American Airlines released their fourth quarter and full year earnings details and while they report fourth quarter pretax profit of $387 million and a full year total of $1.9 billion, they actually lost money flying passengers.
After American’s third quarter earnings release I broke the news that American was losing money flying passengers, and only showing a profit because of the sale of frequent flyer miles to banks.
That’s because in the third quarter American reported that loyalty marketing revenue – money from the sale of miles recognized right away, rather than deferred to cover mileage redemptions – was greater than the airline’s total profit for the year to date.
I spoke extensively with the airline both on the record and on background and this wasn’t disputed, they simply made the point that they wouldn’t be able to earn money selling miles if they didn’t fly.
While true – American Airlines credit card holders want to use their miles for flights and not just on partners, and one of American’s two co-brand partners Barclays only acquires new customers in airport (but not within 100 feet of an Admirals Club) and inflight – it also misses the point.
The lesson isn’t that American should stop flying and just sell miles. Instead the disparity in where it’s earning profit and loss underscores how poorly the airline itself is running.
American’s fourth quarter earnings release shows that for the quarter:
- Passenger revenue per available seat miles was 14.59 cents
- Cost per available seat mile was 15.21 cents
- That suggests they lost 0.62 cents for each seat mile flown
On 68.3 billion seat miles for the quarter that suggests a loss flying passengers of $423 million. Add back though the $264 million earned from cargo during the quarter and flying planes appears to have lost $159 million. (An accounting rules change adopted for 2018 causes American to recognize more money for award travel, making this figure look better than it would have without required ASC 606 changes.)
At the airline’s Media and Investor Day in September 2017 CEO Doug Parker declared that the airline would never lose money again and strictly speaking American Airlines Group didn’t lose money, but what many people think of as their core business of flying passengers did.
During that same event Parker promised that the airline would always earn between $3 billion and $7 billion per year. They barely managed it in 2017, the year it was promised, and they failed to hit that target in 2018 (even excluding ‘net special items’ they were only able to crawl up to $2.8 billion). That’s in what’s largely the best of times, before the world economic growth starts slowing in advance of possible recession.
American Airlines says they have a premium revenue problem even as their competitor Delta earns a revenue premium. It’s debatable whether customers are willing to pay more to fly Delta or Delta is attracting customers who pay more, but either way American is unable to attract top dollar for its product.
A series of ‘own goals’ help understand why that’s the case, and to date American has seemed to lack the meta-rationality to see the mistakes they’ve made which have put them in this position.
- They are proactively moving to offer a worse product across their domestic fleet. It’s not just coach that’s getting less comfortable with seats closer together and less passed seats (not to mention no seat back video), but also extra legroom coach and even first class which not only has less legroom but worse and less comfortable seats so poorly designed that a bar protrudes out the back and there’s little underseat storage.
- They’re reducing the number of business class seats which has caused them to need to take Boeing 787-8s off Chicago – London Heathrow after also freeing up 787s from China flying, their expensive new planes instead fly to Cancun and Anchorage.
- They gave up their key advantage, their frequent flyer program. Customers chose American despite operational and product challenges because of how attractive the AAdvantage program was. Current management gave up this margin between their program and that of SkyMiles and MileagePlus, increasing the price of rewards, reducing the number of miles awarded for travel, and making award space harder to come by on their own flights. (American has made additional coach awards available on a connecting basis recognizing a problem with their lack of award availability though even how they’ve done this creates inconveniences for the airline’s best customers.)
- They’ve even given up on the most premium market in the country and are failing in New York. American is number four in New York. They compete flying to LA, San Francisco and London but they’ve transferred some transatlantic flying to Philadelphia and dropped routes like crucial banking center Zurich. They fly regional jets to key US business markets while competitors fly larger planes. And they fail to serve key leisure markets.
American Airlines Group is earning a profit, albeit less than the minimum CEO Doug Parker promised they’d ever see. Whether or not they’ll ever lose money again though hinges on the success of their frequent flyer program — and whether they can recognize they aren’t offering a flight product that customers want to pay a premium for.
you can’t look at the loyalty program completely independent on the airline. To get the money from the loyalty program, you have to incur costs to fly people. The loyalty revenue is in exchange for flying people which costs money. For example, they get $100 from Citi for points, but incur $80 of costs for the flights. Profitable but $20, not $100 in profit.
Gary
You are 100% on the money!
My AAdvantage Miles aren’t worth much to me anymore
I cannot get non-Stop flights unless I use double the miles
And most international service is connection through PHL or CLT and then on to BA with again many miles and high fees … sometimes the fee is the cost of just buying a ticket.
AADVANTAGE is no longer an advantage
@JL100 – that’s why I looked only at the marketing component of loyalty program revenue (rather than the transportation component)
It is truly astonishing how badly the America West crew is at running a supposedly full service airline.
@JL100
You never heard of an independent mileage program? Like Aeroplan was?
I have had 130k AA miles in my account for about 2 years now. I can’t use them. That is after taking a 8 month trip all over the world, and still was unable to use them. Explain how someone with ultra flexibility is not able to use their miles for a simple Y award. I ain’t asking for much these days!
@JL100, if you bothered to read the article, it would be apparent that Gary addressed this point directly in the paragraphs right after the first inline picture.
What AA doesn’t seem to understand is that their product isn’t as desirable as it used to be, for the reasons that Gary lays out on a frequent basis including here. They’ve done such a good job of destroying their level of service when flying and the redemptive/earning value of AAdvantage that I actually moved all of my yearly travel spend to WN (because I’m based in DFW and they made better sense than UA or DL from a routes perspective). I’m thrilled to be flying an airline with happy workers (along virtually every part of their service) and a more comfortable product for economy, even if the points earning is revenue-based.
Superb analysis.
I do suspect though, that American will be able to keep treading water for some time due to the fact that, as much as the Aadvantage program has deteriorated, lots of travelers still will sign up for and use the AA-linked credit cards. This is because their expectations have been lowered, because an increasing number don’t know how good the program used to be, and because they still can redeem for flights to some extent: for the savvier travelers, for business and first class on partner airlines; and for less savvy travelers, for economy tickets.
Having said that, the treading water will likely end in view of this astute line from your post:
“That’s in what’s largely the best of times, before the world economic growth starts slowing in advance of possible recession.”
A poorly managed airline such as American will suffer much more than a well-managed one such as Delta under these inevitable and perhaps imminent circumstances.
Perhaps you could show a plot indicating if loyalty marketing revenue is increasing. What’s the revenue projection? I doubt the AAdvantage program will be improved until this revenue stream is impacted.
At the end of the day this is emblematic of Parker’s management. He can run a local bus service but he can’t run Greyhound to save his life. At some point the investors will force a change until then I for one do not fly AA.
When you posted years-back that you would fly on AA without researching competitor’s pricing (but now do), that should have been a red-flag for AA that they were killing their golden goose.
I’m willing to bet that their per-mile operating costs is roughly flat, but their revenue per-mile is down. If so, that’s all you need to know.
“For the years ended December 31, 2017, 2016 and 2015, the marketing component of mileage sales and other marketing related payments included in other revenues was approximately $2.2 billion, $1.9 billion and $1.7 billion, respectively.”
Having 12 year running loyalty programs, most (if not all) airlines make money outside of flying. This is not news or unusual it’s part of their business model. In the early 2000s, the only reason we didn’t have airlines just liquidating all together was due to these programs.
I think the AA passenger experience is improving and 2019 should be the break out year post merger (it took DL 6 years to hit their stride after the NWA merger). I am seeing cleaner planes, more consistent product and a smile once and awhile from the crew 🙂 The Live TV and hi-speed WIFI is great and more plugs and larger bins are making it even better. Their hard product is WAY better then DL or UA now.
While service still trails DL and they (along with UA and AK) have chosen different passenger experience then DL, they have their model and moving forward with it. The bathroom discussion is NOT an AA only situation, DL, AK ,UA and SW have a similar design on their new and refurbished planes.
Let’s look at what’s right and not always what’s wrong and hopefully all the airlines have a good year and continue to improve for us who fly with them.
Why am I not surprised, the great old Doug P has driven what was a great airline into one that gives zero respect to it’s own employee and pax. Customer service recovery have gone down the drain, the FF program has gone down the drain, therefore am totally not surprised with how the results have been for the last 2 years.
AA executive board and shareholders should have a good reflection and start finding a new person to lead the company and bring it back to it’s former glory days without impacting profit.
I fly a lot of Dallas-LA, Dallas-SF. Given the same prices, I’d rather fly Alaska. However, the only attractive part of AA is buying F on the one 787 flight it operates a day to LA and SF. Of course, those seats go for around $350-500 on way in F, so that’s not a very good use of a 787. But if I’m flying in F without the 787, there’s no difference between Alaska and AA here and Alaska has a much better loyalty program.
@Sun there’s a difference between making money running loyalty programs (great!) and ONLY making money running loyalty programs and actually losing money on other activities.
@ABC marketing revenue has been growing because the Citi/Barclays deal with AA has the banks paying more per mile. The airline did caution (SEC 8K) that they were failing to meet credit card acquisition targets but they’ve since apparently mitigated that issue. They do seem to think there’s a problem since they’re spending more to offer more award availability on their own metal.
Spot on – it’s so sad to see AA just drifting, rudderless into being a terrible airline. I really thought a few years ago when they introduced a leading international business product and the flagship lounges that they were back on the right track.
Alas, removing inflight entertainment in all classes on domestic flights, making the seats worse, and abandoning JFK as a hub is killing the attraction of the airline for me. I have until recently felt locked in through my status on BA to using AA when I fly domestically in the states (flagship lounge access, and automatic upgrade to main cabin extra have made it tolerable to fly coach) but finally the operational reliability and the increase in horrible new planes flying with the awful interiors are killing it for me – looking at maybe trying Delta for the first time in years on domestic legs of my next trip.
@Sun – How in the world is their hard product (at least domestically, which is what you seem to be referencing) better than UA or DL? That is laughable. Are you Dougie in disguise?
Gary: Great analysis. Note that AA offers miles and sign up bonuses through 7 different credit card offerings – I think none of the direct competitors managed to do that. AA problem is that they cannot sell more miles.
But AA performance on paper, hard and soft products all suck big way. Mechanical problems with new planes, poor gate management on arrival, massive and unnecessary flight cancellations ahead weather events all worsen customer experience. Flying AA in Y is becoming a torture. And all of this only got worse in 2018.
Clearly, AA is now trying to come back by offering free/challenge AAdvantage status and double miles through targeted promotions. The only problem is that there is not much left of AAdvantage and the customer loyalty AA once had. All that is gone long time ago. It looks like Dough and his America West team are running out of tricks and the poor management starts to show.
People love to repeat the mantra that “consumers only care about price, nothing else matters.”
That is correct in the short term, but not sustainable in the long term. Focusing on price while slashing service does two things:
1. It helps your short-term profits as people pick you for the best price
2. It seriously harms your long-term forecast because people don’t come back (and tell their friends)
Uncle Bob who cares about price flies twice a year. Uncle Bob buys a ticket in January for his vacation to Florida in June. Uncle Bob sees AA is cheapest and purchases that ticket.
In May, Uncle Bob buys his Thanksgiving ticket. Uncle Bob sees AA is cheapest and purchases that ticket
In June, Uncle Bob has a horrible time and decides next time he’ll pay extra. He already bought his Thanksgiving ticket, so hes set there. AA gets to count Uncle Bob as a returning customer.
But next January, Uncle Bob sees AA is cheapest and decided to pay the extra $6 to fly Jetblue.
So in year 1, AA is right, they got all of Uncle Bobs tickets. But Uncle Bob wont fly AA again, and hes telling all his friends. This is going to show up in year 2, 3, 4 etc.
Price is most important if you think all airlines are the same. And that used to be the case among the legacy carriers when they were regulated. But thats no longer the case. Youre going to have a much better time on Delta and Jetlue than on AA.
Frequent business flyers are profitable, of course, but AA needs to fill 100 seats of every plane with a whole lot of Uncle Bobs making infrequent leisure trips. We know every airline that has focused on the premium segment exclusively hasn’t done well because you need to pack people in at the back to cover your costs. (not that AA is doing well up front either)
AA VP Vasu Raja’s “logic” :
“we don’t have the slots, the capital, the ability to build a 600 departure hub there.”
translation to laymen terms :
“if we can’t be a bully and rape the local airport authority like in DFW or CLT, then by all means just surrender”
The combination of being able to reschedule frequent flyer flights multiple times for free -and- instantly getting back 10% of miles used to book an award up to 10,000 miles per year (since I have an AA credit card) -and- the plentiful Discounted Mileage Awards renders AAdvantage the best frequent flyer program for me. I’ve had the need to rebook flights many times over many years; AFAIK, a minimum of $100-$150 is required to rebook an economy paid flight with American -or- on a frequent flyer flight booked with another airline -or- on a flight booked via a bank portal with Chase UR points or Citi TY points.
I find it odd that a not insignificant amount of money is required to rebook a paid flight, while it’s free to rebook the same flight booked with AAdvantage miles. I’d think it would be the other way around.
For many years and for many people, I’ve booked paid flights directly through airlines, frequent flyer flights directly through airlines, and points flights via the Chase Ultimate Rewards and Citi TY portals. Depending on the dates and itenerary, I’ve found no method to be consistently the best… though for identical flights (and car rentals), the dollar and point prices offered by Chase are always substantially lower than Citi (and Citi’s TY travel redemptions are going to get even worse later this year).
Great analysis. Personally, I do not see how selling miles while simultaneously devaluing the miles at the same time is a viable business strategy.
Profitability is now forecast to increase 40% this year at AA. Perhaps you should have mentioned that in your analysis? It does not appear that the airline is being run into the ground. 🙂
@chopsticks – they promised the billion from the same revenue initiatives for this year too but it didn’t materialize. In any case it wouldn’t change the fact that they lost money flying in 2018 when their competitors didn’t.
RE (by @henry LAX):
AA VP Vasu Raja’s “logic” :
“we don’t have the slots, the capital, the ability to build a 600 departure hub there.”
translation to laymen terms :
“if we can’t be a bully and rape the local airport authority like in DFW or CLT, then by all means just surrender”
Agree 100% – especially after being asked by family who live in CLT earlier this week to research, and possibly book, flights for them in early May to/from MCO for a special, family wide, celebration for our niece, and then trying to explain to them that their options were “40,000 AAdvantage miles each (for 1st class which was the only class offered for their dates) OR $384 each for (Main Cabin) roundtrip” – while also noting that this was much higher than the roundtrip fares for nonstop flights we looked at, and booked, for our nonstop flights (NYC-MCO-MCO) on the same dates on Delta, even in Comfort+!
So, instead of flying, they’re driving the 8-9 hours each way from their home that’s about 15 mins away from CLT, and not very far from the border of South Carolina as it just doesn’t make any sense to pay $384 each roundtrip for a crappy, small, 30-31” pitch, no legroom Main Cabin seat all the way in the back of the Airbus A321s now used for most CLT-MCO-CLT flights – and then be expected to pay an additional fee for the same crappy, “preferred” seat further forward than them being consigned to the “cheap seats” in the rearmost rows!
Nope. So NOT worth it.
Alas, that’s the reality for those who live in the “Queen City” whose travel dollars are held for a King’s Ransom by an airline that “owns” it with a 90% market share and faces little, if any, meaningful competition for nonstop flights that don’t begin or end at another airlines’ (fortress) hub!
That’s NYC-MCO-NYC in the above!
@chopsticks – our secret internal forecast is for 80% growth. But please don’t tell anyone. We want it to be a surprise
The AA flight product and loyalty program in the main has become so lousy that I barely have any use for even my lifetime AA elite status or higher unless it involves flying airlines beside AA.
AA used to be my carrier and my airline program of choice. Now it’s the carrier and airline program that I try to avoid using.
I hope the AA stockholders wake up quickly before the new brankrupcy that looks will come soon again ,who was very usual with us air !!!!!!!!
It’s a merger that never should have been permitted.
I’ll fly them when their first class is the shortest flight with the best schedule. I’m not price sensitive within some reasonable range: This means I won’t pay the $4399 one way fare from LAS -SJD when one seat is left. I have a trick up my sleeve for that, but you won’t be able to use it without a pilot’s license.
I’ll gladly pay 100% more for MINT transcon.
@Gary, great analysis. To the point that AA has a “premium revenue problem” – YES. I live in ATL and usually fly paid First Class domestically. Two places I fly to are LAX and LGA. AA beats DL by almost $500 for a RT ATL-LAX in First. And ATL-LGA, AA beats DL by $300 in First. One would think this would force DL to reduce prices, but it doesn’t. I guess that is what “the market” values the AA product. I have considered trying the AA product, but so far haven’t – mainly because of my status in the SkyMiles program. One day DL will make a fatal error in devaluing their program, and then I will become a free agent, and go with price alone. It’s mind boggling how much extra DL charges people in ATL. Maybe I should wake up.
AAdvantage became a joke a long while ago when they persisted in showing phantom availability for many flights. The search to find one that actually ticketed was so time consuming I just gave up even looking.
Constructive complaints to AA about specific examples fell on deaf ears and they continued along their merry way.
Even if the latest AA card signup offers a squillion miles, what use are they if you can’t redeem them? I wonder what percentage of expired miles are assumed in their accounting chicanery?