American Airlines: Here Come Cost Cuts

During its earnings call on Thursday American Airlines was pressed to explain how they could grow revenue faster than costs (excluding fuel) in order to improve margins.

During Chief Financial Officer Derek Kerr’s prepared remarks he explained a plan for $1 billion in cost savings by 2021 through better technology and merger redundancies. They expect to realize $200 million in cost savings in 2018.

We’ve identified $1 billion in cost savings that we expect to implement by 2021, driven principally by increased use of technology, changes to process and procedures and further eliminating post-merger redundancies. We are just getting started on these initiatives and will incorporate approximately $200 million of savings in our 2018 plan.

Four years ago United unveiled their own plan for $1 billion each in fuel cost savings and non-fuel savings. This included uncomfortable slimline seats (lighter seats mean less fuel burn). They eliminated garlic bread and ketchup. The effort even had an Orwellian name, “Project Quality.”

Notably American hasn’t said that these are cuts to customer-facing amenities or experiences, although “changes to processes and procedures” almost certainly includes that.

The billion dollar figure in non-fuel savings coming out of a merger is eerily reminiscent of United though.

About Gary Leff

Gary Leff is one of the foremost experts in the field of miles, points, and frequent business travel - a topic he has covered since 2002. Co-founder of frequent flyer community, emcee of the Freddie Awards, and named one of the "World's Top Travel Experts" by Conde' Nast Traveler (2010-Present) Gary has been a guest on most major news media, profiled in several top print publications, and published broadly on the topic of consumer loyalty. More About Gary »

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  1. Any customer facing cuts are going to hurt, given that AA customer experience already is in only a few ways better than, and in many ways, inferior to, that of low cost carriers.

  2. How about building in better Turn times instead of trying to time every flight to a perfect 30 minute turn at a place like DFW where this will never go perfect. Sure having a tight turn around sounds great but if one is missed it adds tons of cost to the bottom line not to mention a domino effect across the airline. In fact this likely adds costs by extra staffing required to handle such issues.
    How about opening up more award bookings on the website. Every time someone has to call in (not to mention HUCA) to book a simple Cathay award or feed segments to a phone agent for a simple ORD-CDG trip that the website is forcing you on an ORD-DFW-PHL (overnight)-CDG award it adds cost.
    How about eliminating beverage service on those <45 minute flights that we can survive without half a coke on.

  3. I was not aware that AA has a customer facing service department following the merger with USAir, much less an opportunity to save costs there. They must be referring to a reserve account that they have been funding and can now begin withdrawing from.

  4. They forgot one thing despite having a monopoly in some select markets
    Customers still have a choice in other major markets
    Not all of us are prisoners forced to fly American
    Customers can earn and redeem in a better more rewarding program
    To not pay change fees Southwest Alaska for mid tier elites and above
    To not be cramped in seats with no leg room fit for animals with seats that have inadequate comfort
    To have excellent customer service
    To have a more valuable mileage currency
    To empower agents to help assist passengers and have a culture which is reasonably
    Welcoming and kind business culture
    I did 0 miles this year after 20 years with American
    I refuse to not recover from mechanical issues and the plane not making it to the final destination. And American doing nothing and remaining silent as if nothing ever happened
    And yes the food on American is fit for animal feeding it is simply disgusting
    They have also proven they can’t even sell something for profit even in s coach let alone
    something desirable that enhances their brand and dedication to quality
    I will applaud when they finally fail from stupidity and greed
    By all means keep cutting costs to making a profitable airline that no one in a sane mind would continue to fly and support
    Signed a former lifetime Platinum and Executive Platinum

  5. If the $1 billion in cost reductions by 2021 includes a ton of merger savings, then Kerr’s promise may not be as big a deal as he wants investors to think it is.

  6. Let’s look at the numbers. Over five years (2016 through 2021) AA expects to trim $1 billion from operating costs. That’s $200 million a year, which represents a number less than 1/2 of 1% of the approximate $40 billion income the airline has made in each of 2015 and 2016, and slightly more when considering AA’s net profit of almost $10 billion combined in those two years. It’s a rounding error! Retirement of older employees (the Boomer generation who held onto their jobs through seniority) will continue to be replaced by lower paid employees. Retirement of less fuel efficient aircraft (MD80s, 767s) similarly are being replaced by a more efficient fleet. Such measures make such savings inevitable without sacrificing garlic bread or those mints we get at the end of a flight in J/F. Unless fuel prices spike — unlikely given the lessen the Saudis got from their failed attempt to flood the market and force US shale drillers it of business. In short, much ado about nothing.

  7. All this just demonstrates airlines (like many public companies) care nothing about their core businesses. All they care about is increasing shareholder value, customer be damned. That didn’t work out so well for UA over the past 7 years, did it?

  8. You can’t cut costs when your CEO gives out raises, “just because” with no increase in productivity, much less quality.

    AA top management continues to demonstrate they have no clue in how to create a “Great is what we are going for” major airline.

  9. @ chase “All they care about is increasing shareholder value” now you know what the duties of the board of directors is. It is to increase the value of the company for the SHAREHOLDERS. This is what is called capitalism. If you do not like it then you can go to China or North Korea where there is none. But in most of the world this is the MAJOR purpose of the board of directors , They have a fiduciary duty to their shareholders to benefit them not the customers.

    As for all the right wingers out there. Get off your high horse. I did not say they do not have moral obligations to not be fair to their employees, customers and outsiders. They need to be considerate of others but their focus is their shareholders.

    This does not happen with Public corporations it happens with ALL COMPANIES.

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