The world's largest airline will be half the size it was through the end of this year. But CEO Doug Parker thinks its flight network makes American uniquely poised to recover faster. The trajectory of the pandemic, of course, will determine if he's right.
American Airlines sees its strong flight network to Mexico, the Caribbean, and South America as key to the first stage of its recovery. These primarily leisure routes are rebounding more quickly than routes to Europe and Asia, American’s executives said during the company’s third-quarter 2020 earnings call.
Compared with rivals Delta Air Lines and United Airlines, American historically has had the strongest network to Latin America of the three. It now sees this strength as a differentiator, as fewer countries in the region have imposed quarantines than in Europe and Asia and their tourism-reliant economies are more eager to re-open. American expects flights to Latin America and the Caribbean to reach 70 percent of 2019’s levels soon, President Robert Isom told analysts during the call.
American isn’t alone in touting its strengths in a particular market. Delta last week pointed to its strong network in the U.S. Southeast and in the Mountain States as key to its rebound. United said its network centers around the largest business-travel markets in the country and therefore it is best poised to recover faster.
But two things all three of the large U.S. network carriers have in common are their renewed focus on the leisure traveler and shifting flights away from coastal hubs and toward what the industry calls mid-continent hubs: Denver and Houston for United; Atlanta and Salt Lake City for Delta; and Dallas/Ft. Worth and Charlotte, N.C., for American. The carrier plans to refocus it fourth-quarter flights on Dallas/Ft. Worth, Charlotte, the Sunbelt and Latin America and the Caribbean, and to mid-continent hubs that allow easy access to ski destinations, Isom added. It also is leaning on its partnerships with Alaska Airlines and JetBlue to provide more domestic routes. “We have a route network that will allow us to compete in leisure markets,” CEO Doug Parker said. “We have a big domestic network that other carriers can’t compete with.”
Despite the bold talk, American, like its peers, if facing a vastly diminished near-term future. It expects to offer only about half the number of its 2019 flights in the fourth quarter. Demand for international routes is expected to be more than 70 percent lower than last year. Bookings were down by 50 percent, an improvement over July’s 80 percent lower year-over-year comparison, but still sobering.
American said it is actively engaged with the U.K. government and its partner International Airlines Group to create a “travel corridor” between the U.S. and the U.K. It offered no timeline for when that may occur. The carrier also is expanding its Covid-19 testing program for flights to Hawaii, Costa Rica, and other Caribbean destinations.
Reductions in force
And it’s hard to escape the fact that American is now almost 40,000 employees smaller. The carrier furloughed 19,000 employees on Oct. 1, when the payroll support program provided through the CARES Act federal stimulus expired. About 20,000 employees already had taken voluntary separation packages or extended leaves of absence. American reduced its management ranks by 30 percent, and Parker said those employees will not be replaced, even if demand begins to recover.
Frontline employees — flight attendants, maintenance technicians, and gate agents, among them — furloughed on Oct. 1 could come back, if the federal government extends the payroll support program through March 31, as the airline industry and its unions have lobbied to achieve. Parker said even if demand remains half of 2019’s levels next March, returning those employees is important in order to “maintain critical infrastructure.” Without licensed and trained frontline employees, airlines will not be able to rebound quickly when demand begins to return, and he said this will impair the country’s economic recovery. “It’s not about getting money into airlines,” Parker said. “It’s about making sure critical infrastructure stays in place.”
Six months from now, Parker expects demand to have started to recover more meaningfully, and airlines will be on the cusp of their lucrative summer season. “I fear that absent an extension [of the payroll support program], you’ll see some of that infrastructure decline,” he said. The carrier already has cut service to several cities in the U.S. after the CARES Act expired.
American expects to realize $1 billion in costs savings due to the reductions in force. About $500 million of that came from trimming its management headcount, and a further $400 million came from the recent labor furloughs and voluntary separations.
Reductions in fleet
Before the pandemic, American was the largest airline in the world, operating more than 1,300 aircraft. It is significantly smaller now. The carrier has permanently retired 150 aircraft, and has removed several aircraft types — Boeing 757s and 767s, Airbus A330s, and MD-80s among them — from its fleet. Chief Revenue Officer Vasu Raja said the airline now is not flying about 200 aircraft in its fleet, including the ones that were permanently retired. The airline could retire 200 more aircraft permanently if demand does not return.
With the retirements, American has simplified its fleet to just four aircraft types: the Airbus A320-family, Boeing 737s, Boeing 787s, and Boeing 777s. The airline has negotiated with Boeing to defer its eight 2021 and 10 2022 737 Max deliveries to the second half of 2023 and the first quarter of 2024. The airline expects, however, to return its grounded 737 Max fleet to the air one month after the Federal Aviation Administration re-certifies the jet, expected later this year. The 737 Max was grounded worldwide last year in the wake of two fatal accidents, in Indonesia and Ethiopia.
The Third Quarter by the numbers
American reported a $2.4 billion net loss for the quarter on $3.2 billion in revenue, down 73 percent from last year. Its daily cash burn fell by $14 million from the second quarter but still is a staggering $44 million. American expects fourth-quarter daily cash burn to be about $25 million. The company, like its rivals, has not had much trouble raising cash and ended the quarter with $13.6 billion in total liquidity.
To get to breakeven, American will need to see load factors — an industry measurement on how full an aircraft is — to be between 65-70 percent. Currently, load factors are around 58 percent, compared with 87 percent in the third quarter of last year. A bright spot was cargo. American has operated more than 1,900 cargo-only flights, something it did not do before the pandemic struck, as most airline cargo is carried in the belly-holds of passenger aircraft. The cargo-only flights offset the reduction in belly-hold capacity, and revenues were essentially flat for the quarter, at $207 million. Passenger revenue, by contrast, fell by 77 percent compared with last year, from $11 billion to $2.5 billion.
“As horrific as all this is,” Parker said, referring to the pandemic’s effect on the airline industry, “it does provide an amazing opportunity to take the largest airline in the world and effectively shut it down and build it back.”
Photo credit: American Airlines reported another quarter of staggering losses. Miguel Angel Sanz / Unsplash