Great. Let's keep cruising on here at a high altitude with American Airlines. Please count how many airline analogies I get through the course of the day. Very happy to welcome back to Laguna American with CFO Devon May and Chief Strategy Officer Steve Johnson. Gentlemen, thanks so much for being here.
Thank you.
Maybe, Steve, do you want to open up with some opening remarks?
Sure. Thanks, Ravi. We have to start the day by remembering that today is September 11th, obviously a super important day in the airline industry. There are a lot of you who remember exactly where you were when you heard about it, and probably a lot of you who can't believe that it's been 24 years. It's obviously a super impactful day at American Airlines. We lost, among the hundreds and thousands of people that were killed that day, we lost 23 of our team members. We'll never forget them. I know Mike will be up here in a few minutes. Big day, important day for United. Scott and Andrew and Mike, if you're listening, our best wishes to your team as well. I think it's a testament to the airline industry. If you think about the events of 9/11, the impact that it had on our business and where we are 24 years later, just a real salute to the resilience, the capability, the ingenuity of our team, our industry team, and the team at American Airlines as we continue to provide and build and make better just this backbone of the economy and this important product for our customers. Thank you for that. Second, just about the third quarter, the third quarter is playing out pretty much exactly as we projected during our earnings call. We came off a terrible July. I'm sure a lot's been said about that already, so I won't belabor that point. As I think we talked about then and others have talked about, we saw bookings start to firm around the 4th of July weekend, and that's resulted in an August that was better than July, a September that was better than August. Although we're only about 50% booked, it looks like October is going to be better than September. That same progression that we anticipated is playing out exactly right. That's resulted in our being very comfortable with our third quarter revenue guide. We're going to produce that on slightly fewer ASMs, maybe towards the bottom of our ASM range, but that's what our quarter looks like at this point. Third, maybe turning to a little longer range point, we feel really good about where American is positioned. We talked a lot about margin improvement, but we don't often talk about revenue, and I'd like to just maybe say a few words about that today. American is a company that has, I think, been noteworthy in its really terrific management of its costs and cost structure. That's been the case for years. Over the course of the last couple of years, we've actually improved upon that with our re-engineering the business initiatives, which are going to take by the end of this year another margin point and a half out of our cost structure. We've had really terrific performance, but we've been less capable at producing revenue. About 15 months ago, I think on the heels of a failed sales and distribution strategy, we made a leadership change in our commercial group. The initial focus, and maybe initially we thought the only focus, was sales and distribution recovery. I'm happy to report that continues apace. It's continued deliberate improvement. We are on track to meet the objective that we've set out in our earnings calls to restore our performance by the end of this year to where it was in 2023 before we actually started the new strategy. As we looked, and with a new set of eyes and new leadership and new perspective, we found that there was lots of opportunity across our commercial operation and in the way we produce revenue. We started to attack that in December. We announced the new credit card deal with Citi. Citi is our exclusive partner. The way in which that's structured and the exclusivity is going to allow us to grow that business much faster than we have in the past. We've talked about the impact that that's going to have on profitability. The next thing we did is build a new team, seven people to oversee the commercial portfolios. I think without doubt the best seven people that we've ever deployed at American Airlines focused on commercial and revenue development and delivery. Those folks have been in office since February. They're already starting to get traction. They're very anxious and excited about the opportunity to improve the performance of their portfolios to world class. I think maybe the most interesting thing for me is how they've come together as a team. Revenue is a team sport for sure, and this group of people, they've known each other for a long time. They work together really well, and they really understand that as we perform as a team, we'll perform as a company. That's terrific. That's led to some other initiatives. First, our customer experience effort, the reimagination of customer experience and the creation of a new customer-based culture at American. We're off to a fast start on that. That's, I think, both really interesting from a vision perspective and from a culture perspective, which ultimately is, I think, the grounding for everything we do. We've also had some quick wins and initiatives. We've talked about free Wi-Fi. We've talked about our new app, which is not only more competitive, I think, but has been re-platformed into an automation structure where we can be very nimble with its continued improvement. We introduced a new airplane, the 787P, which is both, I think, remarkable in its hard product and the soft product that will follow it, and very different from the already pretty good product that we had out there. We've had a handful of 787Ps in service now. The feedback from our customers has been terrific. That is going to be followed by the A321XLR, which we'll put in the market in the fourth quarter on the transcontinental route. That airplane looks just like the 787P and just like the 787P has a much larger premium and premium economy footprint than the airplanes that it will replace on transcontinental. It is going to provide in 2027 a really significant opportunity for us to attack secondary markets in Europe and ultimately on a seasonal basis in Northern South America. We are participating in the lounge competition, arms race in lounges. We historically have a great lounge footprint around our network, and we were the first to introduce premium lounges in the United States and still today have the most of them. We recognize that is a battle that's going to continue to be fought on a number of fronts to make the premier lounges better, to have more of them, and ultimately to address capacity requirements as demand for our premium products grows and our credit card penetration increases. We're excited about that. We've done some simple things like just changing the boarding priority at American, and I hope that you've all been able to enjoy that. From my perspective as one of our best customers, the stress level and just kind of the vibe as you wait to get on an American airplane seems very different and very much better than it was six months ago. We've got some food and beverage strategies that I think are going to be deployed in the short term and the long term. We started last week by making an announcement about some regional experiments that we're trying. Food and beverage is sort of focused on the plates where the flight originates from or is its destination. We've got a fun champagne announcement coming next week. The team's going to be mad at me for disclosing that in advance. Then focusing on something as simple as having a coffee provider that I think everybody looks to as providing really good coffee. We're continuing to grow and invest in our network. The long-haul aircraft are part of that. We increased the number of long-haul capable aircraft and premium seats to the point where we'll be up something like 20% by the end of the decade. The A321XLRs, as I mentioned, give us a whole new set of markets that we can serve. We're focused on our domestic network growing. We focused after the pandemic on growing GFW in Charlotte to their maximum capacity. This year we've focused on Chicago. As you know, we grew our gauge in New York as a result of just deploying bigger aircraft there. Philadelphia, we've increased our relative market share pretty significantly. We've seen really good responses and good financial performance in all three areas, at least compared to our expectations. As we get into 2026, our growth will continue that, and we have opportunities in Miami and Phoenix to accomplish some of the same things we accomplished in Philadelphia in particular by growing our relative market share there. Our partnerships, a really important part of our business in providing a global network to our customers, retrenched during the pandemic, and we've spent a couple of years getting those back to where they were in 2019. Our future focus on our partnerships and making those more seamless and making those more expansive are all upside for us. Even kind of the more routine but really important stuff, we're very focused and taking a comprehensive look at the way we revenue manage on a day-to-day, week-to-week, month-to-month, year-to-year basis, focused on how we price, how we compete, how we price in markets that are competitive, how we price in markets that are less competitive, the quality of our automation, the opportunities to deploy AI in revenue management, all real opportunities for us in the long run. We're definitely playing the medium and long game here. We're able to see some of this already in our third quarter performance and looking ahead to our fourth quarter performance. We are just getting traction on these things, and it shows up less in the revenue environment we are in, that it is still kind of a tougher revenue environment. As we get into 2026, I think you will both see it more in the revenue line, and we will have an opportunity at earnings calls and meetings like this to talk about it in more detail. It leaves Devon and Neil and me and the American team, I think, really encouraged about the upside for American on the revenue line. As I said earlier this morning, we do have a margin gap to the other airlines. More than 100% of that is accounted for by our historic revenue underperformance. I think there is really good upside, some really fascinating things for us to address and achieve. We are very excited. Thanks, Ravi, for the opportunity.
No, that was incredibly comprehensive. Maybe just start with my very last point, the 100% of the margin gap being revenue-driven. Is there some kind of switch or inflection point at which you guys have decided, hey, we've done enough on the cost, but kind of, you know, hey, let's target this as a real issue? What's driving this kind of shift in focus, if you will?
I can start just by describing the margin gap. Obviously, we're first focused on our own margins, but we do spend a good amount of time looking at relative margins as well. If you look back a few years, look back pre-COVID, American and United had pretty similar margins. When I think of margins, I talk on relative margins EBITDA. We have different capital structure, different financing decisions. Relative EBITDA margins, American and United were in a very similar spot, trailing Delta by probably a couple of points. It was the exact same thing in 2023. American and United, very similar EBITDA margins, trailing Delta slightly. In 2024, more of a margin gap appeared. We've talked about sales and distribution. We've talked about our co-brand credit card and the opportunity we felt we have there. We're really excited about the opportunity with Citi. We have seen really great cost performance over the past five, six, seven years, and probably longer than that. Our mentality around cost shifted a little bit from how can we cut costs a little bit to how can we just be more efficient. How do we change process? How do we invest in technology to drive real cost savings? I think over the last five years, we've done a really nice job of that. On the revenue side, though, we did see more of a revenue gap appearing. I think we're focused on all the right things that Steve talked about. As we get through it, I think we're going to be able to shrink that margin gap pretty meaningfully. I look at second quarter as a proof point of that. Nobody had margins up in the second quarter. We all had margins down a percent or a percent and a half. For American, I think that's a pretty incredible accomplishment that our margins were down about the same as our big network peers in a world where we have market labor rates for almost the entirety of our team members. There's a handful of small groups that we have some work to do on. One of our large competitors does not, and that's a meaningful margin impact when they get to that point. There was a cost benefit for them in the second quarter. The other side is just you look at domestic versus international right now. International is performing really well. On the domestic side, we obviously see some weakness in domestic main cabin. We're more exposed to domestic. We're happy to be the largest carrier in the United States. It's the most important aviation market in the world. It's just a great position to be in. For this year, there's an entity mix component that should be driving our relative margins down. You look at it, we all have the same margin performance. I actually think there's a lot of traction, probably measured like 2 to 3 points of relative margin differential between this temporary labor cost differential and this, what I think is going to be temporary entity mix differential as well. We're making up nice ground. I think you're seeing really nice relative unit revenue performance for 3 or 4 quarters in a row where we're outperforming. We're focused on continuing to improve.
Got it. Maybe let's just hit some of those topics, starting with the demand environment. Steve, you said that things are tracking pretty much exactly as you expected coming out of 2Q. Can you just unpack that a little bit more, particularly in domestic where kind of all the focus has been? Obviously, we saw this big weakness in corporate, big weakness in close-in leisure in 1Q. How has that trended? Obviously, July was a month where I think everybody had to really stimulate rather than keep load factors up. How have both of those things trended in August, September, October with a particular focus on close-in leisure and corporate?
Sure. We talked about July. I sort of think of July as, as I said, the worst non-pandemic July in my career, probably between demand and weather. It was really the last of what looks like seven months of really challenging revenue environment. Things certainly around the 4th of July started to inflect and get better. First of all, our business traffic has continued, I think, to develop nicely. We do have a little bit of a tailwind because we are winning back corporate share as part of our sales and distribution strategy. Nevertheless, you can see that business traffic is staying pretty firm, particularly as you come out of August, which is a slow business travel month. Premium has just been a star throughout, notwithstanding the revenue environment. Our premium performance, particularly our long-haul premium performance, has just been very good and very solid and seems to be continuing. The demand for premium products seems to be a, somebody called it earlier, a secular trend. It seems to be, I'll just use a less fancy word and just say it seems to be part of the industry environment now. We're seeing that demand continue through difficult times. We're seeing lots of feedback from our customers, both directly through surveys and just sort of indirectly as we interact with them, just looking for the opportunity to purchase premium products and willing to pay more for those products to get them and applauding all of the product improvements we do. That's been great. I think what you're seeing, a good part of what you're seeing in August versus July, in September versus August, et cetera, is actually affirming of main cabin demand. It's just getting a little bit better, but getting better off a really low base. I mean, we're not just joking around about July. It was a really, really difficult month, particularly from a main cabin demand perspective. You're starting to see that come back. I think that makes sense. It looks like it was economic uncertainty and all the confusion about the tariffs and what that might do that drove July to the point that it was. As some of that's dissipated, and I think as the traveling public has become comfortable that the tariffs, whatever they're going to do to the economy, it's going to be around the margin and not catastrophic. You're seeing that demand pick up. I think especially noteworthy in that we're seeing demand for future bookings really strong. That's sort of, I think, an implicit commitment by main cabin travelers that they feel like everything's going to be OK and they can make commitments to travel, buy expensive airline tickets out in the future. They feel like they're going to be in good shape.
Got it. That's pretty helpful. Delta this morning said that they were seeing some weakness in international Main Cabin offset by corporate strength. Are you guys seeing that as well?
Yeah. The main cabin, it seems almost like the other side of the coin from the really noteworthy uptick in demand for premium cabin. It seems like at the same time, we're having trouble getting, as an industry, I think, filling the main cabin on long-haul international. I think all have to look and figure out what the right product mix and price point is for main cabin travel and long-haul. The first thing we're doing at American Airlines, and I think our competitors are doing as well, is simply building airplanes and reconfiguring airplanes with more premium seats, more premium economy seats. That's where the demand is, and fewer economy seats. I think over the course of the next few years, you'll see the industry and us come up with new products to try to improve demand for and just increase the opportunity to travel to a wider group of people who are price sensitive.
Got it. Just last point on the corporate recovery by year end. You said you're absolutely on track for that. You should have enough visibility into what that business looks like when it is fully normalized. If you compare that revenue base today versus what it was before the change in strategy, are you happy with the size, the mix, the margins of that corporate business versus what it was before?
Yeah, so far, so good. It's working out the way we planned. So far, we haven't had to make any sort of crazy investments in winning back or buying back that business. It's coming back the way that we like. It's coming back deliberately and incrementally over time. While we'll be back to our sort of first quarter 2023 levels by the end of the year, it's going to be next year before we actually see the full run rate value.
Yeah, absolutely.
In terms of absolute revenue enhancement, it's going well. I think it's important to note, though, that that opportunity is bigger than just returning to where we were by the end of this year. In the first quarter of 2023, we weren't in a great place. That was one of the reasons, I think, why we considered an alternative strategy. We're looking not just to finishing the year strong, but also to opportunities to grow our corporate share in 2026 and 2027 beyond that.
Got it. Same thing on indirect, that the piece of business when restored looks just as good, if not better than where we've been?
Yeah. I mean, again, it's a different revenue environment at a different time, but it's working out the way that we like. One point to make is that while the strategy that we adopted in early 2023 was too much, too fast, and on top of that, not particularly well executed, it was an experiment that allowed us, I think, the rest of the industry, the TMC community, and the people who run corporate travel programs to see some things about the way in which that community and that ecosystem works. While we never want to go back and we're never going to say that what we did was a good thing, I think one of the outcomes is going to be that the intermediation of that business is going to evolve over time in a positive way for the industry, positive for industry shareholders, positive for airline customers and travelers. As the intermediation becomes smaller, probably it becomes more efficient. The intermediation will be increasingly focused on that which it does really well for customers and less about just being an intermediary. I think that hopefully we're past that. We are making great progress in winning back share. I think we have some future opportunities ahead of us to improve beyond where we were earlier. Hopefully, we're going to have a good impact and make the business all around better and allow us to provide more products and better fares to our customers and better returns for our shareholders.
Got it. Maybe switching gears away from revenue and talking about capacity for a second. You said that you're tracking towards the low end of the ASM guide for 3Q. I don't know if that's just a function of what July was like or if it was a planned decision. What do you think 4Q looks like for you guys, and are you happy with the schedule that's loaded right now?
Yeah, for the third quarter, we'll be at the low end. It's really just because the operating environment in July and probably into the first part of August was really difficult. A lot of weather hit our hubs particularly hard. Still within the range, but probably at the low end. For the fourth quarter, we don't have a formal guide out there yet. What you will see is a little more capacity growth for American in the fourth quarter than what you've seen in the first three quarters of the year. Part of that, if you look at our fourth quarter last year, we didn't have much growth at all. We were adjusting to what was an oversupply environment in the first half of 2024. We probably pulled down a little too much in the fourth quarter of 2024. There's some capacity and utilization to come back there. Part of it is just continuing to adjust to this new seasonality, that back half of the third quarter, a little softer than what it used to be. Fourth quarter, probably a little bit stronger than what it used to be. We're putting our capacity in at a time of year where we see more demand.
Got it. Maybe kind of sticking with this point, we're looking at the cost side as well. Obviously, we've focused about all the revenue opportunities here, but you've also been very aggressively focused on cost, $250 million of cost savings in 2025, cumulative savings of $750 million. Can you talk about what the opportunities might be going forward, or are you close to the end of the pipeline?
Yeah, it's been a long effort for us. I feel we've had the right focus. Like for the longest time, you're just trying to figure out, can you cut a little bit here? Can you ask for teams to do a little bit more there? We took a different approach when we entered into this about three years ago now. It was all around how do we invest to drive real efficiencies in our business? It's process change, it's technology investment, it's in every part of our business. These initiatives are tracked and measured monthly, reported back to Steve and Robert and myself. It's with every single work group, how do we do things a little better, right? From the decision to staff, to training, to onboarding, to day of, irregular operations, recovery, how do we do things better? How do we rely on more technology and make it better for our customers and for our team members? That's how we've delivered so far. We delivered probably a lot more early this year, a couple hundred million dollars. Some of these just take longer. We got to sit down with our tech ops team. We were on our maintenance operation two days ago. The way they're going to be running tech ops in 2027 is completely different than how we ran tech ops in 2022. It's all digitized. We're able to measure productivity of all of our team members. We're able to ensure they have the right tools to do the jobs at the right time. It's super exciting when you just watch some of this develop. Some of it just takes more time. I can't stop talking about it, or I can't end this discussion on efficiency without talking about our procurement team. We saw it as a huge opportunity for the organization a few years ago. We built a team that's led by what I think is one of the top procurement professionals in the world. He's doing an outstanding job, leading an outstanding team to drive real savings, working capital improvements of over $500 million to date and more to come. It's a huge effort. The whole organization's behind it, and I think there's still more to come there.
Got it.
If I could just add one thing, I've been very impressed with the contribution of our team as a whole, just to the ideation of this. Really, a salute to the team that they've been so creative and so committed to trying to make the business better. That's what leads me to think that we're not done. I mean, they just continue to come up with ideas about doing things differently that can be built into programs as part of this. It's been really fun to watch.
Got it. Devon, just one nuance on Kazim. The maintenance expense has shifted from 2Q to 4Q. That's still on track to be right?
Yeah, that's for the year. You know, at the start of the year, we said we were going to grow low single digit and have unit costs in kind of that mid-single digit range. That's probably where it's coming in. The timing of it has shifted a little bit. The first quarter came in a little bit better than our initial expectations. The second quarter did as well. There is some maintenance timing that we talked about on the earnings call where we've seen some maintenance expense shift into the third and fourth quarter. For the full year, expenses are largely coming in as expected.
Understood. Any questions from the audience?
You mentioned a little bit at the top in the opening remarks around AI for revenue management. I was wondering if you could talk maybe a little more expansively on AI, both on some of the customer-facing things that you guys are working on, as well as the operational side.
Sure. I'll start, and Devon can do. I think, you know, I certainly do, and I think my colleagues all believe that AI is just a revolutionary opportunity for society, but certainly for the airline industry, with opportunities to deploy it limited only by our imaginations, I think, individually. It's a business that is enormously complicated. The ability to have automation that can, in effect, produce answers more comprehensively and faster is always going to be valuable for us. It is just across the board, applications in the way we run our operations, applications in the way we run our operations when they're disrupted, applications for revenue management, which are just, I mean, we file, I mean, an uncountable number of fares three times a day, all of which we have to make competitive in a super dynamic environment. AI is going to help us do that. We have a customer base of, you know, we talk a lot about wanting to respond to our customers. We think about it and have historically thought about it in sort of a top-down macro way. We have 63 million individual customers each year at American Airlines. AI is going to help us really understand what those customers want and help us produce products that can be tailored for their specific needs and their specific times and to offer them opportunities to travel that they may not have thought of in their own in a way that we just can't do it with humans or present automation. It will deploy, certainly, one of the easy and most immediate, I think, use cases is disrupted operations and customer relations where AI can provide a big majority of the circumstances can do a better job than a human being can do in managing problems that we see over and over and in organizing responses to disrupted flights or broad weather disruptions. I mean, I could probably talk for the rest of the afternoon about it, but.
Yeah. The only thing I'd add is structurally, I think we're set up really well for it. In part because of this transformation office we set up with re-engineering the business, we've now put that on the leader of the transformation office to make sure we are driving investment into AI initiatives that we think are going to drive better revenue, better earnings, more efficiencies. He's partnering really well with the IT team and the business units to make sure that investments are going and that we're putting our money in the right places.
Yeah.
I just want to go back to international really quickly. What are your thoughts on some of the domestic carriers, let's say like Alaska, JetBlue expanding routes into Transatlantic, and what would that look for American Airlines?
Generally speaking, the real competition on Transatlantic and international as a whole is, I think, competition between the three global alliances or maybe the joint businesses that are built into those global alliances. Our focus is on competing with Delta and SkyTeam, United and Star, et cetera. We have really great partners that allow us to do that really effectively. Starting with JetBlue, I suspect that JetBlue will continue its Transatlantic operations. It's pretty small compared to what any of the joint businesses do. They provide an interesting differentiated product, and we wish them well. Again, it's always going to be pretty small compared to the size of those markets. Alaska is maybe a bit more interesting. First of all, they're our partner. We wish them really well and support their efforts. They actually are going to operate in a more traditional way with wide-body aircraft, with traditional products with the Alaska touch on those. They're going to operate from a really fabulous international gateway in Seattle, supported by a pretty solid domestic operation out of Seattle that's helped out by American Airlines. I feel like, ultimately, they're going to be ultimately effective in operating internationally out of Seattle, I think both on the Transatlantic and Trans-Pacific.
Any more questions? Maybe I'll kind of end with a couple here. Obviously, a big announcement from you guys, end of last year, with the new Citi announcement that kicks in end of this year, early 2026. Can you just talk about the discussions you had with them, kind of the economics of the agreement, and kind of how much of a benchmark that is for other carriers in space?
Sure. We, I think, at both Citi and we, a couple of years ago, determined that the underperformance versus Delta and AmEx, just to use an example, was the fact that they had figured out a way to grow their program in a way that we had not figured out. Almost all of the work with Citi in the lead-up and during the negotiations was focused on creating an environment where we could both grow the program in terms of card members, card spend, but also the ecosystem for earn and burn and rewards. The first conclusion we reached is that that was impossible with two card providers, but became very possible with an exclusive card provider where we could create a partnership that was a lot tighter. A good part of that is just recognizing that Citi had a fabulous customer base that hadn't been exposed to an airline travel program. We have a fabulous base of AAdvantage members who are in need of banking services. By combining those two, we were able to expand the overall products that we can offer as a partnership and, in effect, start the process of, I wouldn't say combining, but sort of cross-pollinizing the two card programs, our co-brand program and Citi's proprietary program. First of all, we can provide benefits to Citi's proprietary program that they hadn't been able to. They have a program where they issue Citi-branded cards that aren't affiliated with an airline, and they give points, ThankYou points, some of you may be Citi card holders. They didn't have access to an airline program in the same way AmEx did, for instance. We can now provide that. That makes the utility of those cards better and demand for those cards better. Likewise, those cards had not had the ability to, we hadn't had the ability to engage in what the card gang calls points transfer. At Delta and American Express for a long, you probably are Membership Rewards members, some of you, you know that you can use your Membership Rewards points to acquire Delta miles, for instance, and use those for travel on Delta. Citi's customers hadn't had that opportunity, and we introduced points transfer. We also noted that we, while we had a big set of card offerings between the two of us, we had holes in our offerings compared to the Delta and AmEx products and even the Chase and United products. We are working hard to introduce a new product a few weeks ago to, I think, pretty good applause that fills in one of those holes. We'll have another announcement next month about another card like that. It was all focused on trying to create a program that could grow faster. The faster you grow the program, the bigger you can create, the bigger the network you can create. That increases your ability to attract earn and redemption partners, increases the ecosystem, increases the utility of the AAdvantage mile, and just allows us to grow the program faster. That is what gives us the ability to project the 10% annual growth under the new program and ultimately, by the end of the decade, get into something like $10 billion and a $1.5 billion EBIT improvement.
Got it. That is really helpful. Thank you for the comprehensive update. We look forward to more on the conference call.
Sure.
Thank you, Steve.
Thank you.
Thanks, Ravi.