American Airlines Says Its Turnaround Is Working — Why Wall Street Isn’t Buying It Yet

American Airlines had strong revenue growth during the second quarter, $16.7 billion, up 16.3% year-over-year, which is a bit faster than rivals. Their $71 million profit was meager but still exceeded expectations. They’re expected to lose money in the third quarter and break even overall for the year at the midpoint of their guidance. American had better answers this quarter than they have in the past, but analysts also seemed to have a lot less patience. So just as the airline is making progress, management may be running out of runway to execute the plan. The airline is making a lot of progress, getting better in a lot of ways. There’s also much more to be done. And in this capital-intensive, heavily regulated and heavily unionized industry that is very vulnerable to oil price shocks and overall macroeconomic conditions, the levers that can be pulled are limited, and change takes a significant amount of time. This is a sprawling, 130,000 employee company. That’s difficult to manage. Analysts Are Getting Frustrated With American’s Financial Underperformance Given the financial results of American Airlines over the last eight years, there’s not a lot of patience for management to get this right. So during the second quarter earnings call we got two questions along the lines of shouldn’t they just scale back? Duane Pfennigwerth of Evercore ISI asked, “Why isn’t the low-margin producer cutting capacity? Why isn’t there a greater sense of urgency?” David Vernon of Bernstein asked, “Is there anything that you can see as you’re looking at the network that if you were to shape the network differently, maybe not grow it, maybe trim it in some areas, that would lead to some better financial outcomes?” … “Does it make sense to be as big as you are? Could you maybe trim the network, free up some capital to further accelerate some of the balance sheet repair?” And Jamie Baker of J.P. Morgan asked “whether it’s possible you might be adding too much premium capacity” into widebodies, because American’s “share of some of the strongest local international markets is a little bit lighter than competitors.” Robert Isom’s answer on capacity was that fuel moved quickly, schedule planning cycles are months at a time, and the schedule they published had been expected to be profitable. And Chief Commercial Officer Nat Pieper’s answer on premium capacity was that some markets demand more than others, so there will be planes configured for those markets that fly other less premium-routes, but that overall it makes sense not just for share of corporate business but also for the credit card. Pieper sounded far more confident in his remarks, with more energy, than in the past. But these questions overall represented a frustration with American’s performance. David Vernon made this explicit: “We’re hearing the story that the problem is improving. You’re making the investments in the premiums and the LOPAs and the clubs and the loyalty programs… but we’re still seeing such a huge gap in financial performance.” And so did Jamie Baker, pointing out that Robert Isom has been claiming competitors like United were just living off lower labor costs, and once they got new contracts that would change, but United is still making money and United isn’t. “I’m not seeing the sort of relative margin improvement at American Airlines that perhaps you were anticipating.” The Airline Finally Has A Case That Things Are Working The funny thing is that it’s early and American’s management, which hasn’t performed well on these calls, actually seemed to have better answers than they usually have in the past and they simply sounded more upbeat and confident. Their argument is: The strategy is working because revenue, premium demand, corporate share and loyalty are all improving. The revenue initiatives are still early. American’s largest upside is revenue production rather than cutting capacity. They have structurally high costs, and will only make money with revenue gains. The strategy isn’t ‘working’ yet because American isn’t making money. These things necessarily take time. Delta has been at it, in some sense, for 20 years. United has been executing on its strategy to varying degrees for about eight. And American is 18 months in. American can’t turn back the clock either (1) to fix former CEO Doug Parker’s mistakes borrowing money to fund share buybacks and cutting the product, or (2) to implement the changes we’re seeing now back in 2022 when Robert Isom was first elevated from President to CEO. However, American’s premium cabin revenue growth was better than United’s and Delta’s. In fact, United and Delta both saw a reversal of the trend of premium growing faster than economy during the second quarter. American saw a 13.4% increase in premium year-over-year versus 8.8% for main cabin United’s premium passenger revenue per seat mile was up 11.6% – basically the same as coach (11.5%) While Delta reported premium unit revenue “up high single digits” but main cabin unit revenue “up double digits” so coach was growing at a faster rate. To be sure, that’s catch up growth at American. But we’re seeing catch up growth at American! And I loved hearing more of the results of rebanking their Dallas hub – it’s led to a nearly 25% reduction in misconnecting passengers across their system misconnects. That’s great for customer service, for cost (misconnects are operationally expensive) and for revenue (consumer willingness to spend for reliability). Not Everything Is Solid Yet Some of the data that’s being marshalled in favor of success at the airline is a bit misleading. AAdvantage enrollments are up 32%. Of course they are! But that’s because joining the program is no longer about creating a long-term relationship with American, or earning points. It’s simply passengers ‘registering for free wifi.’ Nat Pieper said, though, that “Our biggest enrollment growth occurred in New York City, Chicago, and Los Angeles, and we saw substantial international growth as well.” New York, Chicago and LA matter so that’s great news – international matters a lot less (even though American does have card partnerships abroad). Co-brand credit card spending is up 8%. Michael Linenberg of Deutsche Bank pointed out that “it does lag your peers, which have been in the double-digit territory.” United said card spend grew 14% year-over-year and new cobrand accounts were up 22%. Delta reported “double digit” growth. Pieper argued that it’s still early in the Citi deal. I’d add that structurally American is weaker than Delta and United in the big spending markets like New York and Los Angeles (although American will get more gates in Los Angeles in 2028, so they can turn that around) and San Francisco (where United has a hub). And while it’s early, American hasn’t yet done many of the things they’ll need to in order to win – more widebody aircraft (they’re shopping for planes but no analyst asked about this) more extra legroom coach seats better employee morale and customer service focus (which means more leadership from the top) a better New York strategy (though Chief Commercial Officer Nat Pieper says they’ve reconfigured schedules to better serve the New York market rather than bringing passengers to New York) and also the Bay Area. Will Management Get More Time To Turn Things Around? American says the financial proof that their strategy is working was about to arrive before fuel costs exploded. But that’s not really fair, since (1) most of their revenue growth just tracks United, Delta and Southwest, and (2) they say themselves much of the revenue growth is recouping higher fuel expense. There really is a lag in these investments, many of the investments are merely in the category of ‘announced’ (like many of the lounges, retrofits of planes to get new business class suites, Starlink wifi) or where we’re just starting to see them (like more first class seats in smaller Airbus narrowbody planes), and they haven’t really sold the new vision to employees yet in a way that leads to a different feeling for customers. In the end it seems like high fuel costs are a headwind that may shorten the time management has to execute on premium investments and have that bare fruit. But it would be a big mistake to cut those short. And the fact that they’re not expecting to lose money this year (and that they’re refinancing big debt payments that come due next year) mean the balance sheet can handle it. Topics on this page