The One Question Airline Analysts Fail to Ask American During Earnings Calls

In the fall I walked through American Airlines financials to show that the airline is losing money flying but earning an overall profit thanks to selling frequent flyer miles to banks.

That remained the case for the last quarter and full year of 2018.

American Airlines released their first quarter earnings and here’s how things break down:

  • Passenger revenue was 14.49 cents per available seat mile, while total cost was 15.31 cents per available seat mile.

  • That’s $7.02 billion in passenger revenue. Add in $218 million in cargo revenue, for $7.24 billion in ‘flying revenue’ against $7.42 billion in expense. That’s a $180 million loss for the quarter.

However the airline reported a $245 million pre-tax profit thanks to selling miles to banks. For the quarter their “[o]ther revenue was up 1.9% to $708 million due primarily to higher loyalty revenue.”

American points out that they wouldn’t be able to earn their credit card revenue if they weren’t flying planes. That may or may not be true — LifeMiles sells miles successfully (even referring to flown miles as ‘bad miles’ and sold miles as ‘good miles’) to people who never set foot on Avianca aircraft.

Nonetheless it’s beside the point. They are a successful frequent flyer program. They are not a successful airline. And that means they underperform financially even more than is initially obvious, and the reason why is illuminated.

Surprisingly not a single financial analyst on the airline’s earnings calls asks about this. They ask about capacity trends, fuel costs, pricing power, but not the primary driver of profit for the business — nor why the rest of the business does not make money.

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. I don’t think Choppeddick will like this arrticle Gary
    stay tuned for a rebuttal from “the expert”

  2. Analysts mainly only care about getting their earnings models right. They tend to delve little into whether the company is run effectively. That’s up to activist investors.

  3. I have learned from someone who used to work in IR the analyst calls are tightly controlled and analyst questions gets screened before and during the call.

    This is why you don’t see analysts asking the hard questions.

    There is a lot more that goes on behind the scenes than just analyst popping on the call and asking questions.

  4. Why would they? They are allowed to influence their clients to buy buy buy based on the total results. Only the inept invest in the Big 3.

  5. Good point. These analysts seem to be PRASM, CASM etc. junkies. Maybe the nitty gritty of loyalty programs is not the sandbox they like to play in?

  6. @ Gary — Once they have their massive devaluation, things will get better. Screwing customers will become their primary source of profit like another airline.

  7. It would be interesting to see this as a comparison with the rest of the Big 5 or so. Clearly mileage programs are big money makers but how much more or less for the other guys? Maybe analysts don’t ask because it’s the same story at least percentage wise for everyone else.

  8. Can Chase points be used to upgrade a purchased united economy seat to premium economy or business class?

  9. @Gary: “In the fall I walked through American Airlines financials to show that the airline is losing money flying but earning an overall profit thanks to selling frequent flyer miles to banks.”

    In other words, AA under new Leff-wing management would cease all flying and increase profits (by selling FF miles).

    This sounds like an accountant trying to analyze an economic issue.

    Maybe AA should serve beans instead of pretzels? Then the accountants can count them.

  10. Analysts don’t ask questions like that bc they are the quickest ticket to being labeled as a gadfly. It serves no purpose to their institutional clients who already know the basic economics and competitive forces of the industry. Those kind of questions also telegraph which way they are leaning before they publish, which undermines their value/impact. Someone asking “aren’t you really just a crappy company because of x” are telegraphing they are going to downgrade or cut estimates, and will just piss off their clients who happen to have large positions. If you are balanced, thorough and financially focused those holders won’t hold it against you if they disagree. But if you get on every call and act like Jim Acosta, your career will be very short.

  11. I once had a large client call me and ask “what’s with all the douchey questions today.”

  12. The point isn’t frequent flyer miles the point is losing money flying airplanes. If asking questions about a business’s core operation losing money labels an analyst a gadfly then…

  13. You do understand that the fact they fly to many places and have many convenient flights is one of the reasons they are able to make a profit selling miles. I’m not saying the airline flights should be a loss leader but they add value to the points so it isn’t fair, IMHO, in your oft repeated statement that they lost money flying and only made a profit based on sale of miles. I’m not disputing your math but there is a synergy between the flights and miles so they compliment each other and it isn’t appropriate to treat them like two totally different businesses.

    Next thing I know you will run an expose (and repeat it weekly for a year or more) that Caesars and MGM/Mirage lost money on their hotels and only made a profit because of gambling – DUH!

  14. I get what you mean. I’m just saying institutional investors know the FF program is part of the entire business model and the profits of the FF program are factored into their fare pricing. If they didn’t have any FF program the fares would be raised and they would be profitable flying planes. To ask the company why you lose money flying planes would be like asking hp why they lose money selling printers when they make all of their money selling ink. Why not just sell the ink? Institutions already know the answers to these questions. So to ask the company about it on their earnings call is kind of just trolling them.

  15. @Rob – “If they didn’t have any FF program the fares would be raised and they would be profitable flying planes” that’s fairly silly. If anything loyalty programs create product differentiation out of commodity seats and support higher fares. The existence of these programs is certainly not driving DOWN fares.

  16. @rob
    I understand your analogy and also the casino analogy but I do not think it applies here
    First, if they raise prices load factors would probably decline
    Also, I would guess that half the passengers if not more than that, do not belong or care about FF programs
    Lastly, the airline was not designed from the get go to make money on FF program only, while perhaps the casino model supports that more rationally
    Everybody that buys a printer needs ink, not everybody that flies cares about FF program
    Last, by making the FF program less and less valuable and important, at some point they will have to make money by flying

  17. So another words in spite of record high profitability and load factors they are barely scraping by?
    Something is missing from this analysis.
    They must be banking a huge deferred revenue asset somewhere on their balance sheet.
    And they must have pretty large free cash flow to support share buybacks.
    Bottom line it’s a cat and mouse game between managements and their customers to keep them coming back. Managements seem to be feeling pretty frisky lately about pressing their advantages as a result of consolidating the industry.
    Vegas has tried this too, look at how they are growing gambling revenues with such innovative products as 6/5 blackjack and triple zero roulette.
    This is all a byproduct of a debt driven business cycle fueled by central bankers trying to keep the music playing. What could possibly go wrong?

  18. Ya I mean it is an academic exercise of whether or not they would be profitable in the absence of the loyalty program and I’m not pretending to know the answer. My comment that they would be profitable is more of a common sense assumption that they would manage pricing and expenses differently to achieve profitability like any company expecting to continue to access capital markets would in such a scenario. But the fact that they are profitable with the FF program now suggests they could devise an alternate kind of rebating mechanism to tap into the same profits they achieve now.

  19. I think the ability to sell miles to banks, and build up a pot of deferred revenue, is the only reason they keep the FF programs alive.
    C-suite thinking being that they have essentially merged into as close to a monopolistic structure as the law will allow.
    But people have wised up that the value in airline points is not there, other than in harvesting sign up bonuses.
    Frequent flyer programs are like a vestigal digit waiting to be bred out of existence.
    Anyone remember S&H green stamps? An earlier loyalty program.

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