Operator:

Thank you for standing by, and welcome to American Airlines Group’s Second Quarter 2024 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. [Operator Instructions]. I would now like to hand the call over to Scott Long, VP of Investor Relations and Corporate Development. Please go ahead.

Robert Isom:

Thanks, Scott, and good morning, everyone. This morning, American reported an adjusted pre-tax profit of $1 billion for the second quarter, driven by record quarterly revenue of $14.3 billion. We finished the quarter in line with our revised guidance, with second quarter adjusted earnings per diluted share of $1.09 despite the impact of significant weather events on our operation in May and June. Before I get into more detail on our second quarter results and outlook, I want to first acknowledge that our current revenue performance is not where we want it to be. In May, we made a sizable adjustment to our revenue and earnings expectations for the second quarter, driven by an imbalance in domestic supply and demand and our prior sales and distribution strategy. We know we can do better and we will rise to meet this challenge. I’ll begin with an update on those two key areas that are impacting our results, the softness in the domestic marketplace and our sales and distribution strategy. I’ll also outline the clear and decisive actions that we’re taking to course correct. First, on the softer domestic revenue environment. In the second quarter, we saw the impact of too much industry supply in the domestic market, especially in regions of the country where we have larger operations. That excess capacity led to a higher level of discounting activity in the quarter than we had anticipated. As we said we would, to address the domestic softness, we pulled down our planned capacity growth in the back half of the year. To better align our growth with demand expectations, we now plan to grow capacity by approximately 3.5% in the second half of the year. Second, our sales and distribution strategy. In late May, I said our sales and distribution strategy was not working and we needed to make a change. We’re taking actions that will improve our performance, but a reset will take some time and we will continue to feel the impact of our prior sales and distribution strategy on revenue and earnings through the remainder of this year, which is reflected in our updated full year guidance. Let me outline the three key parts of our plan in leadership and organization, in working with the travel agency community, and in addressing the needs of our corporate customers. With regard to our commercial organization, we immediately took action and changed senior leadership. Steve, our vice chair, second in command, and most seasoned and accomplished executive has taken charge of our commercial efforts, reorganized the team, completed a deep dive on issues and opportunities, and laid out a recovery plan that we are executing on quickly. We have also strengthened our revenue forecasting processes. Our near-term actions are concentrated on winning back customers in our share of revenue in agency and business channels. To that end, in June, we reinstated fares in the distribution channel traditionally used by travel agencies and corporate managed travel programs. Approximately $14 billion of our annual revenue was booked through this system in 2023. This action ensures our product is available wherever customers want to buy it, and removes the most objected-to pain point of our previous distribution strategy. Next, we engaged our large TMC partners to put in place new incentive-based agreements to restore our share in those channels. Those efforts have been well-received, and we are having good conversations with companies including Amex GDP, with which we have a longstanding relationship. We expect agreements with TMC soon, and we will then work to reengage the broader business and leisure agency community. Additionally, we have eliminated plans to differentiate how customers earn miles based on where they book their travel, removing another significant obstacle impacting booking behavior and business relationships. Our products need to be attractive and easy to engage with. A significant piece of that is our AAdvantage Business Program, which replaced our previous unmanaged programs for business travelers. Those previous programs generated more than $2.5 billion in revenue in 2023, nearly 75% of which was booked through travel agencies. With recent changes, we have now expanded the AAdvantage Business Programs benefits so that participating companies will earn miles, and end travelers will earn loyalty points wherever they book, including through travel agencies. Several more improvements are on the way to make the program easier for travel managers to use, and we have established a dedicated help desk for AAdvantage Business customers. Our agency and corporate partners have made it clear they want additional support as they do business with American. We have prioritized adding resources to our sales and sales support team, and have made good progress already. In addition to the dedicated AAdvantage Business desk, the team has hired new account managers for our corporate customers, with more to come as we evaluate the appropriate level of staffing going forward. In August, we will significantly increase resources dedicated to sales support to give customers the assistance they need. The agency and corporate customer response to these changes has been positive, and we are starting to see shares shift back to American. Our partners are incredibly important to American, and we recognize we have a lot of relationships to repair. I have spoken with more than 30 of my counterparts at our largest corporate customers to get honest and candid feedback. And these meetings and calls are occurring in parallel with our team’s efforts to engage with customers at the travel manager level. The feedback we’ve heard demonstrates that changes we have made are focused on the right areas, and that agencies and corporate customers want to work with us as we continue to adjust our strategy. We will continue to listen and further refine our plans as needed. All of these actions and more to come are a sign of our commitment to win back any customers we have lost. We’ve made a lot of progress from where we were in late May, but we still have a lot of work ahead of us. Success will ultimately be measured by improved revenue performance and earnings, but it will take time. In the near term, we will measure success by tracking our agency and corporate share performance and the adoption of AAdvantage Business, and by the feedback we are hearing from our agency partners and corporate customers. I’m confident we’ll regain the standing in the agency and corporate channel, and that, combined with our direct distribution strength, will put us back on track to producing revenues that will meet and exceed our long-term financial targets. Now, I want to spend a few minutes discussing our second quarter revenue performance in more detail. Our unit revenue was down 5.6% year-over-year in the second quarter, in line with our revised guidance. Domestic PRASM in the second quarter was down 6.4% year-over-year, both short haul and long haul international PRASM performed in line with our initial expectations, with transatlantic unit revenue up year-over-year on 6.3% higher capacity. Revenue from our large managed corporations was up approximately 3% year-over-year in the second quarter. This performance is not reflective of our fair share of corporate revenue, and we’re addressing it with the actions we’re taking. We have work to do to get our distribution strategy back on track, but as a global network carrier, we have access to premium and loyalty revenue streams that will continue to perform well. Demand for our premium product and overall engagement with the Advantage program remains strong. In the second quarter, premium revenue, or revenue from customers seated in first, business, premium economy, and main and cabin extra, increased 9% year-over-year. Paid load factor in our premium cabins remains historically high, and was up more than 6 points year-over-year, with strength in both domestic and international. With a planned refresh of existing aircraft and the expected deliveries of new aircraft, premium seating on American’s fleet is expected to grow by more than 20% by 2026. AAdvantage Program membership continues to grow. Loyalty revenues were up approximately 8% year-over-year, and AAdvantage members are responsible for 74% of premium cabin revenue. Total spending on our co-branded credit cards was up double digits year-over-year in the second quarter, once again, highlighting the value of American’s loyalty program. Turning now to our operation. In the second quarter, the American Airlines team produced strong operational results, despite some of the most difficult spring weather conditions we have ever faced and continued challenges with several of our suppliers. Spring is always a good test for our summer preparedness, and the weather we encountered in May and June tested us like never before. Just as we’d ramped up to summer level capacity in mid-May, we were faced with severe weather that affected operations at multiple hubs and impacted our operational performance, and the volatility continued into June. By mid-June, we had regained our operational momentum, and it’s clear our underlying resilience is strong, and we’ve made further strides in our ability to recover swiftly from these events. We’ve done an outstanding job of managing through unexpected weather disruptions, and our frontline team deserves tremendous credit for their efforts to get the airline back on track again and again. Speaking of disruptions, I’d be remiss if I didn’t take a moment to applaud the entire American Airlines team for their work last week to quickly recover from the global crowd strike outage that hit businesses and governments worldwide. By Friday evening, American’s operation had recovered and was set up for a strong weekend. On Saturday, we ran a near 99% completion factor, and were fully recovered. The best operational performance among U.S. network carriers over the weekend. American recovers from irregular operations better than anyone in the industry, and that was certainly the case following Friday’s unprecedented disruption. Finally, and importantly, we’re pleased to have reached a tentative agreement on a new contract with our Association of Professional Flight Attendants. Upon ratification, this contract will provide immediate financial quality of life improvements for Americans flight attendants, one that we’re proud of and one our flight attendants have earned. I’ll come back in a few minutes for some final thoughts, but now I’ll turn it over to Devon to talk more about our second quarter financial results and the outlook for the third quarter in full year.

Robert Isom:

Thanks, Devon. Our airline is designed to deliver results, results for our shareholders, results for our customers and results for our team members. We have not met our expectations this year and our entire team is focused on working with urgency to get us back on track, improve results and deliver on our commitment. That will drive value for our shareholders and all of our stakeholders. As we take a step back, the foundation of our business remains strong and our priorities remain the same. Our operational reliability continues to perform at historically strong levels. Our fleet is the best among U.S. network carriers and drives enormous value for the airline. With this fleet, we have stable and moderate CapEx through the end of the decade. We’ve made great progress in strengthening our balance sheet and remain on track to reduce our total debt by $15 billion by the end of next year. Our network is well positioned and we are working to finalize our co-branded credit card negotiations. We’re ahead of planning in re-engineering our business to operate more efficiently and productively and we’re managing our costs better than anyone in the industry. We’re committed to delivering on a strategy that maximizes our revenue and profitability and importantly, one that makes it easy for customers to do business with American. We remain committed to deliver margin expansion, free cash flow and continued debt reduction over the long-term. When we return to their level of revenue production we know we can achieve and couple that with our operational reliability and best-in-class cost management we will unlock significant value. Operator, you may now open the line for analyst questions.

Michael Linenberg:

Oh hey, good morning everybody. Hey Robert and David, appreciate you giving us the full year TRASM guide so we actually have third quarter and fourth quarter and just based on that by inference it would suggest that that fourth quarter is still going to be under pressure. In fact it could be negative and yet when I think about the decel and your own capacity growth and what we’re seeing around in the industry. As we look into that fourth quarter is it that the corporate disruption or your strategy, your sales and distribution strategy and the impact that it’s had on the corporates that it’s going to take a lot longer or embedded in that are there other factors like maybe more moderate demand, demand sluggishness, whether it’s U.S. or international. That revenue forecast does seem a bit anemic in the fourth quarter. If you could drill down into that it would be great. Thanks, and I have one more.

Michael Linenberg:

Okay, great. And just my second just with respect to leadership you talked about leadership changes. Presumably Steve’s move over to commercial is a temporary one. Have you identified someone or is there a search to actually bring on a commercial officer, chief commercial officer and/or in your sales side of the business plans to not only rebuild it but you know bring back someone like an Alison Taylor make it you know someone within you know a more senior position and a bigger operation. Just comments on that. Thank you. Thanks for taking my question.

Operator:

Thank you. Our next question comes from the line of Scott Group of Wolfe Research.

Robert Isom:

Scott thanks for the question. Just first off in terms of capacity. Again, reason for adjusting capacity supply and demand imbalance and it’s led to pricing weakness. From that perspective we take an action as quickly as we can and from that perspective you’ll see that our total growth in our total capacity in the third quarter is now planned to be actually a little bit less than where we were in the third quarter of 2019. The capacity adjustments we’ve made, Devon can help me with this, in August is we pulled down to 1% growth.

Robert Isom:

Scott as we take a look at into the fourth quarter and then beyond we’re going to react to the marketplace and making sure that we’re competitive but at the same time you’re doing what’s right for profitability. So as we take a look at the 2025 we’re going to be very diligent in assessing and making sure that we’re certainly not outgrowing demand.

Operator:

Thank you. Our next question comes from the line of Jamie Baker of JPMorgan Securities.

Robert Isom:

Hey, Jamie, thanks for the question. Look, there’s no perfect world. And in terms of snapping fingers, we all know that, we’re the product of, years and years of building our network and our system. I really like where we are from a network perspective. One of the things you, everybody needs to be mindful of is that regional differences in terms of growth and profitability are going to happen. It happened every year. And there’s differences in terms of international demand versus domestic. When you take a look at our network and where we’re strongest, it fits very well with where both population growth and economic demand is forecast now and long into the future. The basis for international is our domestic network and our ability to fly into our partner’s hubs and into secondary cities in Europe and Asia and South America. It’s built on the strength of our North American network. And we’re really pleased with what we’ve built over time. Short haul international and MCLA. We’re really pleased with what we’ve built in terms of our hub structure. So my answer to your question is I love the basis on which we can operate. And as we see where demand strength around the world is going and how it’s going to change, we’re going to build off of the strength that we’ve put so much time and energy in over the years.

Robert Isom:

I think it is a flawed assumption. Look, loyalty revenue has been one of the bright spots in terms of our revenue performance year-over-year. And I think, Devon helped me out, loyalty revenues grew by eight percent year-over-year over year. We think that we can do a lot better than that. And it’s based on not only what I see in our loyalty program and how attractive it is to our customers, but also by our partners. City is certainly, at the forefront of that. They absolutely want to get involved in more and deeper ways. We’re going to take advantage of that. And the opportunity for us is actually making up some of the ground versus where our other network peers are. And I have great confidence we’re going to be able to do that because I know that in terms of the negotiations that we’re pursuing, that it’s going to be a better deal in the long run and produce results that I think will be very positive.

Savanthi Syth:

Hey, good morning, everyone. Just kind of wondering on the on the cost side, the execution has been better and wondering what’s driving that. And as you kind of build back your sales force, do you do see any changes there? Or, do you expect to kind of continue outperforming on the cost side?

Devon May:

Hey, and Savi, I’ll just add to that. That’s one of the things that gives me great pride in what the company has done, but also it’s the basis on which we’re building back. We’ve managed cost better than anybody, but it’s not in its name. We’ve run the most reliable airline in terms of completion factor over the last year or so, and it’s evidenced by what we were able to do with the crowd strike issue. We’ve got a great fleet, low CapEx. As I mentioned earlier, we’re going to be renegotiating our co-brand credit card relationships, and I do think that there’s even further things that we’re going to be able to do from a cost perspective. What we’ve got to focus on right now is regaining the share that we seeded from an agency and a corporate perspective. When we get that back, which we will, and you add that to the strength that we have in the other areas that I mentioned, we’re going to get back on track, margin expansion, free cash flow production, and then a continuous path to improving our balance sheet strength.

Robert Isom:

Sorry about that. The domestic details year-over-year, we do have domestic capacity up in the third quarter by about 3.5%. It’ll be probably closer to 3% as we look out to the fourth quarter as we sit here today. As Robert mentioned earlier, fourth quarter schedules aren’t finalized and we’ll continue to adjust based on the demand environment that we’re seeing.

Conor Cunningham:

Hi, everyone. Thank you. You mentioned that you’re starting to win back some share on the business side. I’m just curious on how you’re doing that. Is there a cost headwind associated with it? I’m just trying to understand the margin profile as it’s won back from others out there. Thank you.

Conor Cunningham:

Okay. Helpful. And then I get that you’re making changes to distribution and your network orientation isn’t one for one, but in the past, you’ve talked about how you’re pleased with the network product, the onboard experience. You mentioned that you plan on closing the margin gap. I just struggle to see how that happens without a more wholesome look at the product and networking. The reason why I ask is there is an ongoing concern just around liquidity, for you guys as cash burn kind of continues to be where it is today. Thank you.

Devon May:

Yes, Conor, just on your question on where cash is, and you mentioned cash burn. As we talked about in the script, we don’t have cash burn this year. We’re producing free cash flow. We ended the second quarter with over $11 billion of liquidity. We have reduced total debt by $13 billion from peak levels. Our net debt is lower today than it was at the end of 2019. So from a cash perspective, we feel we’re in really good shape. We expect to continue to delever as we go through 2025, and we expect to hit our 2025 target of total debt reduction of $15 billion.

Thomas Fitzgerald:

Hi, everyone. Thanks very much for the time. Could you talk about the PSP loans resetting to a much higher variable rate in the coming, 18, 20 months, and just how you’re thinking about balancing those needs?

Thomas Fitzgerald:

Okay. Thanks very much. I’m sorry.

Thomas Fitzgerald:

Oh, I was going to switch to follow-up. So if you have more to go there, Robert, I’m happy to pause.

Thomas Fitzgerald:

Okay. I’m just pretty curious on the network side, how you guys are thinking about the hub structure and whether you need to maybe pull back in any of the coastal gateway markets, and how you’re thinking about the fortress hub, the CLT or DFW. There’s talk about, your neighbor in Dallas expanding more in DFW. I’m just curious how you’re thinking about your network strategy overall. Thank you.

Operator:

Our next question comes from the line of Duane Pfennigwerth of EverCore ISI.

Robert Isom:

Duane, thanks. I’ll start and Devon certainly can fill any blanks. Look, we anticipated obviously a more a stronger, more robust demand environment. Plain and simple. There was tremendous growth in 2023 and as we entered into 2024 we simply anticipated that demand would perform and allow pricing to perform a lot better than it did. As we’ve taken a look from that time, we certainly understand that we’re in a marketplace that couldn’t absorb all that capacity and so as we’ve said, we’re making those immediate adjustments, but you’ll see us be very, very conscious as we go forward. But I’m going to underscore again, the biggest issue that we’ve had in terms of disappointment was our misstep in our sales and distribution strategy. That would have accounted for a considerable amount of additional revenue and it’s something that we’re going to make sure that we gain back.

Devon May:

Hey, Duane, it’s Devon. I just, maybe we’ll start by following up on your first question as well. The first half capacity was at least in part the rebuild still of our 2019 capacity. We’d added less capacity back than anyone else. We had some hubs that were still far below their historical capacity levels. That slowed in the second half as we got to product capacity. On your second question around unprofitable components of the network, this is something that we’re always looking is to move capacity into our most profitable parts of the network and to improve on areas of the network that are softer. But we have a fantastic hub network. There’s always going to be best performers and performers at the other end. We think all of our hubs can be solidly profitable and while there are some laggards today, we have a revenue team that has a strategy to improve on it.

Andrew Didora:

Hi, good morning everyone. I guess just touching on demand, given what transpired with the promo environment over the last few months, have your thoughts around the demand backdrop changed at all? Are you seeing any areas of demand softness or are there any geographies where maybe the promotional environment did not stimulate demand the way that you would have thought?

Andrew Didora:

Okay, thank you for that. And then Devon just a housekeeping question, can you remind us is the new flood attendance deal in your guide and have you been occurring for that over the first half of 2024?

Operator:

Thank you. Our next question. Comes from the line of Sheila Kahyaoglu of Jefferies.

Devon May:

Sorry, a little bit of trouble hearing the question. But or on cash and cash outlook for 2025. Yes, we had been projecting greater than $2 billion of free cash flow in 2025. We’re not updating our 2025 outlook right now. Obviously, we expect to perform better on top line, but we’ll give guidance as we get into next year. As it relates to our total debt reduction expectations, we were tracking ahead of our $15 billion plan before. We have a lot of liquidity. We have the ability to go ahead and raise additional debt if we need to. But right now, the expectation in 2025 is that we will produce free cash flow. We will meet our $15 billion debt reduction target, and we’ll have solid liquidity as we get through the year.

Robert Isom:

Well, I’ll just start with, look, premium business is important to us. And as I mentioned, it’s one of the bright spots that we’ve seen year-over-year, and we anticipate that, that strength is going to continue. It’s going to continue, we’re going to invest in it. We’re going to invest in it with real product, real hard product. And it’s not something that we have to talk about. It’s something that we have and we’ll continue to grow in our fleet. So not only do we have the most premium seats of any carrier in the marketplace today, but we anticipate growing those by 20% as we go out into 2026. Headlining that is new 321XLRs that will come in 2025. That will be a great product for things like short-haul Europe as well as augmenting our transcontinental fleet operations. We’re going to be redoing our 777-300s that will add premium seating, new flagship suites and then add to that deliveries of 787-9s as well with flagship suites. So overall, I feel really good about what we can do. And I’ll just say as well, look, we’ve been operating a premium network, a worldwide network for decades, all the way back to our early days. We feel really confident about our ability to operate against any type of competition. And I really like where our fleet, our product and our ability to service that stands right now.

Stephen Trent:

Good morning everybody and thanks very much for taking the question. First, if I may, I know sort of a follow-up to Jamie’s earlier question, I can appreciate that you guys sort of hit the reset button on your co-branded card agreement. And from a high level, when we think about the time line and when you can finalize the agreement to use a baseball analogy, are we in kind of the second inning or the fifth inning, just would love your color on that, if I may, please. Thanks.

Stephen Johnson:

Sure. Thanks for the question. We’ve been in discussions with our partners about our next co-brand arrangement for a while now. Maybe the fifth inning is probably a pretty good analogy. But long enough to know that we and they are really enthusiastic about what we can do next. And so we’re really excited about getting to the eighth and ninth inning and getting it wrapped up.

Robert Isom:

Thanks, Stephen. Yes, I’ll hand it off to our Chief Operating Officer, David Seymour. But I’ll just say this, we’re super proud of our ability to really react to any type of disruption. This was notable, and I think it just shows how strong we are in terms of our operating prowess. David?

Operator:

Thank you. [Operator Instructions] Our first question comes from the line of Alison Sider of Wall Street Journal.

Robert Isom:

Thanks, Ali. Look, our partners, look, we go to market with them. And so the feedback that we’re hearing from them is similar to what we’re hearing from our customers, which is -- they want us back and available in every place that we can be sold. They want to participate in a richer mix of business. They want to certainly be attentive to the way our product is sold in the U.S. And so from that perspective, they are encouraging us, number one, to get content back out. Second, to make sure that we have agreements in place that facilitate the sale of our product through travel management companies and agencies and that they want to have great relationships with corporates. They’re incredibly supportive. We’re in it together. And in the case of BA, we have decades-long business with them as a joint business across the Atlantic. And I know that they are incredibly interested in us getting back on track.

Robert Isom:

So Ali, I’ll take this. I’ll save David from pat himself on the back. Look, David has assembled an incredible team. And I feel like we have more experience from an operations perspective overall than just about anyone in the business. And what we have to go through just in terms of weather across our network, it gives us great experience in terms of disruptions. And one of the things that we’ve learned is that in terms of any disruption, you better keep track of your aircraft certainly, but also your crews wherever they are and you probably ought to take action as quickly as possible to make sure that you don’t lose visibility for the purpose of recovery. We’ve built technology, and we’ve done the right things to ensure that we take early precautions, early steps, and that ultimately results in a better outcome. All that said, I do think we’re also benefited by making sure that we have devices and means of communicating with our team members out in the field. That certainly facilitates but it starts with having people that really know the business and the steps to take. All that said, I just -- I mentioned technology today. It’s something that we’re going to have to continue to make sure that we build resilience around and ensure against a patch being put in place that can knock out so much of the world’s communications.

Mary Schlangenstein:

Hey good morning. I wanted to follow up just a little bit on Ali’s first question. When you said that the feedback you got from your OneWorld and other partner airlines was similar to what you’re hearing from corporate customers. Did you also hear from them from some frustration and just pleasure at the results of your change in corporate strategy?

Mary Schlangenstein:

Okay. And on the $1.5 billion impact that you see for the year, is that an impact to income to revenue? And do you expect it to stretch out into 2025 as well?

Operator:

This concludes the Q&A portion of the call. I would now like to turn the conference back to Robert Isom for closing remarks. Sir?

Operator:

This concludes today’s conference call. Thank you for participating. You may now disconnect.

Operator:

Thank you for standing by, and welcome to American Airlines Group's First Quarter 2024 Earnings Conference Call. [Operator Instructions] I would now like to hand the call over to Scott Long, VP of Investor Relations and Corporate Development. Please go ahead.

Robert Isom:

Thanks, Scott, and good morning, everyone. The American Airlines team continues to build a more reliable, efficient and resilient airline. I'd like to thank our team for running a fantastic operation. We're driving revenue through our commercial initiatives, efficiently managing costs and producing free cash flow to further strengthen our balance sheet.

David Vernon:

So maybe to you or Robert, when you look at the 2Q RASM guide, it's a little bit better, I think, than people were expecting but it's not quite sort of flat and level with peers. There's also a pretty big sequential ramp from sort of 1Q into 2Q when you look at the TRASM number. Can you guys kind of help us understand kind of what's embedded underneath that? What's driving the big sequential acceleration on top of capacity growth? And maybe why that unit revenue metric is not performing at the same rate as peers?

David Vernon:

And then maybe just as a follow-up, when you think about sort of the exit rate of 1Q and what we're seeing kind of in April, is that kind of consistent with that ramp building from a sequential perspective in TRASM? I mean, I'm sure you guys have carefully gone through the guidance and stuff like that. It just looks like a really big sort of 1Q to 2Q pop.

Conor Cunningham:

Maybe we can talk a little bit about the regional build back. I'm just trying to understand maybe to David's earlier point, just the mix dynamic that you're seeing as you bring back regional aircraft, I would think it's positive for unit revenue, but potentially negative for unit cost. But I don't know if it's playing out like that. If you could just kind of talk about the regional build back and how that's contributing to your margin trajectory.

Vasu Raja:

Yes, absolutely. Because this is related to my earlier answer, as we go and get more regional supportability as the year progresses, you can already see it in our published summary and early 3Q schedules, we're driving a lot more connectivity into all of our hubs. Dallas and Charlotte, our 2 largest hubs will not just have some of their large capacity base as ever.

Conor Cunningham:

Awesome. And maybe to stick with that comment. Just on DFW and Charlotte, like you said, it seems like you're entrenching or doubling down whatever the term that you want to use there, you're adding a lot more service there. I would have already thought that your market share was really high. So as you bring on that new service, I'm just trying to understand the dynamics of how those 2 hubs play out and if there's still incremental upside as you allocate more resources there.

Sheila Kahyaoglu:

Vasu, I'm sure you're going to get your share of Latin American comments here. So I just wanted to dig a little bit deeper into that Q1 PRASM performance was 1 or 2 points better than some of your network peers. There is obviously concern about that, you talked about Q2. Last quarter, you talked about Miami being as profitable as it's ever been. So if you could just walk us through short and long-haul dynamics in Latin America near term and how much of a driver the region is an inflecting RASMs in Q3 and Q4?

Operator:

Our next question comes from the line of Jamie Baker of JPMorgan Securities. Jamie.

Vasu Raja:

Well, actually, Jamie, it's an excellent question. I'm happy that you saw it because that is actually part of it. And Chicago, as we see it more and more actually plays a really complementary role with DFW and Charlotte because we can go drive a lot more connectivity on it. To my earlier point about the RJs, as those RJs are coming back, what we get to go do in Chicago that we haven't been able to do in a long time, is put connectivity into Chicago from places like the Upper Midwest that are either unique to Chicago or can serve more efficiently over Chicago.

Jamie Baker:

Okay. That's helpful. And then second, Vasu, as you approach the date at which certain agency bookings will no longer accrue advantaged credit, I guess 2 questions. First, what percentage of revenue currently comes through those affected channels that you're going to cut off -- or not cut off, modify? And second, what are your sort of underlying assumptions as to how that plays out?

Vasu Raja:

Absolutely, Jamie. I'm extremely happy that you asked that question. To give you the best answer is it worth it to understand where we've been to understand where we're going and how -- as we call it the preferred agency program fits into it. So if you look at it for a long time, we endeavor to go and do things like maximize share -- agency share or corporate share, but that isn't necessarily optimizing revenue per se.

Stephen Trent:

I believe I heard in Bob's prepared remarks that 61% of revenue now comes from outside of Main Cabin. Could you give us a high-level view as to what this mix looked like 5 years ago?

Robert Isom:

And Vasu, I would add that, that's a critical component of our distribution strategy as well. We absolutely positively must make sure that our customers, no matter where they interact with us, have the full access to the goods services, amenities that American can offer. That's the key for us going forward. So I like what we see in terms of trends, we're going to pursue more of it. And then from that perspective, from a technology basis, we now are at a point where 95% of all transactions that customers have with us can be digitally serviced. So this is a coordinated effort across everything that we're doing. And as Vasu said earlier as well, we'll make adjustments along the way. This is about win in the long run. But in the short run, we've got to make tactical adjustments and we're doing that.

Robert Isom:

All right. Well, I like that question because it gives me a chance to give a shout out. We all hear in the supply chain of partners or vendors that have really not recovered through the pandemic very well. We all know those names. But I want to give a shout out to Embraer. They have delivered day in and day out to that the pandemic, no matter the concerns of their supply chain. The rest of the industry and our OEM is going to learn a lot from them.

Helane Becker:

So I have 2 questions. One, is, can you discuss any progress or lack thereof on your flight attendant contract? And I think how would that change the comment Devon made about reducing costs and the focus on cost reduction? And then my other very unrelated question is, how has the GOL bankruptcy affected your Latin and South American operations, positively or negatively?

Robert Isom:

We don't have the deal done yet, but we're going to get back to the table. So Vasu, you want to talk about GOL?

Robert Isom:

And Helane, just to add to this, just, look, we've built a great relationship with GOL. And my hope is they're able to restructure in a fashion that benefits them and I know that they really appreciate the revenue we put on their aircraft as well. So my guess is that GOL will be something that is involved with American as we look forward to.

Duane Pfennigwerth:

Just a couple of quick ones and Vasu recognizing you've had quite a work out here this morning already. Sorry for going back to the well, but...

Duane Pfennigwerth:

Just with respect to Sunbelt hubs and the concept that a lot of your geography was sort of reopened earlier had a faster unit revenue recovery. And to the extent that you have a window into kind of coastal markets, urban markets that are maybe recovering more vigorously right now. I wonder if you could just comment on that.

Vasu Raja:

Yes, we definitely have less exposure to coastal market. I mean you can see that in just the ASM mix, not just currently, but certainly over time. But the long-term trends are the long-term trends. The GDP of the country is growing, but it's driven by so many markets that uniquely are created by our hub network. Furthermore, spending is up, it's up even higher in those markets.

Duane Pfennigwerth:

And then just for my follow-up, any update on the NEA appeal?

Operator:

Our next question comes from the line of Christopher Stathoulopoulos of Susquehanna Financial Group. Your question please, Christopher.

Robert Isom:

Consistent with what we've been saying, we are focused on the debt reduction target. We're looking forward to talking about other opportunities beyond that point. But right now, we want to get through our $15 billion hit that number and then we will talk more about capital allocation as we get beyond 2025.

Vasu Raja:

No. We go off of sort of Fed-published GDP rates, and we see exactly the same demand backdrop that everyone else sees. A healthy U.S. economy, which is so key to us, strength coming from the Sun Belt and growing spending on experiences over other forms of merchandise or goods.

Michael Linenberg:

I guess I got 2 here. Robert, any sort of quick takeaways from this rule from the DOT on refunds? Any potential and intended consequences. And maybe is this a solution looking for a problem? Because I thought you were doing a lot already of what is spelled out in that role.

Michael Linenberg:

Great. And just a real quick second one here to Devon. Just the credit card deal renewal, is that a 2024 event? Or is that 2025? Just any color or timing around that?

Andrew Didora:

Most of my questions have been answered. But Robert, just kind of wanted to ask on capacity. I know you reiterated your full year growth, and you hinted earlier that back half bends down a little bit. But you also talked about the RJ building throughout the end of the year and 3Q schedules still look to be up in the high single digits, which is pretty similar to the first half.

Robert Isom:

Thanks, Andrew. I'm going to hand it off to Devon because we can be really clear on this. Go ahead.

Unknown Attendee:

Yes, Robert, I'm curious if you ended up having a meeting with Boeing's Chairman or other directors and how it went and what kind of feedback you provided and what you're hearing about the prospects for Boeing turning itself around.

Unknown Attendee:

And do you see any indications from customers that there's like a nervousness about flying in general or Boeing, in particular, like any kind of book away from Boeing planes or just -- yes, any indication that some of these safety events we've seen across the industry are impacting customer behavior?

Mary Schlangenstein:

Some of your competitors have reported that they saw a managed corporate travel volume increase in the first quarter of like 14%, 15%. I wanted to see if you can talk about the same type as a comparable number on that and what it may or may not say about your push for the direct bookings.

Robert Isom:

Mary, I'll kick this off if Vasu can handle it as well. No, we don't think that is the case at all. Look, we've got some fine-tuning to do. No doubt the objective here is to save -- to hang on to all the cost savings and then also to make sure that we maximize revenue production. As we take a look at the first quarter, there's quite likely some benefit that our competitors received because of some of the things that we've -- the changes that we've made. That said, this is the opportunity for us to go and to make sure that as I said, the goal is cost savings and especially revenue production.

Operator:

Our next question comes from Leslie Josephs of CNBC. Your line is open Leslie.

Vasu Raja:

Sure. This is Vasu. I can start. And I'll maybe do last question first. Look, we continue to see healthy macro trends. We don't guess beyond what's the same information that probably everybody on this call gets to see and report on. As far as bookings go, Look, really beyond the summer, the system has -- it's not very much booked, in June right now in our domestic system where about 35% to 40% booked up, which is pretty normal for that entity. The long-haul network is a lot more booked up. 50%, 60% and building all of the time, depending on the entity that's there. But we continue to see healthy bookings come in. And like I mentioned before, and when I was talking about RASM by geography.

Leslie Josephs:

So bookings for summer are higher than last year?

Robert Isom:

Leslie, just to put a fine point on it, we see strong demand, and we're going to revenue manage appropriately. But the marketplace, domestic international looks very strong.

Robert Isom:

Latif, thanks. Look, we don't like reporting a loss. That's a challenge for us. It's also an opportunity. As we look forward, we are encouraged by what we see in terms of industry dynamics and also by those things that we've identified in the first quarter that we can go and address. We're going to do that. And we're going to stick to our longer-term game plan that we pointed out at Investor Day, and that is based on this that the environment for air travel is very -- is constructive.

Operator:

This concludes today's conference call. Thank you for participating. You may now disconnect.

Operator:

Thank you for standing by, and welcome to American Airlines Group's Fourth Quarter and Full Year 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. [Operator Instructions] I would now like to hand the call over to Scott Long, VP of Investor Relations and Corporate Development. Please go ahead.

Robert Isom:

Thanks, Scott, and good morning, everyone. Today, American reported an adjusted pretax profit of $257 million for the fourth quarter and approximately $2.5 billion for the full year, driven by the strength of our network, continued demand for our product and fantastic execution by our team. I want to thank the American Airlines team for their incredible work to care for our customers and deliver a 2023 that we're proud of. We're running a historically strong operation, driving incremental revenue through our commercial initiatives, managing our costs, producing record free cash flow and strengthening our balance sheet through debt reduction. This year, we'll continue to prioritize reliability, profitability and accountability, while building an even more efficient and resilient airline. We also remain focused on taking care of our team and continue to make progress on our labor agreements. Our commitment in negotiations has been consistent, reach deals as quickly as possible and ensure our team is paid as well as their industry peers. We finalized a new contract with the APA in the third quarter last year. And a few weeks ago, we did the same for our customer service team, represented by the CWA-IBT, giving team members increased pay and quality of life improvements. We continue to negotiate with the APSA with the shared goal of reaching a deal that will pay our flight attendants at the top of the industry. Now, let's talk more about our financial results. We produced record full year revenues of approximately $53 billion, driven by strong demand for our product and record revenue from our travel rewards program. Demand remains strong, and we've seen robust bookings to start the year as travel trends have begun to normalize across entities. We're also very encouraged by the trends we're seeing in business travel. Domestic revenues from business travel ended the fourth quarter at approximately 90% of 2019 levels. We're excited about the continued rollout of the AAdvantage Business program, and we continue to see strength among small and medium-sized businesses. We see further potential revenue upside as we restore our hubs domestically, enabled in part by the recovery and regional supportability. This year, we expect our system capacity growth to be balanced between domestic and international. More than ever, our revenue growth is fueled by a growing number of AAdvantage customers who acquired our co-brand credit cards in record numbers in 2023. AAdvantage customers represent both our greatest source of value and greatest opportunity going forward. In 2023, two-thirds of our revenue came from AAdvantage customers. These customers also account for 70% of our upsell, loyalty and partnership revenue. Over the past year, we have made changes to our distribution strategy to give customers direct, improved access to our best products and enable American to provide better customer service to the individual traveler. We're very encouraged by the results. Customers who shop directly with us have a more enjoyable experience and are 11 points more likely to recommend American than those shopping in traditional outlets. They're purchasing more valuable content and doing so at lower expense. In 2023, our revenue was 15% higher than 2019, while our selling expenses were 10% lower. Our fleet, network and travel rewards program will continue to drive significant value moving forward. And our limited near-term capital requirements will position us to continue to generate free cash flow. Turning now to the operation. The American Airlines team continues to achieve industry leading operational results. We produced our best ever performance in the fourth quarter and over the full year, including our record on-time departure rate and completion factor during the busy holiday season. American ranked first among the U.S. network carriers in mainline and regional completion factor in 2023, with our lowest number of cancellations for any year since the merger. All of this led to record likelihood to recommend scores in the fourth quarter and full year. No network airline has operated more reliably than American over the past year and a half. We're running the best operation in our history, thanks to our focus on operational excellence and strong collaboration across the entire organization. We will continue to build on that performance and deliver exceptional service for our customers. Now, I will turn it over to Devon to share more about our fourth quarter and full year financial results and outlook for the rest of the year.

Robert Isom:

Thanks, Devon. The American Airlines team continues to produce outstanding operational and financial results. When I moved into the CEO role two years ago, we made a commitment to be reliable and profitable and we have delivered in a big way. We made it clear to all of you what we were going to do and our team made it happen. Moving forward, we will continue to execute on our plans and control what we can control. Our team has done tremendous work, but there is much more in front of us as we continue to leverage our fleet and our network and build on our operational momentum. We see significant opportunistic to reengineer the business to build a more efficient airline. All of this will enable us to generate sustainable free cash flow. We look forward to sharing much more at our Investor Day on March 4th. And now, operator, please open the line for analyst questions.

Michael Linenberg:

Hey. Thanks. Good morning, everyone. I guess sort of a two-part question to involve Latin America too, I guess, Vasu. December quarter, it did look like that, that was the geography that underperformed, and I know some have called out that that's going to be a challenging geography in the March quarter as well. Obviously, it's a region that you're very strong in. I believe last quarter, Vasu, you did indicate that you were sort of going to add even more capacity into the region. There were markets that maybe were working there. Can you differentiate between near international beach markets and maybe Latin America long haul? Is there a distinction? One's outperforming the other. Any color on that? And then I have a quick follow-up related to the region as well. Thank you.

Michael Linenberg:

Okay. Great. And then just my second on Latin America. Your partner down in Brazil, looks like they may potentially file for bankruptcy. When I think about your CapEx and investments for 2024, are you including in that some potential additional investment in GOL or is that a TBD or maybe that's not even on the table? How should we think about that and your relationship there?

Operator:

Thank you. Our next question comes from the line of Scott Group of Wolfe Research.

Robert Isom:

Thanks, Scott. Hey, look, we see, obviously, a tremendous demand. But we build our plan based on what we think is going to happen. Now that said, if other carriers are actually seeing that kind of benefit, it's going to accrue to American as well. And so I have no doubt that if there are adjustments to our assumptions based on any reason, whether that be capacity or demand that, look, we're going to be the beneficiaries as well as for overall economic performance in the U.S.

Scott Group:

So, just -- so I understand within your RASM guide for Q1, you're expecting domestic RASM to inflect positive by the end of the quarter. Is that right?

Scott Group:

Okay. And then just so I heard -- just want to clarify then. The full year guide does include expectations for a flight attendant deal.

Scott Group:

Okay. All right. Thank you, guys. Appreciate the time.

Catherine O'Brien:

Hey. Good morning, team. Maybe one for Devon first. Congrats on the progress towards your total debt goal. It seems like that's tracking ahead of schedule. What's the right debt reduction target we should be thinking about for 2024 with over $2 billion in free cash flow currently expected? I'm sure we'll hear more in March, but any high level thoughts on where you want leverage to go in the short term? And what's the appropriate long-term level of net debt or EBITDAR, or whatever your preferred metric is? Thanks so much.

Catherine O'Brien:

Got it. And then maybe, if I could just dig in a little more with you, Vasu, on how you expect the different regions to perform underlying that 1Q unit revenue guide of down 3.5% to 5.5%. Understand, what you already told us about short haul and domestic turning positive by the end of the quarter, but would love to just kind of run through Transatlantic, LatAm, Asia-Pac, domestic with whatever details you can provide. Thanks so much.

Operator:

Thank you. Our next question comes from the line of Jamie Baker of J.P. Morgan Securities. Please go ahead, Jamie.

Vasu Raja:

Well, Jamie, the worst is behind us. That happened in Q3. In fact, New York -- and I'd refer you and others to prior commentary that I made on this either in press or on these calls. The New York marketplace, the New York customer base has changed in the post-pandemic world. It now is the thing, which our slot portfolio serves a whole lot better. Our New York performance is doing better. And unlike what led to the partnerships we've had there, we see continued growth in originations share. New York is our largest market for enrolling new customers, both in AAdvantage and in the credit card and it had never been that prior to the NEA. So, we're certainly open. We're open to any partnership that is better for our customers, period, full stop. But for where we are right now, the worst is certainly behind us.

Vasu Raja:

Hey, Jamie. It's a great question and maybe one that speaks at large our distribution strategy. And so let me speak at large to that first and I'll hit that. First, all of our changes whether it's with corporate travel management or travel agencies, what have you, are this simple, we sell our product through the Internet. That's what our customers demand. That's how we can give them the best content at the lowest expenses to them and the best servicing and we see that. We see that we're producing revenue more efficiently, more strategically more to the liking of our customers. I'll echo what Robert said. We're up 15% in revenue. We are down 8% to 9% in selling expenses. Our likelihood to recommend scores are higher. But as we look at it, what has really been a change is 65% of our revenue comes from AAdvantage customers, but we continue to see a lot more (ph). About 45% of our revenue is coming from AAdvantage customers who are buying premium content, a better seat, more refundability, more flexibility for miles. And that's up 3 points year-over-year. So that's all to say that -- in any which way we double click on that, it's meaningful, right? We too exit Q4 with a 90% business recovery. Within that unmanaged business versus managed businesses, almost a 3:1 ratio, with unmanaged business 100% plus recovered, managed business down further. The impact on managed business is really flat from traffic on higher yields. So as we go forward, actually, we're going to lean further into this. What we have realized through this is first and foremost, we need to make it easy for our customers to consume our content through the Internet. So, we're going to offer more mileage for customers who shop through the Internet. We're going to roll out better servicing capabilities for Internet distribution, and we are going to start restricting the amount of selling and servicing that we do through non-Internet based channels. And we invite all the travel managers and all the travel agencies of the world to join us in this because this is great for customers and it should be great for them too. All of our financial incentives targeted to that audience are really around helping them shift. So, we've actually been very encouraged by what we've seen. I think, clearly, our relative RASM performance is similar to what it was in the exit pandemic period. And now in the year ahead, we have the opportunity to optimize.

David Vernon:

Hey. Good morning, guys. So on the topic of sort of premium and how the buy-ops are affecting the business right now. Can you give us some sort of color around how premium product sales or movements up and down the fare ladder happening, growth in basic, growth in premium? Just give us some sense of kind of where you are in that process of tapping into what is a more lucrative segment of revenue?

David Vernon:

Okay. And then maybe just as a quick follow up. As you think about some of the rationalization of the negative margin or lower margin capacity that's being contemplated out in the industry, how should we be thinking about the impact of, let's say, an unbundled operator pulling in capacity on your fare ladder? Is that sort of uniform impact up and down the different fare classes or is it more concentrated in something like a basic product? Anything you could tell us for, help us to understand how some of the capacity changes in the market might impact American would be really helpful.

Robert Isom:

Hey, David. I just want to add one other thing here, which is, this is that we've built technology to enable us to react to whatever may come our way. So as Vasu has said that, look, our goal is to make sure that we can deliver a product to the customers the way they want to receive it. It also has to be done in a way that is incredibly nimble and can be changed. And in the past you may have seen carriers, even American unable to react very quickly. That's not the case right now. So whatever happens in the marketplace, we've got the technology, we've got the product to be super competitive and whether it's us developing it on our own or having to compete, we'll be ready.

Katherine Kallergis:

Good morning, everyone. This is Katherine on for Ravi. So, thank you for taking my question. My question is really around the Investor Day in a few weeks, which I know is probably the first one you guys have hosted in about seven years. And I was just curious what investors can expect to hear during the event, whether it's new financial long-term targets, revenue initiatives, just any color around the event would be great.

Katherine Kallergis:

And just as a quick follow-up, I know it's probably too early, but I was curious if you had seen any share shift in January just due to the issue with the MAX grounding with other carriers. I wasn't sure if you had seen anything in the data.

Operator:

Thank you. Our next question comes from the line of Duane Pfennigwerth of Evercore ISI. Your question, please, Duane?

Vasu Raja:

Yeah. Hey, thanks for the question. Look, the booking curve is largely flat to last year. There is a moderate shift. Let's call it 2 points from outside of the inside 30 day range to the outside 30 day range. What I would say is, right now, we're intaking revenues in line with capacity and entity by entity, market by market. Sometimes it's yield, sometimes it's traffic. But as long as that's continuing, we're encouraged. Right now, in the summer, really the most impactful thing that we see is long haul. And we're seeing long haul book up on a revenue basis at the same rates as we saw last year, which is a particularly strong year and we're just too early in the domestic and short haul curve to really see that yet. But we're encouraged by what we see even as we start selling more March and the post Easter period too.

Vasu Raja:

Yes. So far we're holding serve, and it's still a long way to go, though.

Andrew Diadora:

Hey. Good morning, everyone. So, Robert, just on the operations, you've obviously made some great strides here post-pandemic. Certainly seems to really be helping your CASM. Don't want to steal any thunder from Investor Day, but just kind of want to get your bigger picture thoughts on like what is next operationally at American into '24 and '25? What's the plan or are you at a point now where it's sort of maintaining what you have built so far?

David Seymour:

Yeah. No, Robert, thank you. And, again, super proud of what the team has done in 2023. It was a great year, but it really as Robert said, it is the foundation of where we're headed into '24 and beyond. What I'd tell you is, we have a much better understanding of the complexities of our operation and we're investing in technology to solve quickly and more efficiently and more optimally than we ever have before. So, our relationship and our partnering with our IT team is just starting, and we had seen a lot of opportunity in the future to do what we do better, more better, more efficiently than we ever had before.

Robert Isom:

Yeah. Hey, thanks for the question. Look, I'll answer it in this way. We have been similarly enthusiastic and even a little surprised at how quickly the transition has happened. It's not just that we're 80% coming through Internet based technology. Within that, 65% plus is coming just strictly through our owned channels, which is our greatest rate of growth. So first, I will say, strategically, we're going to distribute through the Internet. It's what our customers demand. It's how we give them the best fares and the lowest expenses and the best servicing. So at some point, the number becomes 100. And the real issue in 2024 is we want to just continue to transition as many of our retailing partners to use the Internet with us. So ultimately, it becomes 100. We're really encouraged by what we've seen therein.

Savanthi Syth:

Hey. Good morning. Just to follow-up on the commentary about balanced growth between domestic and international, I was curious, if you can talk a little bit about, like on the international side, if there is kind of a difference in growth trends between Atlantic and LatAm and Asia? And then on the domestic side, just if the regional mix, what kind of improvements in mix you're expecting this year?

Savanthi Syth:

Correct.

Savanthi Syth:

That's right.

Savanthi Syth:

That's helpful. And lastly, if I might just kind of be converse of the basic economy discussion on the premium revenue side. Just wondering if you can talk about what you're seeing there and if you're seeing any, what you're seeing on the kind of the booked fresh class load factor, those kind of trends?

Operator:

Thank you. Our next question comes from the line of Conor Cunningham of Melius Research. Please go, ahead, Conor.

Scott Long:

We've got you, Conor. Go ahead.

Devon May:

Yeah. For this year, it certainly is a lot less higher than what we've done in the past. We are going to be bringing on about 1% more headcount. So, we'll call it somewhere around 1,000 or 2,000 more heads this year, but a big reduction from where we're last year. And it's just a sign of where we're at with efficiencies as well. We've probably hired a head a little bit in 2023, but this year we're looking to grow the airline mid-single digits and headcount is going to grow by about 1%.

Devon May:

Yeah. I'll start and just maybe talk about where the P&L has been and then turn it over to Robert, to David. But we did have some headwinds in 2023, I want to say our maintenance expense in 2023 versus 2022 was up something close to $0.5 billion. This year flattens out a bit. We do expect it to be up. And it's one of the areas of the P&L where we'll have a little bit of variability just depending on how many in-house engine overhauls that we end up doing this year. But '23 was a big step up, '24 is less so. And there is a lot of great work being done on David's team to address as well. Hand it over to them.

David Seymour:

Yeah, Robert. Yeah, there's a lot of effort both what Robert and Devin talked about is that a lot of focus here and we have these normal waves that we run into with maintenance cycles that we have on heavy checks and engine checks that we got to do. But a lot of emphasis this past year and going into 2024 of getting a lot more efficient at how we manage that maintenance. As Robert talked about, we have really good control with longer-term resources to get that work done. So, we're very confident that we're going to be able to get the efficiencies and reduce some of that cost here in the near future.

Daniel McKenzie:

Hey. Thanks. Good morning, guys. My two questions are on technology as well here. So, 65% of the bookings going to 100% on aa.com. What percent or portion of the revenue does this represent today and what percent of the revenue was up 15%, exactly?

Daniel McKenzie:

Yeah. Thanks a lot. That's helpful. And then the second question is really a bigger longer-term question on potential cost savings and it relates to the transition to the cloud. I'm wondering where American is at with respect to that transition and what kind of cost savings that could ultimately represent on an annual run rate? So is it tens of millions, hundreds of millions or maybe somewhere in between?

Robert Isom:

Yeah. And Vasu, I'll just add that, look, all of that kind of work will be a facilitator to delivering product faster, more efficiently and so that's the kind of mindset. So we're not -- I'd rather not talk about it just as a discrete item. We'll bring it altogether as we get to March 4th.

Operator:

Thank you. [Operator Instructions] Our first question comes from the line of Alison Sider of Wall Street Journal. Please go ahead, Alison.

Robert Isom:

Hey, Ali. Look, a couple of quick things. First off, some of Boeing's current issues are all around the MAX 9 and the 737-900s. American Airlines does not fly those aircraft. We're a huge Boeing customer, though, and we're dependent on them for just producing. [Technical Difficulty] We're going to hold them accountable. Boeing needs to get their act together. The issues that they've been dealing with over the recent period of time, but also going back a number of years now is unacceptable. And no matter who it is, all of Boeing needs to come together and to get back on the right track.

Robert Isom:

So, look, we will encourage Boeing to do everything that they can to get back on track and produce a quality product, plain and simple. For us, we have a fleet right now of over 1,500 aircraft, so we have 20 MAX 8s that are on the horizon for this next year. These aircrafts are likely already in production, and I don't anticipate to run into any issues. But I'll say this as well, though. Nobody has taken on more new aircraft than American Airlines in recent history. And we take that acceptance process very seriously, and we've done that for years. We have the teams of people in place to make sure that what comes onto Americans property is ready to go, ready to fly. And as I said before, we encourage Boeing to get their act together, get back on the right track.

Mary Schlangenstein:

Hey. Good morning. Just to follow up on that, as you continue to talk to OEMs about a potential narrow body order this year, are the things that are occurring at Boeing right now, is that having any impact at all as you think about placing that order? And then also wondering if you think that federal officials are taking the right steps in looking at Boeing. They've said they may expand to other production lines than the MAX. Do you see them taking the right steps or would you like to see them doing something different, maybe going even stronger on new requirements from Boeing?

Mary Schlangenstein:

So can you comment on whether what's going on at Boeing will reflect your ultimate decision on a narrow body order?

Mary Schlangenstein:

Thank you.

Leslie Josephs:

Hi. Thank you. Are you increasing your oversight personally at Boeing and do you see that as a permanent change, just given that it's kind of been one issue after another? And then just another question. Is Boeing providing any compensation, whether cash or in the form of discounts or anything else because of the issue and the FAA blocking any further production that could impact deliveries? Thanks.

Operator:

Thank you. That does conclude the Q&A portion of our call. I would now like to turn the conference back to Robert Isom for closing remarks. Sir?

Operator:

This concludes today's conference call. Thank you for participating. You may now disconnect.

Operator:

Thank you for standing by and welcome to American Airlines Group's Third Quarter 2023 Earnings Call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question-and-answer session. [Operator Instructions] I would now like to hand the call over to Vice President of Investor Relations and Corporate Development Scott Long. Please go ahead.

Robert Isom:

Thanks, Scott, and good morning everyone. Today American reported an adjusted pre-tax profit of approximately $362 million for the third quarter, an earnings result that was above the high-end of our latest EPS guidance range. The American Airlines team continues to produce strong results, and as we look ahead to the rest of the year, we continue to prioritize reliability, profitability, accountability, and strengthening the balance sheet. We are also focused on taking care of the team. We are very pleased to have finalized a new contract with the Allied Pilots Association in August. The agreement delivers significant compensation and quality of life improvements to our pilots, while allowing us to expand our training capacity to support underutilized aircraft and our future flying. We're also working toward new agreements for our flight attendants and agents. We're running a strong and reliable operation involving our commercial offerings, taking care of our team and customers, producing free cash flow, and strengthening our balance sheet. All of this speaks to our steadfast focus on controlling what we can control. And we are proud to say that we are delivering on our commitments. Now before discussing our results in more detail, on behalf of all of us at American, I want to say how shocked and saddened we are by the horrific attacks in Israel, and we join the international community in condemning these acts of hate and violence. We are devastated by the incredible loss of innocent life. We're making every effort to care for our team members, who are impacted by this tragedy and to keep our team members safe, while also working with the U.S. Government to help find safe travel options for customers trying to depart the region. The safety and security of our team members, customers, and their families remains our top priority. Turning now to our financial results. We produced record third quarter revenues of approximately $13.5 billion, driven by a resilient demand environment and record travel rewards program revenue. Domestic demand remains steady, while international demand continues to drive revenue growth, led by the Atlantic, Caribbean, and Central America. During the third quarter, we saw year-over-year growth in corporate and government revenue, with a return to more traditional seasonality trends. We remain encouraged by what we're seeing with demand and revenue from unmanaged business travel. Importantly, more customers than ever are choosing our Travel Rewards program by acquiring our co-brand credit cards in record numbers, enrolling in the Advantage program, and shopping for our product through our direct channels. Co-brand mileage sales growth continues to outpace airline capacity and GDP growth, driving increased levels of loyalty and revenue production from card users. In the third quarter, approximately 80% of our bookings came from our own channels and modern retailing technology, which is up approximately 11 points from a year ago. These are the most efficient distribution channels in our ecosystem, and we expect to see these trends continue into the fourth quarter and beyond. Looking forward, our Network and Travel Rewards program will continue to be the primary drivers and value for our customers and for American. And we are focused on operating our business as efficiently as possible. Our simplified fleet remains the youngest and most efficient among the U.S. Network carriers, and we are working to increase the utilization of both our mainline and regional aircraft. In addition, we are identifying opportunities to drive incremental value across the company. These initiatives and our limited near and medium term CapEx requirements will allow us to continue to generate free cash flow that we can use to reinvest in the business and continue to pay down debt. Now turning to our operation. The American Airlines team delivered another quarter of fantastic operational results. Our team has produced stellar results for more than a year, including a record-setting performance during the peak travel period this summer. American operated more than 515,000 flights in the third quarter, and we produced our best ever third quarter completion factor of 98.6%. American ended the quarter with the best completion factor of the U.S. network carriers, while maintaining our first place standing and on-time departures through the first nine months of the year. No network airline has operated more reliably than American over the past 15-months. Our operational performance is better than ever and it's because of our steadfast focus on reliability and strong execution in an increasingly complex environment. Our commercial and operations teams build a fantastic plan each month, we execute on it, and we recover quickly during irregular operations. We're building on our momentum and we are committed to delivering a reliable operation for our customers as we approach the holiday season. And now I'll turn it over to Devin to share more about our third quarter financial results and the outlook for the fourth quarter.

Robert Isom:

Thanks, Devin. We're incredibly proud of everything the American Airlines team has accomplished over the past 18 months. We told you we were going to focus on reliability, profitability, and strengthening our balance sheet, and we've done just that. American had a great summer and has run the most reliable operation of the U.S. network carriers over the past 15-months. We're consistently profitable and we've materially improved our balance sheet by reducing total debt by nearly $11 billion since 2021. We'll maintain that focus as we move through the fourth quarter and beyond. No matter the macroeconomic conditions we face or the variability of the operating environment, our team is intent on controlling what we can control over the short-term and setting our company up for success over the long run. I'm incredibly excited by what the future holds for American. Looking ahead, we will be much more efficient as an airline. As an example, even today, we could be flying 5% more with the aircraft we already have in our fleet. We're eager to restore regional service to the underserved smaller markets that are still feeling the effects of the pandemic. We're building back and expanding our network in an efficient manner that will lead to stronger revenue production. Our Travel Rewards Program AAdvantage has already undergone significant change that is helping us grow high margin revenue at a greater rate than GDP and we anticipate that to continue as we work to make our co-brand credit cards even more valuable to consumers and our partners. On top of all that, we continue to innovate in creating a leading retailing experience, ensuring that anything we offer our customers can be shopped, purchased, and serviced digitally. It all bodes well for American, our team members, customers, the communities we serve, and especially our investors as we enter 2024 and look to 2025 and beyond. And with that, operator, please open the line for analyst questions.

Helane Becker:

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

Vasu Raja:

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

Vasu Raja:

Yes, Helene, actually it's none of the above would be the answer to the question. Look in the business of ours from one quarter to another, it's easy to draw a lot of prognostications, which probably aren't there. And as we see it right now, it's a particularly weird time. One, because so many -- so much of the U.S. airline business is still recovering their networks, and the networks that are being recovered are probably never been more divergent, never more different competitively, but also never more different than what was there three or four, certainly five years ago. And so a little bit of what you see is that. And what I would actually say is we, I'll echo the points I made and then Robert made me in the opening bit. As we look forward, actually we see a lot of opportunity. First of all, with our network, you know, as we look out there, we serve 300 cities in North America, in 200 of them, we have a network advantage. And as we bring back more of the regional jets, as we up gauge the mainline fleet, that's a real advantage for us, because so many of our competitors really won't be there. The customers in those cities are about 50% of our customer base, but they produce about 60% of our revenues. They're the ones who are signing up for the program for AAdvantage and enrolling in the card. And then the other big opportunity we have really across our enterprise, but it'll play out most notably in the domestic system, is really with AAdvantage, our travel rewards program. As we see it, our co-branded credit card is the largest co-branded credit card in circulation. Our program is one [Technical Difficulty] maybe travel programs in the business. But if you look at us, we produce probably $400 million less in frequent flyer revenue than what the industry leader does right now. So the quarter-to-quarter trends are just a function of things like the recovery. The real thing that we're seeing is the opportunity in the quarters and years ahead.

Operator:

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

Devon May:

Sure, and maybe I'll just start with fourth quarter performance and then we'll talk a little bit about 2024. And while we're not giving CASM guidance for the year, I can talk to you about some headwinds and tailwinds. So starting with fourth quarter of this year, as Vasu said, these numbers do shift around a little bit from quarter-to-quarter, but our full-year CASM-ex guide has been unchanged since the start of the year. And we knew at the start of the year, the fourth quarter was going to be our toughest comp. Our capacity starts to decelerate or capacity growth starts to decelerate a little bit as we entered the fourth quarter. We also had a couple of one-time credits that we got in the fourth quarter of 2022 that aren't happening for us this year. And then there was a shift of some expenses from the third quarter into the fourth quarter, adding a little bit more pressure. But we're still really pleased with our full-year result, hitting the guide or the midpoint of the guide that we had at the very start of the year. As we look out to 2024, the headwinds are where you'd expect. It's largely around salaries and benefits. We have open contracts with our flight attendants and our passenger service and reservations groups. If we are able to achieve deals that match industry leaders for those work groups, it'll add about a point of CASM pressure year-over-year. We also just have regular increases for other labor groups that are happening next year. But the tailwinds of what Robert talked about and what we're excited about actually working towards full utilization of our fleet. And this operation we've been running has been incredible for the last year, year and a half. Now we have a real opportunity to go ahead and do some optimization work around this operation. So we do have some headwinds on salaries and benefits. We have some real nice tailwinds as well into 2024, and we'll be able to provide more guidance on what CASM will look like on a January call.

Vasu Raja:

Sure, this is Vasu. I can answer that. In fact, I'd be very, very happy to answer it. Look, what we see, and we think that the real causal thing that's happening in the customer itself as opposed to a their product or cabinet service, what we've certainly seen and Robert alluded to it since 2019 advantage -- our advantage customers are really driving the revenue production of the company, and that's manifesting itself in a range of ways. So versus ‘19, our membership is up 50%. Almost two-thirds of our revenue, certainly in this last quarter, came from AAdvantage customers. And what we're finding with them is that those customers are proving to be a much more resilient pool of demand that indeed are willing to engage in behaviors that aren't just shopping for the fastest schedule or the cheapest price. We see that play out in a lot of different ways. One is premium cabin performance, where our premium fair products revenue is up 7% from AAdvantage customers, in keeping with our overall seed growth. Two, we see that remuneration on our credit cards is of about 25% from these customers. And then importantly, we find that these customers disproportionately want to shop with us directly about 85% of all the AAdvantage member revenue in the system is coming through our direct channels. So we see the causal thing, and that's why it was in our remarks, is what's really happening is for our AAdvantage members, there's a real desire to travel, and they're coming to us because they want a great network and a program that rewards them for using it, delivered reliably over and over and over again.

David Vernon:

All right. Thanks, guys.

Andrew Didora:

Hey, good morning, everyone. Devon, maybe just digging into the 2024 costs a little bit. Given the changes in the pilot contract, I know kind of the new profit sharing now runs through the salaries and wages line. How should we think about wage growth next year in relation to kind of the single-digit capacity?

Andrew Didora:

Okay. Thank you. And then [Indiscernible] Vasu maybe -- can you speak a little bit more in terms of what you're seeing on the corporate side, particularly as it relates to both kind of large and small corporates, particularly, I know you've made some pretty big changes with your corporate sales force just curious if you've seen any sort of unexpected share shifts or anything like that as we moved into this more seasonally stronger time period for corporate travel? Thanks.

Andrew Didora:

Great. Thanks for that.

Michael Linenberg:

Hey, good morning everyone. Hey, Vasu, can I just -- I know you’ve sort of called out what the revenue for premium for AAdvantage members was up year-over-year? If I look at in its entirety what year-over-year was the gain in premium product revenue. And then when we think about sort of the split, where are you, you know, as a percent of your passenger revenue, total passenger revenue, premium versus non-premium? Even rough numbers would be fine. Thanks. Hello?

Michael Linenberg:

Okay.

Michael Linenberg:

Okay, great. And then just my Second question on, you know, I saw that you're applying for -- to fly from JFK, Haneda. And I'm curious because, you know, sort of post-NEA, I got the sense that maybe you were going to be sort of maybe, I don't know if downsizing New York is the right thing, but the fact is, you know, wide bodies are scarce and for everyone. And that would take two frames. And you already have JAL in that market with the code shares. So, you know, what's the rationale behind that? Thanks for taking my questions.

Michael Linenberg:

Makes sense. Thank you.

Catherine O'Brien:

Hey, good morning everyone. Thanks for the time. Devon, I just wanted to dig in a bit on the cost performance to-date. You know, you came in close to a point below the low end of your 3Q range. I know you mentioned some timing shift, but you're also sticking with your prior midpoint for full-year CASM-ex despite the extra crew for pilot retro pay since you last updated that full-year cost outlook? I guess, you know, what has been going better than expected? And then can you just remind us what you had originally baked in for the open flight tenant contract in the second-half did that have any impact on 3Q? Thanks.

Catherine O'Brien:

That's great. Thanks for the detail. And then maybe one for Vasu. You know between the third quarter and second quarter you experienced decel in TRASM, you know, on year-over-year in 2019. I totally understand there's so many moving pieces now as the network recovers and the shape of your network has changed a bit over the years. But your fourth quarter guidance implies things will stabilize in a year-over-year basis. Can you just walk us through what's driving that stabilization? Thanks so much.

Catherine O'Brien:

Right, just comparing the year-over-year to each other.

Catherine O'Brien:

Great. Thanks for the time.

Jamie Baker:

Hey, good morning, everybody. Vasu in NEA question, you know, we're obviously tracking some of the rebalancing between JFK and Philadelphia. I see that 787 captains in Philly, that number is moving up quite a bit. Looks like JetBlue will continue to operate a portion of your slots through the end of IATA's summer season next year. I [Technical Difficulty] so part of my question is am I right on that, but more importantly I recognize networks are fluid, but when should we think about Philadelphia and New York, sort of, reaching a steady state? Is that a process that will wrap in time for next summer or should we think of the NEA unwind as lasting longer than that?

Jamie Baker:

Okay, fair enough. And then second question, you know, for Devon, a clarification, the $3.5 billion CapEx figures that you gave or figure that you gave before, that was aircraft only, correct? So all in, we should be dialing in something, you know, closer to $4.5 billion going forward. I'm assuming I got that right. And if so, do you expect to generate cash next year at current fuel prices?

Jamie Baker:

Okay, thank you very much.

Duane Pfennigwerth:

Hey, thanks. Good morning. Appreciate the time. Kind of an industry question, but we'll go ahead and ask it of you. Just with respect to 4Q RASM guidance down 6.5% at the midpoint, which is actually a little bit better than what we were modeling, and the cost pressures you are outlining into next year, what needs to go right to get that unit revenue back to positive territory. I mean, the 5% growth that you're outlining, you know, may or may not be crazy relative to GDP. If we're just thinking about it year-over-year, right, 5% doesn't sound crazy. But if we think about where your margins are exiting here, the exit rate on your margins, you know, any thoughts about how we get back to positive RASM, which it appears you'll need to stabilize your margins here? Appreciate the thoughts.

Duane Pfennigwerth:

I guess just maybe thinking sequentially, like how patient will you be with sort of breakeven-ish, negative margins? Like is that a one or two quarter phenomenon? Is it a multi-year phenomenon?

Duane Pfennigwerth:

No, it's not an easy question, but I appreciate the thoughts. Thank you.

Conor Cunningham:

Hi, everyone. Thanks for the time. Just your capacity has been pretty stable relative to the industry. And a lot of the constraints that we've talked about this year seem like they're going to carry forward next year if not get a little bit worse. And so, at the same time, the domestic competitors are really struggling. So I'm just curious on how you may take AAdvantage of that situation next year, if those themes continue to play out, or are you just happy with the current execution of what you're doing right now?

Conor Cunningham:

Okay and then you know you've executed you know, pretty remarkably on your plan, but your margins, maybe to Helane’s earlier question, just, you know, continue to lag Delta United and, you know, your operations been better, all that stuff, and I get it, but, you know, When you think about the opportunity ahead to close that gap, is it more a revenue equation or cost? I think historically Americans talked a little bit about the revenue gap, but it seems to be that there's more of a cost opportunity here. Just curious on your thoughts there. Thank you.

Robert Isom:

And Conor, I'll just underscore one more time. Please take a look at the past year. There's a lot of variability in quarters in terms of whose network is aligned to do better one to the next. And also, a lot of noise in the numbers in terms of just building back the airlines from the pandemic. We feel really confident about how we're seeing '24 especially on a competitive basis against our peers.

Operator:

Thank you. Our next question comes from the line of Savi Syth of Raymond James.

Vasu Raja:

Yes. Hey Savi, this is Vasu. I can take that, and I'll take it in two parts. First, just around the world, yes, we see really strong long-haul revenue trends, regardless of the entity, long-haul Atlantic, long-haul Latin America, long-haul Pacific and as I mentioned earlier, versus any prior period of time, whether last year 2019 or really anything as far back as it goes we've seen uniquely strong revenue performance. But what we're encouraged by is that our revenue performance, though it's not where we yet wish it to be, has never grown at a faster rate than some of our international partners. And for many of them, fly into North America is the very best thing that they do. So we're encouraged by the journey we've been on we see more opportunity ahead as we do simple things. Configure airplanes smartly, get low-cost jets like the XLR. And so our future in international is one which is well within our control and very practical. It doesn't involve any great prognostications of how the world would change. And then as far as next year goes, look, a lot of our overall entity mix is largely to be similar, where we're going to be about a 70%, 75% short-haul carrier and a 20% to 25% long-haul carrier. But those areas would grow at a similar rate, which is why the mix stays on.

Devon May:

Yes. It's probably a little early to get into too much detail. We do expect to build back the regional network. We're also looking at better utilization on the mainline side. So we'll give a little more detail as we get into January.

Operator:

Thank you. Our next question comes from the line of Daniel McKenzie of Seaport Global.

Vasu Raja:

Hey Dan, I appreciate the question, and I'll do that be your answer sequentially, too. Look, first and foremost, like I said, we're very encouraged by the changes that we've got there, largely, because they're simply responsive to the customers. And we're retailing our product the way customers expect, which is really just through the Internet. And unsurprisingly, customers have responded. So what we saw as we were going through COVID, was already without American Airlines making any strategic changes, we went from about selling 50% direct to selling about 60% direct and right now, what we're in taking in terms of revenue is actually about 80% going through, as we call it, Internet-based distribution, of which about 70 of those 80 points is going through our true direct channels .com and app and the balance coming through new distribution technologies. In fact, our Internet-based travel agency technologies is now a bigger source of bookings than any of the legacy global distribution systems are. So we're encouraged by that, but also very clearly not that surprised. I mean customers want that experience, which is the second part of your question. The very simple benefit is through what we do, we can go and create more offers for customers that they value. We've seen this, and we continue to see this at a number of customers who come to aa.com or the app shopping for the cheapest fare that we have end up selling up, like roughly 70% of the customers who come to our websites actually come looking for the lowest fare, but buy something higher than that. And through these new tools, we can go and offer them a whole lot more that creates value for them. We can differentiate things like how they're able to redeem miles for different fare products or even they're able to earn miles for different fair products. And then the other thing that I would say is, which is we're finding to be very, very impactful. And as we shift to Internet-based distribution, our servicing becomes a whole lot simpler. So it's hard to do what three years out look like. Looks like, but I can talk about the next several weeks and quarters. And what you will see from us are things where we do much more consciously differentiate. All the content we offer will be through Internet-based technologies. We will look to do things like offering more miles for buying premium cabin for shopping through our direct channels for using our credit card. We will create more redemption opportunities for the [Technical Difficulty] but then also, what will be in place by the end of this year is that 100% of what we sell will be able to be serviced digitally but only through Internet-based technologies. That's the thing which is hugely impactful to our customers. For any of you, if you're traveling on American Airlines, I encourage you if you're making changes, please use the app to do so. I think you'll find it to be a much better experience in times past and an industry-leading one as well.

Devon May:

Well, I'll just start with right now, our focus on the balance sheet has been really on 2025. And our stated goal is that we are going to reduce $15 billion in total debt by the end of 2025. We still expect to do that at this point. And we think if we get there, that gets us to a BB credit. Beyond 2025, we'll see where it goes. But right now, we're focused on the next couple of years.

Operator:

Thank you. [Operator Instructions] Our first question comes from the line of Mary Schlangenstein of Bloomberg News.

Devon May:

Hey, it’s Devon. I'll just start on the XLR and then hand over to Sue. We expect our first XLR delivery to come late next year, and then the order stream starts to really pick up in 2025 and 2026.

Mary Schlangenstein:

Thanks a lot, Vasu. Can you just be more specific in terms of the upcoming demand domestically for the holiday period? I mean really, I don't think there's a lot of interest now in what the comparisons are to 2019. Just are you seeing higher demand going into the holidays that you normally would? Is it slower when you say steady, that doesn't give a necessarily very good impression in terms of what your holiday demand is.

Mary Schlangenstein:

Great. Thank you very much.

Alison Sider:

Yes, thank you. I was curious if the latest spirit issues with Boeing are impacting American at all if you're expecting any kind of delays and if those will affect schedules and plans at all?

Alison Sider:

Thank you. And then I guess on pilots, some other airlines and unions have talked about kind of like an unusual maybe reluctance for pilots -- first off, there's upgrade the Captain, maybe more quality of life issues coming up. Are you guys seeing that at all?

David Seymour:

Yes. No, I appreciate the question, Ali. I think you're probably focusing on the regional operations where there -- first off, I think probably the bigger constraint we have is them getting the hours to be able to upgrade to captain. But we're not seeing any reluctance really overall that first officers don't want to upgrade to captain.

David Seymour:

That's correct, yes.

Alison Sider:

Thanks.

Alexandra Scores:

Hi, good morning. Thank you for taking my question, I wanted to ask about station and how that's impacting American customers? And then my second question is what you're seeing in that same vein, looking ahead to the winter travel season?

Alexandra Scores:

Inflation, sorry.

Alexandra Scores:

Thank you.

Leslie Josephs:

Hi, good morning. We've been seeing a lot of discounts, a lot of double-digit fares from you guys midweek anytime. Can you talk a little bit about how much have you had to discount this fall kind of coming off of the peak summer season to fill planes? And how confident are you in this breakeven guide just considering where fuel is now and whether you can drum up fair enough to cover that. Thanks.

Devon May:

Yes, our fourth quarter guide, we've done it the same way we've done for all the other quarters and throughout the year. We have confidence in our revenue guide. We provide a range on it. We have a lot of confidence in our cost guide and fuel remains volatile, but we did put a range on that as well. So as it sits today, we feel really good about what we have out there for our Q4 guy.

Vasu Raja:

Well, that's probably an inadvertent way to comment on fares. And look, what we continue to see is a lot of the same overall demand trend sequentially day-to-day, week-to-week, et cetera. And as I mentioned, air travel remains an amazing bargain for customers. And customers, as we've seen for several years, are keen to travel and traveling at a greater rate than what they were in 2019.

Operator:

Thank you. I would now like to turn the conference back to Robert Isom for closing remarks.

Operator:

This concludes today's conference call. Thank you for participating. You may now disconnect.

Operator:

Thank you for standing by, and welcome to American Airlines Group's Second Quarter 2023 Earnings Call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question-and-answer session. [Operator Instructions] I would now like to hand the call over to Scott Long, Vice President of Investor Relations and Corporate Development. Please go ahead.

Robert Isom:

Thanks, Scott, and good morning, everyone. The summer is well underway, and the American Airlines team is firing on all cylinders. We continue to build on the strong foundation we have laid over the past year and remain focused on reliability, profitability, accountability and strengthening our balance sheet. That focus is showing up in our results. Everything we have said we would do at the start of the year, we have done. Our operation is performing at historically strong levels. And this morning, we reported adjusted pre-tax earnings of approximately $1.8 billion for the second quarter. These earnings were well above the high end of our latest EPS guidance range, marking our fifth consecutive quarterly profit. At the start of the recovery, we told you that returning to profitability hinged on running a reliable airline. American continues to run a strong operation in an evolving environment in which we are very well positioned because of the hard work our team has done in recent years. Our sustained profitability is tied to our leading network rewards program and operation. We have a tremendous network and we operate in a reliable and efficient way, and we reward our customers for using it. Now, let's talk more about our financial results. We produced total revenue of $14.1 billion in the second quarter, the highest quarterly revenue in our company's history. This was driven by broad-based demand across all entities with a particular strength in demand for international travel leading into the summer. Throughout the recovery, we have made structural changes to enhance our customers' travel experiences and position the airline for success. We have simplified and harmonized our fleet to create a more nimble and more flexible network that is focused on our most profitable flying. American strength is our network, which is uniquely positioned to capitalize on the demographic changes in the U.S. More people have moved to the Sunbelt region, which is where some of our largest hubs are located. DFW, Charlotte, Miami and Phoenix are very well positioned now and for the future. Our strong regional network provides service to smaller towns and connect them with our hubs across the country, and our global partnerships are a great complement to our own flying. As a result, we are able to offer customers the most comprehensive network of any U.S. carrier. We continue to adapt our offerings to our customers' evolving preferences. We are taking customers to where they want to go and meeting them where they want to do business. We are servicing more of our customers through our direct channels and driving engagement in our advantage program and credit card portfolio. Our Travel Rewards program is the largest among the U.S. network carriers, and it continues to grow. We are making terrific progress in training our pilots and improving the utilization of both our mainline and regional fleet. Our young fleet and low near-term CapEx requirements enable us to generate free cash flow to reinvest in the business and strengthen our balance sheet. Now turning to the operations. The American Airlines team has delivered strong operational results over the past year, and it continued as we achieved record second quarter completion factor. We operated nearly 0.5 million flights in the quarter with an average load factor of approximately 86%. In the second quarter, we also delivered 11 more combined zero canceled days in the same period of a year ago. The summer peak started strong with our team delivering our record Memorial Day weekend mainline completion factor while operating our largest mainline Memorial Day weekend schedule ever. The momentum has continued into July. We delivered the best Independence Day holiday operation in our history, with traffic levels we haven't seen since July of 2019. At American, we're focused on taking care of what we can control. Our purposeful approach to planning, along with our investments in our team, fleet and technology has set us up for success during the busy summer travel season and beyond. And now I'll hand it over to Devon who will share more about our second quarter results and the outlook for the remainder of the year.

Robert Isom:

Thanks, Devon. The American Airlines team is delivering on our commitments. We're on track to deliver on the full year guidance we provided back in January, driving earnings growth, record free cash flow, meaningful debt reduction and importantly, a strong and reliable operation. We are executing on that plan. We are reliable, profitable and making tremendous progress strengthening our balance sheet and I know that our team will continue to deliver. We're excited to share more about our long-term strategy at an Investor Day later this year on our Fort Worth campus. We look forward to updating you on the business and sharing more about our longer-term strategic priorities at that time. We're incredibly excited about the future of American and can't wait to tell you more. Operator, please open the line for analyst questions.

Jamie Baker:

Hi, good morning, everybody. All I heard was PMorgan but I assume that's me. So Vasu, you spoke enthusiastically last year about the EMEA. You admitted New York had been a challenge for decades. But you were finally seeing New York RASM outpaced the system. And now it appears that, that all reverses. I'll admit my earnings model doesn't model you by hub. But if it did, why shouldn't I assume New York reverts to being a meaningful margin drag from this point forward?

Jamie Baker:

Okay. Very helpful. And then, Devon, on the cost side, recognizing there are lots of moving pieces in the full year CASM guide, can you tell us the last time you adjusted the labor accruals that you're assuming? And also does your full year cash flow guide include retro pay for the pilots?

Jamie Baker:

Okay. Very clear. Thank you, gentlemen.

David Vernon:

Hi. Good morning, guys. So Robert and Devon, first question for you on the guidance framework you kind of laying out for us here for the back half of the year. It does sort of imply a pretty material deceleration from your earnings level in 2Q to 3Q. And we're hearing from you guys that the demand is good. The team is executing, you're delivering on your cost performance. Can you talk a little bit about the thinking behind how you're laying out the guidance here? You just had a huge beat to your 2Q guide. You haven't missed in a couple of quarters. I'm just trying to understand like are you guys just kind of keeping the bar here where you said it in the beginning of the year, or is there something that's really kind of decelerating here in the back half?

Devon May:

No, I think same points. We started the year and set our objectives for the capacity we're going to produce, the unit costs we're going to produce it at and our earnings levels. We're really happy with what we've accomplished in the first half of the year. The guide we have in place did increase our full year EPS to [$3 to $3.75], and we feel really good about upping that number.

Vasu Raja:

Sure thing. This is Vasu. First, look, I'll say at large. We continue to remain encouraged by the overall level of demand we see, especially in domestic and short haul. If you look at air travel spend as a percentage of GDP, certainly retained its relationship revenue, even domestic revenue as a percentage of GDP continue to regain their former relationship to demand. But for us, it's really important to note is this recovery is continuing to unfold. And as we look out there in domestic, a lot of the sequential change that you see is really due to some pretty unique things. About a point of the 2Q to 3Q changes just due to calendar shift. And another point is due to our operational outperformance in the second quarter. Everything else is really a return to normal seasonality. As far as a deceleration of demand or things like that, we don't yet see it now. And in fact, when you look at it for us, like versus 2019 or some base where you lose just the strange comparisons to how recoveries have unfolded. For us, as we get into the fall, and we will be flying an airline has a date in the 2019 airline but producing short-haul RASMs that are 15% to 20% higher. There's still -- we're still in a world where demand is very strong. The year-over-year comps are a little bit strange, owing more to just the vagaries of the recovery than anything underlying the business.

Operator:

Thank you. Our next question comes from the line of Scott Group of Wolfe Research. Your question please, Scott?

Robert Isom:

Hi Scott. Again, I'll tack on to both Vasu's comments and Devon's as well. We're looking at our results over the course of the year. The recovery, as we've seen it has been not exactly smooth on a quarter-to-quarter comparison basis. As we take a look at the year, you can depend on us to produce those results. We're really proud of those. And it's indicated by us, again, moving our EPS guide up as we did this morning.

Robert Isom:

Scott, we're not anticipating any earnings impact.

Operator:

Thank you. Our next question comes from the line of Conor Cunningham of Melius Research. Your line is open, Conor.

Vasu Raja:

Hi. This is Vasu and thanks for the question. And you're exactly right. It's less of a novelty now. This is just part of our base, how the business runs for several quarters now. We've seen a mix of 35% leisure style travel, 35% blended style travel, 30% stuff. And furthermore, within the 30% business, there's roughly a 2:1 split between unmanaged travel and managed travel that's there. That's been pretty consistent for several quarters now. It looks to be pretty consistent going into the future. Certainly, that's what our forward book says. So, that's why no commentary. This is actually how the business operates now.

Vasu Raja:

Look, we've seen corporate -- first of all, I'll clarify this. When we talk about business, we talk about people on business style trips. And within that, there's two groups, there's individuals and companies that fly and they don't manage or buy their travel centrally, and then there's large corporations that tend to man it by their travel centrally. We've seen that those customers who were managed, they buy their travel centrally has -- it's recovered to 80% of historical levels. And that's been pretty much plateaued for several quarters now. However, unmanaged demand continues to grow in our system. And indeed, total business revenues have really regained their 2019 composition in the system. So we remain encouraged on business demand. Should things change, we're prepared to go and adjust accordingly. But no forward change to outlook is any different than the stuff we've been experiencing.

Vasu Raja:

Hi, thank you. And look, we actually view the competitive landscape very favorably. Our network proposition to our customers is creating more origin and destination markets and more unique origin and destination markets than any other airline network. And we have done that really well. We continue to do that really well. That's really been the financial progress that that we've seen. And to Robert's comments with roughly 70% of the airline network is located in the Sunbelt in our Latin America network and London Heathrow are in places where we really deliver a lot of outsized value for customers. And there, while we do see competitors come in, we remain encouraged. Take any number of those markets in our short-haul Latin American markets. We've seen something like 20%, 25% industry capacity growth, but the trends are favorable enough where this fall and winter will fly our largest schedule there, not because we're out to chase market share, but because of the marginal performance of those rates.

Operator:

Thank you. Our next question comes from the line of Helane Becker of TD Cowen. Your question please, Helane.

Robert Isom:

Hi Helane, thanks for the question. Look, in terms of how we actually are able to deliver to our products, that's going to be something that we have to work on with them, and we're in discussions with APA -- right now, as a matter of fact. What I said this morning is something I'm really proud of and that we're committed to. Look, we're going to match the wages that United is proposing. We've got to sit down with to figure out whether or not that is something that they can fit into their the TA that can still be voted on a timely basis or if it's something that's going to take more time to figure out. But we're committed to matching those wages.

Robert Isom:

Well, Helane, thanks for bringing it up. We're really proud of the work that we've done over the last year. It's just a tremendous and relentless focus. It's led by David Seymour, our Chief Operating Officer. And every day, our team is out there, including today, in this ridiculous heat and weather, they're just performing. We've done everything from training to adding new knowledge. And when things go awry, we have been really quick to make sure that we have the tools necessary to put things back in place, whether that be aircraft or our crews. And that's going to continue. I anticipate that we're going to get better and better. Of course, that translates into likelihood to recommend scores and Net Promoter Scores that are the best that we have ever seen. And I have great confidence that, that is something that will continue to play out. That relationship between reliability and what customers really want is super evident.

Operator:

Thank you. Our next question comes from the line of Brandon Oglenski of Barclays. Your question please. Brandon.

Vasu Raja:

Yes. Thanks for the question, Brandon. Look, there were really two issues that we had in New York. One was the amount of connectivity support that we had for our long-haul and the other was just the huge expenses we had operating out of New York Kennedy. As I mentioned earlier, we've done a lot of things to go and reduce our expense base to where, it's not just more in line with our other low-cost hubs that's materially lower than what any other operator has in New York City. But also -- and this is meaningful to it. Look, the NEA was a great outcome for customers who got to go and experience our product who weren't there before. But actually, when you look at those international flights, roughly, as things have settled out and markets recover, roughly 35 to 40 points of the load factor that's on them is actually being generated by our international partners. Our partnership within the NEA was actually a very small amount of the onboard load factor that's there. That's why when we couple both the expense reduction that's there and some changes that we can make ourselves, we believe that we can go and really replace a lot of the demand, especially now that we've got such a larger New York City originating customer base than what we had before.

Devon May:

Hi Brandon. Yes, so the comment was we think we'll have somewhere around $3.5 billion on average of aircraft capital beyond 2024 and probably for a good part of the decade. And where we are different than our competitors is we don't have any fleet replacement needs between now and the end of the decade. So when we are investing in an aircraft that is an investment to grow the network and to grow the airline. What you're seeing from some of our other competitors who just have older airplanes, there's a lot of fleet replacement CapEx required for them. And again, for us, it is just growth aircraft requirements.

Operator:

Thank you. Our next question comes from the line of Duane Pfennigwerth of Evercore ISI. Your question please, Duane.

Robert Isom:

Thanks, Duane. Just a couple of things. Look, I think as you take a look at the industry and especially our needs at American, we're going to need larger narrow-bodies in a number of places. It just fits with how our hub structure works and all the kind of things that Vasu wants to do. I would add to that, though, that probably our biggest and most interesting opportunity right away. It's getting our regional fleet fully back up in the air. And the those aircraft only further our commercial proposition by adding more small markets to what is a great hub and spoke system already. So as we take a look out into the future, you'll see us make sure that we protect ourselves and that we are able to not only replace an upgauge from a narrow body perspective but also have an eye to be able to grow at a rate appropriate for demand levels.

Robert Isom:

Thanks for asking them. Look, and for us, so much of our trans-Atlantic and I'll just speak to the European content at this point, not other things that sometimes get lumped into reporting such as Middle East or India. But for us, a lot of our concentration is, first and foremost, in London, probably much more so than what other airlines are. And that which is in Southern Europe is really heavily season style flying or as we call it large areas the large capital market things like Rome and Athens, Barcelona and Madrid. So we've done a lot over the last several years to actually further to Devon's earlier point, to really restructure our international network. We used to fly a lot of really marginal flights to really marginal markets, and they work for three months of the year and we had nothing to do with the airplane for the other nine months of the year. So we've used the last three years to go and rebuild the foundation, bottom 5% of our capacity is gone fleet that goes with it is gone and the losses that we took from it are gone. And so now what we're building back to Devon's point, of just moderate growth is adding things that really make sense and are a good use of full year aircraft capital.

Operator:

Thank you. Our next question comes from the line of Andrew Didora of Bank of America. Your question please, Andrew.

Devon May:

Yes. So right now, what's included in our guide is Pay rates from May 1 through the end of July. And then starting in August, we hope to have ratification of the tentative agreement. And at that point, we'll have pay rates and all the benefits that go along with it, including the higher profit sharing.

Robert Isom:

Thanks, Andrew. Right now, it's -- we're in the planning stages. But what I'd tell you is that based on the kind of fleet that we have, we would have anticipated mid-single-digit growth for next year. Now, there's a lot of dependencies on that. So first off, we have to be able to get our regional fleet back up fully, and that requires pilots. We've -- to be able to achieve that kind of level of flying we would have to also get a little bit more out of the aircraft we have in terms of utilization as a whole. And the final thing is we're dependent on the airframe manufacturers to actually deliver. They're getting better. Their track record hasn't been great. So we'll see how that shakes out. And if it all comes to fruition, that's probably a pretty good guess at this point.

Operator:

Thank you. Our next question comes from the line of Michael Linenberg of Deutsche Bank. Your line is open, Michael.

Vasu Raja:

Hi. Thanks Mike. It's an excellent question. I was wondering when it might be asked. Look, first of all, all of our selling and distribution changes are done with a really simple lens, really which Robert talked about in his opening remarks. We want to make it as easy as possible for our best customers to be able to shop by and self-service their experience with American Airlines. And everything has been oriented around that. It has indeed been very eye-opening and has performed probably above what our expectations are. The simplest way to it is like this. If you take all of our customers, the actual human, you can divide them into two groups, those who are not members of the AAdvantage program and those who are members of the AAdvantage program. In the quarter, for those customers who are not numbers of the AAdvantage program, indeed, their total travel bell 5%, but revenue from that cohort grew by 5%. Amongst the customers who are advantaged customers, we actually grew their transactions by 8% and their revenues by 13%. That is certainly above what we had expected, but also what we're really encouraged by our three things

Robert Isom:

Yes, Mike. A lot of that is TBD right now. And in fact, Priya Aiyar is here our General Counsel. We're still in a process of determining how to wind down the NEA most notably how we transfer back all of the slots to American Airlines as soon as we can.

Operator:

Thank you. Ladies and gentlemen, we will now move to media questions and answers. [Operator Instructions] Our first question comes from the line of Alison Sider of Wall Street Journal. Your question, please Alison.

Robert Isom:

I'm looking at Devon. We're working on that right now. Look, one of the things I do know is that in our TA, there was significant quality of life and compensation improvements. The vast majority are very close to what United has supposedly in their TA. And while there may be some adjustments that would be required for wages, it's not an indoor amount. Devon, do you have any idea on that?

Alison Sider:

Great. Thanks. And I guess, Robert, you talked a little bit about this earlier this morning, but just curious if there's any kind of impact you're seeing from this crazy heat we're seeing in parts of the country, if that requires any operational changes or different ways of thinking about things for crew and for customers and how you're dealing with that?

Alison Sider:

Thank you.

Mary Schlangenstein:

Hi. Good morning. I had just two quick questions. Vasu, on the LaGuardia slots, are you prohibited from leasing those slots to JetBlue for just their own use for their own flight? So do you have to take those slots back? You can't lease them to them under any circumstances. And my second question is on the pilot talks, are you reopening the whole contract to discussion? Or are you limiting it to changes in pay?

Mary Schlangenstein:

Thank you.

Leslie Josephs:

Hi, everyone. Thanks for taking my question. Just on the pilot contract. I just want to make sure that I understand correctly, you are committing to matching the United rates. I just want to make sure we're clear on that. And then just a second question on buy-ups to premium cabins. We didn't hear a ton of that from you guys. And just kind of curious what you're seeing, especially for premium leisure and international -- are you seeing higher paid loads in premium economy and then in business class. Thank you

Vasu Raja:

Yes. And Leslie, we do -- we've noted it all through the recovery, but we've continued to see strength in premium cabin style fares. Our total premium seats across the system are up about 5% year-over-year. Our total premium revenues were up about 15% year-over-year. And notably, it's pretty consistent across all of our markets in London, for example. We've grown our premium seats about 20% or so. Our premium revenues are up over 25%. And that's at a time when so much of the industry is adding back into London. But we are encouraged, and we're uniquely encouraged by the trajectory that we're on different from others. For the first time in our history, our unit revenue performance in Trans-Atlantic will outperform any of our joint venture partners, both for the quarter and for the full year. So we do see that strength. It's complemented by our distribution strategies, and we see more opportunity ahead.

Vasu Raja:

Nothing beyond historical seasonality, Leslie.

Operator:

Thank you. Our next question comes from the line of David Koenig of The Associated Press. Your question, please David?

Robert Isom:

David, thanks for the question. Look, over time, we're going to run a profitable business. So we have to offer a really compelling product offering to our customers. We're going to try to find ways to make sure that we can do that in a way that customers will benefit and ultimately, it will take more revenue to pay for higher cost going to do everything that we can to be as efficient as possible take care of our team members, but also offer a very compelling and worthwhile product to our customers.

Robert Isom:

None beyond what we've already spoken about in the call.

Robert Isom:

We're really proud of our incredible network that we're flying reliably, and we've got an industry-leading rewards program. We're going to tap into those and make sure that customers are really able to benefit from everything that we can do on that front.

Operator:

Thank you. That concludes the Q&A portion of this call. I would now like to turn the conference back to Robert Isom for closing remarks. Sir?

Operator:

This concludes today's conference call. Thank you for participating. You may now disconnect.

Operator:

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. After the speaker presentation, there will be a question-and-answer session. [Operator Instructions. I would now like to hand the call over to Scott Long, Vice President of Investor Relations and Corporate Development. Please go ahead.

Robert Isom:

Thanks, Scott. Good morning, everyone. American is off to a fantastic start in 2023. 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. Our performance in the first quarter was driven by continued strength and demand and the tremendous work of our team. American entered the year in a position of strength after the outstanding results our team delivered in 2022 and we built on that momentum in the first quarter. 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. Let's talk more about our first quarter results. We produced record first quarter revenues of nearly $12.2 billion, an increase of 37% versus 2022 on 9.2% more capacity year-over-year. 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, though 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. Demand for our premium cabin has been remarkable across all entities, with premium paid load factor and RASM exceeding 2019 levels. We're well on our way to a fully recovered business but we aren't there yet. The recovery is still unfolding and the current demand environment remains dynamic. We continue to learn about evolving customer preferences and changing demand patterns, and we 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. Importantly, customers continue to show preference for our direct channels and travel rewards program. Our co-brand growth continues to outperform consumer spending, in line with AAdvantage enrollment, which are now approximately 60% higher than 2019 on capacity that has not yet fully restored to 2019 levels. The American Airlines co-brand portfolio is delivering the fastest growth since the inception of our current agreements with double-digit growth in sales versus the first quarter of 2022. 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%. We delivered our best ever first quarter completion factor and controllable completion factor, safely completing more flights and more on-time flights than anyone in the industry. We're performing better than ever from an operational perspective. We delivered this strong performance in the first quarter despite the nationwide ground stop in mid-January due to the NOTAM 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. 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. Investments in our operation have enabled us to anticipate the operating conditions ahead of us and recover quickly when the unexpected happens. And we'll continue to invest in our team, fleet and technology, so that we're well prepared heading into the summer and the rest of the year. 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 Devon to share more about our first quarter results and the outlook for the second quarter.

Robert Isom :

Thanks, Devon. And to close, I'd like to take just a few minutes to highlight why I'm so excited about the future of the industry and the future of American Airlines, in particular. Our industry has been through the biggest crisis in its history and is now on the other side. Airlines have navigated a lot over the last few years. Concerns about the economy and demand recovery, the banking crisis, the interest rate environment, supply chain issues, and yet here we are. The industry is in an excellent position and benefiting not only from the recovery involving travel patterns, but also from consumers' changing preference of experiences, over hard goods. And I'd like to underscore, we see a strong demand environment this summer, and we're highly confident that that will continue going forward. If there's one thing that the pandemic has taught us, it's that people innately desire to travel. And at American, the actions that we've taken in recent years are producing returns. We've simplified and harmonized our fleet to provide more flexibility to our network, which is nimbler and more focused on our most profitable flying. And our Sunbelt hubs are uniquely positioned to take advantage of demographic changes going on in the US right now. We've got partnerships that are a great complement to our network, enable us to provide even more unique O&Ds to our customers. Our fleet, which is younger than our network peers, has [ph] low CapEx requirements in the near term, enabling us to generate free cash flow that can be used to reinvest in the business and strengthen our balance sheet. We've also made investments to modernize our facilities and introduce new technology throughout the airline. These initiatives are producing the results that we had hoped for. And we have a number of opportunities in front of us to deliver even more value. We're making terrific progress training pilots, getting our regional fleet back up in the air and getting more out of our mainline fleet as well. That means that there is real and significant upside in terms of the utilization of our existing assets. We're also very encouraged by our operational focus, and our ability to grow the airline efficiently, all while completing more flights on schedule, generating more revenue and reducing costs. On the commercial side, we're building on our premier loyalty program, and the changes we have made are having a real impact on how customers are spending and engaging with us. There's even more we'll do in the coming years to grow AAdvantage and our co-brand offerings. We're meeting our customers where they want to do business and bringing more people into our direction channel. We'll continue to adapt our offerings based on evolving customer preferences. Finally, we are driving a technology first mindset at American, not only with existing processes, but also with the introduction of new tools for our customers and team. We look forward to sharing more on all of this as the year progresses. Looking ahead, we feel great about the industry and what's to come for American. The actions that we have taken have put us in a position of strength that have 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.

David Vernon:

Robert, I wonder if you could talk a little bit about inter quarter trends and how second quarter sort of is shaping up from a booking perspective. I think investors have been very sensitive to potential sort of disruptions or changes in maybe business travel trends kind of as we've gone through the banking crisis here. I'm wondering if you could just kind of give us a sense for what you're seeing day to day in the booking curve and how that is impacting your confidence and the outlook for summer travel.

Vasu Raja:

Look, we remain encouraged by the demand environment that's out there. We see strong booking 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 that's been there in many markets. And they really haven't been open for the better part of four years. Domestically, 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. And I'll add to that too that, 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. In Q1, about 30%, 35% of our volume was leisure, discretionary based trips, 35% blended trips, and 30% business trips. That compares to first quarter 2019 where it was more like 30% leisure, 30% blended, 40% business. But we remain encouraged by it. Though we're seeing that shift, we find that very often, the blended yields that we see are coming in at values that are 8% to 10% higher than the very traditional business trips that they replace. So we remain encouraged and see a lot of the same trends we've been talking about for the last few quarters.

Devon May:

To start this year, we talked about our total debt paid down being at approximately $10 billion to $11 billion from our peak levels of 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 to $12 billion target for liquidity. We're well ahead of that at the end of the first quarter. When we think $10 billion to $12 billion, I generally think of it as we'd like to be around $10 billion of liquidity as we are late in the year [indiscernible] for liquidity. That arrives to $12 billion during the year. At this point, we're well ahead of our target liquidity and expect we would definitely be on the high end of target 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 addressed some of that with 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.

Helane Becker:

Just two questions. One, I'm wondering, on operations, Robert, you mentioned in the quarter that you were, I think, at the top of on-time performance in and so on. I'm wondering if you could talk about some of the learnings that you've had in being with, like, the Dallas storms and the NOTAM shutdown and then what happened in Fort Lauderdale earlier this month, just how that will carry through to prepare yourselves for the summer, which is likely to be pretty difficult. And then, my second question is, I'm wondering if, Vasu, you can talk about the changes you made to NDC and travel agent bookings and how that's being received.

Ganesh Jayaram:

The past seven months that I've been in this role, our technology team has refined our playbook to work better and faster with our partners in the priority areas of operations and commercial for deliver technology solutions that meet and exceed the expectations of our customers and team members. So going forward, we're really excited that we bring new digital solutions to the market in a much more agile manner than in the past, improve our customers' ability to self-serve all the needs of the American as well as solutions like HEAT that improve the resilience of our daily flight operations. Lastly, the technology team, we're working very closely with Devon and the finance team to invest appropriately in modernizing our technology stack to help us deliver the additional capabilities of the future. I can now turn it over to Vasu and David to share some examples of solutions that we're excited to bring to the market in the rest of the year.

Robert Isom:

Appreciate you letting us go long on that. Because you can tell, your question gets to the heart of everything that we're doing from a strategic perspective, operationally and commercially.

Duane Pfennigwerth:

I have a network question, maybe a little bit of a philosophical one for Vasu or Robert. As we think back to 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, the 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 – the domestic bets which were totally appropriate in the pandemic context being rolled back? And what do you think the set of circumstances that would drive a better portfolio outcome by funding international growth with domestic cuts, and appreciate the long winded philosophical question?

Vasu Raja:

Yeah, that's right. I'll pick up from there. I appreciate your longwinded philosophical question. My boss tells me that I'm prone to be longwinded and philosophical, but I'll be very focused and philosophical for this one. Because this is a topic that we've thought about for really a long time since the start of the pandemic. First to pick up where Robert left off. When you look out, though our capacity mix is about 75% to 80% short haul versus long haul, 80% of our growth as we head into the next quarter is really all, what we call, the build back of the long haul network on a more efficient fleet base. That's the start of more – as indeed more airplanes come from Boeing. But 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 and be nimble and produce a level of earnings growth across the business cycle. So, importantly, when you look at us, right, versus 2019, we are about 45 widebodies smaller, 45 narrowbodies larger. That's material, because in the long haul business, and we've seen this over time, it's the most volatile part of a relatively volatile business, its most capital intensive part of a capital intensive business. And it can be very complex operationally, too. So what we found is that, actually, by being a 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 this is the large narrowbody, whether it fills widebody jets or fills regional jets. And the more of that connectivity we can make, the better it is. So what you'll see in our international network, you see it already, is really an orientation around places where we can leverage our domestic strength. For example, Dallas, Fort Worth, or Charlotte which will have four trips to London this summer, or markets where we can leverage our partnership network. We'll fly JFK to Doha where we're able to connect to the entirety of the Qatar Airways network, for example. And we grade that performance really, are we generating as a system? Are we generating more industry revenue, more of our share of industry revenue versus capacity share? And when you look back at the last four or five quarters, that's certainly been the case. At large, we're able to collect more revenue than the capacity share that we're flying. So we're encouraged by that. This summer in long haul is going to be a seasonally and probably a historically strong long haul summer. Over time, 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 and where the demand is.

Operator:

Our next question comes from the line of Andrew Didora of Bank of America.

Vasu Raja:

That's an excellent question. Look, this business is nothing, if not dynamic. Look, in our system, there's probably a lot more forecast clarity in our short haul network than our long haul network due not exactly to any particular demand trends, but just simply to the fact that 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 in domestic, it was strong as we headed into the second quarter, it was made stronger by the fact that so many long haul markets were – they were either closed or it was really difficult for customers to go through. But by being big last year and by continuing to be much bigger than what many other airlines were, it gave us a better sense for any amount of demand projections, both things such as the – how far from departure the booking curve is, how we can position our network based on demand changes, changing customer profiles and tastes. So right now, there's probably a little more accuracy around the short haul network than the long haul network.

Devon May:

Yeah, I'd just say we're pretty early in the year for an update on either revenue or fuel. So we're leaving those out. I will say on a CASMx fuel basis, we still feel really good about our initial guidance of CASM, up two to five for that period. I think we'll be right around the midpoint of that, at least as we sit here today.

Ravi Shanker:

It 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 already have a few more competitors potentially kind of 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 where American is positioned relative to kind of some of the enterprise, historically, competitors, as well as some of the new entrants and kind of going after that managed corporate share?

Ravi Shanker:

Maybe just a quick follow-up. I know there's been some commentary on kind of domestic network on this call already. But just to put a fine point on it, I guess, given your US domestic exposure relative to your network peers, I know there's been lot of talk/speculation on the strength of the US domestic traveler. Any kind of definitive word that you can say about whether you're seeing that strength in demand continuing, the strength in RASM continuing? Are you starting to see cracks? Or people potentially kind of delaying or putting off trips domestically, that would be helpful.

Operator:

Our next question comes from the line of Conor Cunningham of Melius Research.

Devon May:

Listen, to start, we are really excited about our potential for free cash flow production in 2023. And you're right, this is a year where we have lower CapEx than an average year and lower CapEx than we wanted to have this year. We had planned to spend a little bit more on aircraft CapEx. We just weren't able to get the deliveries in the way we wanted. But this year, we think we will be something approaching $3 billion of free cash flow. That is inclusive of our labor agreements, which do have the potential of some sort of bonus pay. So we're proud of what we're 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 does step up a little bit. And 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 a kind of massive CapEx cycle again. We expect a more normalized cycle of capital expenditures. And 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.

Vasu Raja:

Yeah, that's a great question. And probably it's a segment of travel which is maybe neglected historically. Look, we see a lot of growth. Clearly, it's not just that people are traveling less on contracted accounts, but we're seeing people who are taking business style trips or even blended trips who have no corporate – no recognized contract corporate affiliation. And really, probably the biggest thing to note there is that there's just a different set of buying criteria. There's value on flexibility to my earlier point that a lot more of those non contracted customers will look to buy one way trips in order to blend it or construct what they need to do. And also, for those customers, they reflect a lot of the economic dynamics of the country and Robert kind of alluded to it in his earlier remarks at the top of this. So much of that demand is originating out of Sunbelt markets, Arizona, Texas, the Carolinas, Florida, places where we just have an inherent level of strength, and we endeavor to go build a fleet and a network structure to capitalize on.

Michael Linenberg:

I have two quick ones here. Just, Vasu, following on Helane's 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?

Michael Linenberg:

Just to clarify, you threw out 80%. But I guess. to be clear, it's almost – obviously, the NDC peace, but it's almost a bit of a hybrid direct/indirect because the GDSs are part of that solution, right? Is my interpretation right?

Michael Linenberg:

Devon, 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 give us CASMx, is that chasm CASM ex-fuel or is it CASM ex fuel and profit sharing? I just want to clarify that.

Michael Linenberg:

Okay. But would that incurred 100% in the March quarter?

Operator:

Our next question comes from the line of Jamie Baker of J.P. Morgan.

Vasu Raja:

And the lens to see a lot of our changes is through the actual user of the airline product, the end consumer. And that's been a thing where – if you just think about the big history of the airlines, it's been hard to just amass the data and see technologically like who the customer is. We distribute our product based on whether it was a fast schedule or a low price. And so much of what we did was trying to get people to go by the faster schedule because there is a premium on it. But the changes have been meaningful, and none of the top 25 companies who were there in 2019 are any more than about 65% return to travel. However, the top customers, our earlier point, 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 is, through many of our contracts over the years, we granted a level of loyalty status to customers. Well, now what we find is people are willing to actually – especially non-contracted customers, many cases, the actual customer in the corporation is looking to go and earn more miles, 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 status members were through corporate exceptions. So that's a material amount, when you think about it. That's actually curtailing the customer experience of those people who are most using our product, some of whom work in the exact same corporation, but didn't travel as much before. They travel less than some of the people who are receiving the exception. So a lot less of this is backing away from it, but the marketplace has changed. And there's something that we can do with a lot of these travel managers, which could be a much better experience for all of 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 and get some distribution cost savings too. So the change is never a thing which is all the way easy, but it is something where our customers are speaking and for them it's necessary.

Jamie Baker:

Devon, just a quick question on the labor cost accruals. I want to make sure I understand correctly. Those accruals – well, 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, I think that's the right answer. It's just a wage based exercise.

Robert Isom:

Jamie, let me add on here, too. I know that that was a question about real P&L items. But at the end of the day, we're going to end up with a contract that 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 where the changes that we're making are going to benefit not only our pilots, but the airline as well. So I look to changes that are being made as something that we'll be able to accommodate over time without a lot of impact to productivity.

Alison Sider:

Just sort of curious on Boeing deliveries, kind of what what's coming next, what you're hearing on Dreamliner deliveries and whether 737 delays to summer are going to cause any issues? Are you having to thin out routes or cancel any routes or any kind of customer impact there?

Devon May:

Just a reminder, we have four 787 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 MAXes, we have 17 remaining, those will start to deliver over the next handful of weeks. The last two deliveries for this year are both NEOs and we got both of those in the first quarter.

Vasu Raja:

This is Vasu. Look, from a given agency or another, we may see a little bit. But in aggregate, we're really encouraged by the revenue trends that that we see. Indeed, what we're seeing – and while probably many people in traditional travel distribution are adjusting to these changes, what we also see in other cases is end consumers really responding favorably. So 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. And we anticipate by the end of the year 100% of our transactions could be done digitally. So that's a really meaningful change. So again, when you think about who those customers are that are increasingly traveling, whether they're traveling on a blended trip or a business trip or a leisure trip, it's kind of a second order issue. The more that we can give them a contemporary retailing experience, like what they get with anything else they buy, the more they value. We're seeing that over and over again. Our best channel for driving upsell is actually dotcom and the app, and it's consistent across our system. I'll give a for example. This will be relevant for you and even for Jamie's comment. It's not just a function of our domestic marketplace. But when we're seeing 10 to 15 points of transaction share shift out of travel agencies and into the direct channel, it applies 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 have been sold outside of the dotcom at one point in time in the past. As we finish the first quarter here, about 40% of our sales in London-Heathrow premium cabin is coming from our direct channel. And so much of what's happening, when they're doing that, when customers are buying that is they're 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, 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. And we know that many of our travel agency partners, our corporates want the exact same thing. But it calls for a different approach. And 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. And frankly, more competition on how they buy travel.

Mary Schlangenstein:

I wanted to ask, what are American's plans for taking advantage of the waivers that were offered in New York and DC by the FAA? And then my second question is, Robert, you were talking about the parked regional jets and said potentially you might be able to get 100 of them back in service by the end of this year. So realistically, how many of those planes do you think will return to use and will a large percentage of them perhaps never be that flying for American?

Vasu Raja:

Regarding New York FAA, I can start, Mary, and Nate Gatten may want to add as well. But the short answer is, we're really encouraged by what the FAA did. 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. Think, Kennedy to Delhi or Kennedy to Doha. A lot of the benefits are more going to be borne out on people who fly shorter haul markets, higher frequency, where those issues can come and buy some more. So when we go into our summer, our New York will be about 10 or 15 departures down versus what we had in the plan three or four months ago, but our overall seat capacity is up. And across the NEA, it is up and will continue to be up as we both get more people to New York, through New York and from New York.

Mary Schlangenstein:

It sounds like you're not taking full advantage of the slot waivers offered by the FAA. Is that correct?

Mary Schlangenstein:

But as Devon said, you're not cutting under the NEA.

Operator:

Our next question comes from the line of Leslie Josephs of CNBC.

Vasu Raja:

This is Vasu. I can answer both. So, the first question, no change to plans. We anticipate taking – installing the new seat on retrofits as planned and putting them on new deliveries as planned also. And we're really excited for it because it's going to be a really great product for our customers and a much simpler seat to go operate and deliver. To your second question about upsell rates, look, a year or two ago, one of the questions in our mind, earlier point about philosophically how do we think about the long haul business, but one of our great concerns was what was the future of premium cabin, premium economy, things like that. Now that we've had a year of seeing how people use this, even in a world where we have less corporate contracts flying, we've been actually really encouraged, probably never been more encouraged by premium cabin performance. So if you look at us in first quarter, 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 a level of growth which exceeds what we see in the economy cabin, and we see it categorically across every entity that's there, domestic, short haul, Caribbean, London, even the Pacific, we see that. So, actually, we've been very positively surprised by premium cabins, by the flexibility and the upsell that ends up happening. And indeed, to my earlier comments through the call, the fact that so many customers are willing to go and purchase this is, frankly, what makes us more encouraged about any number of the commercial changes we're making.

Robert Isom:

Thank you very much. And thanks for the interest. Look, 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 the last year of getting us into this position – industry-leading operational reliability and then profitability, which is our fourth quarter in a row, record revenue production. When I take a look year-over-year, it's astounding that we're $2 billion in terms of pre-tax – better than we were just a year ago. As project out for the year, we anticipate record revenues in the second quarter. So all that is very positive. But I get asked questions about why isn't our stock price performance moving in alignment with seemingly improved prospects. And in fact, our guidance for the year in terms of EPS from analysts would be 25% below where we're guiding. Can I just say to that right now? No luck. 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. In that case, we're just going to keep producing. Every quarter 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 and generating free cash flow. And we'll keep producing until people do believe. And for those that just want to see another chapter of the book and have some concerns about some issues that we may encounter over the next three, six months or so, hey, we'll play that out too. We're really confident no matter what comes our way that we'll react in a fashion that still 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.

Operator:

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

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. 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.

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.

Helane Becker :

Derek, I'm going to miss you, but good to know that you'll still be at the company.

Helane Becker :

Sorry about Michigan. So here's…

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?

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?

Operator:

Our next question comes from the line of Catherine O'Brien of Goldman Sachs. .

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.

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. .

Vasu Raja:

Absolutely. I would be happy to do that. Look, first of all, in our revenue forecast, we don't assume any change to some of the fundamentals of airline demand. We presume that airline industry revenues will regain its historical relationship with GDP, roughly about a point of percent. We also presume the same historical relationship between revenue and fuel prices. But what is very important is that as we've talked about for some time, what's different about us is that we have used the last few years to really materially change our network, our partnerships and our fleet and that really bleeds through in our forecast for next year. If you compare our capacity mix just in future schedules that we have published to what we did in 2019. We've taken 5 points of capacity out of our lowest RASM, lowest-margin long-haul flights, and we've grown 5 points of capacity in our highest-margin short-haul flights. Additionally, within the short-haul system, we've taken 5 points of capacity from some of our lowest performing, lowest RASM market and redeployed it into our Sunbelt hub, which are not just our highest RASM market, but some of the highest rosin markets in the industry. So when you think about that, that's 10 points of capacity mix that we've taken from truly the lowest RASM, lowest margin things and put into some of the highest margin things that that are out there. And you're seeing some of that trend already through '20. So that was a thing that have been in our past schedules. You see it in our quarter one schedules, and that drives a lot of our revenue performance. Now to put that into a bit of focus, 10 points of capacity in an airline of our size. You can think of that as larger than just about any airline hub with the exception of DFW, Charlotte and maybe one or two other hubs that our competitors operate. So that is a material reworking of our airline network over the last few years. But what's just as important is how we have done it, which is really to a significant amount of fleet simplification. So we -- over the last few years, we've shed 50 long-haul capable airplanes, many of which were really inefficient, like the 757 to 767. We've up-gauged both the regional jet and the main lines that we've got. And we've simplified the airline down to four fleet types. So what that enables us to do is in the fleet that's left, we can much more dynamically alter schedules to follow where the demand is. But we can produce schedules that, as you heard David and Robert talk about, are a lot more operable and frankly, a lot more efficient. So we've seen the benefits of that in our recent revenue performance, and we anticipate the benefits of that in the year ahead.

Jamie Baker :

First, Derek, what a run you've had, just wanted to wish you the very best from the JPMorgan team as you transition. I still remember hanging up on you on October 24, 2003. Apologies again for that. Hopefully, it's…

Jamie Baker :

A question for Vasu. So Southwest cited passenger cancellations didn't book away as part of its first quarter guide this morning. I'm wondering what the benefit for American in Dallas and Chicago might look like? And whether you see share tapering back to pre-December levels in March? Or do you think there's possibly a longer tail to any Southwest benefit that you might be picking up? After all, I mean you're on time and -- excuse me, you're on time and completion factors obviously speak for themselves over the holidays.

Jamie Baker :

Okay. Fair enough. And a follow-up, Doug wasn't shy in discussing hub profitability, L.A., Miami and JFK being the real drags on margin, D.C., Charlotte, Dallas, the obvious standouts. And L.A. has obviously seen some rationalization. You have NEA contribution up here in my neck of the woods. I'm just wondering whether your internal model shows the range between your most and least profitable hubs narrowing? And if so, what the specific drivers might be?

Vasu Raja:

Jamie, you mentioned Los Angeles. So I'd like to pass you to expand on that a little bit. Look, in Los Angeles, we're within a limited amount of gates. And let's face it, we need to use those. We need to use those in a way that's profitable. We've taken a look at that. But we can tell you the kind of changes we make. Well, yes, look, in L.A. much like in New York, through our partnerships, we've been able to create something really cool for customers where -- if you think about it in the times past, we flew 50 seaters and small RJs in markets where we didn't really have a scheduled proposition for customers. And in both of those markets, take it L.A. and New York. Effectively, what we've done is we've turned 50 seaters, which are not particularly efficient and long haulers. 777s that are flying a whole lot further. So we've up-gauged in both of those markets materially. We've been able to use partnerships to go and offer a much broader network for customers. And now we're in this place where lo and behold, we're adding a third LA Heathrow because it's really -- to Robert's point, a very efficient way to go use gates and leverage what we've got with customers. In New York, so much of our growth is actually powered by long-haul flights that are flying within the partnerships that we have with Qatar, British Airways. And the net effect of that has been really positive outside of really good financial results, which we see in our revenue trends. For the first time ever, our top 2 markets for AAdvantage enrollments are New York and Los Angeles. We're signing up more credit cards there. We are originating -- we're having growing originating market share in those places. So a lot of what we've done is, frankly, up-gauge in those markets. We've gotten a lot smarter about what we do for customers. Yet at the same time, there are partnerships we can offer them so much more.

Operator:

Our next question comes from the line of Scott Group of Wolfe Research.

Vasu Raja:

Yes. Scott, this is Vasu. I'll start. I think Devon we'll finish this one out. Look, First and foremost, as we're starting this year, we have been really encouraged by demand trends. Historically, the first three weeks coming out of the holiday season are our strongest sales weeks these first three weeks have been the strongest that we've seen in the post-merger airline. And we're really encouraged by that. And you see that, of course, in our TRASM guide out there. Now what is interesting though is as we are building first quarter, what is different from times past is we have been very conscious in Q1 about how we use the airlines resources. It's people, it's planes, it's facilities, everything, largely so that we can have as much of that capacity for the summer peak as possible. So when you look at our Q1, we have peaked the airline a lot less than what we had historically. It's at a lower percentage of Q2 than what it's historically been. And that's really a conscious design. And you see that is really what you see in our Q4 to Q1 change that's there. And that's sort of a unique thing. And to my earlier point, we don't presume any change to the historical relationship between airline revenues and fuel prices. But Devon may want to add more to that, too.

Scott Group :

Okay. And then just separately, can you just give any color on what you're assuming for the cargo and other revenue and then the non-op expense is up a good amount from the Q4 run rate? Any color there?

Operator:

Our next question comes from the line of Michael Linenberg of Deutsche Bank.

Derek Kerr :

Thanks, Mike.

Derek Kerr:

Boston trip, never forget the Boston.

Vasu Raja:

Yes. Hey, Mike, it's a great question. Look, I would actually even simplify it further. Look, in the airline network business, if you can offer something unique to the customer, they pay you a premium for it. It is as simple as that. And so -- and we see it time and time again, we've seen it do the pandemic the most unique thing we can offer customers is to take them to places where our competitors can't have better schedules than what our competitors can do. So as long as that's the case, we find that those routes regardless of whether customers purchase a transaction, which is first class or an economy or fly for leisure business, they always have yields that index to the top of our system. So if you think about us, right, to my earlier point, in 200 of the 300 cities that we serve in the Western Hemisphere, we have a material schedule advantage. But when you look at it on the number of origin and destination markets that we make and that turns into like something like 65% to 70% of our origin and destination markets. We have a material advantage over what our competitors are. That is what drives our revenue performance. And unsurprisingly, demand at large for the airline product is relatively inelastic. But in so many of those places, it is inelastic. We're also further benefited by just general trends that we're seeing so much of what is driving the economy and likely to continue to do so, are markets in the Sunbelt and the interiors of the country and less so the coastal markets, which creates an immediate benefit for American Airlines. So we've benefited from that. We've benefited from how we can uniquely serve it, are likely to continue to be able to uniquely serve it. And when fuel prices rise, it's a really simple thing for us, with any number of ways to go and manage capacity down as the airline continues to produce.

Robert Isom :

Yes. Mike, thanks for that. And yes, we're in a environment of a lot of constraints coming out of the pandemic. We certainly saw everything last year, it's just things that we never thought we would have issues with pillows and link is in food and fuelers and things like that. We've gotten our arms around a lot of that. But what we have now is aircraft manufacturers that are just starting to get their feedback under them. I mentioned that Boeing is starting to deliver aircraft to shout out to the Boeing team and Dave Calhoun, we need them to keep it up. But there's constraints out there in terms of engines and aircraft. With -- at American right now, we have really an issue with regional aircraft and then some issue with mainline aircraft. On the regional side, it's largely a pilot constraint. And we're not flying the fleet that we'd like to. Vasu would actually like to deploy more aircraft. Now on that front, it's pretty explainable. It's just a shortfall in pilots. We didn't attract people into the business for a couple of years. And we're working our way through that as we have retirements that are coming out the other side. American took the monumental step last year of greatly increasing regional pilot pay. And I think that, that is the biggest thing that any company can do and has done to actually get the pump prime and people flowing back in. And we're seeing that. We're seeing that we've stabilized the pilot ranks at our regionals, and we see potential growth as we come through the end of the year. Now from a mainline perspective, look, we're going through the greatest training cycle of pilots that we've ever experienced. We had, I think, almost 900 retirements last year, probably nearly the same number this year. So we're stretching our training resources like we've never before. But fortunately, we plan for this. And so from an equipment perspective, like simulators, we've got those in place. One of the things that we're really working on is to make sure that we have the people resources and having the check pilots that we need to really address all of our training needs. And I'm hopeful that as we work with the APA and we get a new contract, but we'll be able to give even more flexibility. But overall, I do see from a mainline perspective, we should be through the constraints that related to pilots as we progress through the year. Regionals probably take a couple of years. But as we said, we have aircraft that we can deploy and will, and it's going to be done in a very efficient fashion. You mentioned some other areas that are absolutely positively out on the horizon, the large airports all have constraints, whether that's at the gate or on the airfield. And then we have aerospace issues. That clearly, we need to address. And that's going to take leadership. And fortunately, we're working with the DOT and FAA. And I know that the Secretary Buttigieg has an interest like we all do in making sure that we can invest for the future. And it's going to take a long-term view. But overall, look, these constraints right now are things that we're managing through. I think it bodes well, at least from a demand environment and being able to ensure that we can achieve profitability. And over the long run, we're going to make sure that we have a business model that works in any demand environment with any set of constraints.

Conor Cunningham :

Thank you. And congrats, Derek and Devon. It's great to hear. Just back to Jamie's question on the operation and maybe some of the Southwest issue. I'm just curious if you could speak to the converse, how your conversation with your corporate partners has evolved given your just operational strength. Like I would imagine it would be a lot easier in these days, but can you just talk about how that's how that's changed at all and what your expectation is for new contracts and so on.

Vasu Raja:

Yes. Robert, it's 100% right. And -- so first, I'll say, for our customers at large, they clearly benefit from a better operation, and we see it -- for the year, we -- as Robert said, we posted our best likelihood to recommend scores by a meaningful amount in any time post-merger. And that's no action. That is the operation. But what's really important out there is, yes, many of our corporate partners are encouraged. But what's really important -- and this links back to some of the other questions is that also the marketplace has changed very meaningfully. As I mentioned on our last call, we see the same trends where roughly 30% of our revenues are coming from what we've historically called leisure. About 45% are blended trips. Only about 25% of what we've historically called business trips. And of that 25% -- historically, that number would have been about 35%. So it shifted a lot. And within the 25% only about 5 to 7 points of that are coming from contracted corporations. The rest are non-contracted, unmanaged businesses who are flying on us. And what we see amongst those contracted corporations is quite striking. Almost 2/3 to 75% of our corporate contracts are actually not fulfilling the terms of their contracts for understandable reasons. For so many companies, if you're struggling to bring people back to the office, it's hard to compel them to go do a day trip to Chicago or New York. And so we see that broadly. And so even though many customers are happy with our service and many corporate travel buyers are very happy with our service. The reality is same-day corporate business trips, which used to be 3% to 4% of our traffic is less than 1% of our traffic. And that's been out there for a while, and we are planning that that's going to be the new one.

Devon May :

Yes. This year is a low point for aircraft CapEx. We'll see it come up a little bit next year and then get back to a type capital expenditures as we get out into 2024, 2025. In terms of financing, it's going to be dependent on where the market is at. And so -- yes, there is potential opportunity that we may pay cash for some airplanes, but it's dependent on what sort of free cash flow we are delivering and what sort of market rates we're able to achieve.

David Vernon :

Robert, I wanted to ask you about how we're exiting 2023 on the cost side. You guys have been running a pretty clean operation and the margins are obviously pretty healthy. I'm just wondering how much baggage are you carrying in the 2023 outlook from lower productivity, more full training classrooms. Is there a way to think about what that penalty would be from a unit cost perspective because of some of those lingering effects of restoring the network embedded inside of the 2023 guidance?

Devon May :

Yes. I'd just say for aircraft utilization, we are just starting to approach historical levels. So just starting to approach our 2019 levels of aircraft utilization as we get through this year. So like we've talked about, this is a fleet that should be able to produce higher aircraft utilization than the fleet we had prior to the pandemic. Just recall prior to the pandemic, we had a lot of older aircraft, smaller sub fleets that have really high spare ratios. So even though we will likely put more into operational support than we would have planned to a year or two ago, we still think this is a fleet that can produce significantly higher utilization than what we're doing today.

Devon May :

Yes. I think just as Robert said, there's certainly some more operating leverage in the business. And I'm asking specifically about the salary line or the training headwinds. I think that is absolutely a part of it as we get through this year and get our training throughput to a level that it should be. I think we are going to see some efficiencies on that side. Through the rest of the P&L, yes, there's opportunities as we increase aircraft utilization in areas like airport rent and landing fees, and that type of thing.

David Vernon :

All right. And then one last real quick one. Free cash flow should be something like 130% of net income -- in this -- based on the guidance today. As you think about the go-forward look, I'm just curious about the -- whether you're able to use the losses in the last couple of years. How long is that going to affect sort of cash taxes? And where do you think cash taxes are going to start to become a part of the equation here? Is that a '24, '25, '26 thing? Or is that like any sense of when that might kick in?

Operator:

Our next question comes from the line of Andrew Didora of Bank of America.

Devon May :

Yes. So that is the right calculation. So in the summer of 2021, when we had historically low interest rates, our pension obligation is obviously significantly higher. It's been around $2 billion at the end of 2022. By the end of 2025, where we've set our $15 billion goal is still right around that number, maybe a little bit lighter based on expected asset returns and the pension contributions going to make.

Devon May :

We'll be hiring pilots throughout the year. We feel really good, though, about the hiring forecast we have and what we're expecting for training throughput. In terms of deliveries, as we talked earlier, we do expect to take 23 aircrafts this year. Those deliveries would be required to hit this plan. I think we've taken a pretty conservative approach to what we have for in-service dates. And we feel like this is the plan we're going to be able to hit.

Operator:

Our next question comes from the line of Duane Pfennigwerth of Evercore ISI.

Devon May :

Yes. So we were hiring ahead of needs and training throughput as we got later in the year. So we did pause hiring for most of the month of December, I believe. That hiring has resumed here in January. Our expectations are we're going to hire around 2,000 pilots for this year and probably a little bit on the higher end as we get through the year and training capacity continues to increase.

Devon May :

Okay. There's a lot to that. I'll say our treasury team right now, we have 23 deliveries, 12 of which are already financed. So our financing requirements for the remainder of this year, are pretty limited. But those are all the factors they're going to be looking at is what sort of rates are embedded in the operating leases that are in the market today, what the LTV, we can get on the debt. What's happening with the rest of the balance sheet and our free cash flow and they're going to make the right economic decision. So we have a great treasury team. They're looking at these remaining nine aircraft we need to finance for this year and looking out to 2024 as well.

Devon May :

Yes. It's something that obviously, we expect is going to move around over the next handful of months. I don't have a number that I'm ready to give right here today, but it's something we're going to stay tight with. And we have a team that knows the market well.

Ravi Shanker :

So one short-term and one long-term question. The short-term question is -- it's good to hear that you said you're having your best ever post-holiday booking period so far this year. Can you just expand a little bit more? Are you seeing any changes in customer behavior? Are they flying to different destinations? Are they looking to maybe kind of downgrade their tickets or look for more flexibility, kind of any signs at all of any change in customer behavior or kind of in where macro is?

Ravi Shanker :

That's great to hear. And maybe just a follow-up. You guys have come a really long way kind of in the last year kind of since where everyone was doing the pandemic. But the markets may be not recognizing that. So I'm wondering if there's any plan to kind of host an Analyst Day to kind of give us a kind of a long-term plan on strategic priorities, long-term financial guidance as such?

Operator:

At this time, we'd like to open the line to our media questions. [Operator Instructions] Our first question comes from the line of Mary Schlangenstein of Bloomberg.

Vasu Raja:

Thanks, Mary. This is Vasu. And I'll answer the questions in reverse order. First, look, there is -- we do see a meaningful change in the trip purposes that people are booking that there's a lot more blended trips even so many people who are searching for what conventionally would have been a business style itinerary. We see it in our dot-com end up selecting something which is pretty unconventional or they stay a Saturday night or they book another person for a midweek trip or something like that. So we do see that. And our credit card partners at Citi see the same thing, too, that demand for travel is still a really strong category and as preserved -- a travel at large has preserved its relationship with GDP, if not somewhat grown a little bit. So that -- there is a meaningful thing we're coming out of the pandemic. There's clearly a value the consumer is placing on travel. Then as far as how layoffs are impacting things, look, what's really important to note about business travel is -- yes, it's 25% of our revenues, but those companies are intending to do the largest the biggest, largest ones tend to buy on a corporate contract. And that's -- so much of that business just really hasn't recovered. And we haven't built an airline plan around it. However, non-contracted business is 100% recovered, contracted business is about 75% recovered. And we don't presume that it grows much further than that. So we aren't seeing a really significant impact, but we also aren't building a plan based on a lot of that demand returning.

Vasu Raja:

It's hovered in the -- sorry, Mary. It's hovered in the 75% to 80% range. And to be conservative, we build our plan around the lower end of that.

Vasu Raja:

Correct.

Leslie Josephs:

Curious what your hiring needs are outside of the unionized groups like the offices? And if you're seeing any one apply or maybe you can benefit from some of the tech layoffs? And then secondly, with your plans to do this High-J configuration cabin, are you planning to increase staffing at all of cabin crews to kind of handle the more high touch service and more passengers in that cabin.