Operationally, American had a rough second quarter, with the Max grounding and a labor dispute. But the financial results show the carrier performed fine. Will it last?
With American Airlines unsure when the Boeing 737 Max will return, the airline will retain some older aircraft for longer than expected, executives said Thursday on their second quarter earnings call.
American is making money, but there’s no doubt the extended Max grounding is having an affect on its business. The airline, which said the Max grounding will reduce pre-tax earnings by $400 million this year, up $50 million from a previous estimate, shrunk capacity slightly in the second quarter, even though demand for domestic travel remains strong. In the second quarter alone, the Max groundings cost the company about $175 million in lost pre-tax income, it said.
In comments Thursday, American executives said they’re confident the Max can return by Nov. 2, as they have currently scheduled. But American’s team has made similar comments before — in the first quarter earnings call, CEO Doug Parker said he was confident American would have it back by mid-August — only to push back the plan.
It is now looking increasingly likely airlines won’t fly the aircraft until next year. Southwest on Thursday canceled all Max flights through the beginning of January, becoming the first U.S. carrier to drop flights so far out.
Even if American is hopeful the plane will fly earlier, the airline appears to be making contingency plans for a longer grounding. American said it intends to “extend the operating life” of some Airbus A320s, Boeing 737s, and Boeing 757s so it can continue to fly the schedule it wants later this year. Some of these planes have been flying for 20 years or longer.
American didn’t say exactly how many more aircraft it would keep, but the carrier is considerably short of airplanes. When the Federal Aviation Administration grounded Max in March, American had 24, but its most recent fleet plans shows the airline had expected to have 40 by year-end.
American has other aircraft challenges. Like many other airlines, American said Thursday that it’s not receiving as many Airbus A320neos from Airbus as expected while the manufacturer wrestles with production issues. JetBlue said Tuesday it only will take six Airbus A321neo jets this year, down from 13, because of delays.
“There were five to 10 that just got delayed,” American Chief Financial Officer Derek Kerr said. “They just pushed the whole schedule out a bit.”
American still expected to retire its MD-80 fleet in early September and its Embraer E190 airplanes by next year.
To keep flying as many aircraft as possible, American is also slowing work to add seats on its Boeing 737-800s and Airbus A321s. American has been shrinking legroom on the airplanes so it can reduce unit costs, though some customers have complained about cramped conditions on retrofitted aircraft.
American faced other challenges in the second quarter, executives said.
Top among them was fallout from a labor dispute with the aircraft’s unionized mechanics, executives said. In a lawsuit filed in May, American accused members of the union of intentionally slowing down the airline by pulling an unusual number of aircraft from service. In a 23-day period ending June 14, American told the court it was forced to cancel 722 flights, blaming union actions.
American won a temporary restraining order from a federal judge in June, but the airline has said it still has more aircraft out of service than it should. American said it expects a final decision from the judge about the work slowdown within the next two weeks. The union has denied it has engaged in a coordinated effort.
“The slowdown has significantly impacted the company’s operation and caused a high number of flight cancellations and delays in the second quarter,” President Robert Isom said, adding American is optimistic it can reach a new labor agreement with pilots that will make both sides happy.
Even with the challenges, American turned a hefty second quarter profit, reporting net income of $662 million on record total revenues of $12 billion. The airline’s pre-tax margin was 7.4 percent, up from 6.5 percent a year earlier.
American said its total revenue per available seat mile, or TRASM, a metric measuring how much an airline makes for each seat flown one mile, increased 3.5 percent-year-over-year. American said the quarter’s TRASM constituted a new record.
Still, there are some indications all is not as rosy as it seems. Executives admitted the airline’s TRASM was boosted by the Max cancellations, since American probably booked nearly as much revenue as it otherwise would have, but canceled so many flights that it flew substantially fewer total miles than expected.
Flying less was a slight problem for another reason, executives said. American’s capacity dropped 0.8 percent year-over-year because the airline had fewer airplanes, and the carrier lost some share to rivals.
Don Casey, senior vice president for revenue management, said much of the share shift happened just after the groundings, in March and April.
“When we ended up grounding the Max, there was a lot of schedule uncertainty as to how long this was going to last and how we we were going to move aircraft around to try to cover this,” Casey said. “During that period, starting mid-March through about the third week in April, we did see close-in bookings, particularly for corporate travel, lag. We definitely lost share. We definitely saw some book-away during the time period to our competitors. That did bounce back by the time we got through April.”
Photo credit: American Airlines will retire fewer jets than expected because it is short aircraft. Pictured is one of the airline's Boeing 737-800s. Anthony Dolce / Flickr