American Airlines Group Inc. (AAL) Earnings

Management highlights

Robert Isom started by saying American continues to make progress on objectives. Focus on four pillars: elevating customer experience, growing global network, driving premium revenue, leading in loyalty. First quarter revenue grew 10.8%, expect second quarter revenue growth ~15%. First quarter had challenges like $320M revenue impact from winter storms and $400M increase in fuel expense. Pre-tax margin improved ~2 points year over year. Elevating customer experience: increasing premium seats, investing in lounges, enhancing onboard experience, improving connectivity, and investing in schedule and technology for reliability. Growing global network: prioritizing growth in hubs like Philadelphia, Miami, Phoenix; adding flights at DFW; announcing investments in Miami and LAX; increasing international capable fleet to ~200 aircraft by end of decade; launching new services. Driving premium revenue: deepening relationships with corporate and agency partners, improving revenue mix. Leading in loyalty: redesigned mobile app, record Advantage enrollments, new co-branded card partnership with Citi. Devin May discussed first quarter financial results: adjusted loss per diluted share 40 cents, revenue exceeded initial expectations, premium demand performed well, main cabin revenue improved, international entities exceeded expectations. Talked about second quarter and full year outlook, fleet and capital expenditures, balance sheet improvements.

Guidance

Expect second quarter revenue to be up between 13.5% and 16.5% year over year. Expect adjusted earnings per diluted share of between a loss of 20 cents and a profit of 20 cents. Update full year outlooks to reflect current revenue expectations and forward fuel curve, midpoint of full year earnings guidance 35 cents per share, approximately flat to 2025 despite jet fuel prices increasing fuel expense by over $4 billion year over year. Now expect delivery of 49 new aircraft this year, down from initial estimate of 55 aircraft, reducing CapEx by nearly $300 million. Total capital expenditures expected to be approximately $4 billion.

Segment performance

First quarter revenue grew 10.8%. Excluding net special items, adjusted loss per diluted share was 40 cents. Total revenue growth 10.8% year-over-year. Premium unit revenue growth seven points higher than main cabin. Domestic year-over-year PRASM increased 6.6% in the quarter. International entities: Atlantic unit revenue up 16.7% year over year, London up 25%; Pacific unit revenue increased 7.8% year-over-year; Latin America unit revenue slightly negative but excluding Mexico was positive. Unit cost, excluding net special items, fuel, and profit sharing, was up 5.2% year-over-year. Severe winter storms lowered Q1 capacity production, pressuring CASAmex by approximately two points. Staffing in advance of summer season added cost pressure. Expect second quarter domestic unit revenue to grow more than 10%, all international entities to deliver positive unit revenue performance, led by Atlantic region high single digits. Second quarter CASMX anticipated to be up 2% to 4% year over year. Full year earnings guidance midpoint 35 cents per share, approximately flat to 2025 despite jet fuel prices increasing fuel expense by over $4 billion year over year. Now expect delivery of 49 new aircraft this year, down from initial estimate of 55 aircraft, reducing CapEx by nearly $300 million. Total capital expenditures expected to be approximately $4 billion. Ended first quarter with nearly $11 billion in total available liquidity, more than $27 billion in unencumbered assets and first lien borrowing capacity. Total debt ended the quarter at $34.7 billion, a reduction of $1.8 billion.

Risks & headwinds

Numerous risks and uncertainties could cause actual results to differ from projected, including those related to fuel prices, demand, capacity management, competition, and regulatory changes. Information about some risks can be found in earnings press release, Form 10-K, and subsequent quarterly reports on Form 10-Q.

Analyst Q&A

• Q: Higher level industry question about fare increases and demand impact.

  A: Travel is a good deal, people realize that, American has a great product, network, and feel good about demand.

• Q: Walk through assumptions behind full year revenue outlook.

  A: Second quarter revenue estimation 15% is eye popping, booked 65% of second quarter, incorporated fuel recapture, historically airlines recover additional fuel expense by increasing revenue or reducing marginal capacity, expect 40-50% fuel recapture in second quarter, 75-85% in third quarter, 90s in fourth quarter if fuel continues.

• Q: Thoughts on capacity in back half of year and RASM growth.

  A: Capacity for second quarter reduced due to factors like Tel Aviv, Doha, Chicago; expect higher yields going forward as pass through more fuel expense; will keep close eye on fuel and demand over next four to six weeks for off-peak period adjustments.

• Q: Pivot and re-pivot on commercial business travel strategy.

  A: Pivoted, recaptured lost share, managed corporate revenue up 13% year over year, unmanaged business small and medium enterprises and advantage business product up, TMC performance up, see runway for growth.

• Q: FAA decision in Chicago.

  A: FAA and DOT acted to avoid issue in Chicago, will fly 500 departures, good news for industry, product resonating.

• Q: M&A and industry structure.

  A: Viewed large airline merger as anti-competitive, focused on core initiatives, building network, partnerships are accretive, will be on forefront of potential M&A or partnerships.

• Q: Yield progression and cost.

  A: Yields will balance with recapture assumptions, cost has been long-term effort, 2Q guide good, back half of year set up well, unit cost dependent on capacity produced.

• Q: Loyalty program signups and corporate recapture.

  A: Top three markets for loyalty enrollments New York, Los Angeles, Chicago; loyalty enrollments up 25% year over year; corporate recapture in banking, healthcare and pharma, industrials.

• Q: Operational benefits of re-banking DFW and other operations.

  A: Rebanking DFW smooths operation, improves reliability, reduces stress for customers and team members, expanded to Philadelphia, expect similar results; other initiatives include buffering schedule, contractual changes with flight attendants.

• Q: Fuel pass-through and geographic color.

  A: Domestically, strong network, Q1 stellar performance in Philadelphia, LaGuardia, D.C., second quarter DFW and Los Angeles seeing traction; Atlantic best-performing international entity, Q2 high single digits unit revenue performance; Latin America mixed bag but starting to turn positive; Pacific unit revenue growth, Japan becoming stalwart.

• Q: Capacity decisions philosophy.

  A: Always sharp on capacity, pulled capacity in past when supply issue or demand shocks, will adjust capacity based on fuel and demand in next four to six weeks for off-peak period.