American Airlines Head Robert Isom Tells Miami Herbert How He's Kept The Airline Alive During COVID

Well, hey Dean, thank you so much for having me on today. It's a great honor and I love talking about the airline business. Through whatever comes up, we'll be ready for it. And by the way, before we get started, I've got to give a big shout out. I've got 11,000 team members down in Miami-Dade and we couldn't be prouder of them. They're just really pulling through. And as well, I might even have some board members, both past and current, that are looking out for me. So, I'll be on my best behavior, I'll tell you.

Well, Sue Kronic is our current board member and Alberto Barwin, who's a great friend, and Armando Cadina, who is also a former board member. They're just fantastic members of the American Airlines and I know Miami-Dade community as well. So, to your question though, there's nothing in my background that could have prepared me for what we're going through today. And I doubt there's much that anybody has ever experienced. And I've been through a lot, too. So, I started in the airline business almost 25 years ago, back at Northwest Airlines. I lived out in Asia during SARS and certainly was around during 9/11 and the Great Recession. And you pick up little things along the way. But I'll tell you what, it's a really difficult environment. I've never seen anything like this. Demand is not falling off just for a few weeks or a month like it did post-9/11. But it's months and months. And so, our business has gone from full bore looking for a really strong 2020 down to revenues that are 15% or 10% of where they were at the extreme. I take a look back during the Great Recession and at that time I was working for US Airways and I remember being sent out by Doug Parker and saying, hey, we got to raise a lot of money. And I remember going to partners and really offering kind of 20% returns on investments and having people say, hey, we just can't do business with you. But I'll tell you what, the airline business and the people around it, we're resilient, we're strong, and I think most of us live by the saying that if it's not the end. And if we ever get close, we'll be able to work our way out, no matter what comes our way.

Yeah, you know, you started hearing things just right at the beginning of the year. And again, we've all been through, we have in an airline, we have plans for just about everything, including pandemics. And we'd seen things even recently with like Ebola. And so you never have a real understanding of what can be. Certainly when there started to be an impact from an international perspective, that's when really everybody started to really look in. And initially we have a sizable operation in China, both to Beijing and Shanghai, we fly to Hong Kong as well. And when you saw that there was going to be problems in terms of getting in and out, that's when you knew that this is something that's bigger and that could have an impact on really the rest of the international business and certainly the world. And so we sat down right away and went to thinking about how do you plan the airline. And from an airline perspective, it's people, it's planes, it's everything going on in the world. So we sat down and took a good look at things and took some really aggressive action right off. And so making adjustments to your schedule where you pull down from 100% down to 20%. You know, airlines are built to run all the time, 24 hours a day, 365 days a year. So we were basically rebuilding the airline almost on a daily basis, not really knowing exactly where things were headed. But quickly it became evident that this will have a tremendous impact not just on the global economy but specifically on the airline business. And to that end, we knew that liquidity and being able to manage through is the most important thing. And so much of our attention right away went to raising cash, conserving cash, and really trying to find a way eventually to get people back to travel.

Well Dean, so much of our business, as I think you know, we have tremendous fixed cost in aircraft and facilities and people as well. And so at the height of the pandemic, and this is really just taking a look back in the second quarter, we were burning $85 million a day in terms of cash. So much though when you think about fixed costs is trying to figure out what kind of duration is this event going to last. And our initial work was to go work with the government and we were very successful in participating in the first CARES relief program through a payroll support program which allowed us to keep our team members in place all the way through October at full pay. That was incredibly helpful. It stabilized and helped us get to a point where we could really start looking to the future. During that process, we thought about doing everything that we could to fast forward the transformation of American Airlines to where we want to be. And that's obviously changed as time has progressed, but initially it meant our fleet. So American Airlines has a fleet of over 1,500 aircraft. And we went immediately to what aircraft are going to be in the fleet for the long run, which ones are efficient, sustainable, and we made a quick assessment and with that greatly simplified the nature of the way we do business. So we went from, and this is over the course of five years, but we went from almost 50 different fleets and subfleets down to about 25. And then we honed in on four specific aircraft types for the airline: the 737 family, the A320 family, 777s and 787s. We jettisoned five different aircraft types. And with that, it's everything from spare parts to maintenance programs and engineering and all sorts of training. So, we made some really quick moves that were designed to staunch the tide of bleeding, but then also position us to really come out of this well on the other end.

So a few things first. In terms of team, we're a people business. American Airlines has over 100,000 team members. And we're at the highest of high-tech when you think about aircraft and engines and the internet and how we sell, but we are a service business too. And at the end of the day, our mission at American Airlines is really to take care of people on life's journey. And we have that same view of our team members. And our team, largely organized, nearly 85% of American Airlines team members are represented by unions, they got together and we got behind them in working with the government. And what really appealed to politicians on both sides of the aisle, and this is in the administration, it's in the Senate, and it's the House as well, was that the airline business is essential to commerce in the United States. We're infrastructure as much as anything else any other business is. And so whether you think of cargo or whether you think of critical services, we facilitate business happening. And it became really apparent that if we just simply did what would have otherwise happened if there was no support, we would have pulled the airlines down to 15% 20% of the type of traffic that we had, of frequency that we had. And in doing so, the consequences would have been just catastrophic for the country. During the height of the pandemic, I called some of those people that were traveling like yourself and I asked him, why are you out there flying? I mean, the rest of the world is hunkering down. And what you found out is you had people that, I called one gentleman and he was a power plant mechanic and he said, hey, look, I got to go because if not, you guess what? It's lights and it's air conditioning, whatnot. If I'm not there, that's what happens. I talked to another woman that said, hey, Robert, I don't know what you're calling me about. I don't travel that much. I'm really glad you're flying because if not, I'm a bone marrow courier. I wouldn't get to where I need to go. So, it gave me even more passion for what we do for a living. But when you think about that appeal to the government, it was an easy case to make and our team members led the way. We got behind them. So fast forward and what we did is we went and we said, hey look, we think that through a combination of loans and then also basically payroll support grants to keep team members on, we think that this is going to take 6 months or so. That was the general consensus. We got to October, we found out, hey look, demand has not rebounded as much as it's necessary. We're still only back to about 35% of revenue. The business is still just as important, but you can't keep going on and burning cash forever, especially without outside support. So we found ourselves in a position where we did everything we could through enhanced leave programs, early out programs, to really try to take care of people in the best way. And then where we couldn't, we have furlough programs that we unfortunately had to enact in October. And we have about 20,000 team members that have been out of work now for over a month. And the issue as we look forward is really this is an airline, again, it runs. It's a big machine. And you can't turn it off and on and off with a flip of a switch. Pilots take nine months to get into position. Depending on their widebody or narrowbody or first officer, captain, even our team members that work the fleet side and load bags, they have to be approved and certified to be able to work at an airport, which takes months. So what we find ourselves in is a situation where we don't want to get too much beyond the freshness of these team members being out of work because it'll take a long time to get things back up and running.

So that's an excellent point. Look, the airline business is one that is, we are front and center in terms of being out there. We cross borders and make connections and bring people together, and that's what we do for a living. So, we knew that, first off, we had to be especially considerate of our team members that were going out really on the front lines every day. And so early on we put in place really fantastic benefits in terms of anybody that either came down with COVID or had to self-quarantine because of exposure where they would get extra two weeks of paid leave for that. During the entire time we kept all team members actively engaged and that's worked very well. And for the most part, and I know we'll get to this, the airline and flying itself has proven to be very safe and not an environment in which the contagion is happening. It's actually something that I'd love to talk more about. So I feel like we've done a really nice job of taking care of our team members and even those that have been furloughed, they come with furlough benefits. And then also we're ensuring that we keep in touch with them because the one thing I know and I can see it today is that when things are open, people will travel. So in Miami today, we are going to be running 250 flights. I don't know what the load factor today is but it's probably 60% or so plus and has been higher than that. When things are open, people will travel.

Well, Dean, thanks for that question. But first off to everybody that's out there, please just plain and simple, wear your masks, okay? That's the one thing that I want to just drive home. And if you're on American Airlines, wear your mask or you won't be flying. Okay, so that's the rules these days. But to the travel experience, we know that this is going to be a factor that is a point of differentiation. I think of the business from the old to the new which is we have to be extremely clean, sanitized. And so early on in the pandemic, we took a look at our cleaning programs throughout the airline. Just about any place you could touch, whether it's the kiosks, railings at the airport, jet bridges, you name it, and we went through and totally redesigned things. So aircraft that had formerly only been given deep cleans maybe a few times a week, it's virtually every other day, every turn, aircraft are clean. And now we've even augmented further with electrostatic spraying of antimicrobial disinfectants that we've actually worked with manufacturers to help get certified with the EPA. It's proven to kill coronavirus and that's done and lasts for 90 days on the aircraft. But at the start of the trip, we've established touchless kiosks, as you come onto the aircraft you're given sanitizer. And in terms of the aircraft environment itself, look, we're dealing with, first off, American Airlines has the youngest fleet so we have the latest in terms of the air filtration systems. But the air on an aircraft, and I'll be as brief as I can, it's filtered and brought in new such that the air on the aircraft is changed out every few minutes, almost 20 times an hour. It's the equivalent and even better than what you would get in the best hospital operating room. And so the design on an aircraft has air that comes from the top and then is sucked out through the bottom and 50% is renewed at all times and all of it is run through high efficiency particulate air filtration and that does a tremendous job of first off making sure that there is very little exposure to anything and then secondly making sure that whatever air on the plane is extremely clean. So to that point, I know the design, but on top of that we've had Harvard do a study, the Department of Defense has weighed in, Boeing and Airbus of course have, and what we see is, and I can back this up with whether it's the billion plus people that have flown since the start of the pandemic and really the less than 50 cases of contact tracing that we've been asked to do from the CDC or even our own team members where our flight attendants and our agents, first off, American Airlines as a whole has a lower infection rate than the country and our flight attendants and our agents actually have a lower infection rate than the company average. And so we know in whole that the aircraft itself is a safe environment and one that look, if we can just get everything else around and people wearing masks and ensuring that they take the appropriate precautions elsewhere, we can get this thing under control.

No. And that's not just American, that's the industry.

Yeah.

So we've been very pleased and for the most part, our flight attendants and our gate agents, we make announcements before people board. We will give masks if people don't bring them on and then we'll remind people in flight. And of course there are occasions when people are taking a drink or maybe getting a bite to eat and there are situations where people don't wear masks but we're quick to try to address those. And for the vast majority, that's been successful. And where it's not, we actually put in place bans for travel throughout the remainder of the pandemic. So I've been pleased. And again Dean, the one thing that I know is of interest as well is that in many parts of the country, look, quarantines are in place and they're such that people don't move around and aren't going to move around. But in many, many parts of the country, I know in Florida and other parts of the Sun Belt, when things are open, people will travel. And so I know that there's a pent-up desire to get out there which gives me great hope for the longer term.

Let's see how that all plays out. But I'll tell you this, I think that there's plenty of capacity to meet the demand that might be out there. I hope for the day that we get back to really regular load factors that again allow us to not only make a return at the airline but also think about flying to those places that we've had to cut back on. And at American Airlines, we've had to reduce service to a number of cities. I know there are 11 markets that still haven't gotten service back started up and some may be gone permanently. So my hope is that we get to that point in time. But the great thing about the airline business, again Dean, as you know, whether there's pandemic or it's no pandemic, it's an incredibly competitive business. And my guess is that as travel has always been, it's been something that's been incredibly affordable to really all segments of the country and people that want to fly.

Well, Dean, on that point, look, the American-US Airways merger was, I think, the last of the really big mergers. And that was, look, back 2005, I think that there were 15 different carriers that had 75% of the business. And fast forward to 2015 and it was really five. Look, there's supply and demand. And in terms of the network carriers, I think that we all do about the same thing. We all fly to the same places and we're relatively the same size. There's some carriers that really have different business models, like Southwest and JetBlue and Alaska, that keep things ultra competitive. So my view is that there's probably not a lot more out there. And certainly, at American Airlines, we don't expect it.

Well, that's a fantastic question because in the past airlines have been great collectors of information, right? If you know our head of revenue management, a year ago if you said, hey, how many people are going to fly on the first Thursday of July, he could have come to almost within a percentage or two year after year after year just based on historical knowledge and then also what's coming through. But when you see such a demand drop off, all the models are thrown out. And as a matter of fact, our revenue management team has gone from, hey, we don't revenue manage so much anymore. We're just trying to find people to fly. So any type of changes to the environment with quarantines and testing requirements and you name it, it has an immediate and impactful, it really is impactful. So one of the things that we've seen in terms of consumer behavior right now is that much of the demand curve have shifted into the couple of weeks preceding the day of departure. Whereas in the past you may have seen more of an even spread from day zero out to 60 days prior and actually people booking travel a year out. So it's made it really difficult. But what you see in the month of October, American Airlines flew a schedule that was roughly 40% of what it had been the prior year but we actually achieved load factors that were over 70%. And a lot of that is being incredibly quick and nimble. And so while so much of the airline is planned weeks and months in advance to make sure that we have pilot schedules and aircraft rotations, what we've done at American Airlines, and I give credit to the whole team here, has been incredible in terms of being able to tailor the airline to what kind of demand is out there. And we're able to do it, it builds schedules virtually every month. So, what you'll see from us as we take a look over the next couple of months is really ride the schedule that we have today. We're going to wait to see, I'm very optimistic on therapeutics and testing and certainly the vaccine news earlier this week was good news and we'll see where that takes us out into the new year and then we'll think about how we ramp up from there.

I'll take you through both sides. So in terms of the fleet itself, we have retired over 150 aircraft. Those aircraft are gone for good. So American Airlines is already starting in a position where we'll be significantly smaller. And that's just the plan going forward. We'll adjust it as demand returns. Out of the 1,300 aircraft that we have remaining, what happens now is those aircraft for the most part are on some type of regular maintenance program. We have some that are in extended storage. And then another degree would be actually pickling them and putting caps over a lot of things and having them in longer-term storage. But for the most part, the short-term storage, those aircraft could be, it's really just a question of manpower. We have the world's largest commercial aviation maintenance base in Tulsa and we have a team there that is incredibly well equipped to take a look at making sure aircraft are put back on maintenance programs and ready to go. So right now we have a couple hundred aircraft that are in that longer-term storage. It would take some time but it's a matter of weeks and months, not any time longer. People are a bigger issue though. It takes a lot of time to get a pilot trained and in position. And once they're off and not current, there's a lot of work that has to be done to get them back. And the same holds true for other team members. But if demand returns and when demand returns, we'll be ready.