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.