American Airlines earned just $19 million in the fourth quarter and expects to lose money in the first quarter. Both are above analyst expectations. However their first quarter loss (historically the weakest period for a U.S. airline) doesn’t have United’s excuse of the Boeing 737 MAX 9 grounding.
Passenger revenue was less than the cost of flying passengers. They made money selling frequent flyer miles (mostly to banks for their credit cards, but also to other partners).
- Passenger revenue per seat mile: 17.21
- Operating cost per seat mile: 17.78
In fact, this understates the loss from paying passengers and the contribution of frequent flyer miles to the airline’s bottom line because passenger revenue includes nine figures from mileage redemption tickets.
The airline loses money moving people from one place to another. The value of their credit card partnerships need to be factored when considering where to fly – they need to be relevant in the best, highest spending credit card markets (like New York and the San Francisco Bay Area, their JetBlue and Alaska partnerships were designed to help with this).
American’s operational performance has been fantastic. They’ve substantially improved their reliability, “produc[ing] its best-ever fourth-quarter and full-year completion factor, with the lowest number of cancellations annually since the merger in 2013.” American was third in on-time performance among the 10 largest airlines in North America.
Management’s theory, though, has been that if they operate on time reliably they’ll perform well financially. I’ve countered that reliability is table stakes, necessary but not sufficient.
- American’s overall poor financial performance, a 1.5% net margin (less than $1 billion in full year net profit on $53 billion in revenue) is poor return on capital and lags their major competitors.
- American is a high cost airline and needs to earn a revenue premium in order to exceed costs.
- That means they need a product that customers are willing to pay more for, and willing to pay more for their premium products.
American needs more premium seats (their Boeing 787-8s and Airbus A319s especially are way too coach-heavy). And they need to offer lounges, meals and service that exceed industry average. Currently they meet or somewhat lag average in these regards.
No one goes out of their way to fly AA like they do with DL (even though DL is objectively the same as AA and is now worse in several categories). No one is actively choosing AA’s product over other options.
AA’s brand reputation sucks and they have to fix that if they ever actually want to make money as an airline.
“they need to be relevant in the best, highest spending credit card markets (like New York…)”
100%
AA is a much improved airline. Over the last 18 months I’ve been very impressed with their operational performance.
As long as people who haven’t flown them much in the past couple of years continue to knock them based on years ago experiences, it will be difficult for AA to turn the corner.
AA doesn’t need more premium seats because they can’t translate them into higher revenue than they can get carrying more coach passengers.
But let’s be clear, as much as some will grate at hearing it, that American’s financial performance is closer to United’s than United’s is to Delta.
If you look at profit per available seat mile – which eliminates the need to adjust for stage length – important because UA operates the longest stage length of the big 3 while AA is the lowest – DL gets over 2 cents in profit per available seat mile, AA gets half of that, but UA is at 1.45 cents/ASM.
DL actually flew fewer ASMs than UA or DL but DL generated over $4 billion more in revenue than UA and $5 billion more than AA. DL burned less fuel than either and spent less per gallon on jet fuel. DL’s ancillary businesses including its loyalty program and MRO services add more profit while its refinery reduces fuel costs.
AA is the least premium of the big 3 but DL is the real outlier on the top end more than AA is the outlier on the bottom end.
Add in that DL set the standard for labor costs and is the only carrier that has increased pay for all of its employees post covid and the gap between DL and both AA and UA will only grow.
Given that DL expects to be profitable in the first quarter while AA, AS and UA will not and WN’s margins continue to be very thin and the selloff of DL and airline stocks when DL first reported its earnings was overdone.
I don’t understand why they are not making any money flying. As an EP I fly them a lot as they have schedules that suit me better than DL or UA. 9 out of 10 flights I take are completely full. Their fares are higher than others. For example, they are asking for $13K for biz class to Italy in June while others are half. Perhaps their lack of premium seats is a contributing factor
and just to add to the frequently repeated credit card comment, AA cannot and does not make enough money in markets like NYC and LAX to offset its weaker market position.
It must have a decent presence in major markets but it cannot lose money on its operation there more than it does in the rest of its network and expect to make it up w/ credit card revenue.
For nearly two decades, AA has been unable to be profitable in the most competitive markets and they tried to subsidize their operations by profits in their profitable hubs, realized that doesn’t work, and can’t and won’t offset their operational losses in NYC, LAX and other competitive markets because of credit card revenue.
AA has to figure out first and foremost how to generate revenues comparable to UA at least and shoot for the stars of what DL is doing AND THEN use credit card revenues to SUPPLEMENT its profits.
and, btw, AA and UA don’t break out their loyalty program revenue in their quarterly earnings release while DL does but AA earned more OTHER revenue than UA. UA’s revenue production from its loyalty program is the weakest of the big 3.
If I had to speculate, I’d say that:
1) They don’t have premium pricing right. Every seat is full, but they’re not making any money – how many seats are being given away to upgrade vs. sold? Is there a published statistic of paid vs. award / upgrade seats by type for each airline? AA always seems to price out the same as UA / DL up front but are fewer people actually biting?
2) They lean much harder on their alliance partners for premium long-haul than DL or UA. That means less cash directly into their pockets.
They can’t make that much money selling miles to banks, since the only CC that lets you transfer to AA is Bilt, right? Surely that profit is miniscule compared to Delta and AA.
Where do you get our info ? this is nothing that was said by Isom this morning on the conference call !!!!!!
AA has a reputation problem that I don’t know how they are going to overcome. I quit flying them years ago after a couple of issues in CLT. I go out of my way to avoid them. A business associate that flys a lot more than I do recently dropped them when the threats of CHAOS started before the holidays. He was the last at the office that fly primarily AA. The rest of us use the same strategy, Southwest for direct flights (none of us prefer them, it’s just the route) and Delta for any other (even though on the regionals we end up on crappy CRJs or junkyard 717s). At least they act like don’t hate you for flying them. Fortunately we are located close to a non-hub airport.
So what is the right strategy? Are we about to go down the usual path of proposing to “invest in the premium product and experience” with items that primarily appeal to the subset of saver premium cabin award redeemers that don’t actually regularly pay cash fares for those premium cabins rather than things that would actually drive more profitability?
Now that the pilots have first shot, over concear and EP, to first class, what do they expect, these are the customers that spend the most and fly the most.
As an EP I am actively looking for another airline.
It’s really sad how some people want to see American Airlines liquidated – costing thousands of hard working people their jobs.
This is a good article for WSJ, but doesn’t seem like it belongs here.
To many flyers like me, you’re saying that while AA is making a small profit and is not at risk of going under, I’m getting too good of a deal on my plane tickets?
The headline should be that AA flyers are getting as good of deal as they can without bankrupting the airline.
In order to have a premium strategy you have to offer a premium product and service to differentiate yourself in the marketplace
That’s where the problem begins and ends.American is incapable of offering a premium experience consistently after my 24 years.I constantly seek a better experience elsewhere since the program has devalued
Added to that I looked at a coach ticket on AA miles from the West Coast to Philadelphia for 75,000 miles one way.Do they have a clue thats 3 x what the cost of a miles ticket was in the past in first class but now they offer it in coach! They most be smoking something in Dallas?
I booked the same ticket on another carrier for 35,000 miles in First Class
So if you have premium pricing without a premium offering how do you begin to have a premium strategy? Anyone else have a thought on the AA brand supremacy (sigh) I’m happy too pay a premium if there is something to actually purchase.
Kind of hard to command premium revenue when you run your business like a low cost carrier. I used to fly AA almost exclusively, to the tune of 500K lifetime miles. I couldn’t tell you the last time I stepped on one of their planes.
Gary, the post strikes me somewhat as wishful thinking, i.e. “AA’s operating costs are high, so they need to make upgrades to the flying experience to justify higher fares to cover their cost (by the way, I fly AA all the time so couldn’t possibly have an ulterior motive for suggesting they need to improve the customer experience).”
I feel pretty confident that most management consultants would focus on the “operating costs are too high” part of the sentence and simply continue to institute cost-cutting measures until flying is profitable again.
By the way, as an EXP, I have the same wishes as you do. I’m just not holding my breath.
Management is clueless and has poured gasoline and lit a match to the brand value.
Their actions have been to greatly increase labor costs hoping to recoup it by serving $2 chuck in into F.
Gary , do you think current management can turn things around. I don’t. Where are the shareholder activists?
American is average or below in every category. Their on time performance has improved, great. But it’s not better than Delta or United. Delta has personal TVs on almost all mainline flights, free wifi. United woke up and is adding these elements back. United offers an amazing international network, Delta’s offer is robust as well. Then there’s American… “our in time performance has improved!”…. ok, congrats? Meanwhile their flight attendants are angry and horrific, charlotte is a third world airport to connect though, shrinking in Chicago, shrinking in NYC and LA, small international network, domestic first class is abysmal. Flagship pales in comparison to Polaris- and once Delta opens its Delta One lounges the flagship lounges will be even less of a differentiator… I always say American is great if you want to get from Fayetteville to Milwaukee, other than that they offer little.
TWAviator,
actual data (from the DOT) shows that AA’s on-time through Oct – as recent as the DOT has reported – is better than UA. Let’s not forget that UA had two months – Jun and Jul – that were horrific from an operational standpoint
Even after, UA’s on-time was not markedly better than AA’s.
As for AVOD, let’s not forget that a minority of UA aircraft have it. They have committed to refurbing most of their older aircraft w/ it but that has nowhere near happened and they are not receiving new aircraft near as fast as they want.
AA mgmt’s perception of itself is worse than it should be while UA’s is greater than it actually is.
WN at least recognizes it is in deep trouble financially – the worst it has been compared to its peers – and isn’t sugarcoating where it needs to be.
And, DL execs really don’t brag about their financial leadership but they are the only ones that are justified in doing so.
@GregsDC – “I feel pretty confident that most management consultants would focus on the “operating costs are too high” part of the sentence ”
The problem is that AA really can’t do much about their operating costs outside of bankruptcy, and much of it even inside. They have high debt and expensive labor deals that management consultants aren’t going to solve. They can pay down debt over time but they’re also contemplating a narrowbody aircraft order.
Tim Dunn,
You know the industry well, but I feel like you’re missing my points. The article here is about how AA cannot command a premium for their product, and are therefore losing money on their flying, and as a frequent flier I gave my opinion on why that is from my eye.
As to on time performance. All airlines have bad moments, no one is immune. Sometimes AA beats United and delta, and they also get beaten often. However OVERALL American, although improved, isn’t SO reliable and on time that I would choose them over Delta or United. It’s not a differentiator that would cause people to choose them or pay more for them over competitors. Make sense?
As to AVOD, no one is forgetting that only a small percentage of United aircraft offer it, we KNOW that United just recently began their retrofit program- my point however is that United woke up and realized flyers valued product, so they turned a corner and are now starting to create an experience on par with Delta. And I applaud that. While American continues to offer a weak inflight experience and flyers know that… as shown in their return on ticket prices.
I feel like American management is still trying to pass off this pig with lipstick on it as a premium carrier and no one buys it. Delusional. United sees themselves as Uber premium as well, which they’re only ok but they’re trying. And Delta sees themselves as the most premium, but are slipping and resting on their laurels while United catches up.
All in all, the point of my original post is that it will be a two man fight between Delta and United, while American continues to float in space offering credit card applications to anyone who will listen.
10 months of on-time data is not a sampling… it is nearly a full years worth of performance.
AA simply is statistically not much different than UA in terms of reliability.
DL does deliver a statistically more on-time product. That is not an opinion but fact.
I don’t honestly see AA talking about its premium product.
And it doesn’t really matter what UA says about the product it WANTS to deliver, it is B6 and DL that offer AVOD across the majority of its fleet.
Until UA at least hits 50% of their domestic fleet w/ AVOD, they really are not that much different in terms of onboard product from AA or WN.
and let’s not forget that 90 of UA’s AVOD equipped aircraft have been grounded for the past 3 weeks.
Let’s see how the next few years shape up but 1. AA is not as bad as alot of people talk. 2. UA is not as good as alot of people and UA thinks and 3. UA is squarely halfway between AA and DL, not closer to DL.
And WN has a proven track record of pleasing its customers better than either AA or UA and sometimes better than DL (while the inverse is true) even though AA, DL and UA all operate much more complex networks and thus have a greater chance of creating problems for passengers.
@Jake H~
I think what you overlook is that while AA sells squillions of miles to the banks et al regularly for bulk discount prices, they arguably sell even more to their members at retail prices. These miles are largely redeemed on OW partner airlines premium seats, which AAdvantage does an excellent job of providing availability.
Have you noticed the former back-to-back AA miles sales of old have disappeared? This is because they no longer have to offer sweet bonuses or discounts. The best on offer most of the time now is 25% to 35% miles or bonus, making them relatively expensive on a cents per miles basis. Still, many members still see value to be had.
This is where the money is being made.
Those CC bonus miles splashed around by the banks are (mostly) redeemed, but a large proportion of them go on domestic AA metal, in coach seats. This is why their domestic flights seem so full.
(Other miles are spent on AA Store products~ a criminal waste of miles IMO).
This article is 100% WRONG. American Airlines makes all of its money from flying, including frequent flyer miles revenues, which is nothing but sale of credits for future flying (OK, 2% or whatever are redeemed for hotels or whatever).
Proof? American could not sell a single frequent flyer mile if they stopped flying, so it follows that the sale of frequent flyer miles is a form of revenue for flying.
The major problem they face is that the sale of frequent flyer is an incredibly low-margin business at the moment, so expect violent devaluations to make up for this.
Incidentally, if AA had invested in product instead of the frequent flyer product, they would have passenger revenues per available seat mile of 17.98 cents like Delta’s, which would be enough to make money without selling a single mile. Delta’s strategy of improving the product instead of spending on the frequent flyer program (and ripping out screens from transcon airplanes) has proven to be far superior.
AA FAs are going to be pissed by their profit sharing. The death spiral at AA will continue, as service will continue to decline, driving people with money away from booking AA, AA will make even less money, and so on in a loop until bankruptcy or shrinking to irrelevance:
* Delta’s flight attendants profit sharing: 10.1%
* American’s flight attendants profit sharing 1.1%
Thing 1 purchased some far-out call options on Delta anticipating they will (hopefully) come out ahead in all the current mess once the dust settles.
Yeah, crazy to invest in airlines at all, but life is short and it will be fun having a little skin in the game as things unfold.
As airline sells direct flights for more, this opportunity for direct flight is filled by many.
Customers stop complaining and do whatever is necessary.
Time or what you pay might be the question.
So yes you may find a income loss and wasted hours.
Seat miles numbers count for some reason.
AA has a spending problem not a revenue problem. They love to spend money on stupid stuff. They are like a kid with daddy’s credit card. Look at the headquarters, they spent billions on it. They made it look like a tech company head office. What was the purpose? Spend it on the planes, equipment or debt payoff. Look at all the layers of management they have- supervisors , assistant managers, managers, senior managers, directors, managing directors, vice presidents, senior vice presidents, executive vice presidents, then the C suites. AA could lay off 20000 today and still run the operation just fine without effecting anyone that actually makes the company revenue. It will not matter how good the operation is, people buy on price. They could be #1 in every category but if spending is higher then revenue they will continue to loose. They need to go after spending and worker productivity to make it. If fuel costs would have been the same as 2022 the losses would have been astronomical for the 4th quarter.
@steven – headquarters cost ~ $1 billion not multiple billions, I criticized that roundly. They shed $500mm of non-union / management payroll during the pandemic. Not saying there isn’t fat there, but US Airways taking over in bankruptcy cut short the bankruptcy gains on cost and labor costs are a big driver of rising costs. They aren’t going to reduce those, so they need a revenue premium. They’re not a cost-cutting way out at this point.
You may be spot on with premium capacity- I don’t know how they’re losing money when their premium fares have gotten so outrageous at hubs. Flying J out of DFW these days is almost outrageous enough to save my company money by flying DL or others. I get it when there’s a direct flight, but if I’m choosing between connecting at DTW or PHL to get to EU, why is the price almost 2x what DL wants?
If it was up to me, I would close the high cost crew bases like JFK and LAX and ORD. Slash all flights there to the bare minimum at these bases. Save the 3 cheap hubs CLT, PHX and DFW. The enigma is MIA. Dominate the 3 super hubs. But realize they can’t win against DL and UA.
excellent summary, Gary.
Doug Parker’s ego-driven takeover of AA sentenced the company to a decade if not longer of high costs and inability to compete.
Given that AA’s uncompetitiveness in the first decade of the 2000s was because of the failed out-of-court restructuring post 9/11. Parker spent his time milking AA and further cheapening what was left of a once-premium airline.
Y’all keep forgetting that on March 7th last year AA started the process of dismantling its Global Sales team. AA’s strategy involved firing account managers, removing agency programs and eliminating dedicated after sales support for both Agency and Corporate accounts. Why? Well a guy name Vasu Raja believes that since supply won’t meet demand until 2025 and AA has a very unique network, they can get away with selling the seats directly on AA.com without the help of agencies (consortia, wholesalers, consolidators, etc). Airlines like UA and DL on the other hand, empowered their respective Sales Team and got closer to accounts and provided more support. No wonder in 4Q23 AA’s net profit was meagre $19 million whereas DL was $2 billion dollars. It’s not the Global Sales team that should be sent home but Robert Isom, Vasu Raja and the incompetent leadership at American Airlines.
@ Corrina Prouty
Ummm what about DCA and PHL?
Can they update their website at least? The link to the earnings release shows a A330 with US Airways sidewalls in the background.