American Airlines expects to take a pre-tax earnings hit of $350 million this year because it cannot fly its two dozen Boeing 737 Max 8 airplanes — and that’s assuming the jets return to service by mid-August, as American and its competitors hope.
At first glance, this seems like an oversize number. Counting regional jets, American has more than 1,500 airplanes, and the Max accounts for a relatively small percentage of its capacity. American has an average of 6,700 daily flights, and in the second quarter, it’s canceling 115 each day through August 19 because it cannot fly the Max.
But Derek Kerr, American’s chief financial officer, said the math is more complicated.
The financial impact is disproportionate, as most of the revenue from the cancellations is lost while the vast majority of the costs remain in place,” Kerr told analysts Friday on American’s first quarter earnings call.
For the first quarter, American reported net profit of $185 million, up from last year’s $159 million. Its passenger revenue per available seat mile, which measures how much money an airline makes for each seat flown one mile, increased 0.6 percent.
The Max received most of the attention at American, but it was not the airline’s only first-quarter hiccup. In March, American grounded 14 of its Boeing 737-800 aircraft when it discovered shoddy work by an airline contractor on the plane’s interiors, including overhead bins. For that problem, American canceled 940 flights.
American also reminded analysts fuel prices have been increasing. The airline said it expects its fuel bill to increase $650 million for the year, compared to what it planned for three months ago.
Bringing the Max Back
American has canceled all Max flights through through August 19, about two more weeks than Southwest Airlines.
Like Southwest, the airline is optimistic the FAA could allow the planes to fly slightly earlier. If it does, American will use the airplanes as spares, substituting them when other flights are delayed or canceled. They would help with operational reliability during the busy summer travel season.
American has extended its Max cancellations already — at first it only dropped Max flights for a few weeks — but the airline is now confident about August, executives said.
“We said to the FAA and Boeing, we need like 95 percent certainty that what we will be selling is what we are flying,” CEO Doug Parker said. “We believe August 19 is a date that give us a lot of certainty and that gives our customers certainty.”
Eventually, American and other airlines likely will seek compensation from Boeing. But Parker said nothing is imminent.
“At the appropriate time we will talk about what this has done to American,” Parker said. “Boeing is a good and longtime partner, and we’ll work through that privately.”
Changes in Growth Plan
With fewer aircraft, American will not grow much this year. In the second quarter, it will increase capacity by just 0.7 percent, while for the full year it will grow by 2.5 percent.
Still, American is not changing plans to grow what it calls its most profitable hub — Dallas/Fort Worth International Airport. American soon will add 15 gates there, enough to add about 100 daily departures.
American already has started selling tickets on 23 new routes. It is also increasing frequency on existing routes.
Normally, it takes time for new routes to make money. But American is so strong in Dallas/Fort Worth — it will have roughly 900 daily departures soon — that the airline expects most of the new flights will be fast winners.
“The early results are encouraging as both bookings and yields are coming in at rates higher than the system average,” American President Robert Isom told analysts.