Q1 2023 American Airlines Group Inc Earnings Call
Speaker 1: Thank you for standing by and welcome to American Airlines Group's first quarter 2023 earnings call. At this time, all participants are in a listen-only mode.
Speaker 1: After the speaker presentation, it will be a question and answer session. To ask a question during the session, you will need to press star 1-1 on your telephone. I would now like to hand the call over to Scott Long, vice president of Investor Relations and Corporate Development. Please go ahead.
Speaker 1: Thank you, Ateef. Good morning, everyone. Welcome to the American Airlines Group first quarter of 2023 earnings conference call.
Speaker 1: On the call this morning with prepared remarks, we have our CEO , Robert Isom, our CFO , Devin A. and a number of our other senior executives are also in the room for the Q&A session.
Speaker 1: Robert's going to start the call this morning with an overview of our performance, and Devin will follow with details on the first quarter and will outline our operating plans and outlook going forward.
Speaker 1: After our prepared remarks, we will open the call for analyst questions, followed by questions from the media. To get in as many questions as possible, please limit yourself to one question and one follow-up.
Speaker 1: Before we begin today, we must state that today's call contains forward-looking statements, including statements concerning future revenues, costs, forecast of capacity and fleet plan.
Speaker 1: These statements represent our predictions and expectations of future events. The numerous risks and uncertainties could cause actual results differ from those projected.
Speaker 1: Information about some of these risks and uncertainties can be found in our earnings press release that was issued this morning, as well as our form 10Q for the quarter and the March 31, 2023.
Speaker 1: In addition, we'll be discussing certain non-GAAP financial measures this morning, which exclude the impact of unusual items. A reconciliation of those numbers to the GAAP financial measures is included in the earnings press release, which can be found in the investor relations section of our website.
Speaker 2: A webcast of this call will also be archived on our website. The information we are giving you on the call this morning is as of today's date, and we undertake no obligation to update the information subsequently.
Speaker 2: Thank you for your interest in joining us this morning. And with that, I'll hand the call over to our CEO , Robert Heifel.
Speaker 1: America is off to a fantastic start in 2023.
Speaker 1: This year, we remain focused on reliability, profitability, strengthening our balance sheet, and holding ourselves accountable along the way. This morning, American reported a first-quarter profit for the first time in four years, an improvement of almost $2 billion versus the first quarter of 2022.
Speaker 1: The American entered the year in a position as a strength after the outstanding results our team delivered in 2022 and we built on that momentum in the first quarter.
Speaker 1: The American Airlines team ran a reliable operation for our customers and delivered profit for the quarter, beating our initial EPS guidance of approximately breakeven.
Speaker 1: Our second airline's team ran a reliable operation for our customers and delivered a profit for the quarter, feeding our initial EPS guidance of approximately break even. Let's talk more about our first quarter results.
Speaker 1: We produced record first quarter revenues of nearly $12.2 billion, an increase of 37% versus 2022, 9.2% more capacity year over year.
Speaker 1: Demand for our product remains strong. We continue to be very pleased with our domestic and short haul international unit revenue performance. We've also seen noticeable strength in long haul international demand.
Speaker 1: where we have allocated approximately 80% of our second quarter capacity growth year over year and continue to see strong yield performance carrying into the summer months.
Speaker 1: Demand for our premium cabin has been remarkable across all entities.
Speaker 1: with premium paid load factor and RASM exceeding 2019 levels.
Speaker 1: We're well on our way to a fully recovered business, but we aren't there yet.
Speaker 1: The recovery is still unfolding and the current demand environment remains dynamic.
Speaker 1: We continue to learn about evolving customer preferences and changing demand patterns.
Speaker 1: We've spent the past three years building a resilient airline that can adjust to the variability in demand. We remain nimble and continue to adapt to customer behaviors, both in terms of when and where customers book travel and how we service them.
Speaker 1: Importantly, customers continue to show preference for our Direct Channels and Travel Rewards program.
Speaker 1: Our co-brand growth continues to outperform consumer spending in line with advantage enrollments, which are now approximately 60% higher than 2019, on capacity that has not yet fully restored to 2019 levels.
Speaker 1: the first quarter of 2022.
Speaker 1: Now, let's turn to the operation. The American Airlines team delivered a stellar performance in the first quarter. We operated more than 476,000 flights in the quarter with an average load factor of 80%.
Speaker 1: We deliver our best ever first quarter completion factor and control of a completion factor, safely completing more flights.
Speaker 1: and more on-time flights than anyone in the industry.
Speaker 1: We're performing better than ever from an operational perspective.
Speaker 1: We delivered this strong performance in the first quarter despite the nationwide ground stop in mid-January due to the NODA outage and several disruptive weather events that impacted our hubs across the country. Our largest hub, DFW, was greatly impacted by winter storms in January and February and tornadoes and severe thunderstorms in March.
Speaker 1: Our strong operational performance is driven by our team's focus on running a safe and reliable airline and taking care of what we can control.
Speaker 1: Investments in our operation have enabled us to anticipate the operating conditions ahead of us and recover quickly when the unexpected happens.
Speaker 1: We will continue to invest in our team, fleet and technology so that we are well prepared heading into the summer and the rest of the year.
Speaker 1: I also want to thank and acknowledge the DOT and the FAA for their efforts to reduce congestion in New York, which will certainly help the industry deliver more reliably for customers this summer. And now, over to Devin to share more about our first quarter results and the outlook for the second quarter. Thank you, Robert.
Speaker 2: I'm tremendously proud of what the American Airlines team accomplished during the first quarter. As Robert mentioned, we ran a great operation and delivered on our financial guidance for the quarter, keeping us on track with the full year plan we outlined in January .
Speaker 2: During the first quarter, excluding net special items, we reported net income of $33 million for adjusted earnings per diluted share of 5 cents.
Speaker 2: This result is better than the initial guidance we provided in January , driven by strong revenue production and slightly lower fuel expense during the quarter. As Robert mentioned, we produced record first quarter revenue of $12.2 billion, up 37% year over year.
Speaker 2: Unit revenue is 25.4% higher in the quarter on 9.2% more capacity. Unit cost for the quarter, excluding net special items and fuel, were 1.4% lower year-over-year in line with the midpoint of our initial guidance range.
Looking ahead, we feel great about the industry and what's to come for America <unk>.
The actions that we've taken have put us in a position of strength now allowed us to capitalize on the recovery.
We'll continue to hold ourselves accountable to produce stronger margins generate free cash flow strengthen our balance sheet and run a reliable operation ultimately, creating more value for our customers and shareholders.
And with that operator, please open the line for analyst questions.
As a reminder to ask a question you will need to press star one one on your telephone again Thats Star one one on your telephone to ask a question. Please standby, while we compile the Q&A roster.
Okay.
Our first question.
It comes from the line of David Vernon of Bernstein. Your question. Please David.
Hey, good morning, guys. So Robert I Wonder if you could talk a little bit about intra quarter trends at how second quarter sorry.
It's shaping up from a booking perspective I think investors.
Investors are have been very sensitive to potential disruptions or changes and maybe business travel trends.
Got it Hasnt gone through the banking crisis here I am wondering if you could just kind of give us a sense for.
What you are seeing day to day in the booking curve and how that is going back to your confidence in the outlook for summer travel.
Thank you thanks, David I'm going to send that straight about it yeah, Hey, David. Thanks for your question look we remain encouraged by the demand environment. That's out there we see strong bookings strength really across the airline network.
International of course long haul international is seeing a lot more bookings come in a lot sooner really reflecting the pent up demand thats been there in many markets and there really haven't been opened for the better part of four years domestic we continue to see historically strong booking and indeed, a resumption of a lot of a lot.
More people booking further in advance than what they did last year certainly more people willing to go and shift from a peak time flight to a trough time flight which reflects.
Changes in.
Work schedules through the week, but by and large we remain encouraged by what we see out there.
I'll add to that too that <unk>.
Consistent with a lot of the trends that we've seen in past quarters.
We continue to see a shift from a traditional business style trip to more blended trips and more discretionary trips.
Q1.
<unk> 30, 35% of our volume was leisure discretionary based trips, 35% blended in trips and 30% business trips that compares to first COVID-19, where it was more like 30 leisure 30 blended 40 business.
But we remain encouraged by it.
But we're seeing that shift we find that very often.
Blended yields that we see are coming in at values that are 8% to 10% higher than the very traditional business trips that they replaced so we remain encouraged and see a lot of the same trends we've been talking about for the last few quarters.
Thanks for that and then Devin.
Can I ask you to talk a little bit about the maturities coming up in the next couple of years.
Taxes.
You mentioned youre going to be paying down of around 2 billion of debt this year.
How should we be looking from a liquidity perspective at the end of 2023 based on the guidance and then what is that and how does that compare to the maturities in a kind of a two to three year time frame.
Sure.
Yes.
Start this year.
<unk> talked about.
Our total debt paydown being at approximately 10 to 11 $10 billion to $11 billion from our peak levels of summer.
Summer of 2021 for this year, we expect total debt to be down about $3 billion versus 2022.
In terms of where our cash will be at the end of the year. Obviously, we've talked a lot about a $10 billion $12 billion target for liquidity. We are well ahead of that at the end of the first quarter. When we think 10 to 12, I generally think of it as and we'd like to be around $10 billion of liquidity as we are late in the year at one point for liquidity.
The $12 million during the year at this point, we're well ahead of our target liquidity I expect we would definitely be on the high end of targeted liquidity.
If we hit the midpoint of our guidance this year.
And then just longer term 2024, we have a little bit of a step up in maturities I think most people understand in 2025.
We have a higher debt tower, we proactively address some of that we have a refinancing in the first quarter.
The remainder of it we will seek to either pay down or refinance a portion of it depending on our cash flow production over the next couple of years.
Alright, thanks, guys.
Thank you.
Our next question comes from the line of Helane Baker.
Sorry, Helane Becker of Cowen Your question. Please helane.
Thank you very much operator, hi, everybody and thanks for the time.
Just two questions one I'm wondering on operations Robert you mentioned in the clutter that you were.
At the top of on time performance.
So on.
Im wondering if you could talk about some of the learnings that you've had in being.
With like the Dallas.
Storms in the no Tam shutdown and then what happened in Fort Lauderdale.
Earlier. This month, just just how that will carry through to prepare yourself for the summer, which is likely to be pretty.
Difficult and then my second question is I'm wondering if you can talk about.
The changes you made to MDC and travel agent bookings and how Thats being received thank you.
Thanks, Helane and good to hear from you Hey, we've learned a lot over the last year, let's face it.
Some of our 2022 is pretty rocky and during that time, we got right to work to make sure that we plan the airlines that debt for the resources that we have and.
That's played out over the course of this past year, we got stronger and stronger as the 2022 closed and as we progress throughout 2023, what I'm. Most encouraged about is really when the conditions permit we fly an exceptional airlines, we complete nearly every flight.
And that bodes well for the summer I know that theyre going to be issues.
And we're going to have to stay on top of things, but we've never been more prepared from the perspective of having the right resources the right place and that's everything from <unk>.
At the station level to pilot and flight attendants.
Mechanics, so we feel really good about where we're heading but your question about hey, you know issues happen. So were planned well, but in terms of those issues and disruptions theyre going to happen. We had severe thunderstorms here in DFW last last night, but we have new tools in place.
That allow us to build back from any disruption and a lot better fashion and one that quite frankly protects more passengers.
So our miss connection rates.
<unk> are very very.
Manageable right now and as we take a look going forward the tools that we've put in place system called heat.
That is appropriately named as heat buildup at Thunder storms.
Happening in Destructions happen, what we do is we actually put in place delayed programs and cancellation programs to protect the system and predict the most number of customers and ultimately allow us to recover quicker now. This is part of a bigger longer range plan and I'm, probably going to give more of an answer.
Figure that you need but after the last.
Five years of integration in the pandemic and we're at a point, where we can really.
We do a lot more with the assets that we have we have.
A new a new CIO here can S. Jairam I wanted him to just talk quickly about a technology first mindset that we've introduced is really going to get at the heart of those questions that youre, bringing up about operational reliability cash yeah. Thanks, Robert over the past seven months that I've been in this role our technology team.
Team has refined our playbook to work better and faster.
With our partners in the therapy areas of operations and commercial for delivered technology distributions that meet and exceed the expectations of our customers and team members. So going forward. We're really excited that we can bring new additional solutions to the market in a much more agile manner than the past improve our customers' ability to sense all of it.
Needs with American distributions like heat that improve the resilience of our daily flight operations Lastly, such a project team working very closely with Devon, and the finance team fitness appropriately and modernizing our technology stack, we have some bit of a additional capabilities in the future I can now turn it over to Vasu and David Appreciate some example substitutions.
We are excited to bring to the market and the rest of the year.
Hey.
Helane Thanks for thanks for your question.
I can I can pick up a little bit on the technology point, but let me let me speak very directly to your.
Your question about distribution.
It's really important to understand our changes through the lens of how our customers have changed because that is our true north.
Understanding that and building out our enterprise around that is how we create value.
Earlier, I mentioned, how the transaction mix has changed and has been changing but what's really important is.
And that transaction mix.
How our customers consume our product has changed materially. So if you go back to 2019 and listen all the unique customers took a business trip.
Top 60%.
Business traveling customers produced well over 80% of all the business travel revenue at American Airlines. When you look at that in 2023 that same population of unique customers and actually spending 15% more on slight revenue with the airline however, the mix of their trips has changed materially.
Used to be that over 50% of their trips were purely for business purposes, now less well less than 40% of their chips are purely business purposes.
Let's call. It 10 to 15 points of shift has gone pretty much entirely to blended style trips, but it's gone entirely out of the travel agency distribution channel and into our direct channels like dot com and App.
So thats been.
We've been observing really for the better part of the last year and the trends continue to accelerate so and you've seen that all across our commercial changes we've actively repositioned the network, where we fly less in short haul markets like say, New York to Chicago, but we started a new markets like New York to Tulsa.
We've done things with our loyalty program, our advantaged travel rewards program to make it easier to go and earn miles for things, which arent just taking a historical business trip, which were fewer of those travelers are doing it but the next and very important part of how we sell and service our product and what we've realized is so many of those customers are going direct frankly, because their use.
To a consumer experience at any other retailer, where they can buy the product and shop digitally and they can service. It themselves. So when you look at it through that lens. Our changes are really kind of a simple by the end of Q2.
Anything that we sell and U S point of origination our customer will be able to go in service by end service digitally through our dot com and our App.
Which is a huge change from where the airlines.
In difference from where many of our competitors are.
Traditional travel agency technology doesn't enabled us to roll those same services out through it but some of the new travel agency technology Thats, there that people like sabre and Amadeus travel quarter offering enable us to do exactly that so as the summer rolls on you will see us rolling more of our selling and servicing.
Tools into this new distribution capability, and Thats, something which ultimately should be beneficial to travel agencies that will enable really forward thinking agencies disturb our joint customers a whole lot better and so far we've been actually extremely encouraged we've had three or four weeks now where we've been migrating more services and more.
More of our fair products into this new distribution technology.
And the results have been extremely encouraging so if you look at first quarter.
About 10% of our revenue was booked by travel agencies. We're now virtually all of their future bookings are coming through new distribution technologies. We've also seen new travel agency competitors emerge and theyre growing at an exponential week to week right and they are really disrupting the traditional travel man.
Agent company model at their current rate of bookings.
They will be as large as any of the three largest travel management companies in terms of booked a revenue.
Probably by this summer.
And what we're really encouraged by is everyday a new corporate customers coming to us asking about how they can connect directly to us or which are they can go and best source all the fair content of American Airlines. So.
The important thing is really for US we are making are changes it really in service of where our customers are going we think it's something which can be great for for the travel agency community, but above all the end consumer is going to benefit from.
More competition better services lower cost of sale. So we're encouraged with where this is going.
Thanks, Lee and I appreciate you letting us go longer than that because you can tell your question gets to the heart of everything that we're doing from a strategic perspective operationally commercially.
Thank you so much for those answers, they're clearly very passionate about the business there. Thank you.
Thank you.
Our next question.
It comes from the line of Duane <unk> of Evercore.
Evercore your question please Duane.
Hey, Thanks, good morning.
I have a network question, maybe a little bit of a philosophical one.
For Vasu of Robert as we think back to historical.
Historical periods for the airline industry, there were definitely periods where international growth.
Was funded by domestic capacity cuts when international growth prospects were more attractive.
And if we think about the experience through the pandemic, where everyone was domestically focused and Florida focused.
Because that was the only thing open now slowly market by market.
Rest of the World has gradually become Florida too.
You all now have a much larger opportunity set.
So why don't you think we're seeing some of the domestic bets, which were totally appropriate in the pandemic context being rolled back.
What do you think the set of circumstances that would drive.
A better portfolio outcome by funding international growth with with domestic cuts and appreciate the long winded philosophical question.
Hey, Duane I'll I'll start with I think some.
<unk> in the business and then as you can.
Do more from a philosophical standpoint, the first I just think it's important for.
People that know that American is growing less than anybody else.
This year is that.
Say by choice I mean, let's face it.
We've run into issues with the constraints that we are all aware of manufacturers haven't been able to deliver aircraft on time and we've had pilot constraints that have gotten in the way and that has.
To some degree shaped what we've what we've been able to do.
So we have I think almost 150 original aircraft. They are still in the ground and we're not serving a lot of cities small cities that really have lost service and we'd like to get back into and so I think that that's an opportunity for us and then in regard to international <unk>, who will talk more about it but that is absolutely the largest portion of our growth.
In this coming year.
It's largely been constrained by.
Other issues assume yes, that's right I'll pick up from there and I'll tell you I. Appreciate your long winded philosophical question. My Boss tells me that I'm prone to be long winded and philosophical, but I'll be very focused and philosophical for this one.
This is a topic that we've thought about for really a long time since the start of the pandemic first to pick worked it out where Robert left off when you look out.
Though our our capacity mix is about seven.
75%, 80% short haul versus long haul eight.
80% of our growth as we head into the next quarter is it really all the what we call the build back of a long haul network on a more efficient fleet base. So we that's the start of more as.
As indeed more airplanes come from from Boeing.
Also what's very important to note.
Is we very consciously went and built our fleet and our network through the pandemic. So that it can go in and be nimble and produce the level of earnings growth across the business cycle. So importantly, when you look at us right.
Versus 2019, we're about 45 wide bodies smaller 45 narrow bodies larger that's material because in the long haul business and we've seen this over time if.
It's the most volatile part of our relatively volatile business is not capital intensive part of a capital intensive business and it can be very complex operationally too so.
So what we found is that actually by being very focused operator, a simplified fleet things like that.
That enables us to go and respond to demand a lot more.
Appropriately so.
Further to that to what Robert said the way we go about doing that is actually by making as many unique origin and destination markets as we can.
And our primary asset for doing that is the large narrow body, whether it feels wide body jets are filled regional jets and the more of that connectivity. We can make the better. It is so what youll see in our international network do you see it already is really an orientation around places where we can leverage our domestic strength for example, Dallas.
Fort worth of Charlotte, which will have four trips to London, This summer or markets, where we can leverage our partnership network worldwide JFK to Delhi, where we're able to connect to the entirety of the Qatar Airways Network for example.
We grade that performance really on are we generating as a system are we generating more.
Industry revenue more of our share of industry revenue versus capacity Sharon when you look back at the last four or five quarters Thats certainly been the case.
Large we're able to collect more revenue than the capacity share that where we're flying so we're encouraged by that this summer and long haul is going to be a seasonally.
And probably historically strong long haul summer Ah overtime that is going to go and normalize and we will be able to grow into that and we will have a fleet that enables us to go serve it as on where the demand is Duane now just one other piece of kind of real news on top of that it's just that yes.
Add to that OLED based and I mentioned, the 150 aircraft, but we're not funding from a regional perspective.
Think that we've seen.
The low point of support ability and as we take a look for through the rest of the year, that's going to be built back and.
I don't know if it will be back.
<unk>.
Oh, probably 100 aircrafts, Dan, but I look out over certainly the next 18 24 months to be in a much better position just from utilization and also being able to serve some of these smaller cities and contributing to what vasu et cetera from a philosophical perspective.
Okay I'll leave it there. Thank you for the detailed thoughts.
Thank you.
Our next question comes from the line of Andrew the Dora.
Think of America. Your question please Andrew.
<unk>.
Hi, good morning, everyone and thanks for taking the questions.
Sue maybe sticking with the philosophical a little bit I'm sure. This is still a real tough time to give some revenue projections I guess when you sit down with your when you sat down with your team over the last couple of weeks, which entities today are easier to forecast than maybe some others are.
Yes.
That's an excellent question.
This business is nothing if not dynamic.
Look in our system probably.
Probably a lot more forecast clarity in our short haul network than our long haul network.
Not exactly to any particular demand trends, but just simply to the fact that we've been we've been operating a big domestic system for a really long time. So if you go back and look at last year.
The demand environment and domestic where it was it was strong as we headed into the second quarter. It was made stronger by the fact that.
So many long haul markets, where they were either close or it was really difficult for customers to go through but by being bid last year and by continuing to be be much bigger than then.
And then what many other airlines, where it just gave us a better sense for any amount of demand projections, both things such as.
How far from departure the booking curve is how.
How we can position our network based on demand changes.
<unk> customer profiles and taste, so right now theres, probably a little more accuracy around the short haul network.
Then the long haul network.
Great. That's helpful and then just a.
Second question here.
I guess more near term just in the update this morning, I know you reiterated your full year capacity and earnings goals, but nothing around revenues or costs.
Your thoughts here changed at all or are you just kind of holding in the historical revenue fueled relationship. Thanks for taking the questions.
Yes, I'd just say, we're pretty early in the year for an update on.
Either revenue or fuel so, we're leaving no doubt a royalty on the X.
Our CASM ex fuel basis, we still feel really good about our initial guidance.
CASM.
Three to five for that period, I think we'll be right around the midpoint of that at least as we sit here today.
Great. Thank you.
Thank you.
Our next question.
It comes from the line of Ravi Shanker of Morgan Stanley .
Your line is open Robbie.
Thanks, Good morning, everyone.
Feels like the next kind of 12 to 18 months are going to be pretty important for managed corporate as a lot of the kind of old grandfathered enterprise corporate contracts come up for renewal.
And you obviously have a few more competitors, but as you start to enter the game and maybe the size of the pie is also a little bit smaller at least in the short term.
How are you guys thinking about aware American is positioned relative to kind of some of the enterprise.
Historically competitors as well as maybe some of the new entrants in going up going off of that managed corporate share.
Hi, Ravi. This is this is vasu.
Ill pick up your question.
With reference to some of my early comments here.
Our customers have changed and probably where that changes the greatest is with contract incorporations.
So in <unk>.
<unk> 19, our mix of business revenues I said, there were 40% that was.
Kind of a two to one split between non contracted customers and contracted customers now what we're seeing and what we've been seeing is that relationship is more like a three to one split between non contracted customers and contracted customers. So there is the nature of the travel that's out there.
Changed a lot.
But also.
The way in which we think about corporates has changed as.
As customer tastes have changed and if you think about it for so many corporate.
Really when companies arent back to work, it's really hard to go and get people back on the road and we see that so.
Where we are today, 95% of our corporate accounts are telling us that theyre not enforcing a travel policy in which they require an employee to fly one airline versus another and across our contracted base over 60% of our corporate contracts don't fulfill the the volume and share goals that we've set out.
And which is completely understandable that the marketplace has changed.
Companies are struggling to bring people back to the office.
Practical to think that it's difficult to get them back on the road.
But that said among that terrific.
My earlier comments that same base of customers.
Customers, though they may be traveling less on a contracted deal they're actually spending more money traveling on the airline and indeed that base of customers are doing things that they are the ones, who are most likely to acquire or credit card or where they have our credit cards. They are the ones most likely to go in and drive up spending on it.
So we're actually really encouraged as contracts come up for renewal because its a chance between us and some of these corporates to really figure out how we go in.
Structured deals that are fit for the purposes.
That these corporations have today and tomorrow.
So we're encouraged by that we think that the marketplace is changing very much we're looking forward to changing with it.
I understood that's really helpful and maybe a quick follow up I know, there's been some commentary on kind of the domestic network on this call already but just do.
Put a fine point on it I guess, given your U S domestic exposure relative your network peers.
Is that a lot of stock slack speculation on the strength of the U S domestic traveler.
Yeah.
And any kind of definitive word can you say that you can say about.
Whether youre seeing that strength in demand continuing the strength in RASM, continuing or are you starting to see cracks or.
Potentially you kind of delaying or putting off trips domestically going up that would be helpful.
But look I would say this revenue.
What we see out there is demand for travel has never been.
Probably more aspirational, nor more intentional that we.
We see not just people continuing to book further in advance they're doing things where.
They want to put more spending on credit cards. They want to go earn more miles because theyre aspiring to take future trips that are out there and they are keen to find more ways to go and do that especially as they maybe the companies may be requiring them to travel less but there's also just a lot of intentionality of it right like what we've seen across our.
<unk> is <unk>.
You look at our traffic composition, it's not just that there is no more same day trips we've shifted about three points of our traffic mix from round trips to one ways, where people are sometimes willing to pay a flex flex.
Flexibility premium so that they can structure their trip and their product in a manner that they that they like that's all to say that we do continue to see strength in the demand environment, it's year over year comps may be a little bit odd because.
Purely idiosyncratic issues right last year domestic was benefited by the fact that long haul markets were shut down for example, but so far we still see a really favorable demand environment and we see at the actual unique customer level, a great degree of desire to travel.
That's a very interesting is to add thanks for the help.
Thank you.
Our next question.
Comes from the line.
Oh Connor Cunningham of millions research your question. Please Conor.
Hi, everyone and thank you for the time the.
The pushback I get on the free cash flow production on American is is that it's somewhat temporary as capex kind of picks up again in the future and nothing to the magnitude that you had before and the re fleeting phase but.
Why aren't we talking more about our long term return on invested capital target.
What goes into that thought process for you guys or maybe we're just too early in the balance sheet recovery right.
Any thoughts there would be helpful. Thank you.
Thanks Connor.
To start we are really excited about our potential for free cash flow production in 2023.
Youre right. This is a year, where we have lower capex.
Then a average year and lower Capex and we wanted to have this year, we plan to spend a little bit more on aircraft Capex, we just weren't able to get the deliveries and we want it.
But this year, we think we will be.
Something approaching $3 billion of <unk>.
Free cash flow that is inclusive of.
Our labor agreements.
The potential of <unk>.
Some sort of bonus pay so we're proud of what we are producing this year next year I think we're going to have a really nice free cash flow story again, even though our aircraft capex step up a little bit.
Then longer term I think this is a story that we hopefully will continue to talk about we don't expect to have a need to go through.
Massive cap.
Capex cycle again, we expect a more normalized cycle of capital expenditures in that world, we should be able to produce free cash flow each year.
And as for metrics like a return on invested capital metric. It is early in the recovery, but that's something that we would expect to talk more about in the coming years.
Okay.
Okay.
And then you talked a fair bit about managed corporate travel, but I was just curious if you could talk a little bit about the small and medium business traveler out there obviously been a huge important segment.
Segment for you guys in the near term just curious have there been any.
Changes in trends, our tendency is given the choppy macro backdrop.
Just any thoughts there would be helpful. Thank you.
Yes, that's a great question and probably if it's a.
Segment.
Travel, which is maybe.
Neglected historically.
We see a lot of growth I mean, clearly it's not just that that people are traveling less on contracted.
Accounts, but we're seeing people, who are taking business style trips or even blended trips.
No.
Corporate <unk> no no no.
We recognized contract corporate affiliation.
And really probably the biggest thing to note. There is that theres just a different set of of buying criteria. There is value on flexibility to my earlier point that a lot more.
Those non contracted customers or are we will look to buy one way trips in order to blend it or construct what they need to do and also for those customers.
There is a material they reflect a lot of the economic dynamics of the of the country and Robert kind of alluded to it in his in his earlier remarks, our remarks at the top of this.
So much of that demand is originating out of sunbelt markets, Arizona, Texas, the Carolinas and Florida.
Places, where we just have an inherent level of strength and.
We endeavor to go build a fleet in the network structure to capitalize on.
Okay. Thank you.
Thank you.
Our next question comes from the line of Michael Lindenberg of Deutsche Bank. Please go ahead Michael.
Hey, good morning, everyone I have two quick ones here just <unk>.
Xu following on <unk> point on.
Your answer to your question.
What was the split between direct and indirect sales in 2019, where are you today and where do you think you are say a year and a half two years out.
Hey, Thanks, Thanks, Mike.
We are today, we're a little over 60% going direct which is about a 10 to 12 points improvement versus where we were in quarter one of 19.
We anticipate being about 10 points larger than that by quarter two.
Now importantly, we consider.
Things sold through our.
New distribution technologies also as direct because we're able to provide the first direct is really how do we provide the right level of retail experience selling and servicing to the customer. So we anticipate that will grow.
And potentially be as much as 80% of of the airline by the end of the year.
And.
We certainly are doing all that we can both encourage and incentivize people to make it something greater than that so where we remain.
<unk> with how it's rolled out there.
To bolster that and come back at some point that Robert and Ganesh mentioned.
What we're doing also is we're just we're simplifying what we sell there is a lot of cases, where we created a lot of revenue product for a customer that DSL customer behaviors that just don't exist anymore that required a lot of complications and servicing now we can be a lot more simple we can provide flexibility.
More ways, which ultimately will be a thing that is great for any travel agency looking to serve a customer.
Understandably those are only made possible through contemporary technology.
And so we anticipate that will also further fuel.
Change amongst cut.
Customer behavior, and ideally agency behavior too.
Yeah, and just to clarify you threw out 80%, but I guess to be clear it's almost.
Yes.
Obviously, the NBC piece, but it's almost a bit of a hybrid direct indirect because the gds's are part of that solution right.
My interpretation right.
Yes, that's correct and you're very much right Mike.
And the reality is what the split is that takes us from 60 to 80 between direct and indirect.
We don't entirely know yet and if we look at it certainly from the last three or four weeks that we've been really.
Producing content for new distribution channels.
We've actually seen the primary growth outlet has actually been our app and our dot com.
So.
As things change it remains to be seen and again so.
So much of this is dictated by the taste of the customer and us.
Many of those.
Non contracted business customers that we spoke about in the last question would love to go and purchase and consume our product through the App, so as our App improves.
We anticipate there will be more and more of a shift.
That's great. Thanks, and then Kevin just a quick one the 211 million profit sharing accrual I guess that covers part of last year, but was that entirely incurred in the March quarter of 2023, and when you gave us CASM ex is that CASM ex fuel or is your cash is at CASM.
Ex fuel and profit sharing I just wanted to clarify that thank you.
Okay. So the.
The CASM ex guidance is just CASM ex fuel.
As for the $211 million that is for our profit sharing program for the year ended.
March 31.
We do have a profit sharing program for 2023 that started January and goes for the entire 12 months of this year. So the $211 million as for effectively the nine months last nine months of 2022 and the first three months of 2023.
And that is going to be paid out in may okay.
Okay, but was that incurred 100% in the March quarter.
Sorry, no I wasn't that occurred throughout 2022, okay, great. Thank you.
Yes.
Thank you.
Our next question.
Comes from the line of Jamie Baker of Jpmorgan. Your question. Please Jamie.
Hey, good morning.
Silver to continuing on the.
Corporate question.
You know, we understand the shift to NBC and credit is absolutely due to American.
For having the capabilities that not all of your competitors do.
But what I can't reconcile is the way that you appear to be backing away from corporates and that's based on my conversations with.
Travel managers across the country, what I've seen in the press.
Feels like the new philosophy is that youre not pursuing corporates with the same vigor as in the past because to me that suggests the potential.
For share shift to United and Delta.
Yeah, Hey, Jamie Thanks for thanks for the question and the lens to see a lot of our changes is do the actual user of the airline part of it.
And consumer.
And Thats been a thing where if you just think about the big history of the airlines, but it's been hard to just a masked the data and see technologically like who the customer is we distribute our product based on whether it was the best schedule or a low price.
And so much of what we did was try to get people to go by the.
Faster schedule, because there is a premium on it.
But the changes have been have been meaningful and none of the top 25 companies who are there in 2019.
Or any more than about 65% return.
Travel.
However.
The top customers to my earlier point.
Our travel they're spending more on the airline than ever before now what that means for us is especially in many cases, where accounts aren't fulfilling or things like that.
The nature of the corporate discount and the corporate contract is just changing maybe the best example that I can give us.
Ah.
Through many of our contracts over the years, we granted <unk>.
Level of loyalty satisfied customers.
Well now what we find is people are willing to actually especially non contracted customers. Many of the cases the actual customer in the corporation is looking to go and earn more miles.
They want more and when they earn miles they want to be able to redeem them they want to be able to get their status benefits. They want all of those things to take place.
However, at our peak, we were giving away as much as 35% of our of our status members worked through corporate exceptions. So thats a material amount when you think about it that's actually curtailing the customer experience of those people who are most using our project.
<unk> some of whom work in the exact same corporation, but didn't travel as much before they traveled less than some of the people who are receiving the exception. So a lot less of this it is backing away from it but the marketplaces has changed.
And there is something that we can do with a lot of these travel managers, which can be a much better experience for all of their their customers.
Through all of these changes they can have.
Access to frankly, a much more seamless and simple servicing solution, where they can also go in and get some distribution cost savings too so.
Change is never a thing which is all the way easy but.
It is something where our customers are speaking for them if necessary.
Jamie it's important for me to weigh in too.
And I know this is probably not the case that the nature of your question suggested that's what our.
Our competitors are saying about us in the marketplace and I'd just like to underscore that hey look we're going about things in a little bit different fashion, we're looking to better service offer less.
We are appealing to our largest customers in the way that they want to do business and if there are changes we need to make.
We're going to do it but right now I.
Think that more than anything else, what we're doing is actually having an impact and.
I am pleased with where we're headed.
Okay very interesting thanks for that and Devin.
A quick question on the labor cost accruals.
Do the accruals include any changes in profit sharing formulas anywhere else in the P&L or is it simply a wage based accrual.
Given your answer to Mike's question.
That's the right answer its just a wage based exercise.
And it's something that we will be at higher wages or a pilot work group fourth quarter.
For each tenant agreements later in the year. So there's.
As for profit sharing yes, nor expected profit sharing changes this quarter, but we do have an expectation for a change in profit sharing for those work groups in the back half of the year.
Real P&L items, but at the end of the day, we're going to end up with a contract, but it not only takes care of our pilots from a compensation perspective, but also quality of life, but the good news.
On that front is that look I think that we're going to be in a position.
Positioned where the changes that we're making are going to benefit not only our pilots, but the airline as well so I look too.
Changes are being made as something that will be able to.
Accommodate over time without a lot of impact productivity.
Okay I appreciate the clarification, thanks a lot.
If you're a media and you have a question if you would like to ask a question. Please press star one one on your telephone again star one one on your telephone.
Again, Thats star one on your telephone.
And our first question comes from the line of Allison slider.
W. S. J your question please Allison.
Hi, Thanks, so much.
Yeah, just sort of curious on Boeing deliveries kind of like what coming next year.
Youre hearing.
Dreamliner deliveries and whether 737. This summer are going to cause any issues are you having been out routes or cancel any routes or any kind of customer impact there.
Hey Ali.
I'll start and Devin can give you some particulars, but between the Max's and.
780 Sevens I think we have approximately 20, some odd 23 deliveries planned for this year and certainly we've had some some delays in that.
Concerned about.
You know potential delays impacting the summer as well it looks like we're going to be minimally impacted.
Just to underscore this that anytime that there is a delay in deliveries, especially for an airline like American right now, where we've really built an efficient.
Lead over over the years.
This results in real impact to the airline into our customers, we expected to fly those planes.
We expected to fly in on time, and we have to make schedule changes it impacts hundreds if not thousands of customers Fortunately with this latest.
Issue with the Max we haven't had to make too many changes, but I'd just like to underscore. This Boeing has been a great partner Airbus is a great partner, but look at the end of the day, we need them to be incredibly reliable, we needed them to be better than what they've been and I.
We don't communicate very frequently with the Boeing senior management team and we need them to get their act together.
We need a very very strong Boeing and we need them to be an incredible partner and we have all the confidence that they will get there 70 do you want to add anything else in terms of particulars.
Just a reminder, we have a 477 deliveries. This year, we took one in the first quarter. We expect the next three in the next 30 days or so.
And on the Max as we have 17 remaining those will start to deliver over the next handful of weeks.
The last two deliveries for this year are both neogen.
Both of those in the first quarter.
Thanks.
I can just follow up on sort of all the business travel talk on this call.
You've talked about it a lot but.
Yeah.
The company's agency sort of complaining about some of the changes American has made are you is it are you seeing any market share shift or is it that it just doesn't really matter in the same way it might have at one point.
Hey, Ali this is <unk>. Thanks for the question.
Indeed, what we're seeing in it.
Well probably many.
Many people in traditional travel distribution are adjusting to these changes, but we also see in other cases.
And consumers really responding favorably.
<unk>.
I mentioned earlier, how many of our sales are going direct but one of the things that we're encouraged by is.
By the end of this month over 60% of our servicing transactions are coming digitally.
Transaction share shift out of travel agencies and into the direct channel and a place in our long haul network too.
So London, Heathrow, which for us has.
Our peak flights in London, Heathrow, the entirety of the premium cabin could've been sold outside of the Dot com.
At one point in time in the past.
We're as we finished the first quarter here.
About 40% of our sales in London Heathrow premium cabin is coming through our direct channel.
And so much of what's happening when they are doing that is it when customers are buying that they are buying a product that they can go service themselves. They can change the seat assignment.
They get the full value of not just the flexibility of the fare product, but the entirety of the servicing experience. So actually so many of our changes and we want to make that same thing available to all of our retail outlets wherever a customer wants to shop, we want them to be able to have that experience as well.
We know that many of our travel agency partners and our corporates want the exact same thing, but it calls for a different approach.
So we are doing a little bit of innovation to go and get it to a different approach, but ultimately, it's something which benefits the end customer and it's going to create more choices for them.
Frankly more competition on how they buy travel.
Thanks.
Yeah.
Thank you.
Our next question.
Come from the line of Mary's Langoustine Bloomberg Your question. Please Mary.
Hey, good morning.
I wanted to ask.
What are Americans plans for taking advantage of the waivers that were offered in New York and D. C. By the FAA and then my second question is Rob.
Robert you were talking about the regional jet.
Potentially you might be able to get out hundreds of them back in service by the end of this year. So realistically how many planes do you think we'll return to Houston.
Large percentage of them, perhaps never be back flying for American.
Thanks, Marion Let me, let me take that.
Last one.
First which is.
Look we would we would be flying.
All of those planes today.
If we could and you take a look at small cities throughout the country for US we can give you it works off the list and this.
But places like Green Bay, and Santa Fe in Springfield, Missouri.
Panama City those are all places that would demand more.
Service right now and they really can only be served with with regional jets now at the end of the day, we do that to connect into.
That is the larger part of our network so.
Which then impacts our hubs in our mainline aircraft and international flying and everything else. So it's a it's a positive overall.
But and to that end the largest issue that we've been facing is this shortfall in pilots and we've seen great uptake in terms of people coming into the business because of some of the changes we made competition last year.
And we're getting to the point, where we have enough captains to build hours with first officers to get.
Aircraft back up in the air.
First answer the first question again, yes.
Regarding New York, FAA, I can start Marriott and make gotten.
To add as well.
But the short answer is well.
But look we're really encouraged by what the FAA did a for US we've taken some advantage of it but for us so much of our growth in New York is really in JFK flying long haul I think.
Kennedy to daily or Kennedy to Doha.
Versus what we had in the plan three or four months ago, but our overall seat capacity is up and across the NDA. It is up and will continue to be up as.
Yes.
We appreciate the Faa's leadership here to proactively take steps like this one to improve our.
Aerospace certainly we've seen since the pandemic that.
So this step we welcomed bus you mentioned are <unk>.
To take advantage of this is limited to some extent by the <unk>.
I would just say.
As a part of the NDA, we committed to capacity targets for New York airports, and we expect to fulfill those commitments and I would just add one since we're on the subject.
We also want to commend the FAA for their guidance around commercial space launches, which will now take into consideration the impact that these major launches in particular will we will have one.
On air travel.
The collaborative effort.
To address.
Issue that really challenges the system and hopefully it's something that's going to have wide ranging benefits to the traveling public.
Okay.
Yep.
And so it sounds like you're you're not taking full advantage of the slot waivers offered by the ethane is that correct.
Mary This is vastly less that is correct.
But that largely is due to the fact that we.
Have less flying in the sort of high frequency markets that that would most benefit from it.
Alright.
As Deven said youre not cutting under the NDA.
No. Indeed, we're actually growing seats when you when you look at American Airlines. This summer, we're growing seasonally growing them at a greater rate than anybody else in the NDA is growing at a greater rate than anybody else.
Thats really a response to consumer demand.
You are seeing from US is flying fewer departure with departures with more seats per departure. So we're able to across the NEA operate schedules that we can deliver on.
Okay. Thank you very much.
Hi, Thanks for taking my question I'm, just curious what the timeframe is for the new suites.
We anticipate taking installing the new seat on retrofits as planned and putting them on new deliveries as planned also.
To your second question about about upsell rates.
A year or two ago.
One of the questions in our mind to the earlier point about philosophically, how do we think about the long haul business, but one of our great concerns was what would the future of premium cabin and premium economy things like that.
Now that we've got a year of seeing how people use this even in a world where we have less corporate contracts flying.
Our premium cabin revenues across the system are up 20% versus the same period in 2019, but our premium cabin seats are basically flat to what they were in 2019, that's the level of growth, which exceeds what we see in the economy cabin and we see it categorically across <unk>.
We haven't been there.
Very positively surprised by a.
Premium cabins by the flexibility and the upsell that ends up happening and indeed that to my earlier comments through the call. The fact that so many customers are willing to go and purchase it.
Frankly, what makes us more encouraged about any number of the commercial changes we're making.
Thank you.
Thank you I would now like to turn the call conference back to Robert Isom for closing remarks, Sir.
Thank you very much.
Thanks for the interest, but we're really pleased with the progress that we've made at American we set out with the goal of becoming a more reliable airline and becoming profitable and we've done a remarkable job. Our team has done a remarkable job over over the last year of getting us into this position industry, leading operational rely.
Our ability and then profitability, which is our fourth quarter in a row of record revenue production when I take a look year over year, it's astounding that worth $2 billion in terms of pretax.
Better than we were.
A year ago, and as we project out for the year, we anticipate record.
In the second quarter.
So all of that is very positive budget.
Questions.
About why isn't our stock price performance.
Moving in alignment with a seemingly improved prospects and in fact.
Our guidance for the year in terms of EPS analysts.
Could be 25% below where we're guiding and I would just say to that right now.
Look.
It's due to people not knowing the American story, possibly and in that case, we've got to get out and do a better job of letting folks know, what we see and where things are headed.
And if it's not that they don't believe our story and in that case, we're just going to keep producing.
Every quarter.
Yes that we have a chance we're going to talk about those things that are most meaningful to creating shareholder value and that's earnings.
Generating free cash flow and we will keep producing and tell people do believe and for those that just want to see another chapter of the book and have some concerns about.
Some some issues that we.
We may encounter over the next three six months or so hey, we'll play that out to we're really confident that no matter what comes our way to overreact.
Fashion that still.
Our preserves our focus on making sure we run reliably and ultimately profitably as well so I appreciate everybody's interest and we'll get back to work thanks very much.
This concludes today's conference call. Thank you for participating you may now disconnect.
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