look into 2024, you’ll see us do some things that I think that will hasten the progress to get our aircraft back up. And from a regional perspective, it’s really not a pilot supply issue at this point. It’s more of an issue of having first officers with the amount of time, the thousand hours that they need to graduate from right seat to left seat. And I’m encouraged by what I see on that front. So Vasu, what about — how are we focused in the network?

Vasu Raja: Yes, look, just building off of Robert’s comments in the opening remarks, as we look forward, we think we have a lot of opportunity there. Our hubs and really all of our hubs, but especially our four of our largest and potentially highest capacity hubs in Phoenix, Dallas, Charlotte, and Miami are located near what are starting to turn out to be some of the most economically resilient markets there are. And we still have opportunity to go bring back more fleet, and we have infrastructure in those places to grow further. And as we see the future unfolding, to your point, Helene, we actually see a lot of opportunities to go and grow the performance of the coastal markets and Philadelphia and Chicago specifically in a way that’s really complimentary to that.

Helane Becker: Okay, and then just for my follow-up question on the domestic side, if I look at your numbers versus your two major competitors you seem to be decelerating. And I’m just kind of wondering if that’s just a function of the size of the aircraft you’re flying, not having as many premium seats, or is it just the markets that you’re in? Although given what Vasu, you just said, it seems like the demand in those markets should still be pretty reasonable?

Vasu Raja: Yes, Helene, actually it’s none of the above would be the answer to the question. Look in the business of ours from one quarter to another, it’s easy to draw a lot of prognostications, which probably aren’t there. And as we see it right now, it’s a particularly weird time. One, because so many — so much of the U.S. airline business is still recovering their networks, and the networks that are being recovered are probably never been more divergent, never more different competitively, but also never more different than what was there three or four, certainly five years ago. And so a little bit of what you see is that. And what I would actually say is we, I’ll echo the points I made and then Robert made me in the opening bit.

As we look forward, actually we see a lot of opportunity. First of all, with our network, you know, as we look out there, we serve 300 cities in North America, in 200 of them, we have a network advantage. And as we bring back more of the regional jets, as we up gauge the mainline fleet, that’s a real advantage for us, because so many of our competitors really won’t be there. The customers in those cities are about 50% of our customer base, but they produce about 60% of our revenues. They’re the ones who are signing up for the program for AAdvantage and enrolling in the card. And then the other big opportunity we have really across our enterprise, but it’ll play out most notably in the domestic system, is really with AAdvantage, our travel rewards program.

As we see it, our co-branded credit card is the largest co-branded credit card in circulation. Our program is one [Technical Difficulty] maybe travel programs in the business. But if you look at us, we produce probably $400 million less in frequent flyer revenue than what the industry leader does right now. So the quarter-to-quarter trends are just a function of things like the recovery. The real thing that we’re seeing is the opportunity in the quarters and years ahead.

Helane Becker: Thanks very much. Thanks, everybody.

Operator: Thank you. Our next question comes from the line of David Vernon of Bernstein.

David Vernon: Hey, good morning guys. So Devon, can you help try to shape the cost outlook and the cadence by quarter for 2024, or at least talk to some of the headwinds out there? I know it’s going to be pretty noisy just given the way the labor costs have layered in. Can you kind of help us think about 2024 CASM-ex, sort of, headwinds in relation to the higher level of CASM-ex that you’re expecting now in fourth quarter?

Devon May: Sure, and maybe I’ll just start with fourth quarter performance and then we’ll talk a little bit about 2024. And while we’re not giving CASM guidance for the year, I can talk to you about some headwinds and tailwinds. So starting with fourth quarter of this year, as Vasu said, these numbers do shift around a little bit from quarter-to-quarter, but our full-year CASM-ex guide has been unchanged since the start of the year. And we knew at the start of the year, the fourth quarter was going to be our toughest comp. Our capacity starts to decelerate or capacity growth starts to decelerate a little bit as we entered the fourth quarter. We also had a couple of one-time credits that we got in the fourth quarter of 2022 that aren’t happening for us this year.

And then there was a shift of some expenses from the third quarter into the fourth quarter, adding a little bit more pressure. But we’re still really pleased with our full-year result, hitting the guide or the midpoint of the guide that we had at the very start of the year. As we look out to 2024, the headwinds are where you’d expect. It’s largely around salaries and benefits. We have open contracts with our flight attendants and our passenger service and reservations groups. If we are able to achieve deals that match industry leaders for those work groups, it’ll add about a point of CASM pressure year-over-year. We also just have regular increases for other labor groups that are happening next year. But the tailwinds of what Robert talked about and what we’re excited about actually working towards full utilization of our fleet.