AAL - NASDAQ

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

Thank you, Atif. Good morning, everyone and welcome to the American Airlines Group second quarter 2023 earnings conference call. On the call this morning with prepared remarks, we have our CEO, Robert Isom; and our CFO, Devon May, and a number of our other senior executives are also in the room for the Q&A session. Robert will start the call this morning with an overview of our performance. And Devon will follow with details on the second quarter and will outline our operating plans and outlook going forward. After our prepared remarks, we will open the call for analyst questions followed by questions from the media. To get in as many questions as possible, please limit yourself to one question and one follow-up. Now before we begin today, we must state that today's call contains forward-looking statements, including statements concerning future revenues, costs, forecast of capacity and fleet plans. These statements represent our predictions and expectations of future events, but numerous risks and uncertainties could cause actual results to differ from those projected. Information about some of these risks and uncertainties can be found in our earnings press release that was issued this morning as well as our Form 10-Q for the quarter ended June 30, 2023. In addition, we'll be discussing certain non-GAAP financial measures this morning, which exclude the impact of unusual items. A reconciliation of those numbers to the GAAP financial measures is included in the earnings press release, which can be found on the Investor Relations section of our website. A webcast of this call will also be archived on our website. The information we're giving you on the call this morning is as of today's date, and we undertake no obligation to update the information subsequently. Thank you for your interest and for joining us this morning. And with that, I'll turn the call over to our CEO, Robert Isom.

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

Thank you, Robert. The focus and dedication of the American Airlines team has resulted in strong operational performance which is helping to produce solid financial results. Once again, we delivered on our guidance for the second quarter. Excluding net special items, we reported second quarter net income of $1.4 billion or adjusted earnings per diluted share of $1.92. Our strong operational performance resulted in slightly higher capacity production for the quarter and CASM ex performance better than the midpoint of our forecast. Unit revenues remained strong, resulting in an operating margin and EPS that outperformed the high end of our guidance provided in May. As Robert mentioned, American produced record revenue of $14.1 billion in the second quarter, up nearly 5% year-over-year. This revenue performance led to our highest ever adjusted operating income of $2.2 billion resulting in a second quarter adjusted operating margin of 15.4%. Unit revenue in the quarter was down just 0.5% versus a historically strong 2022 on 5.3% more capacity. Domestic unit revenue was down 1.9%, while international unit revenue was up 18.3% year-over-year. Our unit cost for the quarter, excluding net special items and fuel, was up 3.7% year-over-year. That's better than the midpoint of our initial guidance range due to slightly higher than planned capacity production driven by our strong operational performance. I want to spend a few minutes updating you on our fleet. Our young and simplified fleet differentiates American from our U.S. network peers and provides network flexibility, enhanced efficiency and an improved customer experience. These benefits are the result of the refleeting we pursued from 2014 to 2019 and accelerated during the pandemic. We are pleased we built our fleet in a low interest rate environment and at a time when the supply chain wasn't as challenged as it is today. In 2023, we expect to take delivery of 23 new mainline aircraft which are all now financed. We took 13 deliveries in the first half of the year and expect 10 more aircraft to be delivered by year-end. For our regional fleet, this quarter, we entered into agreements to purchase seven new Embraer 175 aircraft and seven used Bombardier CRJ 900 aircraft that will be delivered starting in the fourth quarter of this year. We're excited to have these aircraft into service and to further bolster our regional connectivity. Based on the latest delivery guidance from Boeing and Airbus, along with our new and used regional aircraft purchase commitments, our 2023 aircraft CapEx is now expected to be approximately $1.7 billion. Our non-aircraft CapEx is still expected to be approximately $800 million. We anticipate our 2024 total CapEx to be between $3 billion and $3.5 billion. Looking beyond 2024, we continually review our medium and long-term fleet plans. Due to the young age of our aircraft, our fleet replacement needs are very limited. Therefore, we expect aircraft CapEx for the next several years and likely through the end of the decade to average approximately $3.5 billion per year. Moving to the balance sheet. Yesterday, Fitch upgraded Americans credit rating. This is the first step towards our goal of BB credit metrics by the end of 2025, and it's nice to see our progress being recognized. We continue to maintain strong liquidity. In the second quarter, we generated operating cash flow of nearly $1.8 billion. Our adjusted net investing cash flow was approximately $550 million, resulting in quarterly free cash flow of $1.2 billion. We have produced $4.3 billion of free cash flow in the first six months of the year and expect full year free cash flow to be approximately $3 billion. We ended the second quarter with approximately $14.9 billion of total available liquidity. We continue to make progress on strengthening our balance sheet in the second quarter by reducing total debt by $387 million. This debt reduction, combined with the improvement in liquidity resulted in a decrease in net debt of approximately $955 million during the second quarter. We have now reduced total debt by approximately $9.4 billion from peak debt levels in 2021, which is significant progress towards our goal of reducing total debt by $15 billion by the end of 2025. By the end of 2023, we expect our total debt to be approximately $11 billion lower than peak debt levels in 2021. Importantly, we ended the second quarter with a net debt-to-EBITDA ratio of 3.8 times, which is lower than it was at the end of 2019. Now turning to our guidance. Bookings remain strong, and we continue to see a constructive demand environment. We saw record revenue for the 4th of July holiday period and booked load factors for the third quarter are in line with what we saw in 2022. International entities continue to lead the way in terms of year-over-year performance, and we are encouraged by domestic business demand, notably from small- and medium-sized enterprises. As the recovery continues to unfold, the strong unit revenue environment in 2022 represents an increasingly difficult comparison. As a result, we expect third quarter TRASM to be down 4.5% to 6.5% year-over-year on 5% to 7% more capacity. We expect third quarter CASM-ex to be up 2% to 4% year-over-year. Our current forecast for the third quarter assumes a fuel price of between $2.55 and $2.65 per gallon. Based on our current demand and fuel price forecast, we expect to produce and adjusted operating margin of between 8% and 10% in the third quarter and adjusted earnings per diluted share of between $0.85 and $0.95, excluding special items. For the full year, we continue to expect to produce capacity that is 5% to 8% higher than 2022. Our full year forecast for unit revenue continues to be up low single digits year-over-year. We now expect our full year CASM-ex to be up 2% to 4% versus 2022. Notably, our expectations for capacity TRASM and CASM-ex are all consistent with the initial guidance we provided on our January earnings call. That said, our estimate for full year fuel expense has changed. We now expect to pay between $2.70 and $2. 80 per gallon, a reduction from our initial guidance. The full year update further highlights the positive environment we are operating in. Based on our demand and fuel cost assumptions, we expect to produce a full year adjusted operating margin of between 8% and 10% and adjusted EPS of between $3 and $3.75. We are very proud of the progress the American Airlines team has made, but we believe there is more opportunity ahead of us. We will continue to focus on delivering in 2023 and unlocking even more value in 2024 and beyond. I'll now turn it back to Robert for closing remarks.

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

[Operator Instructions] Our first question comes from the line of Jamie Baker of JPMorgan. Your question please, Jamie.

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

Hi Jamie. Good morning, and thanks for the question. First, I would say that we don't anticipate it being a margin drag. And for full clarity, it's unfortunate the NEA is terminated. Our commitment to the customers in the Northeast and New York specific hasn't changed. However, the circumstances that gave rise to the NEA have changed. At one point in time, we struggled with really two major things. One, our slot holding didn't match with the demand on that is the majority of demand in New York was for short-haul day trip business market. Our slot portfolio is better matched Mid-Continental, Transcontinental and Transatlantic market. Well, that's changed. Short-haul business demand hasn't recovered to its historical level, but those other markets are much greater. And so that's a material change from before. But also our expense base, especially in New York Kennedy has changed. Through co-locating partners and any number of fleet changes, our employment expenses and JFK are materially advantaged to what any other carrier is in New York. So, what that means for us is that is unfortunate that customers don't get the experience of having a much broader network than what was there before. It was a practical matter for American Airlines. We very much expect preserve the continued margin trajectory that we've been on. And as we go forward, we'll certainly share more, but it's very much our plan and our intention that we continue to go see more New York City originating customers flying with us. And so far, since the NEA has been announced, we've seen that. NEA enrollments in the Advantage program continue to rise. Credit card acquisitions continue to rise, spending continues to rise. So though this chapter is closed, another one might open, but we don't expect any material change to our financial outlook.

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

Yes. So on the cash flow, it does include the retro pay that was part of our or that is part of our tentative agreement that we have with the pilot today. As we talked about last quarter, what we have for an accrual is, we are accruing wages that were agreed to in May as part of the agreement in principle starting on May 1, and we expect the agreement -- or hope the agreement will ratify here in August, at which time, we'll go to the new rates and the benefits associated with that tentative agreement.

Okay. Very clear. Thank you, gentlemen.

Thank you. Our next question comes from the line of David Vernon of Bernstein. Your line is open, David.

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

David, thanks for the question. Look, we've set out clearly focused on producing profitability and our reliability as our operating reliability is actually really facilitated that. As we take a look at it over the course of the year, you'll see that we actually raised the midpoint of our full year guide by a quarter. It's indicative of our belief that the economy is strong, demand is strong. And for us, look, there's seasonality certainly involved. But at the same time, we're looking at this over the course of the year, and we're going to stay the course, and we feel really positive about the results that we reported and what's coming. And Devon, do you want to add anything to that?

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

Okay. And then maybe if you could talk a little bit about sort of the domestic outlook here in the 3Q. You've got, I think, 34% capacity growth in domestic and short-haul international -- how are fair trends kind of moving sequentially. There's a lot of concern, I think, in the market about deceleration in the domestic travel market. Can you kind of elaborate a little bit more on kind of what you're seeing and what you're embedding into the 3Q guide for domestic?

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

All right. Thank you for that.

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

Hi. Thanks. Good morning. Sorry, I lost my voice. But hopefully, you can hear me. I just want to go back to the third quarter guide. So we've just never seen margins go from 15% to 8% to 10%, down 5 to 7 points from Q2 to Q3 -- just any more color to help us think about what's driving that?

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

Okay. And then just to clarify, is there -- are we assuming any earnings impact from losing the NEA, which I know it sounds like you don't think we go back to where we were. But -- is there any earnings impact going forward from losing NEA?

Scott, we're not anticipating any earnings impact.

Okay. Great. All right. Thank you, guys.

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

Hi, everyone. Thank you for the time. Not a lot of talk on blended travelers or blended itineraries this quarter. Just curious on -- is that just because it's in your base now? And maybe you could just level set us on how you're thinking about large corporate in the back half of 2023. Thank you.

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

And just where you're thinking about corporate, sorry?

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

Okay. And then just on the competitive environment in the domestic market, the ULCCs and LCCs have been ramp in capacity in the back half and a lot of that's hit in your hubs. I'm just curious on how you view the competitive landscape right now as you think about the back half of 2023. Thank you.

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

Thank you.

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

Thanks very much. So, hi, team. Thanks for the time. Robert, I thought I heard you say on CNBC this morning that you're meeting with your pilots to talk about matching the United contract. Did I hear that correctly, A? And B, do you have to let them vote and reject the contract that they're voting on now? Or can you adjust it and they vote on any changes you might want to make?

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

Okay. Thanks for that clarification. And then just shifting gears for a minute. You guys have been delivering a really great operation for the past, I don't know, at least three quarters, right, as somebody who's shifted from New York to Philadelphia. I can see it in my flying. And I'm just kind of wondering, are you seeing that also in your Net Promoter Scores? Can you talk about what customers are seeing? And are you seeing any share shift from any of your competitors to yourselves?

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

That’s really helpful. Thank you.

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

Good morning and thanks for taking my question. Vasu, I want to come back to the unwind of the NEA because it does look like you have quite a bit of international capacity you've added at JFK, but not a lot of domestic connectivity on your own network. And I think JetBlue was part of that answer historically. So, can you talk to what the long-haul strategy looks like out of JFK going forward?

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

I appreciate that response. And I guess maybe a quick one for Devon, because I think you mentioned aircraft purchases out in the future could be around $3 billion to $3.5 billion annually, if I heard it correctly. Do you think strategically, that's the right level of reinvestment in the business, especially given that some of your competitors might be spending a bit more than that?

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

Thank you.

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

Hi, good morning. I'm really tempted to ask another NEA wind-down question, but we'll leave that for off-line. Maybe just on fleet. Where do you think your biggest gap or constraint is at the moment? Like where do you wish you could be bigger today? And can you talk a little bit about -- I think you mentioned some regional fleet adds. What are the kind of staffing circumstances you see that are allowing you to invest there?

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

Thanks. And then just for my follow-up, could you just remind us maybe some of the differences in your transatlantic geography versus peers? And maybe it's too fine of a point, but could you contrast kind of your Southern Europe exposure relative to Delta and United? Thanks for taking the questions.

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

Okay. Thank you.

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

Hi, good morning, everyone. First question, Devon, I just wanted to make sure I was clear in terms of what is in your CASM outlook for this year. Does it just include the step-up in pay rates beginning May 1 from the TA? Or do you also factor in a step-up in profit share and work rules? Just want to be clear on what's included there.

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

Got it. And then Robert, I know it's early on, but just when you think about 2024, any initial thoughts on how you're thinking about capacity and the way you kind of -- the continued build-out of both your domestic and international networks. Just curious which entity you think could -- between domestic and international could be growing the most next year and just how you think about growth. Thank you.

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

Got it. Thank you.

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

Hi, good morning, everyone and congrats on the 2-notch upgrade from Fitch. I guess two questions here. I guess, Vasu, just with the rollout of your new distribution strategy, any early learnings direct versus indirect. I sort of caught the two to one, unmanaged versus managed on your corporate piece. I think if we go back historically, they were probably more evenly divided. So it seems like there's a bit of a shift there. Whatever you can tell us. Thanks, and then I have a follow-up.

Hi. Thanks Mike. It's an excellent question. I was wondering when it might be asked. Look, first of all, all of our selling and distribution changes are done with a really simple lens, really which Robert talked about in his opening remarks. We want to make it as easy as possible for our best customers to be able to shop by and self-service their experience with American Airlines. And everything has been oriented around that. It has indeed been very eye-opening and has performed probably above what our expectations are. The simplest way to it is like this. If you take all of our customers, the actual human, you can divide them into two groups, those who are not members of the AAdvantage program and those who are members of the AAdvantage program. In the quarter, for those customers who are not numbers of the AAdvantage program, indeed, their total travel bell 5%, but revenue from that cohort grew by 5%. Amongst the customers who are advantaged customers, we actually grew their transactions by 8% and their revenues by 13%. That is certainly above what we had expected, but also what we're really encouraged by our three things: first, for every -- there's a high level of attachment for all of our Advantage customers. For every dollar of flight revenue they bring in, they bring in about $0.10 of other revenue primarily on a branded credit card. Two, the cost of sale is materially lower amongst our advantage customers. It's not just that we're paying less in booking fees and commissions and things like that. But what we've found is something like 25% to 30% of our calls to reservations are actually bookings at a travel agency originated and is, for some reason, unable to go in service. So there's a lot of implicit savings that we see from it. And last and maybe most importantly, we're encouraged by what we see is really the durability of these customers' demand. These are customers who tend to use our network where it's most unique. They fly more times in a year. They already have bookings out into the fall. They tend to sell themselves up. And importantly, they prefer coming to us direct. So we're currently in taking roughly 70% to 75% of our revenues going through our direct channels. We anticipate that will grow. We're encouraged by this, and we're actually going to continue to accelerate the changes. By the end of the year, 100% of what we sell, customers will be able to service online through our app or our dot-com. We'll roll out those features also over time for new distribution technology. But as this happens, we'll make increasingly less and less of our fare content available through traditional technology where customers aren't able to get that quality experience that they're looking for from us.

Great. Awesome response. And then just my second question, I guess, is to you as well, when I sort of look at it in the forward schedules, it does look like even up to summer of next year, that JetBlue is still maintaining a significant presence in LaGuardia. And so presumably, you will still continue to lease those slots to them and maybe maintain a smaller presence in LaGuardia than what you had pre-NEA? Or is that just -- are those placeholder schedules and that's TBD. Thanks for answering my question.

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

Great. Very good. Thank you.

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

Hi. Thanks so much. Do you have a sense yet of how much more costly the pilot deal could be if you have to go back and boost the pay rates and other adjustments to match the United deal?

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

Yes. We're working through the numbers right now. Obviously, the wages are close, but a couple of percent higher than what we have in our tenant agreement. And we're trying to get more detail on other items that we think might be material. But what we have with our attentive agreement is really significant improvements for our pilots. And as Robert mentioned earlier, the wages is some we're focused on right now to see if we can work with the APA to get some done where we match what United or for.

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

So, hi Ali, and I have David Seymour here to help me. Look, the heat that we're facing this year in the country, I mean, these are records, and it is something that impacts certainly, the aircraft, any machinery, they're more like they're great and run harder and longer. And it's also really hard on our people. Fortunately, we have great experience in dealing with hot weather hubs, places like Phoenix in Miami and even DFW and Charlotte as well. So we're employing all those practices that we put in place. We're just having to use them more often and longer throughout the year. I'll give just a couple of examples of things that we've done on a precautionary basis just because of the trends that we've seen. We put a heck of lot more work into making sure that we're prepared for the summer on things like conditioned air at our jet bridges. So as soon as an aircraft pulls up to a gate, we want to make sure that we can get air to those aircraft to keep them as cool as possible. Our APUs, those little engines that are able to power all the systems when the big engines are off. Those are things that are prone to break during times like right now, but we're seeing really good results because of the preventative work that our maintenance team has done. And you'll see us as well, whether it's making sure that we only board when aircraft are have air conditioning that is appropriate or out on the ramp with our team members, making sure that they get a break from the sun and the heat that there are things like ice carts and electrolyte drinks available to our team members, we're really taking this seriously, and we're going to have to as we go forward.

Thank you.

Thank you. Our next question comes from the line of Mary Schlangenstein of Bloomberg News. Your question please, Mary?

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

So I'll handle the -- I can handle both. First off, in regard to anything that relates to slots or gates or routes or things like that. Look, we're going to figure that out over time. So I'll leave it at that. And then in regard to our pilots, as I mentioned, we're sitting down with our pilots. We have a real interest in making sure that they're taking care of. That's been how we viewed all discussions. And so, we'll see how that goes. My hope is that we can get something done pretty quickly. And no matter what, over the long run, we're going to make sure that our pilots are taking care of.

Thank you.

Thank you. Our next question comes from the line of Leslie Josephs of CNBC. Please go ahead, Leslie.

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

I'll handle the first one, Leslie, and Vasu can handle the second one. Just, look, again, in regard to your question, we're working with the APA and our pilots -- our intent is to match the wages that we're aware of in the tentative agreement that United has signed.

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

And just one quick follow-up. When you get out of the summer season, are you seeing any kind of falloff in either fares or bookings with the TRASM coming down and then the inflation report showing that airfares are coming down in the U.S.

Nothing beyond historical seasonality, Leslie.

Thanks.

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

Okay. Thanks. I didn't hear my name. I guess it's me. Robert, you've talked about matching the United deal, which APA had valued their previous TA at 8.3 billion, and this is going to add a couple of percentage points. Do you plan or do you need to raise fares to cover the contracts with the APA, the APA or other contracts and still remain profitable, should people expect higher fares?

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

Okay Any other areas for revenue besides fares?

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

Sure. Thanks.

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

All right. Thank you.

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

Hey Atif, thanks so much. And I'll just close out this way. Look, you can continue to hold us accountable for relentless focus on reliability, profitability and strengthening our balance sheet. And I'll just point to the second quarter results. In terms of reliability, no one has been better than American Airlines over the last year. In terms of profitability, this second quarter beat of all analyst expectations is just proof that our commercial offerings are really registering with our customers. You run reliably, you produce profits, you can strengthen your balance sheet. This 2-notch upgrade from Fitch today is, again, indicative that we're doing the right things, and we would anticipate further strengthening on that front. All of it together, this outstanding second quarter for us is proof positive that our efforts are working. We're going to get back at it. Thank you very much.