American Airlines Group Inc. (NASDAQ:AAL) Q4 2022 Earnings Call Transcript

American Airlines Group Inc. (NASDAQ:AAL) Q4 2022 Earnings Call Transcript January 26, 2023

Operator: Thank you for standing by, and welcome to American Airlines Group’s Fourth Quarter 2022 Earnings Call. I would now like to hand the call over to Managing Director of Investor Relations, Scott Long. Please go ahead.

Scott Long: Thank you, Atif. Good morning, everyone, and welcome to the American Airlines Group fourth quarter and full year 2022 earnings conference call. On the call this morning, we have our CEO, Robert Isom; our Vice Chair, President of American Eagle and Strategic Advisor, Derek Kerr; and our new CFO, Devon May. A number of our other senior executives are also on the call for the Q&A session. Robert will start the call this morning with an overview of our performance and our 2023 priorities. Derek will follow with details on the fourth quarter and full year, and Devon will then outline our operating plans and outlook going forward. After Devon’s comments, we’ll open the call for analyst questions, followed by questions from the media.

To get in as many questions as possible, please limit yourself to one question and one follow-up. And before we begin today, we must state that today’s call contains forward-looking statements, including statements concerning future revenues, costs, forecast of capacity and fleet plans. These statements represent our predictions and expectations of future events, the numerous risks and uncertainties could cause actual results to differ from those projected. Information about some of these risks and uncertainties can be found in our earnings press release that was issued this morning as well as our Form 10-Q for the quarter ended September 30, 2022. 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. Webcast of this call will also be archived on our website. The information we’re giving you on the call this morning is as of today’s date, and we undertake no obligation to update the information subsequently. Thanks for your interest and for joining us this morning. And with that, I’ll turn the call over to our CEO, Robert Isom.

Robert Isom: Thanks, Scott, and good morning, everyone. Thanks for joining us. This morning, American reported a fourth quarter GAAP net income of $803 million and a full year net income of $127 million. Excluding net special items, we reported a fourth quarter net income of $827 million and a full year net income of $328 million. Our performance in the fourth quarter and for the full year was driven by continued strength of demand and revenue environment and incredible efforts of the American Airlines team. We’re tremendously proud of what the team has accomplished over the past year. We’re committed to running a reliable operation, and we’re delivering. Coming out of the holidays, American had the best completion factor of any major U.S. airline.

We also said we would return American to profitability, and we’ve done that as well. Our team has delivered a third consecutive quarterly profit and fourth quarter margins that are higher than the fourth quarter of 2019 despite our fuel price increasing by approximately 70%. We generated nearly $2.4 billion in pre-tax profits over the past three quarters, and we’re pleased to report a full year profit for the first time since 2019. In addition to running a reliable operation and generating sustained profits, we’re making significant progress on repairing our balance sheet. We recently prepaid a $1.2 billion term loan a year before scheduled maturity date, and we have now reduced our total debt by more than $8 billion from peak levels in mid-2021.

This puts us well past the halfway point of our $15 billion total debt reduction goal only 18 months into the program. Derek will talk more about our deleveraging plans in just a few minutes. Let’s talk more about the fourth quarter and full year results. We produced revenues of $13.2 billion in the fourth quarter, an increase of 16.6% versus 2019 and the highest fourth quarter revenue in company history. Notably, we achieved this record revenue while flying 6.1% less capacity than we did in the fourth quarter of 2019. American also produced record revenues of $49 billion for the full year, which is a 7% increase over 2019, while flying 8.7% less capacity. Demand remains strong and our revenue performance is in line with our expectations following our strong holiday performance.

Post-holiday bookings are off to a strong start. In fact, this is our best ever post-holiday booking period with broad strength across all entities and travel periods. Demand for domestic and short-haul international travel continues to lead the way. We expect a strong demand environment to continue in 2023 and anticipate further improvement in demand for long-haul international travel this year. Now turning to the operation. The American Airlines team delivered a fantastic performance in the fourth quarter. We operated more than 475,000 flights in the quarter with an average load factor of approximately 84%, and we ranked first in completion factor among the nine largest U.S. carriers. Our team delivered an even stronger performance over the holidays, despite challenging conditions in many parts of the country.

American outperformed the industry over the December holiday period, ranking first in completion factor. Key to our success has been sizing our airline for the resources we have available and the operating conditions we expect to encounter. And we will continue to do that going forward. We’re doubling down on our efforts to run a reliable operation in 2023, including investing in our team, our fleet and technology to support our operations and we’re seeing this work pay off as our operation is off to a strong start just a few weeks into 2023, including the best on-time arrival performance of the nine largest U.S. carriers so far this year. American is proud to operate the simplest, youngest and most efficient fleet among U.S. network carriers.

In August, we began taking deliveries of new 788 aircraft from Boeing for the first time in 15 months. In the fourth quarter, we took delivery of five 788s, and we expect to receive the remaining four in the first half of 2023. Our Boeing 789s are expected to be delivered starting in 2024. During the fourth quarter — I’m sorry about that. Okay. During the fourth quarter, we also took delivery of seven A321neos, three 175s and three — and five 737-800s from long-term storage. Devon is going to talk more about that. But what I’d like to say is that the results the American Airlines team produced in 2022 and what we are projecting in 2023 are proof positive that the actions we have taken in the recent years have put us in a position of strength and allowed us to take full advantage of the recovery.

We spent more than five years on the most complex integration in the history of the airline industry. Three years navigating the pandemic and making the airline more efficient. And now we’re poised to drive the business forward in 2023 and beyond. We have simplified and harmonized our fleet, modernizing our facilities, fine-tune our network to focus on the most profitable plan, develop new partnerships, introduced new tools for our customers and team and hired tens of thousands of people. During all, the American Airlines team has gone above and beyond to deliver strong operational and financial results. Now before I turn it over to Derek to provide more detail on our 2022 financial performance, I want to thank him for his partnership over the past 20 years as CFO.

He is a great friend and he’s been a trusted advisor throughout my career. Quite simply, he’s the best CFO in the history of the airline industry. This financial leadership has helped create the largest airline in the world through the mergers of America West and U.S. Airways in 2005 and U.S. Airways and American in 2013. Derek was instrumental in raising $25 billion of capital during the pandemic to ensure American would not just survive, but also be in a position to thrive on the other side of it. And I’m very pleased that Derek will remain as American, Vice Chair and continue to lead our American Eagle and cargo teams and serve as a strategic advisor to the company. As we look forward to 2023, we remain focused on running a reliable operation, achieving sustained profitability and reducing debt.

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We have made tremendous progress in all three of these areas, thanks to Derek’s leadership, and we will continue to sharpen that focus with Devon May as our CFO. And on behalf of the entire American Airlines team, I want to thank Derek for his leadership and tremendous contributions to the airline as our CFO. And now, I’ll hand it over to Derek.

Derek Kerr : Well. Thank you, Robert. Thanks for your kind words. I really appreciate it. It’s been an honor, tremendous honor to serve as CFO of American, U.S. Airways and America West over the past 20 years. I’m incredibly proud of what the team has accomplished in that time. Now on to the business of the morning. Excluding special items, we reported a fourth quarter net income of $827 million or earnings of $1.17 per diluted share. We produced our best fourth quarter pre-tax margin since 2016 when we produced roughly the same results at fuel prices that were nearly double the price per gallon lower than 2022. Throughout 2022, you heard us talk about our focus on returning the airline to profitability, and we have done that.

We achieved a full year profit due to continued demand strength and the hard work of our team, despite a $1.9 billion pre-tax loss in the first quarter. Excluding net special items, we produced a full year net income of $328 million or $0.50 per diluted share. Fourth quarter revenue far exceeded our initial guidance due to continued strong demand. Revenue in the fourth quarter was higher than any fourth quarter in company history. As Robert mentioned, the domestic and short-haul international entities continue to lead the way, and we expect further improvement in long-haul international as we continue to grow back our capacity. Costs for the quarter, excluding fuel came in at the high end of our initial guidance range, primarily due to higher profit sharing expense driven by higher earnings in the quarter.

American is proud to operate the simplest, youngest and efficient fleet among U.S. network carriers. In August, we began taking deliveries of our new 788 aircraft from Boeing for the first time in 15 months. In the fourth quarter, we took delivery of five 788s, and we expect to receive the remaining four in the first half of 2023. Our Boeing 789s are expected to be delivered starting in 2024. During the fourth quarter, we also took delivery of seven A321neos, three E175s and reactivated five 737-8s from long-term storage. In 2023, we expect to take delivery of two A321neos, and we plan to reactivate nine more 738s from long-term storage. Based on our latest guidance from Boeing, we now expect to take delivery of 17 737 MAX 8s in 2023 compared to Boeing’s contractual commitment of 27 deliveries.

This change in timings will shift planned CapEx out of 2023 and into future years. Our 2023 aircraft CapEx is now expected to be approximately $1.5 billion. Repairing our balance sheet remains a top priority, and our actions in the fourth quarter show our commitment to debt reduction. In the fourth quarter, we repaid $1.2 billion term loan secured by domestic slots. This prepayment increased estimated first lien borrowing capacity to $10.3 billion and addressed our most significant 2023 maturity. With the actions we have taken, we have now reduced our total debt by $8.2 billion or more than half of our goal to reduce total debt by $15 billion by the end of 2025, only 18 months into our deleveraging program. We ended the year with $12 billion of total available liquidity.

We will continue to balance both debt reduction opportunities and investments in the business while meeting appropriate target liquidity levels. We will target $10 billion to $12 billion of total liquidity in the medium term and intend to utilize excess liquidity to accelerate our deleveraging initiative at the appropriate time. With no meaningful maturity towers until 2025, we have the flexibility as to how and when we begin to address those instruments. With that, I’m happy to turn the call over to our new CFO, Devon May, who will share our outlook for 2023. Devon has more than 20 years of airline industry experience across finance, operations, network planning and alliances, and he is the perfect person to lead our finance organization going forward.

He has been an integral part of our executive team for more than a decade and has built a great team around him. The CFO transition has been and will continue to be a seamless one. With that, I’ll turn it over to Devon.

Devon May : Thank you, Derek, and good morning, everyone. Before we get into our guidance, I want to start by thanking Derek for his leadership over the past 20 years. I’ve had the privilege of working with Derek since 2002 when I joined America West Airlines. He has been a close brand and mentor during this time, and our airline is set up well for the future because of his leadership. I’m honored to be taking on the CFO role and being part of an incredible senior leadership team. I look forward to leading the finance team and building on the progress we’ve made on our financial priorities. For 2023, we will continue to size the airline for the resources we have with a focus on reliability and sustained profitability. We continue to expect to produce capacity that is 95% to 100% of 2019 levels or up approximately 5% to 8% year-over-year.

We are on track to hire over 2,000 mainline pilots in 2023, and we expect to achieve our run rate level of training throughput in the back half of this year, allowing for further aircraft utilization improvements in 2024. We continue to expect regional pilot affordability to be constrained throughout this year and next. Demand for air travel strengthened as we went through 2022, and we expect industry revenue will return to its historical share of GDP in 2023. Given our level of capacity production, the strength of our network and industry supply constraints, we expect total unit revenue to be up low single digits year-over-year. For the full year, we expect CASMx to be up 2% to 5% versus 2022. These projections include the estimated impact of anticipated labor agreements, which account for roughly 3 points of CASMx fuel.

For the full year, we expect to produce earnings of $2.50 to $3.50 per diluted share. Using the midpoint of that EPS guidance, we are forecasting operating cash flows of approximately $5.5 billion and free cash flow of nearly $3 billion. Looking to the first quarter, we expect to produce an operating margin of between 2.5% and 4.5% based on our current demand and fuel price forecast. And while we are eager to get new labor agreements ratified given where we are at in the quarter and the time required for ratification, we do not anticipate ratifying new contracts prior to the end of the first quarter. If that does occur, we will update our guidance accordingly. In the first quarter, continued strength in demand is expected to result in total revenue per available seat mile that is 24% to 27% higher year-over-year.

Our first quarter CASM, excluding fuel and net special items, is expected to be flat to down 3% year-over-year. The current fuel forecast for the first quarter assumes a fuel price of between $3.33 and $3.38 per gallon and a full year price of between $3 and $3.10 per gallon. As Derek noted earlier, we’ll continue to focus on debt reduction, and I’m proud of the progress we have made to date. In 2023, we expect to make further progress on our $15 billion debt reduction goal. We will use our free cash flow to pay down $3.3 billion in debt amortization this year, and we expect that by the end of 2023, we will have reduced total debt by $10 billion to $11 billion from peak levels in mid-2021. Based on the forecast I just provided, we expect that by the end of the first quarter, we will have lower net debt and better net debt to EBITDAR than we did at the end of 2019.

And by the end of the year, we anticipate having the lowest net debt-to-EBITDA ratio we have had since 2017. In conclusion, in 2023, we will continue to focus on delivering on our stated objectives. We are set up to run a reliable airline, grow margins and strengthen the balance sheet. Importantly, American is uniquely positioned to deliver substantial free cash flow in 2023. The confidence in our ability to execute on these goals is due to our world-class network and incredible team. With that, let’s open the line for analyst questions.

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Q&A Session

Operator: Our first question comes from the line of Helane Becker of Cowen.

Helane Becker : Derek, I’m going to miss you, but good to know that you’ll still be at the company.

Derek Kerr : Thanks, Helane.

Helane Becker : Sorry about Michigan. So here’s

Derek Kerr: Just business, Helane.

Helane Becker : Yes. Yes. So here’s my question actually. Two. The first one is on CapEx. The one — the guidance that you gave for CapEx seems low in light of the fact that you’re taking four 787-8s this year. Is that a mix where it’s leased versus owned in there?

Devon May: Hi, Helane. Yes. This is Devon. That is what’s happening with CapEx this year. So we’re taking delivery of 23 airplanes, four of those are 788s, which are direct leased. So those four are not included in the CapEx guidance.

Helane Becker : Okay. All right. That’s very helpful. And then just for my follow-up question. As you’re thinking about long haul international, do you see in your bookings — I think you mentioned that you think it will improve as the year goes on, do you see that in bookings that’s already starting to occur at some point in first or second quarter?

Vasu Raja: Hi, Helane. This is Vasu. Yes is the short answer. We very much see it in bookings. It’s — we started seeing it, frankly, in Q4 of last year. In Q1, we see continued strength across all of the geographies that we have and that’s continuing out into the summer. So we are very encouraged by the trends that we’re seeing, all the more encouraged because it is coming often at lower cost of sale, and we’re still filling business class cabins and things like that.

Operator: Our next question comes from the line of Catherine O’Brien of Goldman Sachs. .

Catherine O’Brien : I also want to add my congrats to Derek on a wonderful career. And then just on your operational performance really stood out during the issues the industry experienced over the holidays. Obviously, it wasn’t anything geographical considering what happens to some of your peers. So can you walk us through what you think drove it? Were there investments being made behind the scenes over the last couple of years that maybe just got smaller billing in the aircraft investments?

Robert Isom : Catherine, thanks. Hey, we’re really proud of the operating performance. I’ll tell you, it’s something that we’ve been working on a long time. And it starts with making sure that we have the resources available to fly the schedule and we don’t put out a schedule that we’re not confident that we can really fly. That’s where we start. And then, yes, it’s investments in so many different places. We benefit from having the youngest, most efficient fleet of aircraft. We spent a tremendous amount of time investing in technology to make sure that we can identify where our crews and our planes and our maintenance requirements are. But really, I want to give credit to the team here. We have so much experience on board that we’re just really watchful, and it all came together over the holidays.

The investments that we’ve made, the team that we have out there, making sure that we have the right schedule. I’ve got David Seymour here as well. I probably want to add to it. Look, there’s a lot of good decision-making going on out there, too.

David Seymour : Yes, Robert, emphasizing the point you talked about. But another key item here is for these storms and we’ve been very focused on recovery after that because it’s so critical to us is one that I think throughout this year, we’re doing better and better on and we certainly showed that over the holiday. But the key for us, along with having more new positions that we put in that are focused when we have storms like this. We’ve changed a lot of our processes and procedures that we — and how we manage these. And then we’ve also been partnering with our IT group and really enhancing some of the technology resources that we have to manage through these events because they change very dynamically and very quickly, and we have to stay in front of them.

But more importantly is the recovery. We started looking at the forward look of what the storm potentially could be and started building our recovery plan before the storm yet, and that’s where we’re very focused on. So again, as Robert said, very proud of the team, very proud of the partnership with all the whole airline because it’s not just operations. It’s a lot of our support groups that are very critical to us getting through these. So there’s a great job. We’re going to continue to improve on that.

Robert Isom: And Catherine, it just — it speaks to what we’re going to be focused on going forward as well. It’s still reliability and profitability here, and we’re going to try to get better every day. Today, we have another 5,000-plus flights and 0.5 million customers that we have to service. And so we make it make it our business to take care of people every day. So we’re back out there in business. .

Catherine O’Brien : That’s great. That’s a group color. If I could just sneak one more in. Maybe for Vasu. Can you just help us think about some of the assumptions that drive your full year revenue outlook? Like what are the assumptions on business international recovery? Is there an assumption in there that the industry is going to pass on higher price of labor and fuel on a one-one basis? Just any thoughts to drive the full year revenue outlook?