American Airlines profit was down in the second quarter. They’re crowing about record revenue, a lot of that is inflation, and they’re clearly not doing well – profit forecasts were revised downward significantly, and they are now saying they won’t earn anything in the third quarter which is traditionally good. It isn’t winter!
In fact, American Airlines will make money on its co-brand credit cards during the third quarter. That means it will lose money flying airplanes over the summer months. That’s insane. American could lose money even with loyalty profits in the fourth quarter.
The company’s stock price hit a pandemic low of $9.04 in May 2020. They’re back down into the $9s on today’s news. Shares are down two-thirds since before the pandemic – and American was underperforming then. Shares are down by one-third just in the past six months. They haven’t been this low in over four years.
If you want to understand the airline it comes down to a lack of leadership, a failure to reward focus on details, and a focus solely on its operation which is table stakes – they need to deliver a premium product that customers pay more for given their high cost base.
Instead, they’re penny wise pound foolish, focusing on a domestic route network and ‘not spending a dollar they don’t need to’ rather than investing wisely in policies, people and products that deliver a super experience that can compete with their more successful rivals.
Their earnings call highlighted:
- cost savings
- an effort to recover lost business travel through sales efforts (which will raise costs)
- and a hope that other airlines pull back on capacity which will help raise prices (holding everything else constant, which is never true, just today we’re seeing big changes from cross-town rival Southwest Airlines).
The big discussion is about winning back business travel. They’re blaming their malaise on the Vasu Raja strategy (which was the Robert Isom strategy!) of cutting managed business travel and agencies, reducing costs and discounting, believing they could fill their seats at higher fares as a result.
- At stake was $14 billion in revenue in 2023, and Isom says they’ve seen a $750 million impact to revenue in the first half of the year, and expects a similar hit in the back half of the year.
- The Business ExtrAA program was attached to $2.5 billion in revenue in 2023, with nearly 75% of that booked through agencies. The AAdvantage Business program which replaces it is about 75% less valuable, in terms of spend required for equivalent benefits and where some key benefits have been lost entirely. But they’re at least going to provide customer service for the program and let agency bookings earn in the program, which hadn’t been the case.
- Making agencies and companies welcome again helps, letting agencies sell the airline’s non-basic economy inventory and awarding miles for the flights they sell. Adding sales staff, which adds cost, helps supports agencies. And providing sales incentives (commissions) helps. Sales staff are expected to grow back in August.
American is a smaller airline than in the third quarter of 2019. AAdvantage revenue, though, is up 8% year-over-year and according to CEO Robert Isom “Citi wants to be involved in more and deeper ways” which he sees translating into further growth. They describe themselves as “in the fifth inning” of renegotiating their co-brand deals.
Devon May says they are “really proud of [their] cost performance the past several years… focused across the board.” He admits though that there will be “cost pressure as we rebuild sales staff, as commissions go up.”
Their improvement focus is in winning back business travel that they alienated, but managed business and agency travel doesn’t make up the gap with competitors even if they succeed at 100%. And with their cost performance, they still underperform. It’s all about revenue, which means they aren’t delivering the product and flights that customers want.
- American doesn’t have the planes anymore to take advantage of what’s been a boom in international, since they made the mistake of retiring too many planes (Boeing 757s and 767s, Airbus A330s) during the pandemic which were capable. Boeing 787 deliveries have been delayed, and the airline has deferred deliveries too. Their route planning plays small ball, shying away from long haul flying outside of summer seasonal Europe and partner hubs, in any case.
- And their focus has been on delivering a route network to customers, and now in reducing the barriers to sales they had erected, but not in delivering a premium product experience customers pay more for.
Put another way, American’s plan is for mean reversion (getting back to where they were on business travel) while facing higher costs including a new flight attendants contract they expect to start paying on in September. And mean reversion still has them underperforming.
There’s a path to outperform the industry but it means leadership that focuses on premium and details, and in improving AAdvantage not merely waiting to renegotiate a credit card contract.
and, remember, this is before settling the FA contract which AS has already said will take a bite of their 3rd quarter while AA and UA haven’t even announced the cost of the settlement with their FAs but it will be north of $500 million each just in the first year.
It’s much easier to chase away customers than it is to win them back.
They fired Vasu within the last 60 days but it will likely take at least a year to get back to where they were and this assumes they find a smart leader to execute a winning strategy.
How much of this is just airlines having agreed to labor costs that are just unsustainable in the long term?
They were back below $10 at market open today but the last time they were that low was when the path forward out of the pandemic was far from certain. It could be argued that they are really in a worse situation now over what they were in then. The details of the amendments to the contract will come out and the market will react to how much it will cost.
Is there any hope of a JetBlue Deal being revived?
Doug said that American would never loose money again.
Flew on them yesterday and I have to say (I know it is anecdotal) the service is severely lacking still, especially towards business travelers who have no problem spending more money. The entire day yesterday was just cascading delays with poor communication while their employees couldn’t care less. Reached out to their support and received a token response. I fly a lot, not as much as some of your road warriors, but usually 4-5 times a month with between 10 and 12 flights. Why risk pushing the people who travel the most away?
this is the headline in the Dallas News: “… an overabundance of flights in a high-demand travel environment.” In Bidness (as it’s pronounced in Texas) School we learned that’s called .. competition.
As a former long-term Platinum Executive who ran from AA after more than 40-years of loyalty, the problems are obvious as you’ve stated. The leadership team has destroyed a once great airline with its myopic obsession on margins to the exclusion of the basic customer experience. The product and the customer experience is simply horrible. Whether is it the complete lack of customer service and the disdain for the passenger, the poorly maintained equipment with minimal amenities and the all too rare video screens, the inferior business class experience including inexcusably weak food, the terrible employee morale, the evisceration of the AAdvantage program, and the blind arrogance of the C-Suite that doesn’t seem compelled to feel the need to compete with the other domestic legacy carriers, American Airlines has earned its failures.
Let’s hope for new leadership or a merger as this airline must change for the betterment of all.
Great (but sad) article. But it all goes right back to Doug Parker, and his terrible planning: no quality (only focus on network/system) and “competing down” (e.g., against Spirit) instead of upwardly (against DL and UA and quality international airlines). He ripped out all entertainment systems (why???) and provided crappy seating that was never even tested in planes before it was purchased and installed.
I predicted 3 years ago that AA would be facing a second bankruptcy in 5-7 years. I still stand by my prediction. Sadly.
EdSparks58
No problem. Robert Isom (AA CEO) will again make $31,000,000.00 in 2024 as he did in 2023.
Wait until the details of the TA with their FA’s come out. The rumor mills on the financials of the TA, not to be taken at face value obviously, really point to a massive rise in labor costs for an inferior product and underperforming business.
I’d imagine if you think the stock is in the sh*tter now, just wait.
As noted by CNBC, Isom on the earnings call said that theit changes to sales and distribution will end costing AA…
$1.5 billion in revenue this year!
Great job Vasu Raja. You deserved that karma
Oh Timmy, you forgot to mention the cost of Delta needing to update their technology and IRROPS recovery. How hypocritical
@ Christopher Raehl
Not much, this is very clearly a revenue problem rather than a cost problem.
Interestingly they’ve been the only major to maintain their load factor YoY despite adding a lot of capacity. It has clearly come at the cost of yield which got whacked 6.5%. Lets see if they can normalize their capacity and maintain load factors.
American could turn everything around in a single quarter if they really wanted to by simply becoming Delta.
Where’s Eliott Investment?
I’ll be real with you. I’m the Founder of two startups. I am BOS based (which means we aren’t a hub for anyone and I have options for UA and DL flying plus B6 that goes everywhere).
When our business came up for renewal, they always offered two CK memberships that we could use. I kept one and gave the other to my CEO.
The last time around they didn’t do that. They didn’t want to renew our contract. I told them if I don’t get a contract and those two CKs, I was going elsewhere, so that’s what I did.
I’m one person out of 10,000s they did this to. It’ll take a lot to get me back. A LOT.
It’s amazing to me to see how many people apparently want American Airlines to be liquidated.
Looking deep into the 10-Q report doing a side-by-side comparison, there were a few interesting trends between DL and AA. Yes, DL does command a revenue premium but it’s helped by more international flying. AA’s domestic revenue was about on part with DLs but lagged in TATL and Pacific with slightly better results in Latin America. AA generated 600M more ASMs than DL but like everyone else, revenue didn’t increase quite as fast as capacity and this was mostly focused domestically where fares are lower overall. Where DL really won in the revenue game was in the “other” category, especially with their refinery which accounted for $1.3B in additional revenue.
I very much agree with Gary that operational reliability is important bust just table stakes and AA can do more to invest in premium revenue generation, especially with rebuilding their international network. For now, they will be adding seats in F on their A319 and A320 aircraft (sometime soon), refurbing the B773 with more premium seats (starting in Q3), and taking delivery of more B789s with a much larger premium cabin footprint (starting in Q3/Q4).
The soft product has made some incremental improvements but I can see them going much further to command more premium revenue (e.g. tack on an additional $25-$50 to improve meals in premium cabins and market the crap out of it), FA training and incentives for service delivery improvements (many are already wonderful but too many are pulling the rest down). Perhaps they could add back IFE screens to the domestic fleet but they often break and cause frustration to passengers and employees alike.
The stock seems to see a “going concern” risk. If that’s the case, some people like me will slow their pace of spending on their credit cards and pursuing LPs. AA will then need to incentivize us to remain engaged. Let’s see some spend bonuses on those credit cards ASAP!
I find their service low cost carrier 101. Either be a low cost carrier and cut out all frills, ie; the dirty clubs, the now crappy check-in, zero customer service, everything is broken in your lounge areas (and dated) and broken on your airplanes. Or play hard ball with United and Delta. Update your lounges. A choice of 3 snacks on the airplane. State of the art technology. Your not even in the same ball park.
AA BOARD OF DIRECTORS!
WAKE UP!
ISSOM AND TEAAM NEED TO GO ASAP!
CACTUS AIR MANAGEMENT DESTROYING AA.
Yep, but the stock is up sharply today. It’s crazy, isn’t it?
here must be some kind of rumors flying around. Does anybody know anything?
@Jay Newman – you said it all very well and succinctly and I agree. It’s just very, very sad to see a once-great airline twirl into a slow, painful death with top management and board of directors that don’t seem to really care. Where’s the pride, the intiative, the prowess to make things better?? Again, just so sad to see but it seems as if they have no one to blame but themselves. Very sad indeed. I wish and hope that they will become better as they are my hometown carrier. From the looks of it, that doesn’t seem to be in the cards anytime soon.
@ Tim — WN today is what DL will look like in 10 years. The decline of DL has just begun in the last 12 months, as they make one mistake after another. Winners don’t stay on top forever.
Tim why do you so badly wish fire the failure of AA?
I genuinely think something bad happened to you on their flight. You flog AA almost as much as you fellate Delta.
I mean, this has been years in the making- cut by cut. The new American (which is just the old US Airways) chose the cheap option every single time. And the fruits of their choices are now ripe and ready to be reaped. I don’t feel sorry for them at all, the weakest inevitably will be devoured, and their competitors have just pulled too far ahead.
who says I wished ill will on AA?
You, A220, and others droned on endlessly on how bad DL’s IT meltdown would cost them when EVERYONE except you knew that AA would significantly underperform on revenue AND that is before signing a contract w/ the FAs.
I get that the world do you and your ilk is nothing more than a testosterone-filled game of oneupsmanship but AA has been running a bad business for 2 decades and you simply don’t want to hear or read it and instead lash out at others when they dare speak the truth.
Ive been with American 24 years and I rarely fly them now with 500 k one way in biz to Australia
and 35k awards for a 35 minute flight
100 k lax to philly in first really?
Sorry but greed wont get you there with loyalty
Copying delta sky pesos wasn’t a smart move
I book through flying blue whee sometimes I get to Europe in business class for 65,000 miles
still competition out there in case they forgot
There is glaring inaccuracies as people refer to this airline flying under the American Airlines marquee.
It is not legacy American Airlines.
It is USair in sheep’s clothing.
The sham bankruptcy/purchase/merger saw legacy AA erased from the map
What is left is USAir. Remember them? Maybe you recall them better as “useless air” or “us scare.”
Yeah, that is what you’ve got now – just different paint scheme
Being a legacy American Airlines employee for 35 years, it’s truly sad to see it in the dung heap. When I started the aircraft were as shiny as a new coin, clean interiors, maintenance top notch, happy business travelers, everyone had a feel of brand and company pride. Those were the Mr. Crandall years, yep he was tough, sometimes a bastard, but we knew where we stood with him. Fast forward to now and it shows, we can’t even compete with Spirit. Thank you Doug Parker and the rest of the USAir crowd, I understand why you went bankrupt almost three times and continue to show a lack of humility to the traveling public. American Airlines is long gone, it’s just a name with USAir running the show. Brace for impact.
I am a dyed in the wool capitalist but knowing that Bob Isom makes 31M for putting that garbage of a product out there really shakes my confidence in capitalism
Why would Citi want to associate its brand to American’s vastly declining one unless it can do so at a very deep discount?
It’s obvious from AA’s numbers that the type of profitable customers bank crave — high earners, high spenders — have, and continue to, desert American.
That would explain why the deal has been dragging on and on.
Isom needs to go. He has been a total dud. They need to clean house. Why does this airline exist? I can’t answer that question.
And once again, it’s obvious there is a need for leadership change and new direction/ideas. Isom needs to go!
What a bunch of inept and incompetent lemmings. Legacy of Doug Parker’s installed installed dynasty of idiots. And to the AA shareholders. What will it take for you to remove these people?
The “culture” that has been brought from US Air – could probably never be undone.
If anyone is cares, is Ben Smith from AF/KLM group available? Isom just isn’t cutting it. AA has tremendous potential with the right leadership. Biggest strength is the simplified fleet and I believe David Seymour running the operation with a CEO laser focused on the product would be tough to beat.
They’ve really missed out on trans-Atlantic flying compared to UA and DL. It seems the bulk of European flights are on 788’s with only 20 seats in J! Premium cabins to LIS for instance are mostly sold out through November! UA has more than double the number of J seats on some of their 767-300s. I’ve been EP on AA for years and have mostly good experience with them both reliability and crew, although Project Oasis has been a complete disappointment!
Most pitiful run airline that I have ever been on. When a counter agent leaves the counter and walks off and doesn’t return for 40 minutes causing people to miss their flights,that is totally unacceptable, would like to hear from upper echelon team as to what they plan on doing to make my trip home pleasurable rather than a nightmare.