Financial Analysts Now Questioning If It’s Time for a Change in Leadership at American

Mary Schlangenstein has a piece for Bloomberg that raises the question whether American Airlines CEO Doug Parker can turn the airline around. What’s notable about the piece is that a change in management is being publicly discussed – in media, by financial analysts covering the airline.

“I get the question, ‘At what point does the board say enough is enough and we need more drastic change? “‘ said Jose Caiado, an analyst at Credit Suisse. “I get that question a lot these days.”

American Airlines has managed to place itself in a position where:

  • Shareholders are unhappy (shares are down more than a third in a year)
  • Employees are unhappy (the airline didn’t even release full results of the annual employee survey)
  • Customers are unhappy (American cancels more flights than other airlines, while continuing to add more less comfortable seats to aircraft)

American Airlines One Year Stock Performance

The Real Problem for American Management is the Best Argument in Their Defense

The strongest case for American the author was able to muster is: since the airline’s stock has fallen so much, it has more room to go up too (mean reversion) although even there skepticism is expressed about whether this management team get can there.

American “for sure is the ugliest house on the block and it’s a long-term fixer-upper,” Dan McKenzie, a Buckingham Research analyst, said in a July note to clients. “But the price is right.”

The question is whether Parker, President Robert Isom and their team can pull off a turnaround.

American Blames Mechanics and the Merger for Poor Performance

They’re six years into their merger, didn’t have the same kind of IT problems (or federal criminal probe) that hobbled United, yet the merger remains one of the key excuses for why the airline’s performance lags peers.

Last week management explained away their revenue performance to employees as the result of operational issues (blame the mechanics) and failing to add enough seats into planes.

The Airline’s Real Problems are Broader

The article suggests that American’s problems are debt, operations, costs, and company culture. There’s a piece missing from that formulation: product. In fact 7 simple steps could turn the airline around.

American has more debt than peers, which worries analysts in the event of an economic downturn (although lower interest rates could offset somewhat). They’ve been on an aircraft buying spree and may have spent over a billion dollars on their new headquarters that was reportedly planned to cost $350 million.

Cost Cuts Aren’t Enough

Analysts will push mostly for cost cuts. Two are quoted saying “American should go further and close at least one of its nine hubs to help tamp down expenses.” I’ve always been skeptical of Philadelphia as a transatlantic hub less than 100 miles from New York JFK and hubs in both Los Angeles and Phoenix. However American has already effectively closed its New York JFK hub and they should be growing not contracting as an airline so that they can compete in New York and San Francisco because they make most of their profit on credit cards and that’s where consumer wallet spend is.

The analyst argument is ‘cut cost, revenue is as good as it’s going to get except through better merchandising and segmentation’ is an argument for low P/E multiples, for effectively giving up on growth, just bleed the company for cash as long as possible to buy back shares. That’s actually something this management team has the ability to do. Their tenure at America West and US Airways proves that, even if it hasn’t been the consistent mantra at American.

Shuffling CEOs Isn’t the Solution

Changing CEOs isn’t a panacea. What’s important, no matter who carries the leadership torch, is leadership. It begins by giving up the mantra that management is just misunderstood or hasn’t had a chance to prove themselves yet.

  • Give employees a mission that’s bigger than themselves, a quest that they’re all in together. They’re under attack, American is being surpassed in different ways by both Delta and United as the largest airline, management has failed them but won’t do so again — all employees need to band together to deliver not just an on-time operation but a great customer experience to win business travelers.

  • Tie pay to performance. Employees who have to pick up the slack for poor performers is a drag on morale, which is why Southwest Airlines manages to move out their bottom performers in a unionized environment. Forcing mandatory overtime demoralizes customer service agents, making it near-impossible to offer good service to customers. Failing to have parts and tools stationed where aircraft maintenance is done demoralizes mechanics.

    Meanwhile American faces current and near-term contract negotiations with mechanics, pilots, and flight attendants. They’ll be putting pay increases on the table, but those need to align with delivering better performance for the airline and its customers. Ultimately pay can’t grow without productivity, American Airlines has to overcome Baumol’s cost disease.

    There is no question this is hard but can be done with bonuses and increases that pay for themselves, especially in the case of mechanics turning maintenance bases into profit centers for high value work at the same time as outsourcing lower value work.

  • Offer a product that’s worth a revenue premium. It’s not just seat pitch and uncomfortable seats, it’s that American is squeezing premium customers along with coach customers, and that most customers are coach customers at least domestically — those buying international business class develop their impression of the airline in back and as a result American doesn’t get the credit it deserves for their business class seats and lounges. Delta at least has seat back entertainment on 700 aircraft.

  • Compete in the most lucrative markets. American’s footprint in the New York area is smaller than Delta’s (US Airways management sold much of their LaGuardia operation to Delta) and United. When Southwest announced pulling out of Newark, it’s Frontier that swooped in. American isn’t even making use of the assets it has, reducing its JFK schedule by about a quarter over the peak summer period when they were no longer required to squat on slots due to runway construction.

    American needs to aggressively make use of the assets it has, and seek out new opportunities where it can so that it can be relevant to New Yorkers if for no other reason than they need New York credit card spend to fatten their Citi and Barclays portfolios. They need to expand in the Bay Area for the same reason. Notably Delta has focus cities in Nashville, San Jose and Raleigh – all former American Airlines hubs – as well as Boston and Austin. This will bolster their American Express business from these cities.

  • Leverage the loyalty program. Customers need a reason to choose American, and with the airline’s costs the reason cannot be price alone or they’ll lose. Lucrative credit card revenue and a period of full planes has distracted from using the loyalty program as a tool to put butts in seats – and crucially to give premium customers choosing on something other than price to choose the airline even when it’s more expensive or less convenient.

Simply making American President Robert Isom CEO doesn’t get you there. Hiring a new CEO to appease financial analysts and Wall Street doesn’t get you there.

Parker actually has the humility to pull this off. He just hasn’t shown the depth of vision yet.

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. AA continues applying a losing strategy. They are screwing their passengers and their employees. They want their employees to embrace the customers while they embrace neither.

    They’ve applied every revenue enhancement from Delta while continuing a decline in the return for value. Customers want value and AA continues to not deliver. You do not get and keep high value customers with low value commitment. Your employees will not treat customers with respect unless respected.

  2. If he hasn’t shown the depth of vision yet, what leads you to believe he will?

    Its time to replace upper management, not just Parker.

    You forgot to mention the terrible Project Oasis, and how this devalues the experience for the flying customer on AA planes.

  3. Parker still operates on his old model of AmericaWest. As a long time traveler its pathetic to witness what Parker has and crew has done to a fabled airline and its employees. He’s a follower not a leader. His Idol has left Delta however he continues the lame fight against the ME3 which is a losing battle most are sick of his whining .

  4. Fair enough that replacing Parker alone isn’t a panacea, but, sometimes it’s about more than strategy, it’s about optics. I would not be surprised if AA’s employees need a new leader to follow for the sake of having hope and a new drive. While not in the same industry a great example of how both the street and employees need a new person to look up to is Chipotle – what Brian Niccol and team have done there is truly amazing and many of the changes they get credit for were long in the works before they got there – but, what matters is someone came in and said they could do better and would do better. Leadership is more than strategy and frankly Parker just doesn’t have what it takes to inspire people. Just look at his career, it was all being at the right place at the right time.

  5. It really makes you wonder how tone deaf management must be when everyone is screaming how terrible they’ve become. It’s as if management doesn’t care and they’re just looking at bottom line and making share holders happy (when even they’re not.).

    They are the PERFECT example of a greedy corporate culture that cares more about Wall St than Main St. They’re employees aren’t happy. Their customers aren’t happy. They’re losing business left and right to Delta and somewhat United (who has their own problems.)

    All these guys should never be allowed to run any company again unless they want to run it into the ground.

  6. AA is too big for its own good. They are not making money carting low paying passengers a couple of hours and doing this over and over throughout the day paying for increased maintenance, ground and facility staff. My experience on AA long haul 772 business class was extremely positive aside from the cabin crew which was decent but of course too old, too ugly and all the bad things Americans are forced to contend with due to forced diversity and unions keeping these people 30 years past their prime.

    If American does international long haul very well and these routes are the most profitable why is it maintaining its money losing network. Cut out half of the domestic flights based on loyalty metrics of where the most money is spent by business flyers on particular routes and get rid of routes that have little impact on loyalty spend. If AA has too much debt why not sell half of their 737 NGs which with the Max issues can command decent amount (sell the leases) and get rid of the this excess debt.

  7. American needs a new board as well as a new CEO. Is Rupert Hogg still available as CEO? There’s somebody who knows how to run an airline.

  8. Continued devaluation of AAdvantage that sent this 100% leisure, multi-year EXP customer to AS. All of this is cyclical and I can’t wait for the day that these idiots come with tin cup in hand.

  9. Pay for performance in a union shop? Yeah right. Resisting this is a unions only reason for existence in an era of minimum wage, complex employment laws and OSHA regulations.

  10. I was under the impression that AA was fine in PHL because they don’t have any competition there. But serious question? What will closing PHX do? AA already sucks in the west compared to almost every other airlines sans JetBlue. They already gutted their relationship with AS as much as possible. LAX is capacity constrained. How do you not make money in New York? It’s quite baffling.

  11. As Doug Parker continues to demonstrate devastating bad business decision making there can never be hope for a real comeback @American
    It’s shocking with his history in the.aviation business how out of touch with customer satisfaction and brand & program experience
    Until customers and employees matter there can be little chance for success
    Americans program and brand supremacy are over until a miracle occurs and someone returns the superior decision making pre Parker era

  12. My wife and I were “cheap” exp’s spending ~9-12k a year each on AA flights before award flights in J and upgrades turned impossible.

    We now fly whatever is direct. Paid first when prices are reasonable.

    Every time we think about crossing the pond we try to use our gluten of miles & AA fails us with J availability.

    Three years ago I cut up my AA credit cards and I tell all my friends to do the same.

    I went from flying AA exclusively to avoiding them all together.

    When a recession hits AA will try to do better. My revenue spend will go anywhere but.

  13. @Max I know the feeling. I was an ExPlat for almost a decade with 3.5 MM. In 2017 my experience on AA, which had been deteriorating for a while, was beyond the pale. One incident before a DFW-LHR flight at T-D checkin ruined me on AA for life. I missed my flight. Never heard a word from AA. Guess business is so good they don’t care. Thankfully United wanted me and my experience as 1K for past 2 years has been far better than AA ExPlat. Given the bad press UA has received, I had low expectations. But I now go out of my way to avoid AA and to fly UA, which is hard to do being based in Dallas. Even when I fly to PHX I will go via DEN or IAH on UA before I will get on AA. If you aren’t CK on AA, they don’t care about you. ExPlat is just another common tier of worthlessness.

  14. You are so off base

    One, the USA is a big place. AA doesn’t have need be relevant to new Yorkers. Do you expect big revenue gains if they were do that? The US is growing in other mid-tier to large cities, AA’s dollars would be better spent being competitive in those markets. That’d be like saying Delta needs to beef up it’s Chicago traffic. They don’t, and everything is just fine there.

    Also, the below comment. One doesn’t have to do another. We get it, you’re obsessed with the Oasis project. I agree it sucks, but let’s not confuse one thing with another. “Customers are unhappy (American cancels more flights than other airlines, while continuing to add more less comfortable seats to aircraft)”

    This blog is really going to the dumps.

  15. I would love to see the graphic that displays YOY credit card applications, renewals and drops by major market zip code and also correlated to average income/CC spend in those zips. Ignoring NYC, SFO, etc. as you say must kill the incentive to carry the cards in those conglomerations.

  16. @k

    I am a prime example of AA’s ability to lose profitable customers. I am NY based and flew AA primarily for the superior award program and marginally better partners. Once AA abandoned New York, it became harder and harder to fly them. I’m not going to connect in Philadelphia or Charlotte to get to destinations everyone else serves direct. Service continued to decline perceptibly, and 2017 was the last straw. I booked a very expensive last-minute cross-country flight and was stuck in the rear of the plane. I didn’t realize it at the time, but it was the beloved Oasis refurb. The seats were beyond uncomfortable, too tight to use a laptop, and the streaming IFE simply did not work on my device. I called it then and there and transitioned to Delta.

    In the process, I bought into the Delta ecosystem. Now that Advantage was at best marginally better and than SkyMiles, the opportunity costs of generating miles there was a lot lower. Sure, I still rack up Amex/Chase points for use on premium redemptions on other carriers. But I moved significant amounts (very low six figures) of unbounded credit card spend from AA cards to the Delta Amex Reserve and have been really happy. The overall package of benefits with the Amex cards is the strongest of the big three. This matters. I of course have lounge access, but I also qualify for a higher elite status than I would on my own, earning me upgrades and the first class BOGO. This means I fly up front (either upgraded or at reasonable cost) much more often. It also means my partner is happier when flying with me because the trips are far smoother. Lounge access, flying at least comfort plus and usually first, and consistently fast luggage delivery make a huge difference.

    Delta’s customer service has been night and day better than AA or United, and in general they run a better operation. Not perfect, but materially better.

    Because (i) Delta runs a very robust schedule out of New York (without the need to fly from Newark) and (ii) I’ve bought into the ecosystem, I’m now one of the people who pays a premium to fly Delta for domestic/European/Caribbean travel. I may run a quick search to see what else is available, but in general I just book Delta. I’m happy to pay more.

    Growing mid-tier cities are all things considered probably good places in which to live and invest (lower taxes, higher quality of life). But they point blank cannot match the purchasing power of the large affluent US cities. Your analysis misses that boat completely. To Gary’s point specifically regarding New York, AA lot of revenue from me by giving up on the most important air market in the country. Combined with the service/product/operational shortcomings across the board, it’s no wonder they are falling so far behind their competitors.

    I was going to make a snide remark about the analytical prowess of someone who doesn’t know the difference between it’s and its, but I decided to avoid being the stereotypical rude New Yorker.

  17. Gary with all your wisdom and proposed solutions I’m really surprised one of the airlines hasn’t offered you a COO position – SMH

  18. I’m a 30 year Captain at AA. It pains me to see my airline like this. We are working our tails off to keep this operation from imploding. We are a baseball team whose owners allow us to play with only 5 players on the field and 9 managers in the dugout scratching their head wondering why we lose all of the time. Making more numerous complex policies and procedures for the 5 players to follow. And looking for ways to reduce the field to 4 players. Sorry folks. It is what it is. We’re trying.

  19. American had all that you are suggesting to change for the better before the US Air leadership took over and a couple years before that. Proven operational methods were striped from the program. Employee moral is at an all time low. Managment will not listen to the 30 and 40 year veteran workers when they say “we’ve tried this before and it didn”t work.” There is no confidence in the leadership whatsoever.

  20. I am a 30 year AA Flight Attendant and I still love what I do. I do my best with what they give me but come on AA up your damn game, we can and must do better.

  21. The author of this article has clearly never been properly educated on the concept of compensation at a union shop.

  22. Can’t believe I’m saying this, but consolidation was a bad thing for AA. When there was competition, they HAD to do better – but it’s now an oligopoly – and they’re the “third wheel” with much less influence than they had before. That can change, but not under current management.

    It could be more competitive if the DoT didn’t let them follow the tried-and-true method of blocking newcomers using regulations and predatory pricing. Let the ME3 and folks like Norwegian in.

    The whole top end of management needs to go. Not just Parker, but Isom, too. Clean house. Get deals done with the unions, but make it clear that efficiency improvements need to be part of the deal. AA has had labor trouble for decades – part of the reason that Parker got AA is the support of unions (in that respect, they deserve what they get). If they wait too long, they’ll end up with the disaster that comes from a corporate raider (someone like Icahn, who destroyed TWA) or private equity (“pump and dump”).

    AA’s in a bad place and getting worse. It’s not yet fait accompli, but it’s circling the drain. Parker has a vested interest in keeping it out of Chapter 11 given his compensation structure, though I wouldn’t shed a tear if he ended up holding worthless stock.

    As for me, after years as Executive Platinum, my business goes elsewhere. Alaska, Delta, JetBlue, Southwest, and some foreign carriers, with Amtrak to round out Boston-NYC-Washington.

  23. ^^^ I agree with what Mike Hannagan said.

    “My experience on AA long haul 772 business class was extremely positive aside from the cabin crew which was decent but of course too old, too ugly and all the bad things Americans are forced to contend with due to forced diversity and unions keeping these people 30 years past their prime.”

    Forced diversity?

    @Gary Left, get Jackson Thompson’s comment removed.

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