Q2 2022 American Airlines Group Inc Earnings Call
Speaker 1: You F.
Speaker 1: The conference will begin shortly. To raise your hand during Q&A, you can dial star 1.
Speaker 2: Good morning and welcome to the American Airlines Group 2nd floor, 2022 earnings conference call. Today's call is being recorded. At this time, all lines are in a listen only mode. Following the presentation, we will conduct a question and answer session. To ask a question during this session, you will need to press star one. And now, I would like to turn the conference over to your moderator, head of investor relations, for Scott Long.
Speaker 3: Thank you, Livia. Good morning, everyone, and welcome to the American Airlines Group second quarter of the 2022 earnings conference call.
Speaker 3: On a call this morning, we have received your Robert Eism, an advice chair and CFO , President of American Eagle Derrick Curth. Also on the call for Q&A, are David Seymour, Vasu Raja, and a number of others in your executives. And a number of others in your executives. And a number of others in your executives.
Speaker 3: Robert will start the call this morning with an overview of the second quarter.
Speaker 3: Derek will follow with details on the quarter and our operating plans and outlooks going forward.
Speaker 3: comments will open the call for analyst questions, follow-up by questions from the media. To get in as many questions as possible, please want to ask yourself to one question and call for us.
Speaker 3: And before I begin today, we must state that today's call contains forward looking statement. Inclinating statement concerning future revenues cost, forecast of capacity and fleet plan. Inclinating statement concerning future revenues cost, forecast of capacity and fleet plan.
Speaker 3: These statements represent our predictions and expectations of future events, but numerous risks and uncertainties could cause actual results to differ from those projected.
Speaker 3: Information about some of these risks and uncertainties can be found in our earnings press release, which was issued this morning, as well as our Form 10Q for the quarter ended June 30, 2022.
Speaker 3: In addition, we'll be discussing certain non-GAAP financial measures this morning, which exclude the impact of unusual items.
Speaker 3: The reconciliation of those numbers to the GAAP financial measures is included in the re-earnings press release, which can be found in the investor-revasion section of our website.
Speaker 3: Webcast of this call will also be archived on our website.
Speaker 3: The information we're getting you on the call this morning is asked up to date and we undertake no obligation to update the information subsequently. We undertake no obligation to update the information subsequently.
Speaker 3: Thank you for your interest in joining us this morning.
Speaker 3: With that, I'll turn the call over to our CEO Robert Eich.
Speaker 3: Thanks, guys, and good morning, everyone. Thanks for joining us.
Speaker 3: We'll start by thanking the American Airlines team, which has done an amazing job of running our airline, especially during very challenging operating conditions last few months.
Speaker 3: They've managed significant weather, both thunderstorms and extreme heat in many parts of the country. Customers continue to come back to travel in record numbers, and our team has adapted to one of the busiest summers that we've ever experienced.
Speaker 3: And they've done so with grace, professionalism, and a level of commitment to our customers and each other that is second to none. Every single day, I hear from our customers about something incredible that our team has done. Thank you for your work and grateful for their support.
Speaker 3: I also want to thank and acknowledge our key partners in the US government.
Speaker 3: Secretary Myork, Secretary Buttigieg, and their teams at the FAA, TSA, CBP, as well as the air traffic controllers at NATCA.
Speaker 3: They've been right there with us and have worked through these difficult operating conditions.
Speaker 3: The extraordinary surgeon demand for your travel is significantly impacted them as well, and we appreciate their consistency and professionalism.
Speaker 3: All of us have to acknowledge that there are challenges in the national airspace, particularly in high traffic locations like Florida and the Northeast, but I am grateful for the shared commitment that we have in the public and private sectors and management on the front line to facilitate the efficient return of travel.
Speaker 3: American Server 53 million customers in the quarter, and we couldn't have done that without everyone pulling together.
Speaker 3: As we have shared previously, we have two primary goals this year. Running a reliable operation.
Speaker 3: and return to profitability. And that's the entirety of our focus.
Speaker 3: We've made a lot of progress on running a reliable airline, but we have still some work to do. And I'll touch up on that more in a moment.
Speaker 3: The big news is this. We're really pleased to report a quarterly profit for the first time since the start of the pandemic. That's two and a half years. This driven size has drawn to man environment and the hard work of art.
Speaker 3: We're also pleased to have hit our pre-tax margin guidance despite a challenging end of the quarter and a significant run-up in oil prices.
Speaker 3: American reported the second quarter gap net income of $476 million. Assuming that special items we reported a second quarter net income of $533 million.
Speaker 3: American produced revenues of $13.54 billion in the second quarter. And that's an increase of 12.2% versus 2019 and a record for any quarter in the company's history. American
Speaker 3: And let me repeat that, that's a record for any quarter in our company's history.
Speaker 3: These results were achieved while flying 8.5% less capacity than we did in 2019.
Speaker 3: Importantly, these results are an indication that our actions are producing the expected results.
Speaker 3: Early in the pandemic, we made a conscious decision to simplify our fleet network, focusing our flying where we could create outside customer value and using partnerships to augment that service.
Speaker 3: In the second quarter, some 70% of our flying was in American areas of strength. Our Sunbelt hubs. Mexico, Caribbean, Latin America, and London.
Speaker 3: This flying outperformed the industry as we offered customers more options than any other airline.
Speaker 3: Our domestic partnerships are also producing for our customers and for us.
Speaker 3: As a matter of fact, our unit revenue performance in JFK and Los Angeles outperformed the system in the second quarter.
Speaker 3: Customers are flying in different patterns than they have previously, and that's creating opportunities for us.
Speaker 3: System Business Revenue is now fully recovered compared to 2019, with revenue from small and medium businesses and customers exhibiting a blend of behaviors that would traditionally associate with both business and leisure, continuing to outpace the recovery of our managed corporate revenue.
Speaker 3: The majority of this revenue growth has come directly through our website, Bypassing Traditional Channels.
Speaker 3: Further, laser demands surpassed 2019 levels in the second quarter, and customers continue to show us their increasing appetite for travel. Enrollments in our loyalty program continue at record levels, and spend on our co-brand cards is growing at a greater rate than ever before.
Speaker 3: Looking forward, we will limit capacity to the resources we have and the operating conditions we face. We will continue to orient our flying to create value for our customers. And as always, we will remain nimble to ensure that we are best positions to capitalize on continued demand strength.
Speaker 3: We have trained back to re-reliability. After running a solid operation in April and May, headlined by a strong memorial day, we had challenges in June .
Speaker 3: June was a difficult month for the entire industry from an operational perspective, with extreme weather impacting every major hub and air traffic control challenges in certain parts of the country. At American, we encountered significant weather on 27 of the 30 days in June . That weather resulted in ramp closures, ground stops, ground delay programs, and air space flow programs, which had a ripple effect throughout our operation.
Speaker 3: Despite the challenging operating environment in June , our D0 at departure's on time, A14 arrivals within 14 minutes and completion factor for the full quarter will better have been the second quarter of 2019.
Speaker 3: Our team achieved this while flying a second quarter schedule that was more than 25% larger than our closest competitor on a departure basis.
Speaker 3: American operating more than half a million fights in the quarter, that's an 8% increase of the second quarter 2021, with a low factor of 87%, which is 10 points higher than the second quarter of 2021.
Speaker 3: With human challenging, we have seen improvements so far in July , including over the busy and dependent day weekend.
Speaker 3: American finish the holiday period with the combined D0-814 and completion factor all above goal and in line with our pre-pandemic performance. While operating a July 4 holiday schedule that was 30% larger than our competitors has measured by total departures.
Speaker 3: Our operational performance for the full quarter and the results we've delivered in the first few weeks of July give us confidence moving forward, but we still aren't where we need to be.
Speaker 3: And we have a lot of flying ahead of us still in the summer. So we're investing in our operations to ensure we meet our reliability goals and deliver for our customers.
Speaker 3: We've taken proactive steps to build additional buffering to our schedule for the rest of the year. As I said a minute ago, we're sizing the airlines for the resources we have available and the operating conditions we face. And we will make other changes as needed.
Speaker 3: Even with these adjustments, American still offers customers the largest network of any U.S. airline with an average of more than 5,400 daily departures.
Speaker 3: So I want to close by reiterating that I'm tremendously excited about what lies ahead for America. We're encouraged by the trends we're seeing across the business, and we've built an airline that can be successful in a number of different men in economic environments. The man in economic environments.
Speaker 3: Our second core results is drawn revenue production. Despite challenging conditions, demonstrate that our plan to return to profitability and deliver a good operation for our customers is working. And deliver a good operation for our customers is working.
Speaker 3: We have the strongest assets in the industry and the work that our team has accomplished to build and deliver the most comprehensive network in the business is paying off. And the business is paying off.
Speaker 3: And with that, I'll turn it over to Derek. All right, thanks Robert, good morning everyone. Before I begin, I want to thank the American Airlines team for their continued dedication to our customers during this busy summer travel season. Thank you very much. Thank you very much for your time. I'm very, very happy to be here during this busy summer travel season. Thank you very much.
Speaker 3: This morning we reported a second quarter gap net income of $476 million or earnings of $0.68 per diluted share. $1.2 million or $0.67 million or earnings of $0.68 per diluted share.
Speaker 3: Excluding net special items, we reported a net income of $533 million or earnings of $0.76 per diluted share.
Speaker 3: We talk a lot about our goal of returning their line to profitability, and our second quarter performance is a result of that focus.
Speaker 3: Prophebility in the quarter was driven by record revenue performance. As Robert noted, our second quarter revenue was 13.4 billion, was 12.2% higher despite flying 8.5% less capacity than the same period in 2019.
Speaker 3: Leisure demand continued to lead the way, but the acceleration of business and long haul international demand contributed to the strength we saw in the quarter. The
Speaker 3: Operating earnings improves sequentially through the quarter in line with the growth and revenue despite rising fuel costs.
Speaker 3: We continue to reap the benefit of the past investments in our fleet and are well positioned for the future. In the second quarter, we took delivery of five A321neos and reactivated nine Boeing 737-800s from long-term storage. We continue to work closely with Boeing on the timing of our delayed 788s, and we expect to begin taking delivery of those aircraft this quarter. We now expect to receive nine 788s this quarter and four A321neos.
Speaker 3: This year and four in the first part of 2023. Lastly, based on our latest guidance from Airbus, we are now expecting our A321 XLR to be delivered starting in the first quarter of 2024 instead of the third quarter of 2023. This will ship planned aircraft capacity out of 2023 into future years. Our 2023 aircraft cap-backs is now expected to be 1.9 billion. This is now expected to be 1.9 billion.
Speaker 3: We added the second quarter with 15.6 billion total available liquidity.
Speaker 3: During the quarter, we generated operating cash flow of 1.7 billion and free cash flow of more than 800 million. We have free cash flow of more than 800 million.
Speaker 3: Total debt reduction remained a top priority. We remain on track with our target of reducing overall debt levels by $15 billion by the end of 2025.
Speaker 3: In the near term, we will continue to keep our liquidity at elevated levels with a plan to step down to 10 to 12 billion when we are confident the recovery has fully taken hold. At that time, any excess liquidity will be prioritized to reduce debt. To reduce debt, we will continue to keep our liquidity at elevated levels with a plan
Speaker 3: During the quarter, we made a billion dollars in scheduled debt and finance lease payments, including paying off the remaining outstanding balance over center, 750 million unsecured senior notes that matured in June .
Speaker 3: Today we have reduced overall debt levels by 5.2 billion from peak levels in the second quarter of 2021.
Speaker 3: This means that after only 12 months, we have completed more than one-third of our $15 billion total debt reduction target.
Speaker 3: This progress affordes tremendous flexibility as to when and how we bring down the remaining 10 billion total debt by the end of 2025. As we have said previously, moving forward, we will continue to balance our total liquidity with the expected demand recovery, debt reduction opportunities, and investment in the business.
Speaker 3: We expect to make $375 million of scheduled debt payments in the third quarter, which includes the scheduled payoff and unencumbering of eight CRJ 700 aircraft.
Speaker 3: As we look to the remainder of the year, we are making targeted investments to ensure operation reliability.
Speaker 3: With recent schedule adjustments, we now expect full year 2022 capacity to be recovered to 90 and a half to 90 and a half percent of 2019 levels..
Speaker 3: Consequently, we now expect our full year chasm, excluding fuel and net special items, to be up between 10 and 12 percent versus 2019.
Speaker 3: The Incrasion Unit cost is driven by lower plan capacity and other investments to support the operation, including wage premiums and regional pilot pay.
Speaker 3: These unit cost increases represent near-term investments that will drive long-term value. We are confident that unit cost will improve as we increase asset utilization to historical levels.
Speaker 3: In the third quarter, we expect to be profitable despite the continuation of elevated fuel prices.
Speaker 3: Pretext margins are expected to be between 2 and 4% for the quarter. Based on the current demand trends and our latest fuel price forecast.
Speaker 3: We currently expect total revenue to be 10 to 12 percent higher versus the third quarter of 2019 on 8 to 10 percent lower capacity.
Speaker 3: On this revenue strength, we expect total revenue for ASM to be 20 to 24 percent higher in the third quarter versus the same period in 2019.
Speaker 3: We expect our third quarter-casm, excluding fuel and net special items to be up between 12 and 14% compared to 2019. Law or plan capacity and the investment in the reliability of the operation that I mentioned previously are driving unit cost-pire for the quarter.
Speaker 3: Our current forecast for the third quarter assumes fuel between $3.73 and $3.78 per gallon, an increase of more than 80% versus the price of fuel in a third quarter of 2019.
Speaker 3: In conclusion, demand is strong and remains focused on our key objectives of operational reliability and profitability. While we've made investments in our operation that will impact near-term costs, we are confident that we're very well positioned as we move into 2023 because of our network, our fleet, our team, and the actions we have taken.
Speaker 3: With that, we will open up the line for endless questions.
Speaker 2: Thank you, ladies and gentlemen. As a reminder, to ask a question, you will need to press star 1.
Speaker 2: To be fair to everyone, please limit yourself to one question and one follow-up. Please stand by while we compile the K&A roster.
Speaker 2: Now first question, coming from the line of Michael Lindenberg with Deutsche Bank, the line is open.
Speaker 4: Yeah, hey, good morning, everyone. Hey, good job, this quarter and a good outlook. I guess Derek, first to you on the 5.2 billion reduction that you've been able to do this far. to do that's far.
Speaker 4: Presumably you're not including any sort of reduction in the pension obligation and just given the run up in interest rates and sort of thinking where the discount rate would go. Can you just give us a sense of maybe the potential talent on that from a de-leveraging perspective, sort of where things stand and how you're thinking about that pension obligation. Thanks.
Speaker 3: Yeah, two things. One is, you know, we look at that at the end of the year. So there was some benefit in the pension, the reduction in 21. There was a slight reduction in 21 of the pension obligation. As we look at where we're at now, as of June 30, the actual pension status or funding ratio has gone up to about 81%. The liabilities have dropped over three and a half billion due to the interest rate change.
Speaker 3: We are managing it the way we would. Any other time staying very conservative in our pension and watching it, but the interest rate is actually driven a liability much, much slower than what the reduction in the asset class has been.
Speaker 4: Okay, that's helpful. And then the second question, and this is probably more for Vazu, you know, Derek, you said that you're going to get nine 787s this quarter, and I know that everybody's been – that that has slipped multiple times, and assuming that it does slip again, when I look in the fourth quarter, it does look like you do have the 787s scheduled in – you know, it's in your timetable. If for some reason that were to slip again, like how many points of capacity do you have
Speaker 3: to do those airplanes account for in the back part of the year. Thank you. Yeah, I think it's my guy. I corrected that I think in my comments, but it is nine for the year. We will have two coming in, I think in early August . The first two will come earlier. And we don't have any of them built into the schedule until November timeframe. So if those do slip from August a little bit, we have put in almost a two month pad in those coming in.
Speaker 3: But we don't think it'll impact the fourth quarter a lot. If they slip a lot further, the impact is gonna be into 2023, not a lot in the 2022.
Speaker 5: So, pan microdeg, presuming that all nine dose deliver call had a roughly about a point of capacity in a month.
Speaker 4: Okay, okay, great.
Speaker 1: Walk.
Speaker 2: One more on the next question.
Speaker 2: Next question coming from the line up. Lynn Becker with Cowan. Your line is open.
Speaker 6: Vain Prix.
Speaker 6: Morning. Thank you. Hi. Hi. So just like two questions, the first question.
Speaker 6: Robert, I saw you on CNBC this morning and you talked about the pilot contract. And I know you guys don't like to talk about it, but you did present your pilots with an offer that would increase pay by 17% by 2025, I think. Could you just talk about what happens next in the status of that?
Speaker 3: Sure. So Elaine, thanks for the question. But it's really important for us to take care of our pilots. You know that throughout the pandemic, we had put an offer on the table that would have made our pilots the most highly paid pilots in the industry. We never pulled that back even.
Speaker 3: throughout the pandemic. The United, you know, went out and put out a better offer. And we thought it was really important to get to the table and make sure that our clients knew that we were gonna take care of them. So we've done that. And now we are negotiating very closely and actively. And my hope is that we make progress over the coming weeks and months. Now how that fakes into the financial forecast.
Speaker 3: We haven't put anything in yet. We don't know exactly where we'll end up. And then the point I just make is that with every contract, not only are there changes to compensation and quality of life, but we think that when we get to a contract, we'll have a contract that is that operates very efficiently for the company as well. Thank you. Thank you.
Speaker 6: Okay, great, that's really helpful. Thank you. And then just a follow up question on London. I know Phil I sure about that too. And I heard Scot say last night that London operations will call him up and tell him a day or two in advance they're canceling flights. I don't think you guys have as many flights to London as they do, but are you seeing the same issues? And is that, and maybe how does that get fixed?
Speaker 6: Or is it more a British air problem and a partner problem?
Speaker 3: Now, let me start with this first off. You know, we have a really size law phrase. Do you want to??e you want? one.
Speaker 3: Heathrow. With our Atlantic Joint Business Partner, BA, we offer the largest schedule into London Heathrow. So it's right for our test. One of the things that we've done is we've been able to isolate American's operations into T3. And so that has allowed us with our team to make sure that we're doing everything possible. Now, all that said, there's so much that you can do with your own team members. There's infrastructure like bag systems that you're dependent on Heathrow. And then, of course, BA is incredibly dependent.
Speaker 3: on Heathrow as well. To that end, we're working as a group with our one rope carriers to make sure that we match our capacity to the resources that are there. That will take some time to work our way through. And to that end, maybe I'll have Nate Gatton, our head of government affairs and corporate real estate, add to what's going on and the prognosis for that. Yeah, thanks Robert. We were told last week on extremely short notice to cancel.
Speaker 3: and rebooked passengers over other European points of departure, did things like limit, non-REF travel, etc. And the however mentioned we did that in conjunction with our one-world and NJV partners. It's important to understand that these procedures will be in place until the beginning of next week at which point a new procedure for limiting passengers, the Heathrow is going to be instituted this time by the Slack coordinators. And we don't have a full detail on how that's going to work yet. The new arrangement will.
Speaker 3: probably continue to impact all the airlines serving heat through the second weekend in September . But I would just say we're very disappointed in the circumstances. We have high load factors this summer, yet we're told by the airport at the very last minute that they can't handle the passengers and that we need to reduce the capacity. And just final point, fortunately we don't see these same kinds of caps on the horizon in the United States.
Speaker 3: United States. But we do expect to face similar issues and challenges that additional international locations through the summer. Thank you. Thank you. Thank you. Thank you. Thank you.
Speaker 3: The delay not just closes with this, it's look, we're going to put these measures in place, work with the airport authorities. At the end of the day, we've got a match capacity to the resources that are available. And we're going to push hard to make sure that all the airports that we work with get resources, they need to serve our operations at the side that it should be. So thanks for the question.
Speaker 6: Thanks very much, have a great day, team.
Speaker 6: Great day, team.
Speaker 2: Thank you. Thank you.
Speaker 2: Our next question coming from Delana of Jamie Baker with JP Morgan, Yelana Sulfon.
Speaker 3: Hey, good morning. I guess since Helene brought up London, flew back on American yesterday, nothing but positive things to say. I'll take that up with Scott offline. First question for Matthew. Last quarter, you brought up the phenomenon of corporate travelers combining business with pleasure, extending trips, bringing a spouse, that sort of thing. With another 90 days of corporate recovery under your belt now, is the trend any different?
Speaker 5: I mentioned in our last call when you asked the question that it used to be that as much as 70, 75% of our revenues could be both identified and would self classify itself very binary as traveling only for business or only for leisure. And now that's only 50%. And that other 50% that's there indeed is still there. It tends to be a higher yielding. It comes to us directly through our.com and mobile.
Speaker 5: And it does that largely because it's looking for travel experiences and journeys and things like that, which the industry hasn't been able to make available through the very antiquated technologies, and things like that that we've been prone to using. So yeah, this really has opened our eyes to creating a lot of values for these kinds of customers who are a growing number. I think all of our advantage enrollments are coming out of that population. They're disproportionately concentrated in places where America has just a lot of natural strength because it's...
Speaker 3: for Robert but you know the demand data is obviously you know super encouraging you know you're smaller than you were pre-COVID but you're generating more revenue and that's the great strategy for many business I suppose but
Speaker 3: Your margins aren't recovered and you weren't satisfied with your pre-COVID margins to begin with. So, simple question, what are the drivers of pyrimargin from here?
Speaker 3: Well, Jamie, let me start. We're just, you know, let's...
Speaker 3: From the top and then Derek can go into more detail. Look, there's more margin growth at American. We've resources to Sarah line to file larger airlines. And you know, just plain and simple. We built in a lot of redundancies. And even in June , those redundancies weren't enough. But over time, we know that we can utilize our assets a lot harder than we have been able to to this point.
Speaker 3: And as you take a look, you know, going forward in terms of margins, you know, I know that the third quarter, but we pulled that, you know, from a different flying and that's flying that we would rather do. You know that we have a regional aircraft that aren't in the air. And while we may not have the pilots, we have the other resources to actually fly those aircraft. So the key to us is ultimately to be able to use our assets. So the key to us is ultimately to be able to use our assets.
Speaker 3: at a higher rate. But Derek, go ahead. No, I was going to say the exact same thing. So Jamie, as we look at the second quarter, we talked about 100 regional aircraft, you know, being on the ground and we had probably about 40 mainline aircraft.
Speaker 3: Equivalent aircraft on the ground. So you're talking about 150, 140, 150 aircraft that aren't being utilized. So either two things have to happen is the resources come and we put those aircraft back up in the air we've got to get out those aircraft. So we really want to fly all those. We want to get back to the utilization that we were at. And that is where the marching comes. As Robert said, we are built from a cost perspective.
Speaker 3: to fly those aircraft and today we're not. So that's where it's at and that's where we believe is we get ourselves back up to ASM levels in the 2019. It comes at a much cheaper cost because the assets are here. Hey, Jamie, I'll just add one other point, just from even a second quarter perspective. The month of June was really hard on the airline. 27 out of 30 days, we had...
Speaker 3: severe weather that resulted in ramp closures, ground-stask, ground-to-lay programs, air-splaced flow programs. And in some, we flew at least a percentage point or more less than we would have otherwise. June and the second quarter would have been better. Had we seen a more normal type close to the quarter? So that gives me optimism that there's not only utilization that we can work our way out of, but also more not normal operating.
Speaker 2: kind of a follow up to Jamie's question there. So if you look at versus 2019, how much has kind of inflation been built in? I know you have to come to this regional pilot pay that's kind of built in there. So how much of these kind of increases a structural versus what could we like, if I take your either three Q or your kind of full year unit costs, like how much is structural versus how much could we see kind of go away as you get back to,
Speaker 3: kind of 2019 level capacity? I would say, you know, as we look at the cost structure, the cost structure that we talked about, it's built to fly another 150 aircraft. So we did add costs in. So if you take the third quarter or over the second quarter, the increase is really driven by three things, which is, you know, mainline salaries due to, you know, putting in some of the pilot contract issues.
Speaker 3: The maintenance is up up your rear just because of engine overhaul and things that we're seeing throughout the summer and then the regional pilot pay that's put into place. So, you know, the regional pilot is put into place to get more aircrafts up in the air. So that hopefully, that is there. It's there to stay, you know, the higher cost to fly regional and the new contract that we put in place regional is there. That hopefully drives more aircraft back up in the air. We'll see where that goes. It doesn't the neck part.
Speaker 2: but given how much the gap versus mainline pay has been narrowed or in some cases even higher than mainline pay, is that sustainable from an economic standpoint for those markets? Because you're flying them with small aircraft is a fuel is a bigger impact on those smaller markets. Is that sustainable long term? Or is it the right move right now because maybe because capacity is out of those markets and fairs are high or you just need to get this capacity back up? I was kind of curious as to think in behind.
Speaker 3: that big of a pay increase. Let me start and then I know some others might want to jump in. The answer to that is yes. But the regional network to American Airlines is incredibly important. And whether it's 50 or 65 or 76 seed aircraft, you know, being able to serve those markets in a way that connects to our Uzzah, and then unleashes the breadth of the rest of our network, that's a really compelling offering that achieves higher yields.
Speaker 3: And so even though pilot expense for those regional aircraft will be going up, we're confident that the yields that will be produced, we'll take that into account. But one thing I want to make clear though is, if we take a look at regional pilot pay, but it costs quite a bit of money to become a pilot. And the expectations for a pilot coming out and saying, taking that first job, right, they have changed over time. So as we look forward, I do think that as an industry.
Speaker 3: pilot wages are going to increase and that's something that the industry as a whole is going to have to digest and ultimately that will show up through our cost structure and you know be a factor in terms of how we try to monetize our product
Speaker 5: Yeah, and hey, this is Vasu. I'll just add to what Robert said in this, but for our airline in particular, so much of how we create value at Drive Margins is by creating as many unique O&Es as we can. And you've seen it through many quarters now, where we've flown more capacity in the industry that can produce higher nominal plasm, at least as good, if not better, than what our network competitors are, certainly in domestic and short haul.
Speaker 5: And a major part of that is the regional jet. In this last quarter, we flew 20%, we had 20% more O&Ds than what our next largest network competitor did. And in those markets, we're seeing yields that are 25% greater than what happened through the rest of the system. Indeed, that's what's really driving the yield growth that's there. Many of those markets are where we see the high value blended demand that Jamie asked about earlier. So indeed, not only is it something.
Speaker 5: sustainable, something which is a unique feature of what we do and always will be. Please share that. Thank you.
Speaker 7: Thank you. One moment for our next question.
Speaker 7: Our next question coming from Delana of Twin Fennesburg with Evercore ISI. Your line is open.
Speaker 8: Hey, thanks. Good morning. Maybe we'll start where Savi just left off. So.
Speaker 8: I guess anybody could do what you're doing on the pay side. So it's hard to see how that's a unique benefit. So, you know, historically on the regional side that pay arbitrage was one of the reasons that profitability worked.
Speaker 8: So why are pay increases like this the right answer from a profitability perspective? I understand why they might be the right answer from a small market share perspective, but why is that a better answer than your peers from a margin perspective?
Speaker 3: Let me start. Well, first off, again, the days of being able to go out and attract a pilot for wages that are $40,000 a year, okay, are gone. I don't think that we're going to return to an environment where that is the type of compensation that regional pilots make. Jr dunk like
Speaker 3: It's a different world and for pilots coming in, we're still not talking about exorbitant salaries. And I think that that is something that, no matter the carrier, they're going to face the issues of having to pay higher rate for pilots.
Speaker 3: That said, there is a uniqueness about American Airlines Network that allows us to use our regional pilots in a fashion that produces outsized yield.
Speaker 5: That's what will differentiate us. It's not that, hey, we're gonna go out and be able to have a slight difference in terms of pilot wages, and that's gonna make the difference in terms of the margin we make as a company. Basu, you wanna add something? Yeah, I'll just add to it very simply, the way in an industry that has struggled for a long time to be able to pass its costs into revenue, at least for us, we've seen time and time again with the regionals, is anytime there has been a cost increase, that is the one part of the business where we can most consistently pass it through to revenues.
Speaker 5: For us, this is actually a place where by doing it and frankly by doing it through our wholly owned regional gests, which themselves are very massive airlines, it creates a lot of unique value for our customers, which turns into revenue for us.
Speaker 8: Appreciate that perspective. And then just one thing that's a little confusing to me, can you clear up the difference in characterization on corporate? You know, a couple of your peers call it sort of 80% recovered. Perhaps you carried kind of less of that premium traffic going in, maybe differences in hub geography explains it. But why do you see it as sort of fully recovered versus the 80%? How do I get in erratically to grad student?
Speaker 8: And if much more of it is coming through your own distribution, how do you know it's corporate? I think you're taking the questions. Thank you. Thank you.
Speaker 5: Yeah, yeah, thanks, Deway. And I think this is an important clarification because I think that maybe throughout the industry, people use a lot of different words, or the same words mean different things. Let me be really specific about what we do. When we talk about business, we talk about a trip type that is business. And this is Jamie's question. We're able to go and calibrate it on, you know, we ask customers, did you actually buy for business and we can actually go and look at it?
Speaker 5: wasn't a single person in the itinerary. They didn't check a bag. They did a day trip like the business, right? And so business revenue is that. For us historically, that business revenue has been 40 to 45 percent. It's been 40 to 45 percent.
Speaker 5: Of that, a component of it, historically there is a 60-40 split between what we consider unmanaged or small businesses and really managed businesses. These are large corporations that contract travel globally, typically, right? They use large travel agencies to help them manage the program. And so for us, what we see is that business revenue is indeed 40-45% recovery.
Speaker 5: The nature of it has changed materially though, where that unmanaged business is 125 to 130% recovered, and that managed or contracted corporate business is indeed about 75 to 80% recovered, maybe consistent with other things that you've heard. That's the thing that we've been seeing for some time. We see it's gonna be a relatively durable trend and one that will continue, which is that there's gonna be more and more unmanaged businesses out there. Indeed, we see even with...
Speaker 5: Those accounts that are contracted corporate accounts, as we emerge from the pandemic, fewer and fewer of them are enforcing travel policies or doing a lot of the things that they contracted to begin with anyways. So that's a trend which we anticipate will continue. And hopefully that clarifies the point too.
Speaker 8: It does. Thank you.
Speaker 7: Thank you, and our next question coming from the lineup. David Vernon with Bernstein, Yelana Sultan.
Speaker 9: Hey, good morning guys. So Robert and Eric, I want to talk a little bit about the rate of recovery and sort of either pre-tax or operating margin. You know, you were down on pre-tax, sort of 390 bits, looks into 19 in second quarter. It looks the same on a September level. And I'm just trying to get a sense for when we should start to expect to see those pre-tax margins kind of recover and is that all 100 driven by with low average risk behavior.
Speaker 9: you know volume recovery or is there to do on the revenue side of the cost side to kind of accelerate the rate of change in the profit margin.
Speaker 3: Well, I'll just start, David. Hey, look, this gets back to the question that was asked earlier. We have a lot of redundancy built into the business. Utilization isn't where we need it. I think that as we take a look to the future, we're depending on a couple of things. One is, fortunately, we're in a really strong revenue environment, and as we're looking into the third quarter, anticipating...
Speaker 3: Any environment and as we're looking to the third quarter, you know, anticipating 20 to 24% increases in, in transum versus 2019 from a cost perspective. You know, that's where, you know, we would like to see, you know, costs, you know, come in lower. And the big driver to that is making sure that we fly a more false and schedule and, you know, take out the redundancy that we have built in.
Speaker 3: And it gets back again to, and our quick move, we can get these tests back up. From Riddle perspective, getting 787s back in, and by view is that, you know, that's the name of the game for us as we go forward. And as we take a look into the rest of 2022 and 2023, our goal is to make sure we're utilizing our assets as hard as possible again. This is hard as possible again.
Speaker 9: And well, if I were to play devil's advocate and say, this is certainly the case and we're thinking about this, in a world where we don't get that capacity recovery. The conversation was in the company or was it being deployed around, maybe research at that level, that resource level to some level of lower. Not saying that's a base case, but I'm just wondering, as you guys think about managing the organization through the next couple of years here, if we end up in the world where that next 10% of the SM.
Speaker 9: The demand just isn't there. What is whatever levers that you could pull to maybe you know, take the resource level down.
Speaker 3: Hey, David. I mean, you've nailed it. We will size the airline for the demand that's out there. So right now, there's more demand than we'd like to be servicing. We have the capacity to be able to do it. But at times, it's forward. If that demand doesn't materialize, what we will do is we will size the airline appropriately. We have flexibility within our fleet to be able to take out, you know, I believe, everything that we would need to.
Speaker 3: in terms of maxing demand going forward. And on top of that, then we would size the resources around it, including, you know, all of, you know, the people resources. Now on that front, you know, we have great flexibility because we're hiring so many folks just to make sure that we can run the airline as we need to. So whether it's a people perspective, whether it's a fleet perspective, we have the ability to size the airlines for the demand of factors out there. Yeah, I'll add some numbers there, David.
Speaker 3: You know, in 2023, we've got 95 lease renewals, 2024, 72 lease renewals. We have under-comber aircraft, we have over 200 aircraft. You know, we have deliveries coming in in 2023. We have 31 and 2024, 47. So that is exactly right. What you said is what we would do. We're not there yet, because we believe that the demand is there to get more of these aircraft up. But if we see that, then that is what we would do is not renew leases.
Speaker 5: push deliveries like we have in the past. You saw us last quarter, you know, push out some deliveries on the 7, 8, 9s and make sure that we've right side those. And then we would take some of the unencumbered assets and we would move those and sell those and that put them back up in the air. So that's where we would go. You're exactly right. You're exactly right.
Speaker 5: deliveries like we have in the past, you saw us last quarter, you know, push out some deliveries on the 789s and make sure that we, we write side those and then we would take some of the unencumbered assets and we would, you know, move those and sell those and that put them back up in the air. So that's where we would go. You're exactly right. All right. All right. Thank you guys.
Speaker 7: Thank you, and our next question coming from Delina of Daniel Mackenzie with C.P.R.D. Thank you, and we'll see you next time.
Speaker 5: Oh, hey, good morning. Thanks, guys. Going back to the commentary of more margin growth over time, setting aside market expectations for a recession and just putting a finer point on the prior commentary, all else equal, based on what you see today, are the initiatives in place to offset the structurally higher cost in this next cycle. So just putting a finer point on getting back to margins in the last cycle or actually exceeding those because in the past...
Speaker 3: really challenging and operating conditions, or expected profitability as we go into the third quarter. And I tend to just stay in the black, okay? That's job number one. As we go out, it's still a murky environment out there. We're recovering from the pandemic, and we're doing so well. We know that demand now is back and back strong. There's so many constraints out there in terms of aircraft deliveries, in terms of just people and pilots.
Speaker 3: that look, we think that we're gonna be in a position where we have the ability to improve revenue performance and get higher utilization out of the assets that we have. That's always well for the future, but I'm reluctant to look too far up in 2023 and say that there are certain margins that we will or will not hit. And I'll leave it at that and not anybody else wants to chime in.
Speaker 3: No, but I would say, yeah, that is our goal and that, you know, we know where we were in 2019. We know what those, you know, pre-taxi, Bazaar margins are. You know, getting the asset utilization back up with the demand environment is, would get us back to those levels. So it is all about We're in the appointment.
Speaker 5: you know, moving forward, getting the asset utilization where it needs to be, get the aircraft back up in the air, and we can reach those levels for sure. And hey Dan, let me pick up where Derek left off too. In this way, if you think about American Airlines prior to the pandemic, we flew more capacity than many of our competitors, but we've produced certainly lower nominal prasem than what many of our, certainly what the industry leader at the time was.
Speaker 5: And through the pandemic, we've done a lot. In fact, this is Robert's commentary really. We didn't just simplify the fleet. We also concentrated the network where, 70 to 75% of it is flying in places where we can create really outside consumer value, Sunbelt, MCLA Heathrow, and we really lean hard into partnerships to create value where we couldn't organically. And now we're in a place where really for a couple of quarters, we can fly five to 15% more capacity than the 2019 Prowson Leader.
Speaker 5: to go build off of and from that a lot more as possible and we'll be.
Speaker 5: Yeah, understood. Thanks for that. The question on the regional operation, what does it look like one to three years from now? Same size, smaller, and as you look at the percent of the regional network that's competing against mainline aircraft, where is that today and where would you like to see it? And is that an opportunity for helping to drive margin expansion?
Speaker 3: Daniel, this is absolutely an opportunity to drive margin expansion. First goal is to just get all the aircraft that we have back up and flying. And so, our fleet is of regional aircraft, this roughly 600 aircraft. Love to get those back up, and over time, there will be changes in terms of mix to that fleet, but it will be based on how effective it supports our hubs and the rest of the main line operation too. So...
Speaker 3: First goal and one that I think will take the next couple of years for sure is to get all 600 backup flying. It's a full 600 backup flying.
Speaker 3: one that I think will take the next couple of years for sure is to get all 600 back up the fly. Thanks for the time again.
Speaker 7: One more for our next question.
Speaker 2: Our next question coming from the line off Sheila Kayagul with Jeffery. Your line is open. Hi. Good morning, guys, and thank you for the time. I echo Jamie's comments. I don't know if you guys were screening for airline analysts going into Heathrow, but my experience with American was pretty good. All right. That's something to hear. Maybe just talking to your other large hubs, if you could talk about unit revenue in JFK and LAX. You mentioned in your prepared remarks it's outperforming the total system. Can you maybe provide some color on that?
2019 on an absolute unit revenue basis across the system. Yeah, I think the question is to and the answer is both to Robert specific points. That is compared to our system in absolute, but let me try a little bit of context behind the point. You know for us historically in New York, especially New York, Kennedy and L.A., American Airlines typically produced unit revenues that were, let's call it 90% of what the
So we're able to go and serve these markets with higher unit revenues as it bleeds through. It's something that we tend to look at really, really closely. But what we're really most encouraged about in New York and LA is this isn't just a function of going in there and cutting a bunch of flights and growing razzum. We've improved the consumer proposition that's there. In New York, certainly, we, between American Airlines and JetBlue, our Northeast Alliance has put back more capacity sooner.
than anybody else. We've launched new routes. We've taken the American Airlines medal in the markets like Doha and India that two or three years ago would have been relatively unthinkable. And our consumers are responding. We're seeing originating markets share both in that partnership and also our West Coast partnership with Alaska. And that's coming directly away from our large network competitors. So we're encouraged by the whole thing. And really the context for it is, if this consumer proposition is starting to bleed its way and that you have revenue.
because of the due regional operations.
Oh, because of subdued regional operations. Got it. You know, it's really difficult to do. What do we've actually taken a couple of cuts at it? Because the reality is that this is such a sort of unprecedented time in the industry where there's so many constraints on the infrastructure, so many issues with aircraft deliveries, resources, things like that. The target really isolate what affected it. In fact, what do we look at it? What we find is...
Through the pandemic, we've been able to sustain a lot more of the conactivity of our system through the regional jets. And those places where we've sustained the conactivity are really what's driving our yield growth. And it's bringing in new customers that are not in necessarily large coastal metro areas. So for the Derek's commentary, the regional jet, especially the Holyo Regional Jet, is really key to helping our nameline fleet grow and recover its utilization.
When I look at other airlines, I think you guys are now the one that's not pointing to a sequential acceleration in total revenue growth 2Q to 3Q. Why do you think that is and are you just trying to be a little bit more conservative given what's going on out there in the macro environment right now?
Well, let me start by saying we're actually really encouraged by demand. The demand for our product is then, you know, high in a historical way, that continues. And indeed, the way demand is coming back is both really encouraging and somewhat different than what was there before for my earlier commentary. But really, when you see when you go from 2-3 to 3-Q, it's, first of all, just a change in capacity production. We're taking a more conservative view of
how we size the airlines of the resources we have for Robert's comments, that impacts a lot of it. And then beyond that, really there's a wide range that we have in unit revenue production because we're really encouraged by the trends that we see, but if we've learned anything over the last couple of quarters, things could go change a lot. But right now our optimism, we've seen nothing really, and clearly found food out of our optimism in any way.
Okay, understood. And then, I've just been thinking, given the operational challenges across the entire industry, do you think that's going to influence the way maybe corporate willingness to travel come the fall? Have you or Robert had any conversations with kind of your big managed corporate clients that have maybe expressed concerns over this operational reliability? I wish I could have just curious your thoughts on that. Thanks.
Look, I'll start and then others can pick up too. Part of it, this kind of goes to some of my earlier commentary. One of the things that we're seeing is that large contracted corporations are starting to just use different tools than what they had before. Prior to the pandemic, if corporations wanted to go and manage travel behavior, they could create more elaborate travel policies and hire a range of consultants and other firms to help manage that.
But now through the pandemic, you know, video conferencing has become normalized. There's a lot more flexibility in the workplace and things like that. And so what we see actually is, in a lot of cases, corporations, though they may be, they may not be enforcing travel policies as much as there was before, there is a lot more latitude. And so we'll see customers who will often supply out of their travel policy will pay more for a service than what might have been there before.
because we continue to see demand come in and encourage about where it may go, even if it comes back differently.
Hey, Andrew, I'll just add one other point. And it's just this. Look, travel is coming back in record numbers, which is fantastic.
And we have set really, really high standards for ourselves in terms of operational reliability. We start out every day doing everything we can to get every single pass, every flight, head, where it used to go on time.
But if you take a look at really what's going on in the second quarter, okay, we're not that far in terms of overall operating performance from where we have been historically. As a matter of fact, in the second quarter, American did better than it did in 2019. And if you take a look back at prior quarters of history, we're not that far off from other points as well. The fact of the matter is that, you know, look, we have operating conditions that we have to be sensitive to.
I can't nor can anyone else do anything about 27 out of 30 days of really severe weather and a number of our hubs that just ultimately result in flight canceling and then rolling from day to day. But when we talk about weather, please understand this. It's not weather, it's safety, okay? When there are traffic control programs, when there's weather, when there's, we're doing it.
We're taking actions to make sure that we ensure the safety of our folks, not just our customers, but also the people on the ground. When ramps close, it's due to lightning strikes.
And so those kind of things are things that we're always going to take into account. And you know what? There will be seasonal variability to what we do. Everybody's working very hard. I know that our government partners are working very hard. The airlines are working very hard. And I know that the rest of the world will get to where the United States is, which in the scheme of things, the United States is doing very well compared to the rest of the world.
Very clear. Thank you very much.
Next question coming from the line-up, Stephen, trying from 3-E on his open.
Good morning everybody and thanks very much for taking my question. I just wanted to go back to something you mentioned earlier about investments that you've been making that have affected your near term cost. I think people are pretty aware that you guys are making a big effort on the pilot side and that makes sense. Could you elaborate maybe outside of crew whether you're making digital type investments or other processes that can...
improve your throughput. Thank you.
We're super excited about a lot of the digital enhancements that we've been making. I'll separate them, as Robert says, into our main goals of operational reliability and profitability. On the reliability side, I've done so much to really shore up how we respond in an irregular operation to bring our crews back together. We've also really enhanced some...
Focus on how we do gating at some of our larger airports like Dallas and Charlotte and when we get better at that what happens is we reduce the taxi time So we say fuel we dedicate more time to the time and we better utilize our asset We've also done some Interesting work in creating algorithms that help us especially in markets like Charlotte where we get these tough up thunderstorms where we can actually slow down the operation a little bit rather than use sort of a
We've done a lot of improvements in over booking technology. In a world where there's no change fee, there's a lot more volatility when it comes to cancels, closing cancels, and no shows that we have to have a better over booking strategy for that. You've heard Batsu mention how important our partnerships are and how we rely on them for revenue generation. We need to create a much more seamless experience for our customers when they're traveling on us and, for example, JetBlue or Alaska.
And finally, you also heard Basu talk about the loyalty program and how we have used it to really grow our co-grant spend, our enrollments are up, and engagement with the program is really up. So those are just a few of the things that we're doing.
That's very helpful. Let me leave it there and thanks very much.
Thank you, now will not send a call back over to Mr. Isle for any closing remarks. Thank you, Mr. Isle. Thank you, Mr. Isle. Thank you, Mr. Isle. Thank you, Mr. Isle. Thank you, Mr. Isle. Thank you, Mr. Isle. any closing remarks.
Well, I'll just I'll close with me. We're going to go to media. We're going to go to media next. OK, great. Media next. Thank you.
Ladies and gentlemen, we will now move to the media question and answer session.
And as a minus to ask a question, please press star one.
One moment for our first question.
The first question coming from Allison Sato, Yelena Selpin.
Hi, thanks so much. Just curious if you could share anything, if you're seeing any delay or disruptions that are tied to not having enough spare parts or engines, if there's any kind of supply chain types of issues you're seeing there. Thanks, Allie. Hey, I'll have our Chief Operating Officer, David Seymour, take that one. Yeah, Allie, I appreciate the question there. Yeah, that's something throughout the pandemic that we've been monitoring very closely and working with our large OEM partners throughout to stay ahead of that. So we've been doing a lot to.
provide forward looks at what our requirements are. So while we know the supply chain systems are tight, we've taken a lot of steps throughout the pandemic to stay ahead of that. And so right now we're not experiencing those, but again, we know that they're not far away and we're gonna continue to monitor them closely. Yeah, and Ali, I was gonna say, the biggest supply chain issue has been the aircraft manufacturers themselves. We haven't had the kind of delivery certainty that we'd like. So.
We know that our friends that are following their bus are working hard to get that back on track.
And then I guess just on hiring, do you still have a lot of hiring left to do or when has it shifted more towards, you know, just training and getting everyone up to speed and sort of level up to level of experience?
So, hey, I'll start on this. Look, the American Airlines, I know we have 12,000 more team members in position, but that's resulted is the result of 20,000 team members that we've had to bring on board to get up to speed. We're behind 2200 pilots, both this year and next year. We've done a great job, I think, in just about every other rank within our team to get the right keep on board. to get the right keep on board.
So, you know, from an American Airlines perspective, we're doing a good job. Of course, we'd like from the regionals to have, you know, more supply of, you know, new pilots. But we're working hard on that. Over the long run though, coming to American Airlines is not only a great career, great competition, great benefits. The time to get here is now because if you ever wanted to get in and build some yori or take on, you know, a new role and, you know, lead, it's a good time to come to America.
Thanks. Thank you. One moment for our next question. Okay. Okay.
Our next question coming from the line of Mayor Sonson with Bloomberg, Richard Kill?lmer Selpin.
Hey, thank you. Derek, I wanted to see if you could clarify one thing. You said you have 140 to 150 planes on the ground, but you referred to mainline equivalent aircraft. So can you be a little more specific? You've got 100 regional jets, and then what makes up the rest of that number?
Yeah, the mainline equivalent, our mainline aircraft, but what we've done is instead of pulling aircraft out of the schedule, we lowered the utilization on those aircraft. So if you normally fly 10 hours a day, we now fly nine hours a day. And if you take that hour across the entire fleet, it's equivalent to about 44 or 45 aircraft. So we haven't really pulled anything out of the schedule. We've flown it. Now as we look forward, I think the right answer as we pull down capacity in the third and fourth.
have more aircraft for maintenance and more aircraft for spares.
Okay, great. And how long do you expect that conditions in the industry are going to require American to limit its capacity?
Well, look, Mary, if I do the answer to that one, it's really good position. But hey, look, I think it's dependent on supply chains, aircraft manufacturers, and ultimately, pilot supplies to get all back in sync. We're doing our part, and as we've talked, we look at it from a mainline perspective, kind of getting everything back fully utilized over the courses next year.