American Airlines has fallen behind its main U.S. rivals. Some of the operational issues are down to bad luck but Doug Parker clearly has a big task on his hands to turn things around.
When American Airlines Group Inc. exited bankruptcy in 2013, its new boss vowed to trounce rivals within a few years. These days, those competitors are delivering the beating.
American is underperforming Delta Air Lines Inc. and United Airlines Holdings Inc. on profit margins and on-time arrivals. Investors are punishing American’s stock, sending the shares to the biggest decline this year among U.S. transportation companies. And to add insult to injury, a plague of summertime flight cancellations has angered passengers and sullied American’s brand.
It’s far from the outcome Chief Executive Officer Doug Parker envisioned when, as head of US Airways, he engineered a merger with American in a New York bankruptcy court and took the reins of the combined company. While Delta and United reap the rewards of a decade of airline consolidation and greater pricing power, American’s declining performance has solidified its status as the industry laggard.
“I get the question, ‘At what point does the board say enough is enough and we need more drastic change?”’ said Jose Caiado, an analyst at Credit Suisse Group AG. “I get that question a lot these days.”
The board hasn’t shown any signs of displeasure, Caiado said. But with an 18% share drop this year, American now has a market value of $11.7 billion, or less than a third of Delta’s.
American’s adjusted net income has tumbled 44% since the US Airways merger closed almost six year ago, the only drop among the four biggest U.S. carriers, according to data compiled by Bloomberg. Looking ahead, American expects a pretax profit margin of as much as 7.5% this quarter, compared with a forecast of up to 16.5% at Delta and 12% at United.
Wall Street analysts are grasping to explain the lag.
Stifel Financial’s Joseph DeNardi questions the sense of urgency “to do anything, to make any significant changes.’’ Darryl Genovesi of Vertical Research Partners sees a lack of accountability. At Wolfe Research, Hunter Keay says there isn’t enough attention to detail, and praises the job done at United by American’s former president, Scott Kirby.
Customers, meanwhile, are reeling from operational snarls, worsened by the grounding of the Boeing Co. 737 Max and a labor standoff with mechanics and ground workers.
Exhibit A could be Bonni and David Lipton. They got a text from American around 1:50 a.m. on Aug. 23, telling them that their flight about six hours later had been canceled. A second text arrived soon after, saying they couldn’t be rebooked.
The couple wasn’t traveling alone. They had bought tickets for 28 people from Newark, New Jersey, to the Turks and Caicos Islands for a family celebration. American couldn’t rebook their flights that day — or any of the next three, which covered the entirety of their planned stay.
“This trip can never be recreated,” Bonni Lipton said. “It’s done. One and a half years of planning and all that money and all that excitement gone.”
Parker — who is paid only in company stock — said there is “absolute accountability’’ and “absolute urgency’’ to correct the shortcomings.
Improved flight reliability is a key goal. In fact, the carrier would be having one of its best years operationally but for two extraordinary hurdles, he said. One is the 737 Max’s grounding, which took 24 planes out of American’s fleet starting in March and forced the cancellation of more than 100 flights a day.
Compounding that was a slowdown by mechanics and baggage handlers. American secured a court injunction forcing the union to stop endorsing the effort and is seeking financial damages for 950 canceled flights and 280 delays of at least two hours.
“We will get all that behind us and all the work that the team has accomplished has us very confident we are well positioned to run the best airline American has ever run, to be competitive with any airline,’’ Parker said in his first interview since moving into American’s new company headquarters. “People want to be on a winning team.’’
The new corporate campus, with five glass-walled buildings near Dallas-Fort Worth International Airport, symbolizes the cultural change Parker has been pushing at an airline long known for its top-down hierarchy and strained labor relations.
Executives don’t have individual offices. Instead, their desks ring the top floor of a three-story atrium in one of the buildings. (American committed to spend at least $350 million to win local tax incentives, but the company hasn’t disclosed the project’s total price tag.)
Parker’s upbeat view has some support among analysts. American’s plan to beef up operations at its three most-profitable hubs — Dallas, Ronald Reagan Washington National and Charlotte, North Carolina — is a step in the right direction, said Savanthi Syth, an analyst at Raymond James. The plan also calls for wringing $1 billion from costs and boosting revenue by $3.2 billion from 2018 to 2021.
By one measure, American shares are a bargain. Based on the average 12-month price target of analysts, American has a potential return of more than 48% over the next year. That’s the most among U.S. airlines with a market value of at least $1 billion.
American “for sure is the ugliest house on the block and it’s a long-term fixer-upper,’’ Dan McKenzie, a Buckingham Research analyst, said in a July note to clients. “But the price is right.’’
The question is whether Parker, President Robert Isom and their team can pull off a turnaround.
American should go further and close at least one of its nine hubs to help tamp down expenses, said Credit Suisse’s Caiado and Genovesi of Vertical Research.
Costs for each seat flown a mile are already rising faster than at Delta or United, and that’s before any pay raises as American conducts labor talks with pilots, flight attendants and airport ground workers.
Even if American can curb cancellations, ease delays and rein in costs, two big challenges remain in the long term: debt and company culture.
American has $29.6 billion in long-term debt, according to data compiled by Bloomberg. That’s the most in the airline industry, and it makes the carrier more vulnerable than rivals to an economic downturn. And while American used the money to overhaul its fleet with 500 new jets, the more fuel-efficient planes haven’t produced as much in savings as analysts expected, Caiado said.
Parker has also emphasized improving morale to make it a competitive advantage, arguing that happier employees provide better customer service.
Yet some veteran employees say they see little evidence of real change six years after the merger with US Airways and the exit from bankruptcy.
“Admittedly, it’s a gargantuan task,’’ said Trice Johnson, a flight attendant for 35 years. “But before they keep talking about this wonderful change in culture, they might want to get down in the trenches a little more and see what’s actually going on.’’
©2019 Bloomberg L.P.
Photo credit: An American Airlines 737-800 approaching Ronald Reagan Washington National Airport. the company is lagging behind its rivals. airbus777 / Flickr