American Airlines announced what’s generally been characterized as strong second quarter results. They made money flying, not just selling miles to banks! Yet their stock closed down on the announcement. American Airlines Group shares closed at $18.60 on Wednesday. The airline released earnings and held their earnings call on Thursday, and the stock closed at $17.44 for a decline of over 6% on a day that markets were closer to flat (but down less than 1% in any case).
J.P. Morgan’s Jamie Baker points out that American Airlines has provided guidance that their third quarter operating margin will decline by over 700 basis points, and that American hasn’t done this poorly outside of Covid in the last thirteen years – and they’re guiding to performance over 800 basis points worse than Delta. And they don’t explain what’s going on.
He offers several theories.
- American may be forecasting conservatively? But why? They are negotiating with pilots and don’t want to appear too flush? They’re also negotiating with flight attendants. This seems unlikely. Maybe they just haven’t updated their guidance based on a successful second quarter? Surely they’re competent enough that their guides represent their best current estimates.
- The second quarter was just out of sample on the positive side for what the carrier can earn, and that’s not replicable. I mean, sure, but their revenue wasn’t up much year-over-year when adjusted for inflation so that seems unlikely as well.
- American Airlines is mostly a domestic airline. They aren’t flying much to Europe compared to competitors, so won’t benefit from seasonal Europe demand – which Delta says has expanded out to start earlier and end later than it used to. The traditional strategy of sending planes to Europe in the summer and then scheduling countercyclically (such as to South America) is something they’re more or less skipping. They don’t have the planes to do it, having retired their Airbus A330s, Boeing 767s and 757s and they’re behind schedule in receiving new 787s.
- The airline has walked away from much corporate travel, preferring booked direct flights. They say they’re generating over 70% of their revenue through direct channels and that’s both lower cost (sales staff, less servicing) and means less discounting. Managed corporate travel is still at least 20% off of where it was pre-pandemic. And American is going to receive much of that business in its uncontested hubs like Dallas and Charlotte. But it makes them less competitive in markets like New York, Boston, and on the West Coast – to the benefit of competitors like Delta.
Baker suspects that American’s lack of summer Europe, and lack of corporate competitiveness contribute to underperformance and also that the airline is sandbagging on their guidance (my characterization, not his).
The airline, and in particular Chief Commercial Officer Vasu Raja, made the case during the call that their corporate strategy is working. He’s made a big bet that the nature of travel purchases, and who is traveling, has changed. He now oversees not just route planning but all revenue, including their co-brand business. So he sees ‘who buys travel’ as also who signs up for cards. (It’s still not easy and instant to join the program while booking a ticket…)
Raja’s bet is that traditional corporate travel efforts won’t move the needle for their business, and won’t maximize revenue for the seats they have to offer. Either Baker’s right or Raja is. And while I think Raja is mostly right it still seems like a mistake to underinvest in earning the corporate business that’s still on the table.
Meanwhile the airline’s route planning, and fleet, has been optimized for domestic travel and they’ve walked away from much international. They fly to London, to joint venture partner Iberia’s hub in Madrid, and to some major destinations like Paris and Rome. But their European flying is limited, and that’s a cash cow in the summer (third quarter). Asia has never performed well for American. So they don’t have the upside some other airlines do. Meanwhile they face high costs with interest rates and debt still high and labor expense rising.
As long as jet fuel prices stay manageable and the economy avoids recession, the airline is in a good position to continue paying down debt – but they’re guiding to underperformance relative to peers.
I think that retiring the 20+ A330s was a short-sighted decision, at least until more 787s arrived. The A330s were almost exclusively used for European flying. It appears AA would prefer to route everyone through LHR or BCN. Or onto DL/UA?
AA is not maximizing the busy summer travel season in part due to pilot and other staff shortages and more importantly because the FAA asked them to reduce overall departures. This has to be a significant drag on earnings especially if costly aircraft are widely underutilized.
A read of the earnings call transcript shows that analysts hit hard on the drop off in revenue. I suspect it is a combination of AA’s heavy focus on southern European cities – where it has not received average fares on par w/ Delta (which is the strongest of the big 3 in southern Europe), the gap between the Latin/Florida buildup in the winter and the higher cost of new labor contracts – including for flight attendants – that AA is honestly assessing while UA quoted its non-GAAP adjusted margin which yanked $800 million in pilot retro costs right out of its earnings calculations.
AA needs to explain but I suspect they wouldn’t have signed the pilot deal if they really believed they wouldn’t be able to afford it.
And Delta also grew its international network faster than American or United on a percentage basis and got better revenue plus has plenty of widebody capacity coming in the next 2 years and into 2026.
AA has missed a great opportunity to grow revenue by not replacing the widebodies it – UA passed them in passenger revenue but both still trail DL not just in passenger revenue but also total revenue where DL shines in non-transportation revenue. And DL has more than replaced the aircraft it retired during the pandemic and also gained substantial operating cost benefits from its new A330-900s and A350s.
AA has a very strong southern route network but it is vulnerable because of the small number of aircraft it has on order including very small amounts of widebody growth capacity.
Also, Airbus is now admitting that the A321XLR will not have near the range they have advertised it would because of the changes that are required because of the added fuselage fuel tanks.
Given that AA and UA are both counting on the A321XLR to help grow/replace parts of their transatlantic network, both might not be much better range wise than the 757 offered.
So they are mostly a domestic airline chasing non-corporate travel. Yet the strategy is to have worse interiors than DL, B6 and UA along with inane policies such as D0 and lying to customers whenever delays happen. Zero ambition and whatever they do try, is usually half-assed.
Seems like there are plenty of explanations for why they are doing worse than their peers.
What is the impact of terminating the JetBlue alliance?
There ARE no worse interiors than DL 757s. Ancient crap.
Barcelona isn’t an Iberia hub. Madrid is the hub of Iberia. BCN is a hub for Vueling, IAG’s low cost carrier. This article also argues that AA doesn’t fly to Europe much. They certainly don’t have the network that DL and UA have across the Atlantic (UA’s is actually larger than DL’s for the past two years) because AA doesn’t have fully paid/depreciated aircraft to fly secondary, tertiary, and tourist-heavy routes like Tenerife, Nice, Naples, Shannon, and so forth, but their network isn’t entirely insignificant.
This article also ignores the fact that even with routes that normally end in October across the US3 to Europe being extended into early December, in January and February, there is a substantial pull down across the 3 airlines in terms of capacity and service. TATL is strong, will remain so through Fall, but it might begin to level off and it is too early to tell what Spring/Summer 2024 will look like given shifting weather and climate change-induced heat-waves.
The end of the NEA could possibly give way to a code-share with B6. B6 doesn’t need AA as much as AA needed B6, but it seems the accruals to revenue from this partnership were marginal for both carriers. The JFK situation will likely continue as is, with perhaps some more domestic service replacing some other routes, to support some long haul but by AA’s admission, JFK is an O&D station for the most part. At LGA, AA is a strong #2, but it needs to optimize the routes and create more frequencies on some routes where it can, once it gets its slots back.
The UA operation at EWR is a complete mess. Flights are delayed every day, some with 3+ hours or more, notably to Europe. It is essentially an unreliable mess and taking the departures down from 410 to 390 will not solve much. The airport’s design and the airspace infrastructure has severe limitations. Eventually, these delays and problems will eat well into UA’s profits, as will the contracts across the US3.
Shoe,
you make some good points and also say some things that are not correct.
1. AA reported $1.9 billion in transatlantic revenue in the 2nd quarter while it was $2.8 billion for Delta and $3 billion for UA’s Europe and Middle East/ India/Africa network (which is all transatlantic). UA claimed it is flying more than 10% more capacity than DL but their revenues weren’t 10% more than DL’s.
2. AA actually increased capacity more than UA on a percentage basis – and so did DL – but on a composite basis, AA’s transatlantic RASM increased more than for UA’s Europe/ME/Africa/India. AA did very well on its transatlantic network and it was no less good because it was 2/3 the size of DL and UA’s networks.
3. Airlines always face risk in long-term revenue estimates but there really is no evidence that anything is going to decrease relative to this year.
4. AA can only provide estimates based on what it is approved. Its relationship with B6 is coming to an end and they have no approval to do anything else.
5. EWR is a mess and has been operating beyond capacity; UA simply had to go through a painful process to realize that. AA and DL’s 2 airport hubs (DL’s obviously being much larger) at LGA and JFK is far better suited for the realities of NYC ATC and airport capacity. and, no, the impact to all 3 airlines will not be the same.
SST.
DL’s 757s have in-seat audio/video on demand, the same seats as on other airlines and aircraft, and actually a slightly more spacious cabin than other narrowbodies. and they are as well maintained as any airline’s fleets.
If you have actual facts to compare DL’s 757s to any other aircraft, please do post it, otherwise your comment is an unsubstantiated opinion.
@sst – and the DL 739s are a close 2nd worst – what a travesty even in first class
RE: AA’s intl – they depend more on the JVs with BA/Iberia – and those carriers have more Europe origin traffic, which hasnt been nearly as strong as US origin
The other one is possible teething pains with the sudden cutoff of travel agency platforms this spring for Raja’s bet
Care to make a correction to the title of your post? Never in the history of commercial aviation have 10% margins been “disasterous.” I guess “guiding to lower third quarter margins” doesn’t work for you?
Here’s the Earnings Transcript discussion:
___________________________________________
Now turning to our guidance. Bookings remain strong, and we continue to see a constructive demand environment. We saw record revenue for the fourth 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 CASMx to be up 2% to 4% year-over-year. Our current forecast for the third quarter assumes a fuel price between $2.55 and $2.65 per gallon. Based on our current demand and fuel price forecast, we expect to produce an adjusted operating margin between 8% and 10% in the third quarter and adjusted earnings per diluted share between $0.85 and $0.95, excluding special items.
looks like AA mgmt has offered a sweetener to the AIP which would match most of the financial terms of the DL contract and UA AIP
AA has really sank into a hole. I agree – no vision. No leadership. No direction. Employee moraI is low. I can’t remember the last time I saw ONE of their flight attendants smile. Customers want to see happy people – or people who LOOK happy. They’re just coasting along – and it shows . . . All the way to bankruptcy.
AA gutted commission contracts for TMCs and there is a war behind the scenes to avoid booking AA. There is also a lot of anger with NDC which is a disaster in native Sabre. Whether this moves the needle on earnings I don’t know, but I’m sure other airlines are looking on with intense interest.
As a legacy airline with government guarantees of bailouts and subsidies to keep its worker comrades employed, ask me if I care.
I had an average flight JFK-DEL-JFK on AA. AA’s flight competency is there; I just can’t get too excited about it.
While Iberia is American’s joint venture partner, they dont have a hub in Barcelona. They have a hub in Madrid. Barcelona is a spoke for Iberia. Only has flights to Madrid. Stop being so lazy.
I have been traveling on AA almost weekly to California, Caribbean, Boston, NY, London and Africa since March. All AA flights are full.
I’ve noticed a drop in domestic airfare costs especially to NY, LAX and Boston
I see so many articles annd have had so many personal experiences with flight attendants that are angry and bitter. If you don’t like your job or your employer….quit and do something else. Life is too short to have a job you hate
Why are you apparently celebrating this?
@DesertGhost – this is presented clinically, and fairly non-normatively I think, certainly from my perspective
For several years now I too have not seen one single AA flight attendant smiling or accommodating a passenger or helping lift a bag into the overhead bin… etc…. such misery! A few months ago I flew GIG-MIA in business class and the flight attendants didn’t even bother to offer a pre-departure drink. For us who don’t fly business class frequently and look forward to a joyous occasion – it was totally depressing and sad.
AA needs to take notes from Southwest Airlines flight attendants. Have fun with your job – even if you’re having a bad day. SMILE. It costs you nothing and can increase profits. Who wants service from a miserable flight attendant???
I think AA wants to break the FA union. They want pilot pay but just don’t understand they’re completely fungible. Now that AA has signed away all their cash to the pilot’s, AA has created a situation where they’ll be too broke to give the FAs anything. The execs won’t even mind if they have a bad strike. The low-cost scabs will be hired on permanently, and AA will suddenly have a mixed-fleet FA pool.
AA flights have all but disappeared on our corporate travel booking site. Flights showing as available on AA’s website are not showing as options. Our finance department is strongly encouraging us, just short of a mandate, to book on other carriers and we cannot book on AA’s website ourselves.
I’ve held EP status for several years and am about to qualify for this year. I also hold the AAdvantage Executive credit card to get Admirals Club access. If I’m not flying American there is no value in the card for me.
It seems awfully short sighted to cut off corporate contracts. This is forcing me to move to a competitor when I’ve been generally happy with AA, despite the crappy domestic planes. As a lifetime PLT member I can always come back with some benefits, but I’m going to give UA a shot as it seems like they are at least investing in the passenger experience.
@Jason – I meant to write Madrid, basically a typo.
People need to stop being so dramatic!
Comments such as: I too have not seen one single AA flight attendant smiling or accommodating a passenger or helping lift a bag into the overhead bin… etc…. such misery! are silly. I flew AA to Cabo and had very pleasant experiences with them. You get what you give.
Bad experiences make the news and onto chat boards, but the good ones don’t and that’s just the life of a public company serving millions of people a day.
Your experience is the same as the person who wrote “they haven’t seen a single smiling flight attendant”- YOUR PERSONAL EXPERIENCE. And why are you so defensive? Could it be you’re an employee of AA? Give positivity and people will say positive things.
I’m not an AA employee, never have been. You’re absolutely right, these were my experiences. The internet allows us to write/post gross, sweeping generalizations that do not represent the reality for 97% of others. Most people don’t comment or are not compelled to describe their experiences on the internet when they’ve had a positive one which make the complaint posts that much louder. Plus, people love to pile on.
Maria, go have a good day and spread some of that positivity around.
Well done on finally correcting the ‘typo’…
Thank you. I will.