American’s stock hit new lows yesterday in advance of today’s earnings call. That left the airline in a tough position, needing to explain how they’d cut costs which are rising at a faster rate than revenues.
I listen to the earnings call with a different perspective than most people covering them. I’m interested in news about the loyalty program, about the product, and about how changes to the business are likely to impact the way customers interact with the airline — as well as what we can expect from the overall direction in the industry.
As a result some of the six things that stuck out for me are likely to be different than key takeaways elsewhere, and are things you may otherwise miss:
- AAdvantage drove $4.2 billion in revenue during the first 9 months of 2018. American stopped revealing significant information about its loyalty program financials two and a half years ago. This is high margin revenue though — exclude it and the rest of the airline business looks really bad.
- The airline’s executives emphasize that their capacity will grow ‘at or below GDP’ and ‘less than competitors.’ Of course the bulk of their growth comes from more seats, not more planes. There’s something strange though about the airline industry where they seek to give investors confidence by promising that the business won’t grow. Airlines can be a decent trading play at times, but if you wonder why they won’t be a good long-term investment that’s a pretty good explanation.
- People haven’t been choosing basic economy even after American eliminated carry on bag restrictions according to Don Casey, Sr. Vice President of Revenue Management, they expected to see buy ups from basic economy to regular economy drop ‘from the low 60s’ down to 50% but that hasn’t happened.
- Tone of the call was surprisingly soft. Analysts just didn’t hit American for their performance during the call. Even questions that revealed American’s underperformance were surprisingly understated. For instance Helane Becker of Cowen & Company asked about how much of increased fuel costs are being recaptured in revenue increases, and Doug Parker largely deflected.
- He suggested that the calculations other airlines are doing aren’t really robust, they’re just looking at revenue increases over cost increases.
- He acknowledged that American underperformed here against Delta and United, but that United is coming off a low base. They were making progress narrowing the gap with Delta until this year. And that was pretty much the end of the discussion of American and fuel, other than offering a ‘40% year to date’ number, which has been such a hot topic.
- He suggested that the calculations other airlines are doing aren’t really robust, they’re just looking at revenue increases over cost increases.
- Expect to see more upselling in the coming year. When the airline talks about $1 billion in revenue opportunities from ‘segmentation’ (getting customers to spend more money for regular economy because of basic economy, and to buy up to premium economy) that’s not just about offering the products but making sure they market aggressively — beyond point of sale, and up until the passenger boards the plane.
So they twice mentioned “making sure that the sell-up activity is available to their customers… [and] available in channels we don’t have it yet.”
- Mid-level managers who didn’t take buyouts and weren’t part of the airline’s layoffs (to get to 5% reduction in management headcount) were described as ‘renewing their vows‘. I suspect many just breathed a sigh of relief.
A year ago Doug Parker made a bet that his stock would hit $60 by next month.
Shares were at a two year low of 30.24 yesterday but rose in pre-market trading on the carrier’s earnings announcement and during the call, and then opened higher as well. As I write this shares stand at 31.81 — an increase of around $1.50 a share is a 5% bump given the low base.
The airline has a lot of debt coming due for new planes, currently financed at low costs. Fuel is up, the current revenue environment is good but may not stay that way, and the airline is underpeforming Delta and United. Interest rates are rising. They see capital expenses lowering, but those are driving high interest expense.
There will be continued challenges going forward, especially as the carrier continues to add seats to planes, degrading its product, while hoping people are willing to spend more to choose them over competitors.
And Parker continues to see hatred of his performance by former long time exiting customers
Until he is removed I will never come back
I’ve never disliked anyone at American in my lifetime till he destroyed their iconic FF program,loyalty, saver award availability morale and all of customer relationship management
AA has done a great job backing themselves into a deep and steep-walled hole. Over the past years they’ve made conflicting bets; buying new planes but forcing more seats in them is one example. Now they’re finding a less friendly cost environment with higher fuel prices and interest rates. The past few years should have been about winning customers yet they’ve managed to push people away, and now that economies are tougher they’re left with declining revenues and lackluster performance against primary rivals DL and UA. Shareholders won’t hold for what is needed now, bigger investment in product, because of higher expenses it would require. And if the BOT doesn’t recognize Parker’s hand in this mess then they all deserve to lose their jobs (not just Parker).
Interesting business plan: Create a mediocre product that is almost universally disliked, then think the biggest challenge is to market some small relief from that.
I used to think Southwest was pretty clver. More and more, I see it was really just easy pickings.
Is the AAdvantage revenue all driven by sale of miles ( and perhaps other revenue from credit cards).
Strange that after gutting saber award availability, they are cutting back on Aviator if that’s their cash cow.
That’s why I am a SAVE investor. 52 week high!
When will the board realize that Parker is the problem and can him?
It was apparently mentioned on the call that a key initiative is to increase upsell into Main Cabin Extra, however aren’t they reducing the number of MCE seats in their 737’s? I find that contradictory, unless they plan to decrease investments in retrofitting old 737’s.
You know an airline is in trouble when the customer contact people — counter and gate agents, flight attendants — are grumpy and sullen. AA’s staff reminds me of Eastern employees just before that airline imploded.
@Beachfan
No – the $4.2 billion in revenue is partially from the marketing component of mileage sales (primarily to Citi and Barclays), but is also from the movement of deferred revenue from the liability account into passenger revenue (from previously earned and sold miles). So it’s not “$4.2 billion in mileage sales this year”.
The Aviator play is strange in the sense that allowing the credit card to provide an avenue to bypass EQD requirements is a core strategy (executed well by DL/UA) to encourage elites to take-up the co-brand card.
Fire Doug Parker already.
I’m confused.
Reduce the number of seats in J and MCE, tighten the pitch in F, eliminate IFE and squeeze a couple of extra rows in the 738’s and 321’s, then try to up sell?
What are they upselling to, with # of MCE+ seats going down? Also, the domestic product at every level has been downgraded from 5 years ago, less incentive to the customer; also it seems to me there has been a quiet but defintite cost increase in the upsell prices.
This whole thing is a massive fail. I think Parker is actually waiting for a downturn, so he can blame prevailing economic conditions for his exit.
I never thought I’d miss the bulkhead row in Y on the old Mad Dogs this much.
You guys are delusional. Upsell includes offers to move from coach to first at check-in for a couple of hundred dollars. You think upgrades are a rarity now, just wait.
I am a based out of PHL, and switched all of my business over to Delta this year. I am paying 5-10% more on average for travel costs and ALWAYS have a connection, with few non-stop options. I fear AAL is beyond the point of no return. They are hemorrhaging cash and customers.
If my experience this morning is any indication, I’m beginning to wonder what AA management has been smoking: I needed to buy an F Class revenue ticket from DCA to LAX about six weeks out. AA and DL had direct flights leaving within a few minutes of each other. Both were charging nearly the same fare: AA was $10 higher.
AA’s offering: A reduced pitch seat on the new 737 Max, with no separation between First and Economy.
DL’s offering: Lie-flat Delta One seat on the 757, dedicated flight attendant in separate F class cabin, lounge access on both ends.
Maybe AA figures that nobody’s going to buy the revenue ticket anyway. So why not upsell that reduced-pitch seat for a few bucks. Meanwhile, their most loyal customers wait in vain for their phantom upgrades to clear.
I know that my experience proves nothing: But it is a data point and a glimpse into AA’s thinking. They seem to have no intention of offering a better product or even a comparable one.
RE: “Tone of the call was surprisingly soft. Analysts just didn’t hit American for their performance during the call. Even questions that revealed American’s underperformance were surprisingly understated. For instance Helane Becker of Cowen & Company asked about how much of increased fuel costs are being recaptured in revenue increases, and Doug Parker largely deflected.”
Of course, the “tone of the call [with Wall Street “Analysts”] was … soft” – with the word “surprisingly” intentionally omitted here in my comments.
Actually, the surprise would’ve been if these purported “Analysts” actually asked tough questions about “Always Awful’s” (that be what “AA” is now 😉 ) business “plan” to make its product worst in class with crappy seatback IFE-less planes; crappy, no legroom rows; hated, loathed, reviled, 10-abreast, “densified” Boeing 777s and it’s evil twin sister, the equally awful, hated, loathed and reviled, 9-abreast Boeing 787s for long haul flights; kiddie sized loos that some adults have reportedly gotten trapped/stuck inside of on its (SO NOT AN) “Oasis” Boeing 737s (btw, a plane so horrible, that Dougie P refused to step aboard it until relentless negative press forced him to – AND for which one of the airline’s pilots described the teeny, tiny toilets used often by NOT very teeny, tiny people [with a nod to “Despicable Me”] as among the worst experiences he ever had [which was confirmed by someone I know well who works at the airline who remarked those planes are so hated, deadheading flight attendants would rather work the flight than be stuck sitting in its awful, uncomfortable seats); oh, and whatever else that’s been widely reported here and elsewhere that speak to an airline seemingly being run into the ground.
If one has been to Terminal 8 at JFK lately, what with its poorly maintained state featuring dropped ceiling tiles so badly stained they look as if gigantic vats of coffee have been poured over them (that is, IF there’s a ceiling tile at all in place); gigantic dust bunnies AND LITTER strewn about the structure’s steel beams and other structural/internal furnishings (such as utility closests on the floors below); formica trim above ticket counters taped (with yellowing packing tape at that) formica trim used to tamp down portions that separated from its substrate/backing on the wall; splotches/patches of exposed sheetrock/drywall that are damaged an in a state of disrepair; a urinal covered in a plastic trash liner in the men’s room; more gigantic dust bunnies/blobs stuck to other structural elements coated in something sticky enough to keep them accumulating on upright surfaces; mismatched interior lighting, including one fixture where one light was lemony yellow and the other a greenish lime color.
And that’s just what was seen landside since my two recent visits did NOT bring me airside.
Oh, and is it just me – but has anyone else passing through JFK noticed the state of disrepair outside of the facilties under AA’s “care” (if one can call it that) when compared to virtually EVERY OTHER PASSENGER TERMINAL and cargo/aircraft maintenance facility at JFK under the control/management of other airlines?
Even Delta’s ancient, Terminal 2, which is older than me, and I remember when an airline called Northeast Airlines (aka “Yellowbird”) was still around (it was bought by Delta a looooooonnnnnggg time ago) and I used that terminal to board a Yellowbird DC-9 to Florida, is in better shape than AA’s Terminal 8 when by chance (and a few days after I emailed highlight “lowlights” to Gary) my recent trip to RDU had using that terminal.
Just look around next time you’re there!
As one loops around JFK (especially on the toy…er…AirTrain) as they pass virtually every other passenger terminal one sees well maintained exteriors and the areas surrounding those buildings – even at JetBlue’s Terminal 5, which is a contruction site for the redevelopment of Eero Saarinen’s masterpiece, the former TWA headhouse into the due to open next year, TWA Hotel, clearly were being well attended to.
And then one rounds the bend and sees AA’s Terminal 8 with its decidedly less pleasant looking rusting chain link fence, encircling a grassy field that has litter here and there AND a tarmac so old and poorly maintained that tall weeds are seen growing through its expansion cracks and other holes.
Yowsa! You don’t see such an aesthetically unappealing unfinished lot surrounding any of the other passenger terminals at JFK.
Or how about AA’s aircraft hangars/cargo facilities?
Yep, with its weed filled tarmac, and its crumbling, yellowing concrete; the rusting, dilapidated, leaning chain link fence; an employee parking lot that looks like it hasn’t been repaved in years (or who knows, maybe decades?); the sun faded/discolored exterior of the airline’s buidings; and its decidedly less frequent litter patrol than virtually every other cargo and maintenance faciltiy seen lining the sides of the Van Wyck Expressway from the AirTrain (and the Federal Circle station that overlooks AA’s hangars and cargo facilities of virtually ever other airlines’ (Korean, Lufthansa and even the one where United’s signs are still hanging for a facility that airline hasn’t used since it packed up and left for Newark Airport a few years ago).
It’s so sad – and depressing to see.
And yet, that’s what’s seen: cost cutting taken to an extreme, with badly degraded, even at times dilapidated aircraft interiors; facilities that mirror the conditions seen on its degraded aircraft; other cheapened and badly degraded hard and soft products; badly degraded frequent flier programs and more – ALL OF WHICH WAS DONE BY DOUGIE P AT THE BEHEST OF THESE VERY SAME “ANALYSTS” to better fund…yep…you guessed it, ever larger and larger than the already obscenely large multi-billion dollar stock buybacks.
It’s abject greed at its worst – engineered and ordered by these “Analysts” to better line their, their firms’ and the very small community that can actually own enough equity to make it worthwhile to strip down the product as much as possible, cash in while the gettin’ is good, and of course, all of whom will bail out and leave the dying carcass to restructure at taxpayer expense under the cover of bankruptcy court whenever the next recession or sudden market calamity strikes.
So, of course, is it really any ‘surprise’ the “Analysts” suddenly went “soft”?
They created this mess.
Raise your hands if you think they’ll EVER take responsibility for the mess they created here – or in the industry in general.
Yeah, I didn’t think I’d see any hands raised, too!
Do you?
(btw: as noted, I sent Gary a limited selection of the pics taken of AA’s Terminal 8 at JFK. I have many more, including comparisons with cargo/aircraft maintenance facilities of AA’s with others’, but as pics cannot be posted by readers, they’re not shown here. But, I really was disappointed at what I saw at Terminal 8 at JFK earlier this month when I was there.
And while it’s been many years since I last worked on consulting assignments at JFK Airport, the fact remains that I spent 2+ years working on consulting assignments for airlines and their cargo facilities [including BA’s Terminal 7 during its $200+ million renovation at the turn of the century & cargo; Korean Airlines’ & Lufthansa’s cargo facilities]; Terminal One Group Associates [TOGA]; and others with on airport facilities sub-leased from the Port Authority of NYNJ where facilities’ management was among the primary components of the work itself.
So, with much of my own work, be it as a desk jockey that pored over every line of every expense from every vendor and anlyzed them before coding them in bespoke spreadsheets [that later became templates for the airlines and others to properly code their taxable versus non-taxable expenses per specific criteria in NY State sales tax laws and special purpose economic development agencies to avoid overpayment of sales taxes for exempt items], or out and about touring the facilities to inspect the work being done that the airline or terminal management was being billed for, I spent a lot time becoming very well acquainted with several terminals and other buildings at JFK inside and out with terminal operators, vendors and even the highest level construction managers for the largest jobs – so what was observed at AA’s Terminal 8 at JFK recently is a reflection of 2+ years of very intensely focused professional work, and not just as a casual observer…)
The reason AA stock is up so much today (from it’s crazy stupid two-year-low) is the realization that free cash flow at the airline is about to dramatically increase after years of spending that money on shiny new planes to update the fleet. Everyone who thinks Doug Parker doesn’t know what he’s doing because their flight has been delayed, or the AAdvantage program has been too stingy, etc., should probably keep the punditry to themselves. You don’t build a highly profitable airline empire from basically nothing (near bankrupt America West Airlines) by being an idiot. Sadly, whether AA stock is $33 or $83, it’s not going to make any noticeable difference to the passenger experience. They have a reasonable financial plan and are sticking to it.
This is really a serious question which I hope I am able to phrase properly.
Is the development of American Airlines under the leadership of Doug Parker the moment in history that company value and income production actually separates from product (services, in this case) so completely that the connection between earnings and quality services/product becomes meaningless?
In other words is American Airlines (stock) becoming basically a pseudo currency? Does the market fail to operate with American Airlines? Has the market become so skewed and distorted that American can continuously offer a poor product and still earn many millions?
I’m serious. Have we completely entered a Brave New World of altered reality?
JFK T8 last week was like heaven compared to the terrible EWR C
@chopsticks,
Yes, there may very well be some short term “pop” to ‘Always Awful’s’ stock for reasons you noted.
However, the fact remains that the airline’s unit revenue metrics versus its peers, and especially Delta’s, is lagging; critical aspects of its pricing strategies, especially Basic Economy, are not meeting expectations; the airline, once the predominant brand for business travelers in NYC is rapidly shrinking its footprint in NYC and is becoming an also ran behind United, Delta and even JetBlue in the nation’s largest market; the airline’s attempts to build up trans-Pacific routes, especially at its Chicago/O’hare hub, haven’t panned out; and like it or not, sooner or later all of that corner cutting that’s clearly evident at the airline’s facilities at JFK, and likely suggests a whole lot of “deferred maintenance” not just as seen cosmetically, but is probably equally spread across parts of its facilities that are unseen by the public, is going to require extensive repairs and upgrading as time marches on and those minimally maintained facilities age and their obsolete equipment and parts wear out.
Oh, and did I forget to note that Dougie P has long eschewed the need for hedging fuel expenses in an era when the price per barrel is trending upwards towards $80 (or higher)?
Yeah, good luck with all that.
Oh, and one last thing: lest we forget that part of Dougie’s “success” at America West were due to that airline’s ties to the late Senator John McCain, who intervened on that airline’s behalf to change the perimeter rule at Washington/Reagan National so it could operate nonstop flights to its (then) hubs at both Phoenix and Las Vegas airports; and whom also made sure the airline was generously funded with government support and loan guarantees after the terror attacks on 9/11.
Yes, there are a great many other things that Dougie P and his team at HP did that catapulted him to the top of the world’s largest airline over the course of his career. And personally, having met him several times and even dined with him at Wall Street led conferences, I have always found him to be bright and pleasant to talk with, I’m not sure the business models and strategies that worked for him at the “second tier” airlines he used to lead, America West, followed by US Airways, is the same one that should be grafted over to American Airlines, which had a different and much better brand reputation than either of the two previous carriers he led, and for which had an entirely different place in the country’s, and industry’s, hierarchy as a sort of de facto “flag carrier”.
His one size fits all, cookie cutter approach used at HP and US seems to be missing the mark at AA when considering a wide array of outcomes seen taking place since he took over AA nearly five years ago.
And that’s not going to be overcome with a short-term decrease in capex arising from the brief lull in new aircraft deliveries due to deferments of narrowbodies that were arranged within the past year to temporarily reduce cash outlays before the deliveries for the many 787s ordered earlier this year begins in earnest in the coming years.
I guess, as the expression goes, “we shall see!”
@chopsticks. Last time I checked, debt service (and lease payments) require cash. “free cash” will increase, but it’s still a highly leveraged business and operating earnings still matter. Putting out a crappy non competitive product at a me too price is not a good way to increase operating earnings. Reducing capacity also increases leverage
@UA-NYC
No argument from me that except for gates C120-C139 at United’s Terminal C at EWR, that place is a dump in DESPERATE NEED of a top to bottom renovation.
In fact, except for those UA gates, and a small portion of Terminal B that was renovated/expanded to allow for international arrivals as that airport evolved from being largely a domestic airport to one with a more limited schedule of nonstops around the world when compared to JFK, virtually all of Newark’s terminals, A, B and C are dumps in desperate need to either a top to bottom renovation, or as is now underway, complete replacement with brand new facilities as Terminal A will be once the $1.5+ billion Terminal 1 is completed in the early 2020s.
In fact, I passed through the domestic section of Terminal B at EWR used by Delta just 10 days or so ago, and it sure was DUMMM-PPPPEEE!
But, here’s the thing: the dump that is most of Newark Airport NOT the C120-C139 gates, is for facilities that were completed 45 or so years ago in the early to mid 1970s, whereas “Always Awful’s” Terminal 8 at JFK are comparatively much younger at 15 or so years old – at most.
And that’s what I found most concerning!
Both Terminal One and the “A” side (as in airlines NOT Delta) of Terminal 4 at JFK are older than AA’s Terminal 8 by a few years or so – and both of those relatively new facilties (which I’ve been to numerous times each this year) are in much better overal condition than AA’s Terminal 8 was.
Indeed, I took pictures at all three of those terminals (but especially Terminal 4 on recent trips there just to illustrate the difference between T8 and others facilities after I stopped by T8 and found myself so surprised at the conditions I observed while there), and even the oldest building currently in use at JFK, Terminal 2 – which predates my mid-50s age – when a Delta flight on Oct 12th departed from a gate there instead of the far end (as in a mile or so walk from check in) of Terminal 4 as it usually does!
And even at that 50 or more years old building, where the stairs/doors I used as a young child to board/deplane aircraft after walking out across the tarmac are still there, is better maintained than AA’s T8 is.
So, yes, while other than at LaGuardia, I agree it’s hard to find anything worse than most of the decrepit terminals at Newark, including United’s gates at the older sections of Terminal C that would make for AA’s T8 being a ‘palace’ by comparison even in it’s underloved and undermaintained current state.
But, then again, let’s look how low one has to go in order to find an example that makes AA’s Terminal 8 look “good” by comparison – pretty low, eh?!?! 😉
Just sayin’!
(Hehehe)
Interesting information from AA’s filings with the SEC:
1) Doug Parker’s compensation is entirely stock based. He draws no salary or cash bonus. He does get as additional compensation the usual executive package of life insurance, medical insurance and an executive physical, travel perks, etc. He has slightly more than 150,000 shares of stock in restricted stock units that are either vested or will vest next year. At a market price of $32.37/share, this is worth just under $5 million. He also gets stock appreciation rights (SAR’s) This is worth about $17.6 million today, based on underlying grant prices of about $8.50/share
Since the stock is trading at just above its 52 week low of $30.24, and well below its 52 week high of $59.04, Parker has taken a huge personal financial hit in the fall of the stock. The amounts above would be worth about double at the high.
So, when he makes a bet that the stock will hit 60, it’s not just some silly bet with an analyst, he’s betting about $22 million of his own money.
Source: 2018 Proxy statement, filed April, 2018.
2) According to the 10-Q filed today, about 8% of passenger revenues were attributable to award travel. Passenger revenues of $28.278B and Loyalty Revenue-travel of $2.436B. This seems to be fairly stable year over year. (Note to readers: The interesting parts of financial filings are always the notes to the financial statements. That’s where they hide the bodies.)
@ Johhny — AA is going to be fine. Parker has run airlines with almost no cash and one foot in the bankruptcy door. And then 9/11 hit. The current AA situation is a cakewalk by comparison. He can buy new planes, pay his employees decently and even give you free pretzels in coach. He’s got $7 billion in liquidity and is sleeping like a baby. But you’re not going to particularly like the product he sells you unless you’re willing to pay up for it. That’s just the economics of the business.