Why the Grounding of the 737 MAX Has Helped – Not Hurt – American Airlines

After the grounding of the MAX there was certainly a period of time where American was hurt. They were moving already-booked passengers onto a condensed set of flights, and so they weren’t able to sell higher-priced last minute tickets. I might believe that their financial performance was harmed in the second quarter.

However American didn’t just lop off all of the flying they had been doing with the Boeing 737 MAX. Some flights that had been operated by MAX aircraft simply were operated by Boeing 737-800s instead. They preserved their best, most profitable flying and largely cut what they believed to be their most marginal flights.

And American’s most marginal flights are clearly money-losers. Their operating margin from flying airplanes (passengers and cargo) was just 1% for the quarter. (Most of their profit is attributable to selling miles to Citibank and Barclays.) While some of their routes were profitable, much of it wasn’t — they’re doing unprofitable flying even with the MAX grounded, we can assume most of the flights they would have operated if the MAX were in service would also have been unprofitable.

To be sure, American has aircraft expense for the grounded MAXs. By not operating the planes they’re saving money on fuel and crew. And with 300 Boeing 737s in the air, grounding 24 means, roughly, losing the bottom 7% worst performing flights.

Moreover a 1% margin from flying also tells us that if the Dallas Fort-Worth, Charlotte and Washington National hubs were profitable (as American executives have frequently said) that likely means that several of their other hubs were not profitable – such as Miami (due to weakness in Latin America), Los Angeles (a hyper-competitive market), Chicago O’Hare (despite seeing improvements during the quarter) and Philadelphia (an airline should be making money on its transatlantic flying during the summer).

While American’s claims against Boeing will likely be settled amicably, the airline has a hard case to make that Boeing ought to reimburse them for any lost profits when it’s more likely that the grounding of the MAX simply averted losses.

I asked American whether they disagree with this analysis and if so where I’m off the mark. Despite initially responding that they’d look into it, and being given a week to do so, they did not provide any reason for doubt. I will update this post if they respond.

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 »

More articles by Gary Leff »

Pingbacks

Comments

  1. I understand the point you are trying to make but this is a stretch. A route that they currently fly an older 757 on could very well be much more profitable on a MAX. The assumption that they stopped flying the least profitable routes when they took the MAXs out of service I also don’t think is the reality.

  2. Look dude, the plane is a design flaw in that the engines are to big for the wings. Now, the software is supposed to compensate for that flaw. This why it isn’t an easy fix. If they just scrap the plane and design it correctly, like it should have been done the first time around, then you have a quality product. This is what happens when you take short cuts!
    So the fact that Boeing is trying to shove this fix down our throats and claims it is safe by fixing the software, It is just BS!

    So, NO, I am not flying on the MAX and nor shouldn’t anyone else! Unless __________
    You fill in the blank. I will give u that much.

  3. “Moreover a 1% margin from flying also tells us that if the Dallas Fort-Worth, Chicago O’Hare and Washington National hubs were profitable“.

    Do you mean Charlotte or ORD? You listed ORD as “not profitable” as well, but nothing on CLT.

  4. I would also add that the grounding has suppressed capacity growth, resulting in higher unit revenue and hence higher margins for everybody.

  5. Why does this accurate synopsis read so hauntingly like Amtrak?

    The media, public, and even the politico class, actually believe the Pravda propaganda how profitable the Northeast Corridor is, despite the fact that Amtrak’s own code of Omertà accounting does not capitalize infrastructure expenses. If that happened, the Northeast Corridor would be in the toilet. Even as a federal monopoly, why has it been so pathetically tolerated that Amtrak abuses the entire concept of GAAP (Generally Acceptable Accounting Principles) by overtly cost shifting what is clearly one;y incurred by the Northeast Corridor?

    Apparently, Amtrak and American should huddle together to figure out their responses. Like Amtrak, American has no standing against Boeing, given its inability to meet and service passenger demands. Sad, how the route of the Astro Jet used to be tip top!

  6. You forgot to mention JFK slot sitting. Some marginal routes, some routes not coming back (Seattle). But the runway renovation gave American an excuse to cut routes and hold onto its slots.

    Aircraft expense (any lease or finance payments for non operating aircraft will likely be paid by Boeing)

    Also, southwest not having the Max likely hurts their capacity more and southwest is likely cutting marginal routes and not entering into capacity/market share fights. Southwest competitive hubs (ord/dfw/lax) likely have less competitive pressure than they otherwise would.

  7. JB San Diego were you also that person who was afraid when Electricity came into the house also?

    Unless __________ What? there is a 2nd coming of God?

    Can not wait to see sit on a plane and find out they switched the metal at the last second for a MAX . First and last time you will be on an airline when they deplane you because you are too scared to fly.

  8. I have made the same point for Norwegian. I think the grounding of the MAX is helping airlines that were struggling financially. In Norwegian’s case, they were cutting back their footprint/stopped their route expansion and so not having the MAX may have helped them avoid cost (planes, fuel, staff, landing rights, etc.). And for Norwegian and all other airlines that have the the MAX but perhaps don’t want as many new planes anymore, they will enter the negotiations with leverage. They could negotiate cost down, they could say “our pax don’t want to fly the MAX so we don’t want it anymore, they could say they are owed a huge make-good for all the lost pax or routes, etc. etc. I am pretty sure American (and Southwest and Norwegian and all other large MAX users) are all lawyerd up to reap max (pun intended) benefit.

  9. There are so many ways the financial impact could be rationalized. Based on this analysis and on an analysis over the historical performance of all airlines in history..,..we should just shut the industry down, because most of the flying is financially marginal at best and never provides enough return relative to the capital risk. Maybe AA should be prepared to write a check to Boeing with a big thank you card and flowers.

Leave a Reply

Your email address will not be published.