American Airlines has made a lot of excuses for its performance this year. It blames so many of its problems on a labor dispute and the grounding of the Boeing 737 Max. But perhaps there's something more here?
Skift Editor-at-Large Brian Sumers writes this column with a critical eye on the important global issues impacting the airline industry, from the middle seat of the last row in economy class to the boardrooms of the world's largest carriers.
When airline insiders gathered between 2012 and 2016, many asked a simple question: What’s wrong with United Airlines? They saw a company with so much potential, including hubs in the largest U.S. markets and an unbeatable Asian franchise, that repeatedly disappointed investors and customers.
But under new leadership, United has its mojo back. So the insiders have moved on, whispering (or sending me text messages) to ask about another U.S. airline. What, they ask, is the problem at American? Why is it underperforming peers and disappointing its best customers with late flights and often surly service? When will executives in Dallas/Fort Worth understand they’re dealing with a crisis?
This was the conventional wisdom before Thursday, when Delta Air Lines snatched a 20 percent share in American’s most important Latin American partner. American downplayed the move, saying its tie-up with Latam Airlines produces only $20 million in annual incremental revenue. But American had bigger plans for its relationship with Latam — the two airlines sought antitrust immunity in some markets— and it is remarkable South America’s top global airline will leave American’s fiefdom for Delta’s. The spin aside, this is bad news for American, which relies on South American routes for a significant share of its revenue.
Perhaps if Delta had made this move in a vacuum, others would have given American the benefit of the doubt. But it plays into a narrative that American has been unable to match Delta and United on a slew of commercial initiatives related to passenger experience, operations, and foreign partnerships.
Here’s the gist of the argument: As Delta and United improve, American management seem to be working from an old playbook, where air travel is a commodity, costs must remain low, and U.S. carriers stay away from foreign entanglements, such as investments in not-so-profitable yet strategically vital global airlines, like Latam, or in United’s case, Avianca.
It’s easy to guess why American is bucking trends. Before bringing American out of bankruptcy in late 2013, CEO Doug Parker and President Robert Isom, along with Scott Kirby, who now works at United, turned US Airways from one of the world’s worst-run airlines to one of the best. They had little need to upgrade the product or invest in far-flung carriers; they were just trying to keep the airline flying.
When they picked up American, they promised to change their ways. In some aspects they have, investing billions in the passenger experience and strengthening relations with some foreign partners, including Qantas. They even made a small investment in China Southern Airlines.
But they’ve been slow to respond to other emerging trends. And investors have noticed something isn’t right, pushing American’s stock price down by about 50 percent since January 2016. Even though American remains solidly profitable, there are whispers some investors may be pushing for a change in American’s executive leadership.
“It’s an airline that right now is going through some big problems,” said Jay Shabat, senior analyst at Skift Airline Weekly. “I definitely think there’s a chance Parker is going to lose his job and a new management team comes in.”
Maybe Delta’s tie-up with Latam will produce gigantic profits, or maybe it won’t. Regardless, it’s a major coup for Delta, long an also-ran in Latin America. With its more than $1.9 billion total investment, Delta should gain major scale in an important region, while it wounds one of its biggest competitors.
It’s another indication Delta is willing to rewrite the rules of the game. You name the topic, and Delta is moving the industry forward. “They are just strategically a cut above everybody else,” Shabat said. “Delta is just in a league of its own.”
The list is long. Delta has invested in the passenger experience, retaining relatively comfortable seats while adding personal televisions on most airplanes. It is growing in the most robust U.S. economies, including Seattle, Boston, Austin, Texas, Raleigh, and Durham, North Carolina, as it spends a fortune on its operation. And it’s eschewing airline alliances for equity investments in key airlines, such as Virgin Atlantic, Air France-KLM, Korean Air, and Aeromexico.
United has been making some similar moves, albeit more slowly. However, American remains much more cautious.
On passenger experience, American is cramming as many seats as it can in many of its airplanes, using what some detractors say are unusually cheap seats with limited padding. Moreover, American is removing personal televisions on short-haul airplanes that have it, saying they become obsolete within a few years.
In addition, unlike Delta, which is going where the money is, American is not interested in opening new hubs or focus cities, instead flying where it’s already strong. Fortifying its best hubs makes some sense, but American likely is losing customers in places that were once part of its sphere of influence, including Boston, Austin, and Raleigh. And don’t forget New York, a long-time American stronghold where the airline has pulled back.
Then there are the tie-ups with foreign airlines. American still has antitrust immunity with Qantas and British Airways, two iconic carriers. But in the past two years, American has lost two key partners in the Americas, first WestJet in Canada, and now Latam. In late 2017, WestJet, the Canadian airline, dropped its deal with American in favor of Delta.
In public forums, American’s executives repeatedly make excuses for their troubles. Asked last week at the Skift Global Forum when American will get its swagger back, Chief Financial Officer Derek Kerr said the airline will improve as soon as it reaches a contract with its mechanics union, which the airline has accused of intentionally delaying or canceling flights because of a labor dispute, and resumes flying its Boeing 737 Max aircraft.
“I don’t think there’s a long-term sustainable issue, because we are going to get a mechanics deal done, and the Max’s are going to go back in the air,” Kerr said. “I think eventually everything is going to be where it needs to be.”
It’s not clear this will solve American’s troubles. Some say American may need a fresh leadership, with a new CEO making swift changes. It’s also possible American may try to fill some top jobs with outsiders, perhaps adding a chief operating officer or chief commercial officer. Today, American has neither.
“I don’t think management at American understands how frustrating it is for their own employees when executives come out and say they have only two problems,” said Holly Hegeman, a long-term American watcher who writes PlaneBusiness, an industry newsletter. “It disturbs me to see the airline standing there saying, these are the two big problems, as though when these are taken care of, everything will be fine.”
Given its remarkable history and the breadth and scale of its operation — it’s by many metrics the world’s largest airline — American has the tools it needs to shake off its slump. But it would be nice to see a little more urgency from management.
Photo credit: American Airlines executives have been blaming the grounding of the Boeing 737 Max for some of their troubles. Pictured are American Max jets on the ground in Tulsa, Oklahoma. Patrick T. Fallon / Bloomberg