Seven Things I Learned From The American Airlines Third Quarter Earnings Call

American Airlines released third quarter earnings and held their earnings call this morning. The carrier reported $557 million in pre-tax income for the quarter.

Their 4.6% pretax margin during the peak summer third quarter is weak. However CEO Doug Parker kept his job through the quarter and that’s the biggest victory for this management team after alienating employees, shareholders, and customers and having pending joint venture partner LATAM stolen from them by Delta.

American Made Money Flying Planes – Barely

I’ve made the point in the past that American Airlines largely makes money selling credit cards, not from their flying. That wasn’t the case in the second quarter (they made money doing both) and the airline’s reported numbers for Q3 show they repeated that success.

  • Passenger revenue was $9.6 billion.
  • The cost of flying planes was $9.7 billion.
  • However if you add in cargo revenue the airline made $115 million for the quarter. That’s just a 1% margin on their flying.

So unlike the third quarter of last year and also the fourth quarter American Airlines (barely) made money flying planes.

American should be in a position where passenger revenue per available seat mile (PRASM) is greater than cost per available seat mile (CASM) but isn’t. And given the importance of credit card revenue to their bottom-line, it ought to be better integrated into route planning – building up flying to support the underlying credit card business in key markets where spend is greatest such as New York and the Bay Area (instead of gutting their relationship with Alaska Airlines which gave them some relevance in Northern California and tech-heavy Seattle).

Expect a New Partner in South America

During the earnings call President Robert Isom emphasized the airline’s strength (on its own) in South America and suggested he is “confident we’ll attract other partners in the region.”

I wrote on September 30th that I had heard from American Airlines sources that they were in talks with Gol. There had also been, at least, some spitballing about trying to partner with Panama’s Copa – which used to be substantially owned by Continental (United) but is no longer as tightly-linked (though Copa is one of four ‘preferred partners’ under United’s new revenue-based elite status scheme.

On October 11th it was reported that American was in talks with Gol on a joint venture. Delta is walking away from their stake in Gol to get anti-trust approval for their LATAM partnership. Gol wasn’t a strong partner for Delta because Delta isn’t strong in Brazil. American though serves four cities in Brazil and operates from several U.S. hubs.

Somewhat disingenuously in my view Isom pointed out that “for now customers are choosing to fly American” rather than LATAM. Immediately after LATAM and Delta announced their deal, American zeroed out inventory on LATAM codeshares on routes where the two airlines compete so of course customers are ‘choosing American’ because they cannot choose American’s codeshares operated by LATAM.

American is Out of Excuses on Earnings

Joe DeNardi from Stifel asked, if 2019 earnings were hit about $700 million by the mechanics’ slowdown and grounding of the MAX, shouldn’t 2020 earnings be better by about that much even if they don’t improve on any other margins? That’s without earning more from growth (including from more gates in Charlotte), from attracting more customers, and from improved upsales.

Last month President Robert Isom promised ‘no excuses’ other than of course the excuses they keep making of the mechanics and the MAX.

American Airlines operating income has suffered relative to peers and mean reversion alone should lift their performance. If they don’t it would be hard to imagine current management being given more runway… although it’s been hard to imagine their getting the runway they have already received from what seems to be a complacent board.

American’s Growth for 2020 is Surprisingly Anemic

Hunter Keay pointed out that while American’s planned 5% growth in 2020 sounds significant, about a third of that comes from the return of the Boeing 737 MAX.

Senior Vice President Vasu Raja acknowledged that densification (Project Oasis retrofits of narrowbody aircraft) is a driver of that growth as well.

So while American adds flights, especially from new gates in Charlotte and new international routes, and upguages some routes, there’s not a lot left.

Chicago is Working Well Despite United’s Growth

Despite cancelling their Asia flying, and despite United’s buildup in Chicago, American remains bullish on O’Hare. Senior Vice President of Revenue Management Don Casey says that Chicago was “the best performing hub for unit revenue” in the third quarter and that they grew corporate passenger business 7% during the quarter.

Vasu Raja says American has “more first class seats in Chicago” than united despite their introduction of the premium-heavy CRJ-550. They plan to introduce the Airbus A319 into Chicago to “enable us to upgauge regional jet markets, to vary capacity by day of week” and to “replace 50 seat RJs with 2 class airplanes.” He also suggests American’s strategy is to serve the local Chicago market versus using it as a connecting hub as United does.

On the other hand I do see that American is downgauging a couple of their Chicago O’Hare – New York LaGuardia flights to regional jets despite it being considered a ‘shuttle’ market, although that may be part and parcel of the carrier’s retrenchment in New York.


American Airlines Chicago O’Hare

Doug Parker Expects Airbus to Pay Tariffs, Not American (For a Very Strange Reason)

While some of American’s incoming Airbus A321neos are coming out of Mobile, Alabama many are not. As a result tariffs are an outstanding issue. Doug Parker says “the goal of the [U.S. Trade Representative] was not to have these tariffs paid by U.S. airlines and passed on to U.S. citizens” – it’s supposed to be borne by the French.

He says they’re happy to work with Airbus to minimize tariffs but doesn’t expect to incur those costs. While there will be negotiations over this, the question of incidence won’t have anything to do with the intentions of the Trump administration.

Project Oasis Boeing 737 Retrofits Will Be Completed by Summer 2021

American took a hiatus from “densifying” (cramming in seats into) their Boeing 737 aircraft over the summer because of the grounding of the 737 MAX (and, even before that, because of shoddy retrofit work done on some of the aircraft by Aviation Technical Services).

When US Airways management took over they increased seats on these planes from 150 to 160 seats, and now they’re adding another two rows of seats to get to 172. That’s meant less space between all seats (even extra legroom Main Cabin Extra and first class seats). It’s meant thinner, less padded, less comfortable seats even in first class. It meant eliminating a bulkhead between first and coach, and tiny ‘space saver’ lavatories. It also involves bigger overhead bins.

The airline has re-started retrofits, and President Robert Isom says that the “upgrading” (sic) of their Boeing 737-800 fleet will be completed by the summer of 2021.

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 InsideFlyer.com, 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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Comments

  1. This… “However CEO Doug Parker kept his job through the quarter and that’s the biggest victory for this management team.” LOL.

    Another quarter of dismal performance from the HP gang.

  2. If you can’t rake in the profits now, what will you do when the economy hits a real recession? Fuel prices are not that high, people seem to be taking a ton of vacations, planes are nearly always full, etc. This should be the easy money time. Most of their problems are self imposed. Instead of letting problems fester, get out front and solve them early.

  3. I don’t hate Doug Parker I hear he is a nice guy
    However I hate his poor decision making and what he has done to crippling the business culture @American
    the sad employee morale and the customers like myself who walked out from irresponsible unhelpful customer service by far too many employees
    I am happy flying the competition and sadly look back too when American was number 1 as a program and the best Choi ever to fly despite its warts and wrinkles as an old legacy carrier
    Can they ever come back ?

  4. No reason why D0ug Parker hasn’t been shitcanned yet. Their vision for AA is a horrible experience for customers. See Project Oasis for reference.

  5. What’s an A390? I havent heard of it.

    Again, attention to details detracts from your analysis. Not a hard lift. And believe it or not, even people in ubers on the way to the airport CAN do a quick check on things before hitting “publish” or whatever it is you do.

  6. AA needs a new management team NOW, while the economy is doing fairly well. If they wait until after the economy tanks and the airline’s performance is even worse, the new team will have an awfully large hill to climb.

  7. No great surprise if you’ve tried to book a ticket lately. I’m flying from Memphis to Dallas, basic economy is $275, but they punish you if you buy that ticket, regular economy $960, no one is going to pay that for a 500 mile flight. This is pretty typical for the short routes I fly with them.

    And the new seats are so damned uncomfortable. I for one am not doing it anymore.

    So in short, they are willfully limiting themselves to minimum fares.

  8. AAL futures look like they are grounded… $29.00 today. They need change and a better loyalty program. Who wants to be part of a sinking ship?

  9. AA’s board is letting the company down.

    I agree completely with @rich – if you can’t haul in similar net revenue as the competitors what will happen when things turn bad again?

  10. Did the amount people pay less to fly AA than they do do fly DL or even UA (RASM / yield discount) change this quarter?

  11. Well, I looked it up. For every seat-mile AA offers, customers are paying 14.50 cents. For every seat-mile DL offers, they’re willing to pay 15.06 cents.

    The difference, 3.9%, is 4 times as much AA’s profits from flying.

  12. Unfortunately, Doug Parker and the others from US Air/America West don’t really know how to run an airline. They know how to drive them into and bring them out from bankruptcy (especially the former) but not much on the day to day operations.

  13. This article is biased and misleading. The 737 did. Go. From 150 to 160 unblocking the middle seats in the rear part of the aircraft. The airline had blocked some. Middle seats ” for passenger confort” / avoid paying a fourth flight attendant.
    The article makes it sound like the cramped seats. From. 150 to 160 and thst is false information.
    Project oasys did add two more rows and the seats are slimmer, yet Alaska also did the same and nobody noticed it. Also. Delta use the same small lavatory even Before American.

  14. AA prices just do not make sense to me. BOS to LHR on BA is cheaper for me to book on BA then on AA by US$30. If I want to fly AA metal the price is even more. Why? There is no incentive for me to fly AA to LHR.

    As a Lounge member we do not have access to One World lounges while flying OW airlines even though we have paid for Admiral club access (same issue with Quants Members.) Why can we not have access for one or two trips a year at least?

    Have met a number of AA employees there are some good and some BAD ones. The BAD ones need to either retire or be made redundant. As an employer I have realized that one bitter employee will infect an entire group of employees.

    As a AA share holder I want the stock price to increase. Doug does not realize that DO is not as important as arrival with everyone there. Lost luggage, missed flights, bad employees, canceled flights, small seats, crap food, dirty planes all call my stock prices to drop.

    Doug needs to be made redundant and new blood needs to revive the company.

  15. Funny- everyone wants to bitch about AA. So did I. Then I began my trek to see the light at UA and DL. When all was said and done I was underwhelmed. DL and UA have horrendously small lavs (like AA), UA has the dirtiest planes ever beyond what I could ever imagine on a crappy x-Us Bird.

    DL has great cabins but service is wildly inconsistent and their boarding is junk. Those who complain about the Oasis are complaining that AA is giving the same product that UA and DL pax get… DL has a great IFE system but aside from that it’s not different than UA or AA in terms of comfortability. And in fairness to AA the Oasis has conveniently placed power and good WiFi with steaming IFE.

    Long rant short — I’ll be booking AA again as long as the connection doesn’t involve DFW during thunderstorm season

  16. If American isn’t making money flying planes why don’t they cut out half of their unprofitable routes and give up near 500 planes. Some domestic routes and international long haul must be profitable on its own. American has all the data about which cardholders and frequent fliers fly which routes and which customers are the most profitable. If they focus on this they can cut out a lot of the money losers.

  17. @Rogerson its a common misconception (shared by AA’s bush league management) that airlines can simply cut “unprofitable” routes and pave the way to a profitable operation. Airlines don’t sell routes, but rather sell their network, and like consumer product companies hold their greatest asset in the value of their brands, airlines hold their greatest value in the asset of their route network. The value of the network is a function of the number of its nodes (cities) and the ability to connect people between them. AA has destroyed its shareholders greatest asset, built over 30 years by dismantling the network and disconnecting so many of the cities its customers need to go from it. They think connecting Philadelphia and Charlotte to the network are just as valuable as connecting New York and Miami, not realizing that every lost connection destroys the value of their greatest asset.

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