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.
[…] is optimistic about his airline’s performance improving: Boeing 737 MAX returns to the skies. But American’s marginal flights, grounded by the MAX, are money losers. Contract with mechanics will improve operational performance. It will also increase costs, and the […]