American Airlines has had a rough year. But on its third-quarter earnings call, top executives made a compelling argument that they've turned things around. Are they right? Or was it just spin?
American Airlines in 2019 grounded one of its newest jets for months, lost a key South American airline partner to a top competitor, sued its mechanics union over an alleged illegal labor action, and struggled with operational reliability. Yet, speaking Thursday on the carrier’s third-quarter earnings call, American’s top executives were chipper.
And why not? Despite all the drama, American reported solid profits in the summer quarter, including net income of $425 million, up 26 percent, year-over year. The airline’s pre-tax margin was 4.7 percent, slightly more than the same period in 2018.
That’s not Delta Air Lines money — America’s most profitable global network carrier made $1.5 billion in net profit in the most recent quarter — but it’s solid for a company under siege for most of the summer, with some asking whether CEO Doug Parker and President Robert Isom could lose their jobs by October.
“Nice to hear the renewed vigor,” JP Morgan analyst Jamie Baker, one of the industry’s most influential analysts, told the executives. Another analyst, Daniel McKenzie of Buckingham Research Group, headlined a note on Thursday by saying “The Price is Right for this “Fixer-Upper.” He set a price target of $42, more than $13 more than the stock price Thursday afternoon.
On the call, executives broke down each of the problems plaguing American and sought to explain how they either had fixed them or why they did not matter as much as some observers thought.
Here were the key issues.
American’s biggest problem for much of this year has been a labor dispute with its mechanics union. American in May filed a lawsuit against the union, called the TWU-IAM Association, accusing some of its members of intentionally finding fault with aircraft so American would cancel flights.
American won a temporary restraining order in June, but according to executives, the work slowdown continued into the summer. A federal judge issued permanent injunction in August, however, and since then American’s performance has improved, executives said Thursday.
The airline has been reaching out to customers to apologize, asking them to return to American. “We simply will not allow our customers and team members to experience another period like this past summer again,” Parker said Thursday.
Still, the underlying labor issue persists. Six years after US Airways and American merged, the mechanics are not working under a combined contract. Mechanics have said they want a new deal that protects them against outsourcing and increases their wages. American has said it’s offering an industry-leading contract but needs flexibility to compete on costs with other airlines.
The National Mediation Board is helping the sides negotiate. Parker declined to comment on the talks, saying he promised mediators he would keep the discussions private. But he suggested he’s optimistic the sides will reach a deal. His sentiments, further, mirrored Chief Financial Officer Derek Kerr’s emphasis on prioritizing labor issues in September at Skift Global Forum in New York City.
Overall On-Time Performance
The labor dispute was big problem earlier this year, but wasn’t the only factor in American’s decreased reliability.
At least one of the airline’s regional partners, flying as American Eagle, struggled with on-time performance, while American had maintenance and other reliability challenges with some aircraft. The airline has had trouble with baggage handling, Isom said, pledging to improve.
“We continue to strengthen our operations with ongoing enhancements, including retiring older aircraft, simplifying our fleet and schedule, and fortifying our maintenance and airport resources,” Isom told investors.
American said reliability improved in September, with Isom saying the carrier’s on-time arrival rate last month was seventh best in its history and best since November 2017. October also has been strong, Isom said.
Reliability is so important to American, Isom said, that if an “unforeseen event” occurred in 2020 that threatened on-time performance, American would cut flights rather than run a shoddy operation.
“We don’t believe that will be required, but we also know it’s a commitment we need to make to ensure that we restore operational excellence,” he said.
American has been unable to fly its 24 Max jets since March, forcing it to cut capacity. In the third quarter alone, American canceled 9,475 flights because of the Max grounding.
American is now optimistic it can resume flying its Max jets by mid-January, assuming Boeing hits its target for U.S. regulatory approval.
If that happens, Isom said, American would begin operations with five aircraft, each flying about four segments per day. Two weeks later, American would add 12 more aircraft, and two weeks after that, it would add the remaining seven airplanes.
Next year, American expects to take delivery of 26 more Max aircraft, though it does not know when they would be delivered.
The airline continues to discuss compensation with Boeing, Chief Financial Officer Derek Kerr said, adding he expects the grounding will cost American $540 million in lost pre-tax income for 2019.
The talks with Boeing have produced no “clarity” so far, Parker said, but he said he’s not worried.
“We feel highly confident that the losses that American Airlines have incurred won’t be incurred by American shareholders but will be incurred by the Boeing shareholders,” Parker said.
Delta in late September poached American’s top partner in Latin America, Latam Airlines. American’s executives were caught unawares, as Delta announced it was spending more than $2 billion on the tie-up, including an equity investment.
American rejiggered its executive ranks after the announcement, promoting Vasu Raja to oversee alliances, while another executive announced he would leave the company.
American executives reiterated on Thursday they retain the dominant position among U.S. carriers in Latin America. And they said they will continue to add flights to compete with the Delta-Latam partnership as American will no longer be able to rely on LATAM to shuttle American’s passengers from Santiago, Chile, Lima, Peru, and Buenos Aires, Argentina, to smaller markets in South America.
“The great news is that our network, by far, best in South America,” Isom said.
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Photo credit: American Airlines jets on the ground at Dallas/Fort Worth International Airport. American had a rough summer, operationally. Patrick T. Fallon / Bloomberg