Q3 2019 Earnings Call

October 24, 2019

Ladies and gentlemen, thank you for standing by and welcome to the first quarter 2019 American Airlines Group Inc. earnings Conference call. At this time, all participant lines are in listen only mode.

After the speakers presentation, there will be a question and answer session.

Good question during this session you'll need to press Star then one on your telephone.

Please be advised that today's conference is being recorded if you're acquiring any further assistance. Please press star then zero.

There are a cheap and on financial officer also in the room for a question answer session or something like our senior execs, including Maya Leibman, Our Chief Information Officer, Steve Johnson, our VP of corporate affairs lease ever wine or give me a few people communications, Don Casey or senior Vice President of revenue management.

Well the commentary on operational performance and our commercial activities for 2019 to 2020, Derek will then walk us through the details on the third quarter.

Well I know some additional information our guidance for the remainder of the year, that's a preliminary guidance for 2020.

Before we begin we must stay in today's call does contain forward looking statements, including statements concerning future revenues and cost forecast capacity traffic both factor fleet plans in fuel price.

Thanks again for joining us this morning at this point I'll turn the call over to our chairman and CEO Doug Parker.

Thanks, Dan Good morning, everybody, thanks for joining us.

But we know these earnings in the agrees earnings should have been even better.

Third quarter results from 22 major challenges impacting our business.

First seven three so nicely remain grounded throughout the quarter.

Negatively impacting our pre tax earnings estimate of $140 million in this quarter alone.

Second we had significant operational challenges American first enough for the quarter.

We continue to work on negotiating an industry, leading contract we want our GW and I am team.

As it relates to 730, so not that situation is of course on going.

First of course is we're going to complete your pays required recertification process and ensure the aircraft safety flying.

So we're working to ensure that Boeing shareholders bear the cost Boeing's failures, North American airline shareholders.

Turning now to respond to remain challenging GW I am contract, we've seen significant improvements in our operational reliability as our negotiations the reason.

We've been immediate talk through the National radiation Board since early September those are first talk since April .

Both parties, who agreed not to discuss MACOM to those talks publicly at the request to the enemy.

But you should know that we're very focused on research agreement, which is fair to all involved ensures our operations back on track.

We're committing to urgently improving performance enhancing shareholder value.

We also appreciate that in many respects the.

The long terms now.

We know we need to do better and we will.

As we never give a 29 team we're coming to the whatever on three key areas will create value for our shareholders and 2020.

Operational excellence.

He fishing and profitable growth.

Significant free cash flow generation.

First and foremost.

We must restore Americans operational reliability standards of excellence and our customers and our team members dessert.

As Robert will discuss in more detail, we're executing on specific plans to improve our operating reliability beyond reaching a labor and specific goals, we will me.

Simply will not allow our company team members to experience and other periods like this past summer again.

We anticipate much of this growth well, we had an anchor above system average unit revenues.

Driven by gates, we've been able to acquire in Dallas Fort worth in Charlotte.

There are two of our highest margin hubs.

For example, many of the cost of our 737 Max aircraft are already in our cost structure.

Terrible provide some high level CASM estimates in his remarks, we'll provide more specific details on the fourth quarter call. Once we complete or budget process, but just now we're excited about our prospects to grow and to grow efficiently and profitably 21.

Lastly, and importantly, we are confident we'll begin to produce significant free cash flow for investors and 2020, India.

Much of that confidence is driven by the earnings improvement. We expect first you I've just discussed we expect those initiatives to improve profitability over where it would be otherwise.

It seems like that's happening we're reaching the end of an unprecedented program to invest capital into American Airlines.

$3.7 billion 20, 22.1 billion in 2021 and should average approximately $3 billion thereafter.

There were just two years and again that's on constant 2019 earnings none of US we'll be pleased with constant 2019 earnings 2020 2021.

So as you said in the past as we generate significant free cash flow, we will naturally delever our balance sheet.

We expect adjusted net debt all by approximately $3 billion to $4 billion in the next two years.

Entering a period of significant free cash flow generation will facilitate that initiative.

So in summary, we're pleased to large issues that have impacted our performance should be addressed as we enter 2020.

It relates to our shareholders. For example, we know we haven't profitability margin gap reserve large competitor and we're committed to narrow that gap in 2020 me.

We're excited about prospects for the future and are grateful to 130000 hardworking team members of American Airlines and the amazingly great work, they do everyday to take care of our customers.

Before I begin I'll add my thanks to our team members for doing a great job taking care of millions of customers during the busy trying to summer travel period.

Importantly, we continue to execute on a number of initiatives to improve the trajectory of our business going forward.

It's also marks the twelveth consecutive quarter of unit revenue growth and we expect to produce our 13th next quarter.

As Doug mentioned this improvement continues and no into November into October .

We continue to strengthen our operations with ongoing enhancements, including retiring older aircraft.

Simplifying our fleet and schedule and fortifying, our maintenance and airport resources.

And as a result, we expect our 2020 completion factor to increase by one to two percentage points and to see a significant improvement in all reliability metrics, including on time performance baggage handling and customer satisfaction.

Rather than let our operation become the bar, we don't believe that will be required of course.

We also know it's a commitment we need to make to ensure that we restore operational excellence.

Now with respect to the Max.

We have extended the cancer, our cancellations through January 15th.

Regardless of when the aircraft as recertified, we plan to be prudent as we entered reintroduced the Max back into our network.

And only then we gradually placed the aircraft back into our schedule.

As part of our phased approach to it to reintroducing the 24, Max aircraft that we havent and storage today.

[laughter].

Well begin with five aircraft flying in the first two weeks Thats 20 departures per day. Two weeks later, we'll add 12 more aircraft. The remaining seven will be phased into service two weeks after that.

And we'll add additional Max aircraft as they become available.

And note by year end 2020, we plan to take delivery of an additional 26 Max aircraft for a total of 50 in our fleet.

While tenant those 26 aircraft. It then bill we don't know exactly when there will be delivered or when the remainder will be built.

Restoration of operating reliability will drive customer satisfaction, but there is much much more that we're doing to make the journey more efficient easier and more enjoyable for our customers.

We created unique opportunities for our customers to up sell into the premium cabin, thereby significantly growing ancillary revenue.

We've recently launched board now notification to reduce the wait times gate for customers.

And were speeding customers boarding through biometrics biometric boarding at DFW for international departures.

And when there are disruptions we've added the ability for customers to changed flights and receive compensation before traveling to the airport and Weve automated hotel meal and transportation doctors deliberating electronically to customers during disruptions.

We continued to be extremely excited after seeing the results from our network expansion plans with growth targeted our most profitable hubs. This ever began in May we added 100 daily departures out of our DFW huh.

Got it exceeded our initial expectations.

On the partnership side late in the quarter, let Tom notified us that their attention to leave the one world Alliance and a former relationship with Delta.

But not surprising given the regulatory challenge our proposed joint venture face.

Our fast South American network will ensure that we recaptured the majority of the potential codeshare revenue on our own aircraft.

And we're confident that with the strength of our network will attract other partners to in the region.

So in conclusion.

We haven't we haven't Great Foundation belt and our core business is strong we made investments to improve the product. Our fleet renewal is program is nearing completion and we continue to refine our network to add margin accretive growth.

We're confident we'll do deliver improved results in 2020 and beyond to benefit our shareholders our customers and team members.

And with that I'll turn it over to there.

Thanks, Robert and good morning, everyone. During the quarter were able to growth for our both pre tax margin and earnings per share for the second successive quarter. Our third quarter results came in towards the high end of the guidance range you provided in July for the third quarter, our pre tax profit excluding net special items was 835.

Ian resulting in a pre tax margin, excluding special items of 7% compared to 6.2% in 2018, our third quarter 2019 pretax net net profit excluding net special items was 630 million a 15% increase over the third quarter of 2018.

And our diluted earnings per share excluding net special items in the third quarter was $1.42 per share up 20% readout from $1.19 per diluted share in the third quarter of 2018.

Passenger revenues grew by 4.1% to 11 billion a record for the third quarter.

Latin was the best performing entity during the third quarter with year over year unit revenue improvement of 5.65, 0.9%, Brazil, and Mexico led the way with double digit improvements in yield while we improved load factor in entity overall by six and a half point.

Specific unit revenue also continues to show improvement aided by our China restructuring last year with unit revenue up 1.6%.

Specifically, Japan, and Australia were up year over year, while we faced challenges in Hong Kong and Korea.

Atlantic unit revenue declined by 4.6%. This decline was driven by transfer payments related to our joint business agreement of about 2.3 points and currency effect of about one point.

International point of sale remains challenging, but we successfully shifted to north American point of sale and grew load factor by 3.2 points.

Domestically, we saw and continue to see broad based strength with unit revenue growth of 4% and improved unit revenue across every hub.

208 million.

Total operating expense in the third quarter were up 2.1% at 11.1 billion.

When fuel and special items were excluded our unit costs increased in the third quarter by 4.8% compared to 2018.

Due primarily to higher salaries and benefits maintenance in regional expense and lower than planned capacity.

Turning to the balance sheet, we ended the quarter with approximately 8 billion in total available liquidity well above our targeted liquidity balance of 7 billion. During the third quarter, we paid dividends of 44 million and report repurchased 200 million of stock or 7.3 million shares.

As Doug talked about we have begun to de lever the balance sheet as our capex acts requirements have reduced this year, we expect our adjusted debt position, including pensions decreased by one and a half billion this year.

On October 10, we announced we had removed the 737 Max from our schedules through January 15, 2020, we now expect 737, Max grounding will have a negative full year 2019 pre tax income impact of approximately 540 million based primarily on a lot.

Revenue from scheduled reductions.

Now that we've removed the Max from 2019, we expect capacity growth of approximately 2.7% for the fourth quarter and 1% for the full year. This is less than half the full year capacity growth. We had expected at the start of 2019. Despite this capacity level our expectations.

For full year cost brands, excluding fuel and special items is unchanged from previous guidance at approximately up 4%.

For the fourth quarter, we continue to expect that are CASM, excluding fuel and special items will grow by approximately 3%. Despite the additional reduction in asms due to match grounding in the fourth quarter.

Looking forward, we see no signs of macro softness in our for bookings, we expect domestic demand to remain robust and land to again be the best performing international entity, we expect our fourth quarter year over year TRASM to be flat to up 2% and PRASM to be about a point better than TRASM.

We also expect that are pre tax margin, excluding net special items to be between five and 7% the midpoint of which would represent the third consecutive quarter of pre tax margin expansion.

Given our expectations for the fourth quarter. We believe that are full year earnings per diluted share. Excluding net special items will be between $4 and $55.50. We've tightened the top end of our previous guidance of 450 to $6 per share due to the additional $140 million reduction in earnings.

From the deferral of that Max in 2020.

Our total projected capital expenditures for 2019 is expected to be 4.3 billion comprised of 1.7 billion in non aircraft Capex and 2.7 billion an aircraft capex the slight change from previous guidance is due to the timing of the Max deliveries moving from 2019 to 2020.

As Doug mentioned, we plan to grow our network with efficient and profitable growth at this point, we anticipate total 2020 year over year capacity growth of approximately 5%.

Given this capacity guidance, we have tightened our estimate for CASM ex fuel special items in new labor agreements to be approximately flat in 2020.

Thank you. Thank you.

Also in the interest of time and I'm sure everyone has a chance to ask a question. We do ask that you. Please limit yourself to one question and one follow up question and again, ladies and gentlemen that is star one to ask a question.

Comes from.

From Stifel. Your line is open.

Yes, thanks, good morning, Doug what it whatever coffee you had this morning I would like some of that.

I'm wondering if you could just talk about kind of expectations for earnings next year, if you've lost five or 600 million from the Max and maybe a couple hundred million more from the mechanics issues, how much of that can you.

Kind of recapture next year, what why shouldn't kind of the base level of earnings for the business be somewhere closer to 4 billion next year. Thank you.

Sure.

Well be able to give you a much better guidance as we get for budgeting process. We've just begun.

A better job.

When you estimates next quarter.

But.

The two headwinds that you discussed as you mentioned.

That we produce this year certainly should not be headwinds next year and the amounts.

You described the one issue I would just.

I'm a little bit.

And.

In 2019, I don't think you should build all that in for 2020, but our run rate earnings you're right and again I'm not I'm not any means trying to give you an earnings estimate, but absolutely Andrew that whatever earnings are going to be in 2019, they're going to be a good bit better and better for two reasons you suggest.

The free cash flow outlook that bullishly I don't think in terms of how much. It is relative to your market cap I just want to make sure I kind of understand them in from a leverage standpoint, nothing has changed the leverage will kind of come down naturally, but we should assume that the free cash flow is primarily used to.

Repurchase stock is that the idea going forward.

Those numbers, Joe really I mean, not because there.

Third dramatically different than we would've said in the past are just now year.

In the past, we're going through a period of high Capex once we get through expects to generate free cash flow. When we do that you'll see us naturally de lever although statements I hopefully you would agree we've always said.

Three years from now here's what those numbers will be.

Now and now as it is upon us.

That free cash flow gets generated in 2020.

We can give you we'd give you more clarity on that so we're happy to.

I'll decide what earnings might be as we go forward, but that's what that is and again, we certainly are going to be happy of 2019 earnings on areas of 2021.

Just looking at what we.

So that number again nothing.

Just want to map is going.

And then to your point.

Thanks, Tim that first number the free cash flow generation is greater than.

Our cash.

So that's which that's what you should expect.

Thank you.

As Joe.

Thank you.

Next question comes from Brandon Oglenski from Barclays. Your line is open.

Hey, good morning, everyone and thanks for taking my question.

Doug I guess, just looking back on the last couple of years I mean, I understand that the Max definitely I was quite disruptive this year and you guys do have some good things going on the network, but even giving credit for that it does look like your op income is still down I'd like a two year basis, and what's been pretty robust economy and not that.

Were necessarily comping everyday to your peers, but they're op income is up in that same time period. So.

You know retrospectively and looking forward what can change in this dynamic where American can start to really leverage the economy.

Sure. Thanks, Brian .

I won't.

We always encourage you to capitalize our operating leases on the balance sheet.

But putting that aside I don't disagree with your point.

That weve.

Just at the ownership costs.

Good.

The.

As we look to that.

Primary reason.

Related to the issues, we talked about we've seen our.

Properly adjusted stage, we've adjusted unit revenue gap certainly.

As we through every year since I'm sorry, it was a narrowing every year since.

Starting to widen the last six quarters, Hum and Thats not what it should be doing we should be narrowing that gap not whitening.

No doubt 737 Max issue.

Certainly as lenders are widening effect.

But.

If I see Roger.

Take that.

Significant benefit as we improve the connectivity of our hub, we see that not only that the marginal revenues of our new flying is coming in well above system average, it's having a meaningful impact on all the flights that remain so for example, the new flights the new routes that we added the new frequency and came in at 85 plus percent marginal PRASM.

Thanks, Brian .

Thank you.

Hey, good morning, everybody.

Are there any triggers with Boeing in the contract or potentially with less stores that would allow you to alter the delivery schedule once the Max pipeline resumes also on the 5% capacity growth.

So as soon as.

They can be as soon as their certified and we have pilots trained we'd like to give them service as quickly as possible.

So thats and that's what we think the right thing to do is so we're not looking to change delivery schedule.

We feel really good about our growth.

Good.

But anyway, we're going to try and maximize value at all times not so much.

To manage earnings as much as maximizing value, we believe the way to maximize value.

As to continue to expand our network, we have fewer in place today than we would like.

They are looking there on the table asking for more aircraft not pure.

We want to get those airplanes into system again. This is not business grows you should be happy about that were commented before this is in our core markets.

And add more flights into those hubs.

Really really good growth.

Include lower or is it predicated on Boeing compensation.

I told you I.

Again, what is predicated on is.

Flat earnings year over year.

Thank you.

Good morning, everyone.

Thanks airtime.

From the Max at that you laid out.

Having less capacity overall does that make sense.

Yeah, I think so and I think I understand the reverse side of it.

I'd there. So the 540 is really a number where you take about seven hermina revenue due to the not flying offset by some costs.

You sort of don't you don't get it back right Lemon suppose January 15th ends up being way optimistic.

They are probably.

For instance, I mean, you're probably not going to be.

You know asking.

Pilots to bid on schedules.

Yes, and getting hit by that extend that you did early on in this process and so I guess I was thinking that theres, probably some CASM ex relief so.

Associated with just not kind of having to manage things on a day to day like databases like yet.

You are definitely right on that.

This is assuming.

Okay, and if you have you slowed you're hiring at all.

In distribution and this keeps that this continues to linger.

We slowed our hiring early in the fall here, but then we are higher back up to meet the schedule needs for early part of 20 early part of the first quarter. So we're back we're we're back making sure that we can fly the schedule that Robert talked about with the aircraft coming back so that when they come back we're ready to grow.

Alright, great. Thank you.

Thank you.

Hey, good Doug Hey, good morning.

We do not have an answer on that yet it all depends on how we get it back.

Okay. The accounting is if you get it against the aircraft price that would just go into reduced aircraft price and wouldn't hit a few now.

If it comes back as lost earnings and possibly could hit the DNL. So.

We don't we do not know yet where negotiations with.

And as we continue to go through that we will.

Eight everybody on where it will hit BNL and if it will have BNL and what that number is going to be.

Great and then vessel the the 5% capacity growth.

I'm surprised that so low.

Implies only about 3.5% core growth in 2020.

Four or 5% sort of core growth. So is that a conservative number any color on that would be great from your perspective. Thank you.

Hey hundred front first of all we're still working through our level of operations for next year, but I'd say the simple way to think of it is that.

The remainder of the is the growth of our core business.

That remainder.

It's pretty evenly split between just a variety of gauge initiative.

And and actual departure based growth.

Of course was announced a lot of international routes, you can probably backstop for some of it but we anticipate that.

Thats, what well moderately outgrow international but it'll be pretty close, but we're refining margin should have more in the next quarter.

Thanks honor.

Thank you.

But does your flat CASM outlook or are preliminary flat CASM outlook include or exclude new labor agreements.

Excludes labor agreements.

Timing on mechanics, and pilots next year.

Hey, good morning stock on that one agenda as I said in my comments we.

Have agreed.

We're hopefully understand we're much more focused on negotiation don't want to jeopardize that mine what is targeting that we're happy run negotiations were happy to be as ask is.

Not to talk about it we think that helps negotiations present hurdle.

And we don't want to violate that when we do have a contract we won't we will absolutely, but you know answers to those questions.

Totally fair sorry for asking.

Appreciate the surprise that was kind of dumped on you by the Chilean courts.

So.

Cargo I'll go ahead and start on that.

Great News is that our network by far the best Best in the South America. There's a lot that we can do to augment that on our own and while again, let Tom.

Was disappointing.

You also have to realize the nature of what that was what could be so for now customers are choosing.

Working and exploring and evaluating.

The opportunities that are out there right now so good things to come.

Okay. Thank you.

Thanks Ryan.

A question on the.

Double digit increase and would you expect that to moderate given the revenue pressures.

Yeah, Hi, this is not too.

A lot of what's what's really driving our capacity growth.

The leadership that you had with with some of that kind of the taking advantage of your larger grades.

Have you with.

The performance in Chicago, and your positioning in Chicago.

We're actually really excited for our future in Chicago and on a number of levels that I mean for one and I'm talking about this probably in a lot of forum.

Removing Chicago to Asia for US and then actually a big benefit to the Chicago.

A lot of that was not just unprofitable flying in of itself is claiming space off of domestic airplanes and things like that that could have otherwise gone to.

Also as we look forward, though our principal competitor there is indeed on rolling out the new product. The reality is we still will be able to offer more first class each of the Chicago customer and we absolutely intend to continue doing that one of the the major things that we're excited for.

During the Athree 19 into Chicago, which will enable us to.

To be targeting so we very much like our chances out there we very much will continue to do that.

4% and our best performing huh.

Good day.

Yes.

Thank you sorry.

Doug a question for you I appreciate the enthusiasm this morning, but what makes this time different versus before I mean, we've heard relatively bullish pitches for new analyst day down in Dallas, a couple of years ago. So what stands out this time versus then sort of get to buy in from foreign investors and analysts alike.

Well.

What.

Hey, guys.

We have out we needed to invest in this company and we we described in the time to our investors that it was going to be significant and the reality is while we were while we were make you record profits.

That.

The $1 billion I talked about last six years 23 billion that was spent on new airplanes.

So.

The change in bullishness, it's a new message.

And one that I think is important to our investors Thats 0.1.

The other only to what I'd add to the bullishness. Please.

Absolute understanding that we are earnings this year were hindered by two circumstances.

We fully expect to be behind us.

Early in 2020.

And.

And our commitment to ensure that we have operational excellence and the growth prospects again all of that.

As we excited.

You talked about conclusions and that's where we're.

Thanks, that's helpful.

Follow up.

Just maybe for for Garik as well probably on a labor I don't want to talk about specific contracts, but broadly on labor or do you believe that you've got a.

Step up wages to get the by end of employees I mean that was sort of strategy United It seems to be successful for now, but maybe I'm not thinking about it or approaching at the right way that that may be needed to deliver on some of what you're describing.

Yeah, as we talk to our employees.

Biggest thing we do for our team is providing reliable operations.

Great frontline leadership.

Don a really nice job of take care of our team we have.

As you're well aware needed to increased compensation across the board get our our wage levels to where our their peers. Other airlines are because they certainly.

Deserve to be paid.

As much or more as those theyre doing some more jobs are there.

But this issue we're dealing with now as it relates to the team is.

We need to give them the tools they need to do their jobs, which they do so incredibly well.

Yes, that's go take care of customers.

We haven't been doing that we don't Rob.

We don't have operational excellence our team ends up.

Bearing the brunt of that.

No not being when they're supposed to be an independent mandatory every time, they end up having unhappy customers.

All of which impacts the room.

So what we are what we know and one.

It is operational excellence as to our customers to our shareholders, it's really important arcade and that's.

All of those reasons why we why we're still committed to making sure it happens.

And.

We believe doing that we'll do more for our team than anything else can do right now.

Thank you Sir.

Thanks.

Thank you.

Our next question comes from Mike Linenberg from Deutsche Bank. Your line is open.

Yeah, Hey, Hey, Doug Hey, two quick questions here I guess on fleet. The eight to 10 billion dollar reduction in net debt over the next five years, presumably there's no major sleet decision for American probably until 24, 2025, thats kind of implicit in that and if.

That is the case what is what is the next aircraft type in the fleet that you're looking at that you then have to address what's the timing on that thank you.

Oh, yes, they are concerned I got its Mike.

And we will have them da's warm gone out to anyone Ninetys gone out of the fleet seven Sixs will have gone out of the fleet.

Fives will eventually go out of the fleet. So the next real make decision for US is in the Athree 19 category everything else will those aircraft are.

And on average 15 years today. So as you said, we don't have any decision to make until you know 25 timeframe. You know we might talk earlier, but I think it's really in that category. The threenineteen category and will be the replacement for that and our three twentys.

At the bottom end, a 150 seat range to 130 seat range.

And Mark I was kind of data points are you and everyone else.

As we look at our fleet now Ali.

Only tempered, 10% originally only 10% roughly 20 years or older.

As compared contrasted to our two largest competitors.

About a third of their fleets 20 years or older. So anyway, it'll be a while we feel very good and indeed over half of our fleet.

Nearly 10 years. So we again, it's because it took us a lot to get there we had to spend on to do it.

We feel really good about where we are.

With our fleet and certainly relative to our cash needs versus our competitors going forward.

Great great position to be in and then just my second follow up on the Athree 21, Neos I mean, you're obviously, taking delivery of them now and into 2020.

Given that you are I think Airbus as you may be their largest customer for the 320 family right now just looking at your fleet and the potential any chance that you can have those airplanes deliver additive mobileye rather than than Europe as as we move forward.

Yes, I would say.

This is Derek and we have you know we have already a schedule out through the mid of 2020, where we'll have nine coming out imobile.

Six of them are Hamburg today, and then we are still six to be determine so we'll do you know everything we can we have 21 deliveries next two years, we're doing everything we kinda talk to Airbus and try to get them get them automobile and make sure that those aircraft come come from that manufacturing facility instead of.

But.

Today, the Chubb the 21, we have come in six come from a number nine.

Imobile and six yet to be determined which are late in 2020.

It will.

I continue to work to get those automobile.

But Mike.

Implicit in your question I think is that.

If we didnt do that.

We would be paying the tariff I'm asking.

When you didn't say that let me just.

Let me assume you did.

Look definitely.

Well we know.

I don't think no.

That the U.S.T. our.

The tariff with a level it did.

Ensure that the burden didnt get.

Born by U.S. Airlines, but by the French.

So we're we're happy to work with Airbus mitigate that amount, but I don't think you should assume that if it's not many Dan that American airlines.

Would be would be your words <expletive> , having said that.

What we really helps it doesn't ever get to that point. The answer this is not keep escalating and having tariffs on both sides answer to that.

Before the.

Hi, Michelle you ask the artist down.

Work this out when doesn't have tariffs or plays but if they can't do that.

This.

Again.

We are certain.

But the goal of the U.S. our was not to have.

These aerospace.

Hi, U.S. Airlines.

And then passed on to Us citizens.

Great. Thanks, Doug Thanks Derek.

Yes.

Thank you. Our next question comes from Helane Becker from Cowen Your line is open.

Thanks, very much operator, hi, everybody and thank you for the time I just had.

Two questions. My first question is with respect to how you're intending to use envoy in some of your other regional airlines for the capacity growth that you're doing in Dallas in Charlotte and then my other follow up question is.

As you think about growing Latin America, which you talked about in your prepared remarks relative to you know taking up that capacity that.

You are kind of loosing with what town is their space at Miami to do the same thing you're doing in Charlotte DCH and and Dallas. Thank you.

Hey, Helane. This is not to let me do your questions in reverse order first of all on space Miami, Yes, we have we had the space Miami Ted.

Grow in any number of ways.

Adding the three flights that that Robert mentioned earlier on the Dol accommodated within that capacity footprint that we have there we haven't really great position in Miami, I really great relationship with Miami Airport and community at large and so we the way we see this is Robert says that we will always have begun the best Latin America.

And network. It is at the very hard about competitive advantages in airline and that's one thing that even through all of this stuff. We will continue to do well continue to be able to go and operate in Miami and grow their though it doesn't have the profitability of markets like DSW and Charlotte there are routes out of Miami that are among.

Our our most critical for our customers and certainly certain days a week in times of year on its really attractive marketplace for us and you'll see us.

Take full advantage of that in the year ahead.

Your first question about envoy growth, which I think in Parliament envoy, maybe larger you kind of regional versus mainline I'll speak to both.

Our growth. This this past year has been heavily driven by by the regional operation.

Next year, it will be more heavily driven by our mainline operation.

Our growth in Charlotte, especially is less about growing our regional jets, it's about one improving the conductivity of the hot making more LNG market and a very critically having having more seats on all of those I wouldn't be so you'll see a few things like bring the 737 down the larger degree turned more regional jets in the main line.

We endeavor to do the same thing and DSW as well now that said there are regional jet network has been up is a very critical part of our airline that does.

We say that the little Jets make the big Jets go.

And so we'd there will be a big deficit of regional jet growth as well it'll just lack the main line next year, whereas this year it kind of outpaced mainline.

Okay. Thank you very much.

Excellent.

Thanks, Doug.

Thank you and our next question comes from Dan Mckenzie from Buckingham Research. Your line is open Oh, Hey, good morning, Thanks for the time here.

OSFI will love to clarify the messaging on on 2020, so CASM ex fuel flat next year, you expect to grow earnings investors are going to interpret that as your base outlook for unit revenues to be flat or up despite a pretty high capacity picture.

No not asking for for 2020 revenue guidance of course, but just trying to make sure. There's just no fall here in the preliminary thinking.

Sounds like your revenue guidance.

[laughter].

If we take at this point ask of earnings are up it sounds like driving revenue guide but.

Okay.

I wanted to go back to what we said so far Dan.

We're not yet prepared to give you real guidance on earnings in 2020 because.

We're doing our own work.

And.

So we'll we'll let you know more as we know more ourselves.

Certainly over the next call, we should be able to give you better guidance on 2020.

Earnings forecast.

You should do your own work on what you think about entering into revenues.

Where we are Roes that right now we can't give me much.

No I understood. Okay, I had to try to of course.

Okay. So.

Good commentary free free cash flow demand solid revenue backdrop.

There is worry that the parallel universe that the consumer today goes the way of the industrial sector Tomorrow, I've I've had more than one conversation with owners, but what Americans earnings would look like in a downturn and again I know that's not your message today, but can you talk about the fleet flexibility so both narrow body wide body.

And is there a way to get ahead of the economic data points, if they start to worsen.

Yes, Dan we have a significant amount of fleet flexibility.

You know we have a unencumbered aircraft of some 264 aircraft almost 100 to those mainline hundred 72 regional.

We have 65 deliveries to come next year, which we could we could deal with if we needed to lease extensions. There is about 47 of those that wouldn't come off and and older aircraft. We have 53 of those which most of those are any uncovered category. So yeah, we have upwards of three.

Hundred 350 aircraft.

We flexibility that if if something happened we could we could take the fleet down if required if there was some type of a recession or anything like that but but as I said earlier, we're not seeing anything like that and in our bookings and things just continue to stay strong.

Understood. Thanks, so much you guys.

If you Dan.

Thank you and we'll take our last analyst question from David Vernon with Bernstein. Your line is open.

Hi, guys. Thanks for taking the time question for you on the focus for 2020, obviously Robin Doug you talked about getting the on time performance in the basic execution done.

And improved Im just wondering if there are specific things in the revenue pipeline.

That will help you to narrow that gap that you do you know you mentioned before the unit revenue side with some of your peers.

Yeah. This is Don again, if you don't look at our.

In our passion hitting a record performance this year and 2019, we did better than our thanks editors bye bye.

Based on guidance for Q.

That was based on the revenue initiatives, we have pipeline this year, which also included.

Growing operation and Dallas, which we had in place.

In July so as we look forward into 2020, we continue to have a pipeline of revenue initiatives. Obviously next year, a big part of that is going to be the annualization of the growth in Dallas, adding the growth in Charlotte and we are going to be up gauging and adding seats to airplanes, which is going to be very accretive to our overall.

Revenue performance in 2020.

Anything on the product.

Typically that you could talk to around.

There is some of the premium products or.

Some of the other what you've been doing on the cabin side.

I would help us kind of.

Look for it.

The able to get some upside.

So that you can you can chime in here, but hey.

One is that we're finally getting to the point of being able to offer.

And just an upscale and higher level cabin, so as weve been improving our ability to segment, whether its main Kevin extra or premium economy type seats are being able to offer that customers and a convenient way. It's something that we finally have the technology to be able to do a and that was launched earlier this summer.

Expand it a throughout the domestic.

And now we're looking to move that.

Not to international and also to into other channels as well. So that's something that will absolutely help us take advantage of the product offerings that we have out there.

Ted to Dons point in terms of being able to.

Harmonize our cabins.

And ensure that we had the configurations, we want we.

We had to take a hiatus because of operational issues. This past summer on those programs, but those have been restarted and we anticipate that our cemetery 37 classic fleet will be fully upgraded by the summer of 2021.

Okay, and then maybe just a quick follow up on the deleveraging that's going to happen over the next next couple of years.

Is there anything you can.

Tell us about the rate than that you'll be retiring versus the rates you're paying on on more recent debt like is it going to be any sort of shift in the effective interest rate as well as we're modeling out the next couple of years the cash flow.

I would say this Derek I would say no I think our average debt.

As around 4% right now so.

Most of the higher price that we paid off.

It might be slightly higher up the old old things are going to pay off because most of it is aircraft.

That will include pension do so we're going to take the pension down by about $3 billion in that calculation.

So from an aircraft standpoint.

It will be you know older aircraft that thats, probably up in a 5% range a little bit higher than what our average cost of debt, but not significantly higher just for clarification three billions in.

Yes, three billions in 810 billion sorry, the of the over the five year period.

Thank you.

I will open up the lines for media to ask questions do you have a question at this time. Please press star and then one.

Once again, ladies and gentlemen from the media if you would like to ask a question at this time. Please press star and then one.

And one on that while we compile our roster.

Thank you and our first question will take us Alison Cider from Wall Street Journal Your line is open.

Oh, okay. So.

Hi.

You could tell us anything about sort of the tone of the discussions you're having with Boeing around compensation progress being made or from your comments. This morning.

Concerned about an impasse there.

Allison.

Again, the discussions are underway been.

I I guess I'd characterize it on as well as early.

[noise] productive no reason for us to be concerned at this point, but also no real clarity at this point.

It much of the reason being.

From the standpoint, a Boeing I'm still not certainty as to when the aircraft will be recertify. So.

Torture underway.

But but they're there early.

But we feel highly confident.

That the.

They put the losses.

The American airlines have incurred.

Won't be incurred by American shareowners.

Turning to Boeing shareholders.

Got it and.

Concerned at all but any.

No delays in a return to service timing and I guess, probably do you feel like Boeing leadership changes is mainly have gone far enough or do you think the company might have to do more.

We.

Well, we're are asked to return to service.

I'll just answer that question has returned to service.

Our data we have January 15 is based on the best information, we have from talking to not just Boeing.

Yeah, Hey.

We were encouraged to see Boeing.

Announced earlier this week.

The thing they believe here will be certified in the fourth quarter.

So.

That information I guess.

Probably it's probably safe to it's probably best describe that information is best case.

Given what we've all seen over the over the course of this process.

But it's a reasonable case.

Therefore, we.

Indeed that.

Is that situation is correct. If indeed the aircraft is recertified.

In the fourth quarter, we absolutely.

We will be able to.

Our five airplanes as Robert described.

Certified fine art.

Revenue fine as early as January .

If indeed that doesn't tend to be the case, we will we will once again.

To adjust.

Weve.

Unfortunately are getting really good at that we've designed this one in particular to be.

Is your to do than others in that regard so.

Yeah, we're frustrated but is hopefully getting the point.

It certainly feels as though.

The delays, we hear about seem to be shorter delays.

Competent seems to be higher, but we don't take that as certainty or even close to it.

Based on everything we know today, certainly seems reasonable and these aircraft in our is good at the five airplanes on January 15, and were highly hook ought to be the case, if indeed that there is not to be the case, we will we will adjust what our customers know well in advance.

Got it thanks leadership.

Okay.

Okay. Thank you.

Thanks.

Thank you and our next question comes from Dawn Gilbertson from USA today. Your line is open.

Hi, Good morning, Hey, I've two questions one Robert you mentioned on your consumer initiatives.

New technology, I think you said a related to helping families. Together can you go and any detail on that.

My second question is.

These are really prevalent right now and I'm wondering where that you can give any sense of revenue opportunity, there and where that ranks right now in terms of ancillary revenue. Thanks.

Hey, I didn't hear the second part of the question the first part and just in terms of.

Seeding.

Families together I'll just I'll, just say that we've always had technology to help we've improved our algorithms and.

Ultimately, we are getting a much better hit rate of making sure that we protect and we've reserved seats.

For those families and southern Theres good things, there's good things on that front at all technology based and really enhancements to processes that that we have placed today, but knowledge that get works. The second part of your question was I Didnt hear that say Ccs did you say.

I wanted to get a sense of the scope of you started these preferred Ccs and every all airlines have now pretty much to one degree or another and it seems to me that's got to be a pretty big.

Revenue.

You bring in a lot of money from these preferred Ccs I'm. Just wondering if you can give us any sense of the scope of that where you plan to take that and where that ranks now and you know kind of in the ancillary hierarchy.

Sure. This is a this is on case, we've done quite a bit and on the seats out of it and one is just introducing products.

Kevin extra revenue to re launch with enhanced benefits.

Yep.

And that has proven to be very successful.

And again there are customers do have the willingness to pay right a bit more from enterprise and that's what we're finding out in the marketplace and we're continuing to expand the product performance better products out there and provide a better capabilities for customers to buy out.

Those better products and we're seeing good demand.

Seat.

Revenue today is now our second largest in summary revenue stream after bags.

If I could just south of just a quick follow up related to that when you say on CP revenue does that include so that includes your preferred keep these when you get nothing extra and also made cabin extra what's in that basket.

And then it's it's basically every additional charge customers willing to pay for the better as seen on airplanes.

So in the case preferred seats and those are I was on windows and close the front and then Kevin extra items extra leg room.

Frank and better dedicated accessed.

And our anymore.

Thank you.

Thanks, Tom.

Thank you and our next question comes from Tracy Rosinsky from writers Your line is open.

Hi, Tracy.

Hi, good morning.

Doug I was wondering what is your own position on the Boeing employee simply instant messages about and the simulator and the emails that deferred to not including mens and kids in the plate man.

We don't have a position on that.

Our position as we're highly interested in having.

The airplane Boeing meet the requirements.

I guess airplane reserve I will note.

Yeah.

Just doing a fantastic job because process and is.

Showing real leadership, they always do on safety and aviation and.

Feel really confident that one.

Recertify says airplane acoustics world.

We are looking forward to that Dave.

Thank you.

And our next question comes from Edward Russell from the point Sky. Your line is open.

Hi, Thank you Bob.

What you about your comments on Chicago, you mentioned offering more first class the than competitors and then you've talked about shifting to more athree hundred nineteens in 2020, However, my understanding of they've been occasionally at eight Chris class seats versus some of your adult seat.

Aircraft of 12.

As offering and on they're new dual aircraft.

Aircraft talk a bit more about what's the strategy is to attract business travelers in the Chicago market.

Yeah, that's great question and.

Importantly, though that the 319.81st class C. Anytime, we're taking out a single class 50 seater and replacing it with bigger jet Yeah of course going from zero first class b something more than that regardless of what it is so so would that in mind.

But really there is multiple things that we plan to do a in Chicago, one of which is look we have a luxury in Chicago that competitor doesn't have which is that we haven't gigantic east west hub in DFW on for a competitor that is the best East West hub that they have a and so what we're really interesting deals.

And as being able to provide the best product and schedule to the customer Chicago to the world and will increasingly do this as we move through a number of our lead initiatives, a and product initiatives to we will have better schedule on the key days the business travelers go will vary the capacity levels that we have to of course.

We and then over the long term.

What we will increasingly do is as we do more.

50 seat replacements, you'll see more and more to past services, whether it's larger RJ threenineteen or 730 cents coming into Chicago I'll just ask Don.

Yeah.

Right right now I mean, they like our product in Chicago, where we're seeing the numbers I mentioned earlier hit our unit revenue Chicago has the highest any have we had a and we grew our corporate passenger volumes in Chicago third quarter myself.

So customers like to product you have that right now.

Okay. Thank you.

So just to be clear I'm understanding, but 50 seaters will come out.

319, and those 50 seat markets will step up to 76 theaters and does that really that's kind of the idea sort of the cascade category.

Yeah, Matt over over time, they well, we're working through what that looks like I think at this point, we're probably not not yet ready to reveal all of it but that is our higher long term plan is that that's long been our fleet plan and markets like Chicago exactly the kinds of things we have in mind for it.

Great. Thank you some price.

Thank you and that does conclude our question and answer session for today's conference I now, let's turn the conference call back over to Doug Parker for any closing remarks.

Alright. Thank you all very much for interest income.

We appreciate you have any questions on other contact Investor relations or communications, we haven't answered. Thank you very much.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the programming you may all disconnect everyone have a wonderful day.

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