American Airlines lost money in the third quarter, driven by a large one-time payout to pilots as a contract signing bonus (which covers retro pay for the time it took to negotiate a deal). Even so, excluding this they earned only around half a billion dollars as they enter what’s traditionally a tougher period for airline financials, and they’re underperforming Delta and United.
Some of this is that demand is strongest internationally, while American’s route network is heavily domestic. Some is that they don’t seem to be growing revenue as they grow their flying. And some is that their costs are going up too much. Nonetheless, these are all part of the standard stories around the quarterly call and report.
That’s not what my ear is attuned to. I’m more interested in the product, tidbits about the AAdvantage program, and how customers are responding. Towards that end, here are (6) takeaway from the third quarter earnings call today:
- American AAdvantage is performing well. This didn’t wait for question and answer, it was included in CEO Robert Isom’s remarks – they’re seeing record cobrand card signups and AAdvantage miles sold to partners is growing faster than airline capacity and faster than GDP (although those metrics seem modest).
- They’ve succeeded in selling most travel direct. They highlight that 80% of bookings came from their own channels (AA.com, reservations) and New Distribution Capability agency sales, “up 11 points” from a year earlier. But with total revenue not really growing significantly, the shift to direct may just be explained by a falloff in other sales, since American stopped offering its lowest fares through other channels.
- Customers are buying up to premium. AAdvantage members are “driving revenue production” for American, up 50% versus 2019 and almost two thirds of revenue in the last quarter came from AAdvantage members. These customers are “not just shopping for the fastest schedule” at the cheapest price. Credit card revenue is up 25% (though much of this is driven by inflation, everyone forgets to inflation-adjust their numbers or hopes that people won’t notice).
Customers that are buying the most restrictive products, who aren’t AAdvantage members, represent about “30% of system revenue,” while “70% is from customers buying premium quality fares,” and this is “disproportionately weighted to AAdvantage members.” 70% of customers who start at AA.com looking for the lowest fare end up buying something more than that (which I interpret to mean either a high fare type or paying for ancillaries).
- American is taking Alaska Airlines narrowbodies something that JonNYC was flagged as being discussed back in fall 2019. They’re continuing to grow capacity, even as capacity growth doesn’t seem to be driving revenue growth. They plan for 2024 to be bigger than 2019.
- Adding more first class Robert Isom said they’re reconfiguring planes for more “first class” product. That’s an interesting choice of words. The airline has announced plans to reconfigure Boeing 777-300ERs with more premium seats, and new Boeing 787-9s and A321XLRs should be premium heavy. However he said first class not business class.
I shared past internal plans for adding first class seats to their Airbus A319s which currently have only 8 seats up front.
Chief Commercial Officer Vasu Raja reports that premium cabin revenue is up 6% – 7% for AAdvantage members, and 5% for non-members. With premium demand strong, indeed Delta using it as an excuse for increasing elite requirements since there are so few seats available for upgrades, the better strategy is to increase premium inventory to sell those seats and upgrade valuable customers.
- New York is a positive surprise. American entered into the Northeast Alliance with JetBlue, which the government forced them to dismantle, because – in Raja’s words – American was “losing our relevance to NYC originating customers” and seeing a “declining originating share” of passengers while AAdvantage enrollments were declining because they weren’t large enough (slots) to compete.
However there are fewer New York-originating (business) day trips, which means they don’t need as many frequencies on a route. And there’s more international long haul, West Coast, and Florida flying (the latter always the case for New York). Raja says that their slot portfolio is strong for this flying, and that their “originating share is stable” since the JetBlue partnership was terminated. Oddly given Raja’s remarks, American lacks New York flying to Fort Lauderdale, West Palm Beach, and Orlando in their winter schedule.
American Airlines reliability is up, and that’s great as a customer. AAdvantage is still an excellent status program, and partner award value is great. More premium seats will be a big benefit, both to members looking to upgrade and because there are new premium products coming online. Their newest three Admirals Clubs are fantastic.
However they’re slow to invest in more clubs and refurbishment, many of their employees seem visibly unhappy and that manifests in their service, and it feels like they’ve given up on food and beverage. Their premium cabin soft product is lagging, from food to bedding (where other airlines will be offering it on more flights).
They’re in a bit of a pickle because they don’t have the financial strength and performance to absorb higher labor costs, and may be tempted to squeeze elsewhere. But this constrains revenue growth potential, and makes for an even bigger problem. As a high cost airline they also need to be a high revenue airline, which means offering a better product not just a reliable domestic schedule.
AA’s financial results were weaker because they did not “pre-book” their pilot contract retro payout as UA did or as DL already paid.
Neither AA or UA have a new FA contract which means their costs will continue to be pressured.
AA is not going away in NYC but they do not have the size to compete for the biggest corporate contracts. DL, not UA, is AA’s largest competitor in the NE. It isn’t hard to argue that AA is doing well “after dismantling the NEA” because the revenue hit came WITH the dismantling of the NEA.
LGA and JFK operationally are in better shape than EWR so of course AA is doing better than UA but still trails DL. AA also will benefit from running a better operation than ex-partner B6.
AA has typically shunned used aircraft but the ex-AS A321NEOs are good aircraft and AA can use them to supplement its relatively small order book relative to DL and UA.
AA’s RASM growth metrics trail DL and UA in multiple regions.
Flew AA last week – crews were amazing on all flights (2 mainline and 2 regional). But jeez, the ground experience – at my originating airport the ticket guy didn’t put the orange “priority” tag on my checked bag, and timid me, not wanting to seem like an entitled jerk, said nothing. And of course my bag didn’t make it on the flight, it came later through CLT (I checked the bag over an hour ahead of departure) and was delivered at 10pm that evening, when we were supposed to be on our way to see family 5 hours away. On the return, my bag made it but took almost an hour after gate arrival to arrive at baggage claim (on a flight that arrived close to midnight).
I fly in and out of Dulles now and good lord I hate that airport
They made 13.8 billion, they cook the books because it’s contract time
@gary Do you have any sense for whether the NYC-driven AAdvantage interest/uptake, reflected in these numbers — especially cobranded credit card spend and retention — will hold up vs. drop post B6 Northeast Alliance?
@timtwa Total revenue doesn’t equal profit. Also, it was below estimates. A small economic blip that leads to softened demand would spell trouble for AA and the others. The industry has always been this way and it won’t change.
Why are you happy that American is doing worse than United and Delta (i.e., the world’s only PERFECT airline) this quarter? Why do you apparently want to see American liquidated?
holy cow, Ghost!
Were did I say I was either happy that AA is doing worse or that I want to see AA liquidated?
Your inferiority complex is really getting the worst of you.
AA underperformed DL and UA. That is a fact.
Nobody said anything about liquidation. NO ONE.
Another thing that contributes to us profit is customers wanting to shift to other places. Who wants to fly with an airline that is notorious for bad customer service, disruptive passengers, god complex employees, and a corporate who stands behind them no matter how bad the wrong is. No matter how obvious it was wrong, such as trying to ignore a way, the family whose little girl was victimized by a flight attendant trying to produce child pornography of her.
I have a lot of friends that travel for work and periodic leisure, and they all say that they will choose almost any airline over American.
@PDT *if* AA can be relevant to the NYC market, but they’re growing in PHL, they moved the Doha flight, we’ll see if they get JFK – Tokyo Haneda. I don’t think summer seasonal Cape Cod, Martha’s Vineyard are enough.
If I were betting I would bet against, but would love to be proven wrong because it would mean that AA has developed a NYC strategy post-JetBlue alliance that makes them attractive to heavy spending NYers.
@timtwa – American Airlines definitely did not generate $13.8 billion in profit.
@Tim Dunn “AA’s financial results were weaker because they did not “pre-book” their pilot contract retro payout as UA did or as DL already paid.”
Even backing that out AA only made $500mm in the quarter.
“AA has typically shunned used aircraft” those ex-F9 A319s they took on were real dogs…
@gary Thanks. As a less frequent NY-based traveler now, that’s my guess. The seasonal summer resort traffic is well handled by the others. There are also scheduled fast ferry and seaplane services that can work well for those markets. I loved the original HND flights from JFK, despite complaints about timings, as they gave me full days in NYC and Tokyo – perfect for O/D, but not connecting. JAL/ANA are now such vastly superior services on their low-density planes, in all fare classes. AA always seems out of its element on any Pacific Rim flights. I’m actually surprised they didn’t apply for PHL-HND for connecting traffic with current PHL strategy.
@gary Thanks. As a less frequent NY-based traveler now, that’s my guess. The seasonal summer resort traffic is well handled by the others. There are also scheduled fast ferry and seaplane services that can work well for those markets. I loved the original HND flights from JFK, despite complaints about timings, as they gave me full days in NYC and Tokyo – perfect for O/D, but not connecting. AA seems out of its element on any Pacific Rim flights. I’m actually surprised they didn’t apply for PHL-HND for connecting traffic with current PHL strategy. The JAL (and ANA) flights are the wise choice in JFK market..
Just reinforces the notion that AA is a credit card marketing company that happens to fly airplanes.
Their Revenue (RASM) performance is very troublesome. On the profit side, they benefited from lower fuel costs and that benefit is starting to diminish as Fuel prices are rising again. Their Free Cash Flow was good, but Q4 and FY2024 could be a bit challenging for them.
Gary,
AA TYPICALLY shuns used aircraft. They have no choice but to look for used aircraft because they don’t have enough new aircraft deliveries coming in the near future and are cleaning up their balance sheet. They swung too far from too many deliveries to too few.
Yes, AA’s profit was weak even excluding the pilots undoubtedly because of the end of the NEA and some network issues that resulted plus their distribution issues which Cranky is covering today.
@Tim Dunn – I wasn’t disagreeing with you, I was pointing out that they got burned on used! And they’ve been addicted to new orders!
But they made a big mistake retiring the Boeing 757/767 and A330s during the pandemic. When demanded shifted to international, United and Delta made money and American didn’t have the planes to benefit, while Boeing 787 deliveries were delayed.
When so many of us buy premium, why have they taken the widebody flights out and replaced with narrow body aircraft with 16-20 F seats as opposed to 52 J seats on a 777?
Doesn’t take a rocket scientist to crunch the numbers that a widebody with 52 seats would generate more income than a narrow body with 16 seats! And then they could have fewer flights with more income! I am referring to MIA LAX for instance!