Good morning, everybody. Moving right along. Very excited to turn the stage over to United Airlines next. We've got Scott Kirby, the CEO, and for the sake of people listening in at the table, we also have Andrew Nocella, Mike Leskinen, and Kristina Munoz. I forgot that I wasn't supposed to wear this blazer today because Scott always tells me that I look like a professor. From this point forward, you have to address me as Captain My Captain.
I don't think that.
Yeah. Okay. That was a move of reference. Mostly what you look is extremely hot to me. That's like a thick coat and a sweater, and I'm hot standing up here. Anyway, thank you all for joining us today. This is the one conference that I start every year with. Jamie, we go back a long way together. This is one of the highlights of the year. I know everyone in the room is anxious to talk about the short term, especially with all the 8-Ks that came out last night.
Can I give a quick wink?
Oh, you can.
Yes. Pretty rude.
Today's discussion may contain forward-looking statements which represent United's current expectations based upon information currently available to the company. A number of factors could cause actual results to differ materially from our current expectations. Please refer to our latest earnings release, Form 10-K and 10-Q, and other reports filed with the SEC by United Airlines for a more thorough description of these factors. We may also discuss United's financial metrics on a non-GAAP basis during this discussion. Please refer to the related definitions and reconciliations to the most directly comparable GAAP measures in our latest earnings release and investor update, which are available on the IR section of our website and are filed with the SEC. Thanks.
All right. Thanks, Kristina. I will talk about the short term, given I know it's on everyone's mind. I want to start with the long term because the long term, everything that we've said for several years now, the industry and United Airlines are developing much like we expected. There are certainly some short-term macroeconomic issues, but that doesn't change what's happening. The structural changes that have happened in the industry are what's happening in the long term. Nothing that we've seen in the short term impacts what we think is going to be happening even a year from now. I want to start there. To talk about the long term, there's sort of been two ways to think about it.
We have talked about an industry thesis and a United Airlines thesis for several years now that have been consistent, and all the data points seem to be consistent with that. At an industry level, we thought that cost convergence broadly, all the supply chain issues, all the other FAA challenges, all the things, airport costs going up dramatically, all of those things were going to drive what is effectively a supply response in the industry. That more and more markets, particularly for low-cost carriers, were going to become uneconomic. They would not be able to be profitable. That was going to drive supply out of the low end, in particular of the industry. That is exactly what has happened. That is continuing to happen. I think that the near-term economic pressures likely accelerate that.
I think you'll see another really sizable drop in capacity as we move past the summer peak, the second half of August, that you'll see that same thing happen again for the exact same reason that we've been describing for years. That industry thesis remains intact. I think that's a lot of what the stocks moved on last year. That industry thesis remains firmly on track regardless of what is happening in the short term. At United, I have described what is happening to United and our movement to the industry leadership, to an industry leadership position in terms of margins and with the customers as structural, permanent, and irreversible. What I mean by that is really two things. We have two things going for us that are hard to replicate if you do not already have them. Number one is revenue diversity. We have international.
We have domestic. We have cracked the code on the price-sensitive customer with Basic Economy and higher yield. We have cracked the code with the domestic road warriors, elimination of bag fees. There was another big change today that helps that. It is going to help that airline more, but helps with that. The premium we have always been good at, and we have gotten better at it. You add loyalty to that, and we have a diverse revenue stream that even when there is weakness in some part of the business, as there is now, the other parts can at least cover for much of that. The second, and I think in some ways more important element, is winning brand loyal customers. I want to start this. If you are, you need to think about why customers choose an airline. Broadly speaking, I think there are two ways they choose.
There's a large set of customers who typically are infrequent, don't travel a lot, that choose an airline based on schedule and price. That's what we talk about in the industry a lot. Schedule and price. They're much more commoditized customers. There's a large segment of the population that does. They're important to us. We can't ignore it. That's what Basic Economy in particular has done for us. We've gotten to a point where we're going to win our fair share of those price-sensitive customers. The real game in airlines is to win brand loyal customers. What I mean by brand loyal, these are people that fly a lot. They're typically not out price shopping on every flight. What do those customers care about? First, they do care about schedule and price. The price is generally, on a large level, the same.
On average, it's the same at all the big airlines. You kind of almost put that aside. They care about the schedule. If you're a brand loyal customer, you're going to fly a lot. You live in Dallas. You may like or dislike things about American Airlines, but you're going to be an American Airlines brand loyal customer. If you live in Atlanta, you're going to be Delta. That typically is number one. In all those competitive markets, and most of the country is competitive, whether you're in Chicago or New York or Los Angeles or Nashville or Grand Rapids, all of the other parts of the country that aren't people that don't live in those big hubs are up for grabs for brand loyal customers. What do those customers care about?
The schedule matters, but the schedule in most of those cases is equal between one or two airlines. Their choice comes down to whose frequent flyer program do I like? Whose club programs do I like? Whose service do I like better? Whose airplanes do I like better? Do I want to be on an airplane that has seatback entertainment? Do I care about the Wi-Fi? All of those things go into the mix. The important point about those customers is that they are sticky. Once they decide to switch to an airline, they tend to stay there for decades or beyond. They get the credit card. They tend to stay. A good example at least that I can use for brand loyal customers, two of the markets where we have won well into double-digit market share are Denver and Chicago.
It is not a knock on those airlines. United has done a lot of things to just win brand loyal share. Those also are two markets where we have had over 100% growth in credit cards from 2019 to today to last year. In five years, both well over 100% growth in credit card signups because as customers switch to us, they get the credit card. They are sticky. The point of all that is those customers are sticky. Those customers are typically choosing the best airline in any given market. If you live in Denver, you are trying to choose the best airline. If you are second place, you do not get a fair share of it. You get dramatically less traffic if you are second place.
Trying to be the number one airline for customer choice in each of the big markets we fly has been our strategy for brand loyalty. I have lots of microdata kind of market by market where we've done that. It's the reason that Andrew talked about at our last earnings call, that the difference between our most profitable and our least profitable hub is only six points. We are the only airline in the country that is even close to true that all of our hubs are profitable. It's because we've won brand loyal customers. All of that, those industry trends and the United trends remain firmly in track. Now, in the near term, read the same newspapers, read the 8-Ks this morning. We have also seen weakness in the demanded market. It started with government. Government is 2% of our business.
Government adjacent, all the other consultants and contracts that go along with it are probably another 2%-3%. That is running down about 50% right now. A pretty material impact in the short term. I will talk about what we can do about that in the medium term. We have seen some bleed over to that into the domestic leisure market. The good news is that international, long-haul, Hawaii, premium all remain really strong. We have seen government and some low-end consumer leisure weakness, which also appears consistent to me with a lot of other data that I look at. We have had a fuel price benefit from that, and our internal costs are also better. You put all that together, and we now expect to be at the low end of our guidance range.
We did not put an 8-K out, but we expect to be at the low end of our guidance range. What do we do in response to that? At United, we looked at that and said, you know, what we are doing, one of the things that we are doing is we are early retiring 21 aircraft. That is something that will be cash positive this year. We have had to spend $100 million on engine overhauls this year alone for those airplanes. It will be CASM positive. Those are our most expensive aircraft. We built a plan. We told all of you, we built a plan with optionality and flexibility that if we see short-term headwinds, we can make short-term responses. That 21 aircraft, by the way, sort of correlates with what we have seen from the government. We have already started the process of where that capacity is coming out.
A lot of it trans-border, big drop in Canadian traffic to go into the U.S. Some of it's going to come out in government markets where we've seen less demand. We're also going to cancel red-eye flying. Utilization flying is generally unprofitable at airlines, even in good times, and it's really unprofitable in bad times. We're taking those proactive steps. Further, particularly with the government traffic, there's a short-term yield management effect. We see that kind of drop off. Effectively, the yield management system is saving seats for those customers. By the time we're into April, we're not doing that anymore. We've adjusted the yield management system. We're taking more leisure bookings instead of government bookings. Much of that kind of 45% or that 50% drop in government gets corrected by the capacity changes and by removing by the yield management system.
That's what United is doing. From an industry level, I expect that you're going to see probably modest supply changes in the very near term. As we go through the summer, hope springs eternal, and it is the summer peak. I don't think you'll see huge changes. I think by the time we get to August next year, just like we got to August of last year, there's going to be a huge every analyst is going to be writing about the capacity cuts and the supply changes. It's just economics. Like I said on the last call, airlines were moving to their markets where they have a comparative advantage. One of the big trends that's happening is there are I do the P&Ls for every airline for every route. I know them. I probably know them better than some of the other airline CEOs.
Where you see people cutting is the places that they've lost money where they have a comparative disadvantage. You cannot be the number two brand loyal choice with customers in a market and succeed. It's not possible. The industry is evolving to a place where people focus on their comparative advantage, where they focus on the markets where they have the number one position with customer choice and moving away from others. All of that, I think, is good. I think the short-term turbulence is going to do the only thing it's going to do, which is accelerate the endpoint. We're going to end at the same endpoint from an industry supply perspective, but we're going to accelerate that endpoint as we go through what looks like a tougher economic time ahead. We feel really good at United about where we are.
We feel good about our ability to manage even through a downturn if it happens, having, I think, margins that are going to surprise to the upside even if there is a downturn and what all of this means for the future outlook. Thank you, Jamie. Thank you, guys, for having us and Mark as well. If that opened up to comments, questions.
Scott, I think it was like three quarters ago that you really started to lean into the permanent structural and irreversible. The irreversible became part of the Kirby vernacular. I don't disagree with you, but I still, with your help, want to try to push back on that. For example, is there a scenario where certain carriers could reestablish massive pilot pay differentials that would help some of those airlines like they've had in the past? You talk about cost convergence. Is there any scenario where costs would begin to diverge?
Yeah. That's a fair one. When I talk about permanent structure and irreversible, I'm more focused on the customer side, the revenue side of the equation where customer choice isn't going to change. You'd have to do something to really change that customer choice. I think the structural cost labor is one where somebody could perhaps do that. The structural costs that matter are much bigger than that. Labor, I didn't even list labor in my list because, I mean, airport costs are probably the most important one. You cannot be a low-cost carrier and fly to the big three metro areas. You can't. This is one of the fundamental things that happened with the low because the air costs got too much.
Southwest, which was the greatest airline in the history of global aviation, did more to change it than any airline in history. I have immense respect for what they did. One of their foundational planks was we fly to cheap airports that are not crowded. By the way, there is still one successful low-cost ULCC in the world. It is Ryanair. They do not fly to London Heathrow. They do not fly to Charles de Gaulle because those airports are too expensive. In the U.S., low-cost carriers just wanted to keep growing. They plowed into New York and LAX. You cannot pay $50 in airport cost and charge $70. You cannot do it. The economics do not work. Maybe they would be better at competing in Akron to Orlando if they had lower labor costs.
They can never compete in the New York metro area, in the Chicago airports, in Los Angeles, in San Francisco. The airports are just too expensive. The airport costs, I see Shawn from Dallas. The airport authorities have killed the low-cost carrier business model in big cities.
Looking out five to ten years, do you think there'll be more point-to-point service by some of those carriers?
No. I think five to 10 years from now, you're going to have airlines concentrated in the places where they're successful. United, you're going to have seven hubs. We don't have aspirations beyond that, our seven hubs. Six of the seven, by the way, we're the clear leader now in those hubs. We've won lots of market share. I talked about Denver and Chicago. San Francisco and New York are our third and fourth largest increase in credit card signups, New York metro area and San Francisco metro area. LA is still a toss-up. It's the only one that's kind of a toss-up. It's down to two airlines. It used to be four, down to two airlines that are sort of tied for the brand loyal customers. Our focus is going to be there, for example.
I think other airlines, the other network, the big airlines are going to be focused there. There is going to be a lot less low-cost carrier capacity. I think there is a niche that works for the low-cost carriers of point-to-point. The niche does not involve a big city, a big high-cost airport at one end. It is just a smaller niche. The reality is what happened to the LCC, ULCC business model is they outgrew their total addressable market size in the United States. That got exacerbated when we all eliminated change fees. That was a huge, huge market share advantage. In a place like Denver, when United had change fees in place, there were a segment of customers that United was the brand loyal airline. There is a segment of customers, I am not trying to knock on Southwest. I see Doxey here. Hi, Tom.
He worked for me for a long time, so he has good training. He ought to do well at Southwest. Southwest had those domestic road warriors, the biggest advantage that Southwest had over United was no change fees. For customers that mattered, that was enough to overwhelm our frequent flyer program at first class and clubs and food and all the other stuff. Now that's a tie. We're not better, but that's a tie. All the other stuff at United wins. The brand loyal customers move. Not because Southwest did anything wrong. They did not. We just matched their one competitive advantage. Those brand loyal customers have switched. That is the point about it. It is sticky. Those customers are sticky.
As other airlines incrementally move closer to us, it's not going to be enough that they pass us and an airline and a customer decides to switch. They're sticky at United.
A couple of years ago, you made the point that you felt that there was room in the U.S. for two premium airlines, which I interpreted as a nod to Delta and maybe a swipe at American. The question that I've gotten is that, I mean, is that just something you said at the time, or do you think that the premium market itself can't actually support more capacity?
The first time I actually remember saying that was December 9, 2013, which was the day the American Airlines-US Airways merger closed. At the end of a successful day, I got everyone in the room and said, "There's only room in the country for two successful premium airlines. We're going to be it. Here's what we're going to do. We're going to seat back entertainment. We're going to invite all sort of the same playbook. We're going to do all this stuff. We're going to push United out of the Transcon market. Then we're going to push them out of Los Angeles. Then we're going to push them out of Chicago." I said that on December 9, 2013. I have thought that for a long time. The airlines decided to flip the playbooks. I still think there's only room for two.
It's just the size of the market. You just look at the big metro areas. New York is big enough to have two. It's really hard to be three in there. It's hard to have a competitive advantage. Here in New York, Delta's bigger on one side of the river. We're bigger on the other. We can each kind of be number one, but the real point is it's hard to be number two. You just run out of big cities where you can be number two. You can be really big in a place that's not New York or Chicago or Los Angeles. It's hard to be kind of global and comprehensive if you can't be number one in those big cities. I thought there was always only room for two as you just look at the map.
I still think there's only room for two.
A couple of questions from me for Andrew. We already spoke with Delta this morning a little bit about their government exposure. Can you talk about your government exposure and specifically IAD and the Washington sort of catchment versus the rest of the network and how that's been playing out?
Sure. There's no doubt when a Dulles hub, we have more exposure than they do. So roughly 2%, a little less than 2% of our revenue. And that's true for both domestic and international, the level of exposure. Obviously, Dulles has the highest exposure at United. We've seen the fall off, as Scott said, of roughly 50%. It's more in far-out bookings than close-in bookings. The close-in government bookings continue to be rather normal. It's the far-out stuff that has dissipated quite a bit. We'll see where it goes. As we hinted to earlier, our ability to refill the seats as we head into the Easter and spring break time period is much better than in February or March at this point. We feel bullish as we go forward that we'll be able to recoup some of what's been lost.
It is roughly 4% of our revenue when you take the direct and the indirect impact of what we think the government provides United.
Any observations on other corporate sectors? We spoke with Delta a little bit about they cited aerospace and defense, autos. Obviously, the A&D has a government relationship. Just when you look at obviously, you have a big tech exposure out of the West Coast and so forth. Just any observations when you look at corporate travel trends?
I think we'd reiterate what you heard this morning that as we ended the year and started this new year, the trends were incredibly strong. They have dissipated a bit. They still remain, I think, relatively healthy in the corporate space, excluding the government part of it. I'm pretty bullish that hopefully we get through this little rough patch and we see that traffic return to that fast pace that was just a few weeks ago when you add it all up. I generally see similar trends across most of those businesses at this point. There's nothing to point out that's worse or better, in my opinion.
A question, maybe, Andrew, for you or for Scott or Mike. When you think about Southwest's decision to eliminate bag fees, how do you compare that in terms of the impact on United as change fees or some of the other sort of barriers that have fallen to level the playing field?
I think it'll be a really big deal for Southwest. It'll be good for everyone else. It'll make them more competitive. It mostly impacted the low-end customers. Our customers that have the credit card or the frequent flyer program get free bag fees. It's the reason we never worried about matching it. I think it'll raise the tide for Southwest across the board. The relative margins will be worse in competitive markets because it will cause some customers at the margins to switch to competing airlines. It'll net be good for them. I think the far bigger thing is it's the slaying of a sacred cow. It's one of the two big things that gets Southwest back to industry-leading margins, that and stop flying places that lose money. If you're willing to slay one, you're maybe willing to slay two. I don't know.
I view it as a big deal because it feels more a financially driven, results-driven airline than it's ever been before.
Mike, I want to ask you a question about the balance sheet because under previous regimes at United, there was never a goal to be investment-grade rated. It was always investment-grade metrics and so forth. You have changed that up. You have a goal to be an investment-grade rated airline. We have not had a chance to discuss in a big forum like this. I just want to ask you why that is so important.
Appreciate the question, Mark. The best balance sheet to get to investment grade, it's all about playing offense. You need to have strong P&L. You need to have strong margins. Otherwise, what you would have to do, the balance sheet would just be exorbitantly expensive to get to investment grade. As we're on this march to double-digit margins, we now have that opportunity that I don't think existed in previous regime at United. The brand loyalty, the resiliency of the business, the predictability of our margin, and along with having relative industry-leading margins, all of that is the foundation for investment grade. Now we think about what we're doing with operating cash. What we're doing with free cash to bring down the balance sheet is at the same time we buy back shares.
We're on a path right now to get to below two times net debt to EBITDA. I'm not sure if we need to refine that a little bit lower than that. We're going to work to see that. Investment grade is really important for a ton of reasons for this business. The biggest reason is the optionality it creates in times of crisis. What we're seeing in the market right now is the cost of borrowing unsecured is starting to become really tight with the cost of borrowing secured debt. As that continues to narrow, you should expect to see us evolve how we finance this business. I do think as we roll into 2026, we'll be at investment-grade metrics. We'll see how long it takes to get from investment-grade metrics to an investment-grade rating.
Just on that point, how does that interplay with the fleet strategy? You sort of build up, sometimes we heard from Delta, big unencumbered assets. Historically, there was sort of a move to kind of balance financed aircraft and leased aircraft. How does United think about sort of that leased aspect vis-à-vis kind of the path to IG?
Yeah, it's a great question. The overarching principle is how do we optimize our overall cost of capital, debt and equity capital. As we think about mixing lease financing with more traditional EETC financing, it's about what is the most cost-effective at the time. I think that what you'll see more and more of is maybe we'll start to tap into the unsecured market as well. It is really about optimizing overall cost of capital. In the past, it was about minimizing cost of debt in a vacuum. I want to minimize the cost of equity at the same time.
Got it. Thanks.
I've got one for Mike. And then a follow-up for Scott, depending on Mike's answer.
I agree. I think it was the January earnings call last year that I asked you about the potential to do something with loyalty, some potential form to monetize maybe a portion of the program. I remember I asked the question because it was two years prior that there were some Bloomberg articles on that topic. In any event, you really seemed to lean into that question at the time. The impression that I got in the months after that was that it was something that was being seriously looked at internally. The stock started to work. The impression that I've been left with is that any efforts in that regard were kind of pushed to the side. I guess my first question is, is this a reasonable way to describe history? Is it just kind of a no-brainer?
I mean, with the stock under so much pressure, does that mean you potentially revisit some of those thoughts?
Jamie, you're an astute observer of this industry. Look, I would say that we're trying to optimize our balance sheet, optimize our cost of capital. It was clear to me before I joined United that we had this hidden gem in the loyalty business at United and a couple of other airlines, three or four programs. That's it. In the pandemic, we tapped that to raise liquidity at a time of crisis at reasonably attractive rates. In a time of strength, as the economy is stronger, what does that mean for our equity value? We weren't getting any credit for that. We still aren't getting sufficient credit for that. The goal when we were talking about monetizing that loyalty program was about getting respect for our equity multiple. Trading at four times was just simply unjustified.
As our multiple went from four to eight times, that did not say we stopped the process. It meant that we could take our time. Everything, all the work is being done. To the extent our multiple were to contract for an extended period of time, we would take that book off the shelf without question. That is just part of the story, though, because the other part of the story is we have got a business within the larger airline business that is high margin and low capital intensity. That should be a higher multiple business. We can get credit in the overall business for that. That business, we ought to be allocating more and more resources to, both operating expenses and CapEx.
What you've seen is a pretty dramatic shift at United where we're allocating more of those resources to that business to expand that low margin and that high margin, low capital business. We're not quite ready to unveil all of the details of that, but we have supercharged that business. You're going to see an accelerated growth rate. Over time, you're going to see additional disclosure. We want to do it right. There have been plenty of loyalty programs, whether or not they've been spun out, where the relationship with the overall airline has been imbalanced. That creates a lot of disruption. We're trying to take our time and do it the right way. Make no mistake, I want to end on this, that there's a ton of value there.
If the market sees that value, then we do not need to do anything more but disclose. If the market does not see that value, then we have an obligation to shareholders to do something more to create that value.
My follow-up for Scott, you have very sophisticated internal systems for monitoring route profitability. You have your competitors. I assume that you've crunched whatever numbers you can on the Citi American deal, and you have good line of sight into Delta Amex Economics. You've expressed dissatisfaction with your Chase Economics in the past. Certainly, some of the stories I've heard about you and Jamie Dimon are colorful, but I think that's all in the past. How would you describe? I mean, are you operating at an economic deficit to where American and Delta currently are with loyalty return?
I would not describe it that way, that we have not expressed dissatisfaction with Chase. We have a great relationship. We have a great partnership with Chase. Like all of these deals, they are sort of competitive in the market. Whoever has done the latest tends to jump to the top, at least a little bit. Ours was signed earlier. I do not think there is anything.
Pilot contracts.
It's like pilot contracts. When you sign the next one, you jump to the front. We have a great partnership with Chase at all levels of the company, from me and Jamie. I'm going to see him later today, to Andrew and his team, all the way down. We have a really solid partnership. We know that we win together. New contracts are not up for a few years, but I would not describe it the way you said. I think theirs are probably a little better than ours, just because they came after us.
Yeah.
Tell Jamie we said hello. Scott, you're the only CEO that may give us a somewhat direct answer to this question, which is.
You're telling me you're setting a trap, and I'm going to walk into it anyway.
I'm trying to exclude with this question here, okay?
How do you know what it is?
Excluding Spirit and Frontier, will we see and/or do we need more industry consolidation? Does United play a role in it?
I don't know. I think it's, I probably think it's less likely than others think. JetBlue is the obvious candidate. Joanna is going to be here later today, so you can ask her what she thinks. She's probably.
She's not going to answer.
That's why we're just going to. She's probably in control of that decision. It's possible. There are a lot of challenges. I look at it from United's perspective. We have a great plan that is working, and mergers are so hard. They're disruptive. Your technology team spends two years on the sideline just integrating. I bet a lot of you use the United app. I bet you all think it's the best app in the world in airlines because it is. That kind of investment just gets harder to do. We've got some super cool stuff coming for customers this year. That stuff just gets harder and harder to do. At United, while when the basic business plan is working, the hurdle to go do it, we don't need a deal, for sure. The hurdle to go do a deal gets a whole lot higher.
That said, at least at United, I would like to have a bigger, I'd like to have a presence on the other side of the river at JFK. All the headache, all the brain damage of buying a whole airline to get that, that's a lot to do. I think the ball is going to be in JetBlue's court. They're working. I have a lot of respect for them. They're working hard. They're also an airline that focuses on brand loyalty. From the customer's perspective, they have a lot of those sort of core DNA things that I respect. They're also competing with another airline, JFK and Boston, that has that too. It is a tough position for it to be in. It is sort of their decision on how to sort through that.
That is the only one that I think really is potentially in play one way or another.
Any hope that the change in administration in Washington, besides all the noise that's out there right now, leads to some beneficial improvements to United in terms of whether it's air traffic control, FAA, what you're hearing from the Department of Transportation?
Two things. First, I'm hopeful. I think all of us think that there's opportunity to make the government more efficient. I might go about DOT a little differently if I would go about it a little differently if I was running it, a little more scalpel, maybe a lot more scalpel approach. Hopefully, the government, a more efficient government, even if we pay some short-term pain, which we're going to go through some short-term pain for that, hopefully, we're better on that in the long term. I think without question, the FAA is set up to finally fix the FAA. I think that Secretary Duffy is focused on the, I put it out of push. There's three things they need to do to fix the FAA: get staffing back up to full staffing, technology, and facilities and equipment investment. They've just got ancient facilities.
They spend 92% of their budget repairing and maintaining existing facilities. There's no business. Business is the inverse. It's literally the inverse. We fix those three things. They're not that complicated. They're not easy, but they're straightforward to understand. I think Secretary Duffy gets it. The administration gets it. I'm up on the head straight from here to DC. I'll see a bunch more people. I've talked to all the people on both sides. This is one that's bipartisan. Washington, though, just God, it's hard for me to understand it. Everyone agrees, and they still don't do it. I think this time it's going to actually get done. I think the FAA, it won't happen overnight, but I think the FAA in a few years is going to be fixed. That is an absolute upset.
Time for one more from the room. Anybody? All right.
Oh, yeah. The clock is going the wrong way.
Yeah. All right. Thanks, Jamie. Thanks, Mark. Thanks, everybody.
All right, folks, moving right along. Happy to turn the stage over now to the third of the big three, which we had presenting in order this morning. Very happy to have Robert, and Devon, and Abriell here. I think you're going to start out with the boilerplate stuff.
Of course.
Thanks again for making the trip and taking the stage.
Jamie, thank you. .
Yeah. Just before we get started, I just want to make a reminder that today's presentation contains a number of forward-looking statements that represent our expectation of future events. Numerous risks and uncertainties could cause actual results to differ from those projections. Information about some of those risks and uncertainties is included in our SEC filings. In addition, we'll be discussing a number of non-GAAP financial measures. Definitions of these measures are available throughout today's presentation. With that, I'll turn it over to our CEO, Robert Isom.
Abriell, thank you. Good morning, everyone. Thanks for making time for us this morning. I'm going to start off with a quick presentation, then we'll get into Q&A. Forward-looking statements, as we mentioned. I have to start with this. I've been in the business 30 years. There's been a lot that's gone on over those 30 years. I can tell you that from a leadership perspective, none has been more difficult than this quarter. It's certainly been a difficult time for American Airlines in regard to Flight 5342, the tragic accident that happened at the end of January. I want to say a few words about this before moving on to anything else, because this has been the primary focus of attention for American, certainly since the end of January.
Our efforts have been solely to make sure that we take care of the families of those victims, 70 in total, when you include those from the helicopter as well. That means mobilizing just an incredible force of people. We train for this, and you never think you have to put it into action. We have had 200 and more people that have been deployed through most of February, taking care of all of the victims' families' needs, including travel, funerals, and any other type of needs. Those 200 people have been deployed in Wichita. They've been out in DCA at our care center. They've just done a tremendous job. I couldn't be more proud of our team and how we've responded. It has obviously taken a toll.
We now still have some people that are deployed and are bringing those folks back now that families have returned to their homes. We are going to continue focusing on that. One of the things that we have done, because go back to 9/11, you go back to the Colgan Air crash, these events, they stick with us forever. We have actually set up an Office of Continuing Care. We have appointed a Vice President that will be in that role, making sure that we care for families and their needs going forward. That said, there is an investigation going on. The NTSB, I think later today, will issue a preliminary report. I have been working almost certainly weekly, if not daily, with Chair Homendy, head of the NTSB.
I want to give a shout-out and a thanks to them for the good work that they're doing or being cooperative in any way, shape possible. With Chair Homendy and also Secretary Duffy, we're taking this as an opportunity to make sure that we're doing everything possible to make aviation safe, even safer than it has been, the safest form of transportation. I'm pleased with the efforts that Secretary Duffy has taken right off the bat. I'm confident and hopeful that there will be some actions taken soon that will further strengthen our air traffic control and certainly prevent incidents like this from happening again. At the end of this, it is something that has impacted American, I think, more than anyone. That said, our attention has been making sure that we protect American over the long run and our reputation.
I believe that we have done that. I do not believe that this incident will have a long-term impact on the industry or America. Though that said, it has had a real impact on this first quarter. I will go from there to the first quarter revenue environment. You have heard a lot about this from others. You are probably not going to hear a lot of new news. Everybody was impacted by the wildfires. Sunbelt weather impacted us and some of our big hubs, DFW and Charlotte. It certainly had an inordinate impact on American, I believe, as well. If those were the only two issues, we probably would not be talking about major adjustments. When you combine 5342 with the uncertainty in the economy right now, and certainly domestic weakness in March, those are the primary reasons behind our adjustments to revenue. 5342 is a big deal.
Economic uncertainty is a big deal. We have really seen some weakness in March. That has led to the guide that we issued earlier today. You have seen this. Ultimately, it means that we have extended the projected loss for the quarter on an EPS basis. This is disappointing. We had ended the fourth quarter with a lot of momentum coming into this. It is something that we are certainly focused on addressing as we go forward and improving results from here. That is where I will go. The quarter is incredibly difficult, incredibly difficult for American because of 5342, on top of everything else that is going on in the industry. For us, no matter the revenue environment, I believe that American is set up very well.
From that perspective, we came into this year with a measured approach to capacity and one that I think was in tune with projected GDP growth. American has had a focus on making sure that we restore our network. I'll talk a little bit more about that. We have built ourselves to be nimble and able to adjust to demand environments as they might change. Others have taken some different views in terms of growth. For us, our growth for this year was estimated to be in the low single digits. It is something that I believe we have the ability to adjust as we go forward. American, I believe, has the greatest potential for recovery as we go forward because of some of the actions that we took. Everybody is very well aware of our sales and distribution missteps.
We're doing very well at recovering. From that perspective, I feel great. As well, American was probably the slowest to build back our network. We prioritized where we were going to build back. It was in DFW and Charlotte, our strongest hubs. We had probably the largest impact from a regional airline perspective due to pilot shortfall. That meant that we had, up until last year, almost 150 aircraft on the ground. Before that, I think almost 250 aircraft. We are working now to get our Northern Tier hubs rebuilt back to where they were. I'm very optimistic about that, plus our sales and distribution work to get us back in line with expected performance. On top of that, we're set up as well because we've paid close attention to our capital outlays. From a fleet perspective, we're in really good shape.
We do not have extraordinary capital requirements coming up. On top of that, with the debt that we brought through the pandemic, we have done an exceptional job of making sure that that is addressable as we go forward. We do not have debt towers or huge payments that are coming that are of concern. As we go forward, our focus remains the same. That is an effort to produce long-term free cash flow. Last year, American produced over $2 billion of free cash, $2.2 billion of free cash flow, record free cash flow a year. Feel really good about that. 2025 is expected to be more of the same. That has allowed us to strengthen our balance sheet with some other actions that we have taken. We are a very different carrier than we were from debt peaks of total debt of $75.4 billion.
As we came out of the pandemic, we've hit our $15 billion total debt reduction target. We've set a new target. I feel really good about that. It has made sure that we're in a position to take care of American going forward. Ultimately, right now, American is focused on margin expansion, profitability. As we look into 2025, how do we go about that? It starts with building off of what we're really good at. We run a solid airline. American Airlines has been second to none over the last couple of years in terms of operating an airline in any conditions. While other carriers have struggled in recovery from some Crowd Strike and weather issues, look, we all get hit. American, I think, has built a reputation to be able to manage through all of those and do it very well.
I'm really proud of the team and the work that they do day in and day out, no matter the conditions. From a Re-engineering the Business perspective, Devon, when he took on the CFO role, embarked on a path that was a multi-year effort to reduce expense, make sure we're as efficient as possible, free up working capital. From that perspective, we've taken out almost over $500 million of operating expense, produced $500 million of working capital. Re-engineering the Business 2.0 is in the works. We pride ourselves in being the best in the business at managing our costs. To drive long-term margin expansion, we build off of that. It really is delivering on our revenue potential. We start with getting back from a sales and distribution perspective, the indirect share that we had had back in 2023.
We're making great progress on that as well. There are opportunities to fine-tune our revenue management, make sure that our revenue management systems, that we're merchandising effectively. We have opportunities with our app. All of that is going on right now. That builds a baseline to ensure that we can capitalize on customer experience investments that we've been making. Ultimately, the other points here that you're well aware of, we're rebuilding our network. The new Citi deal that we inked last year, that comes into play in 2026. We're well on our path to getting that off to a great start. Delivering on our revenue potential, this is from our year-end earnings report. The progress continues. I'm pleased with what I see.
As we look to exiting 2025, I anticipate that we will have regained the share that we had lost. That's important. It's important right now. Businesses have been holding up a little bit better than the domestic. From a high-end leisure perspective as well, that's beneficial to American right now. That's a game that we play in as well. From a customer experience perspective, we've made great investments over the years. We'll continue to do so. We have a great international fleet, domestic fleet. We were the first with the ultra-premium lounges. The investments in those will continue with our Philadelphia lounge that is opening up. There are ways that we can monetize that. That's the pursuit that we're looking for. It's anchored on having a hard product that people want to fly.
You will see the investment in aircraft for us coming in terms of growing international capable fleet. It is not just that. It is also having an international fleet that has the right mix of premium economy and business class and coach seats as well. I really feel great about where we are headed with the introduction of our Flagship Suites, new XLRs coming this year that will first be deployed from a transcon perspective. Ultimately, being able to do some short- haul Europe and South America and international overall. We have the new 787-9s that are coming. We are reconfiguring our 777-300ERs, 319s, and 320 aircraft that will put more premium seating available on those aircraft as well. That is all good news. We are definitely in that market and poised to excel.
From a network perspective, again, American has built our network based on a number of constraints that we had to get through. First was getting our regional fleet back up in the air and also addressing our mainline pilots. Unfortunately, we've been able to put in place a contract two years ago now that has allowed us to grow where we need to. What you'll see is our growth is primarily in 2025 going to be centered on our Northern Tier hubs, namely Philadelphia and Chicago. I anticipate great things from the growth plans that we put in place in Chicago right now. We see them booking to levels that we expect. Philadelphia is coming back nicely as well.
It's important because American was really hamstrung by the fact that we didn't have a network that was quite capable of delivering to our most premium customers. I feel good about the growth that we're putting back in place. I have mentioned about the Citi deal. We have talked about this before as this progresses over the next few years. As cash remuneration approaches $10 billion, we anticipate another $1.5 billion of earnings to American. It is something that has been a shortfall for us in comparison to other carriers. I am really pleased with the start here. Citi is a fantastic partner and really invested in this effort as well. I wrap it up with this, that the focus remains the same. From a margin expansion perspective, we are going to continue to operate with excellence from a reliability perspective.
That's the best, most efficient way to run an airline. We're re-engineering the business. Others that may be coming into this game, we've already started. We're great at it. We've built labor contracts that are fully embedded into our cost projections. We don't have anything new coming all the way out through 2027. That cost certainty is a real blessing right now. From a commercial initiative perspective, I talked to you about restoring our sales and distribution share, renewing our focus on customer experience and monetizing that, strengthening our network and getting back to having full hub strength, and then enhancing the AAdvantage Program and co-brand cards. Ultimately, free cash flow generation, which we talked about, record 2024, anticipate more of the same in 2025. Limited CapEx exposure. Fortunately, we have the youngest fleet among the majors.
We invested up to the pandemic over the prior seven, eight years, almost $30 billion in aircraft. We do not have to go through that. Others have a different path ahead of them. Ultimately, we have got a much stronger balance sheet and one that is capable of weathering any type of storm that might be on the horizon. I feel great about where American is. It is a difficult, difficult first quarter for so many reasons. We have got a great team and a path that is clear and certain. We are ready to go and bring this all to light. With that, I have got Devon and Abriell, and we will be interested in any questions you have. I guess I will start. We have a shy audience this morning.
Look, when Mark and I do these conferences, the goal isn't to engage in tit for tat, he said, she said kind of stuff. You were in the room. You heard what Scott had to say. He is still, Scott Kirby, CEO of United, for anybody listening. He is still of the view that the market can support two premium airlines. The implication is that American is not one of those two. I assume you disagree. Why are you right?
I'll just start with this. I worked for Scott and with Scott for a long time. I've seen him be right on a lot of stuff. He's a brilliant man. I've seen him wrong on a lot of stuff. In this case, he's dead wrong. The reason for that is American has been around for a long time. American probably had a weaker hand going into the pandemic. Certainly, we were hamstrung on the way out. I mentioned that we had over 200 aircraft that we couldn't fly because of regional pilot shortfall. I love our regional network. It flies incredibly well. We've got a great fleet. By the same token, you have to have pilots to fly it. You know what? We're back out.
Scott says that kind of stuff, I'm sure, because he would like nothing better than to not have American as a competitor. I guarantee he doesn't like us being a competitor in his backyard in some places. To that end, we're a premium product carrier. We've got a great fleet. We're not dependent on a lot of the issues that Boeing or Airbus has to deal with. Our growth is fairly metered as we look out. We've grown in DFW, in Charlotte. We have an incredible position, Sunbelt position, hub position. Enviable relationships. I see Luis Gallego here from IAG. Anyone would love to have a partner with Iberia and BA in their network of carriers. The same thing holds true across the Pacific with JAL and our other partners. American is not going anywhere. American is recovering.
I can guarantee you that anything that you hear to the contrary is just concerned that we're actually making a lot of progress.
Thank you.
Robert, can you talk a little bit more about you had the bullet up there on DCA and your market share. Can you talk a little bit about performance there in light of everything going on in Washington related to travel? That was also obviously where the accident was. The weakness that you're seeing there, is some of it attributed to the accident? Is most of it attributed to the government, obviously? Just how should we think about that and how is that playing out?
A couple of things. Devon can join me here. First off, yes. The incident had a big impact on DCA shortly after the accident. DCA is also a center to a lot of government activity. While corporate, our government contracted business for us is only 1.5% of our total revenues, there's associated impact to that. Whether it's 1.5% is just our straight government contracted. There are government contractors that have been impacted. Anyone as well in that area is feeling the concerns of uncertainty. We know that there's some follow-on effect in terms of leisure travel associated with that as well. I'll note this, that DCA historically has been one of our most profitable hubs. We have an enviable position there. Over the long run, I'm confident that it will return to its full share of profitability.
Realize that it's actually a fairly small part of our network. Total ASMs is 2%. About 2%. I'd love to get it back to that profitability level that we had seen. We've taken some actions to address capacity. Over the long run, that's going to work out really well for us. Government travel has a way of coming back.
Can we take that and lead us to sort of corporate travel recovery on the network, the Vasu unwind, whatever we want to call it in terms of your attempts from over a year ago now, right, to disintermediate and sort of bringing back the direct booked corporate revenue. You're recovering. You're not yet fully recovered. Is the expectation that you will get fully recovered? Have you seen any? Is there any sort of do you think there's any reason for sort of permanent corporate share shift because of the experience that you've gone through?
The answer to that is no. The reason is I've been out there as much as anybody else on our team talking to CEOs and corporate buyers and the travel management companies and to a person. They all say, hey, we'd much rather have more competition than less. The door is open, right? You have to come in there with a compelling offering. From that perspective, we've retooled our sales and distribution teams. You've seen that we've reorganized on that front. I feel great about the progress that they're making. The good news on that front is that you can see as you sign new contracts, as there are new commitments that are made, right, those take some time. When we talk about what we're seeing right now, the seeds are planted.
I know that we're going to harvest them later on this year. As I mentioned in my comments, as I take a look at exiting 2025, I think that we'll be back to full share restoration.
Last one for me. I'm turning it over to the crowd here, hopefully for some questions. Northeast Alliance, there's obviously some legal activity related to that that I know you can't speak to directly. Maybe just bigger picture, can you talk about where you stand with that process? How important is it to do something, whether it's what the government allows or whether trying to rewrite what the government said was the path to go forward with that? What sort of thoughts can you add for your presence in the Northeast?
I'll just start with this. The Northeast Alliance, it benefited consumers. Plain and simple, it did. It is disappointing that we had the outcomes from a litigation perspective. Disappointing that we had the judges that were chosen in those cases. I think that different courts, probably different verdicts. At the end of the day, the reason that we continue to pursue efforts is just simply because I do not like the precedent. It is wrong. It does not benefit anybody. Consumers had a much better opportunity to get where they wanted to go at the price they wanted to go with three really strong competitors in the New York region. For us in New York, look, we have got a great JFK hub for us from an international perspective. I mentioned again the relationship we have with IAG. We have got the premier New York to London franchise.
We are going to continue to build on that. LaGuardia will be our largest operation since the pandemic this year. We have seen some improvement in business there. All carriers have their strengths and others, and all of us have areas where we need to shore up. We are going to be focused on the Northeast. We are going to make sure that we take care of ourselves. If there are partnership opportunities, we will pursue those vigorously. If not, you will see us make sure that we leverage the assets that we have throughout the country and our just enviable domestic position, largest among the network carriers, and especially in those places that are growing the fastest in the country.
The last time I was at your headquarters was fall of last year. You had not inked the new loyalty contract yet. You were still pitting the two partners off one another, presumably. One of the questions I asked you at the time was whether it was a priority to also be able to improve and expand the disclosures of the program. You kind of shot me down. You are like, economics first, first and foremost. You have certainly given us high-level color on the improvements to the contract. Were there any changes in terms of what you can ultimately disclose going forward that would better allow analysts and investors to actually begin modeling AAdvantage returns? I know Chase still puts a lot of handcuffs on what United could say. My question is, Citi and American, can you give us more data?
Yeah. I think we gave a lot when we announced the new agreement in December. Probably more disclosure than there has been, at least in our business, and maybe with any loyalty program. What we announced in December when we announced the new agreement is a couple of things. One, we expect this to drive a lot of growth in this part of the business. We would be growing by 10% a year for that 10-year period. That is just remuneration. What we also disclosed, though, effectively is the earnings from that remuneration. For the year-ended third quarter of last year, we had about $5.6 billion of remuneration. For the full year 2024, we are a little over $6 billion. That included a bonus in there. Let us just go off that $5.6 billion base. We said we would grow that by about 10% a year.
As we approach $10 billion, when you do the math, that puts you around the end of the decade, you'd be at around $10 billion of remuneration. That marginal growth would drive an earnings improvement of about $1.5 billion. 33%-35% type margin on that remuneration growth. I do not know how much more disclosure is needed beyond that, but it felt like there was a ton of disclosure at the time, more than anything I think that has been done in our business. It gives people a really good feel for just how valuable these programs are.
Thank you. Devon, we spoke a little bit with Mike Leskinen at United before your presentation about balance sheet strategy, the shift at United from not targeting investment grade to now targeting investment grade. The question I want to ask American about the balance sheet strategy is you've set these deleveraging targets. Yet if we run the math on your free cash flow, we've written about this and talked about it a little bit, but there's still some wiggle room in there for capital return to shareholders. When you think about the industry environment, how you're thinking about when is the right time to sort of flip the switch, and how are you trying to balance those debt reduction goals? You're going to have a choice whether to tighten those further or to turn that switch back on and return capital to shareholders. What's the debate like internally?
How are you thinking about it?
It's fun to start talking about it again. We have been solely focused on repairing the balance sheet since we came out of COVID. We, in the middle of 2022, had $54 billion of total debt. We set a target that by the end of 2025, we'd reduce total debt by $15 billion. We did that by the end of 2024. The latest target we put out there is that we would reduce total debt by about another $4 billion by the end of 2027. We had talked about that at our investor day. At that point in time, we said it would be by the end of 2028. We brought that forward by a year. You're right.
If our free cash flow projections are right and we think we're really well set up to produce really nice free cash given our capital requirements, we should have excess cash to do something else with. We'll have that decision to make. It is something that Robert and I will talk about with our board. Just do we want to continue to accelerate the deleveraging, or do we want to do something else with that excess cash? Obviously, first priority is investing back in the business. We think we've made the right investments there. If there are great opportunities there, we'll continue to do that. We like the position we're in. We have the lowest net debt right now that we've had probably since, I don't know, for sure since 2019.
By the end of this year, I think we'll be in the lowest net debt position we've had since 2016. I feel great about the progress. Excited to have more of these conversations as to what to do with excess cash.
One question we did not get a chance to talk about with United that I want to ask you because you obviously have aircraft on order from both manufacturers. With Boeing specifically out of Seattle, for you or Robert, are you reacting favorably to the change of regime there and what you are hearing out of Seattle? Obviously, you have had 787s that have been on constant delay. Are you feeling better about Boeing's ability to deliver airplanes to you on time?
Yeah. I think we're seeing progress for sure on the 737s. We gave a range of deliveries this year of 40-50 aircraft. That's really going to be dependent on how many airplanes Boeing can deliver. I think on the narrow bodies, it feels like they're making nice progress. The wide bodies, we're still waiting on a handful there. We'd like to see progress there. We're really excited about the product, as Robert talked about earlier. Yeah, I think they're doing a nice job right now. The wide bodies maybe are a little bit TBD for us.
Thanks. Good morning. Given some of the pressure you talked about on the demand environment, would you think at all about accelerating any retirements?
We feel really comfortable about the growth we have planned for this year. I'd leave it at that. We're building back our Northern Tier hubs, Philadelphia and Chicago. We were already very measured in our capacity growth for this year, low single digits. I think the question comes in is what economic conditions do we face later in the year and what kind of impact does that have on 2026? From that perspective, I'll let Devon talk. I think we've got a tremendous amount of flexibility to meet whatever demand needs are out there.
Yeah. That's the greatest part about our capacity plan and our fleet plan right now. If we are heading into a softer demand environment, right now we're growing low single digits. If we need to pare that back a little bit, that's pretty easy. It's not like we're growing at some multiple of GDP. As we look out to 2026, we have a fleet that could allow us to grow 5% - 6%. More likely, though, we're going to grow in line with economic growth. If that continues to come down or if that is showing any signs of weakness, we can pull back on that growth through some retirement of older airplanes, return of leased aircraft, or we can work on our delivery schedule a little bit. Our fleet has a ton of flexibility to meet really any level of demand.
Thanks, everybody. Take care.