American likes to tout its strengths from more flights and a broader domestic network when it talks about the recovery. But with higher costs than competitors, it will continue to lag its peers even as some forecast profits in the coming months.
American Airlines epitomizes the U.S. travel recovery. The airline has come back faster than anyone expected a year ago carrying more passengers and generating more revenue than any other in the second quarter, and is on track to do so again in the months ahead.
Nearly 85 percent of the seats on American’s more than 426,000 domestic flights were filled in the June quarter — better than at both Delta Air Lines and United Airlines. That’s a lot of full flights to places like Fort Myers with its sunny beaches and Missoula with its mountain vistas. Travelers took advantage of the carrier’s robust flight schedule and travel options for their — mostly — leisure trips.
But despite its lead, the largest U.S. carrier has an achilles heel: costs. American has more debt to service and generally higher unit costs, including labor agreements, than its main competitors, Delta and United.
This adversely affects its profitability, both before the crisis and today. This structural difference — and one the airline is actively working to close — is the main reason why analysts believe American did not join Delta and United in forecasting profits excluding the benefits of federal aid in the September quarter.
“We expect our losses too narrow even more in the third quarter as we march back to sustained profitability,” American CEO Doug Parker said during the airline’s second quarter earnings call on Thursday. Executives would not go so far as to promise revenues that exceed 2019 levels, let alone profitability, in 2022 when asked by analysts.
Despite lagging on profitability, the overall the picture is good. Net bookings, once an indicator of the precipitous drop off in air travel, are back to 2019 levels with managers in Fort Worth, Texas, focused on raising fares rather than simply filling seats. Staffing issues that forced American to prune 1 percent of its July schedule have been resolved in time for the final burst in summer leisure travel in August. And business travelers are coming back with revenues down roughly 55 percent in June compared to to two years ago.
In addition, American sees “encouraging” results from its new partnerships with Alaska Airlines and JetBlue Airways despite only launching earlier this year, said chief revenue officer Vasu Raja. The carrier plans to continue deepening the relationships, which American hopes to “shore up” its network along the West Coast and in the Northeast just in time for the return of the lucrative business travel segment. However, executives noted that the federal antitrust officials continue to watch its JetBlue pact for its affect on consumers.
“We are encouraged with what we are seeing with American,” MKM Partners Analyst Conor Cunningham said of American’s outlook. Asked about profitability, he said the trend is good overall with the timeline being “pulled forward” by the recovery and a recognition at the airline that it needs to boost incremental revenues and reduce expenses.
American’s plan to accelerate deleveraging its debt-soaked balance sheet is one area of excitement for Cunningham. The carrier aims to repay roughly $15 billion by 2025, up from a previous target of repaying $8-10 billion. This will both reduce overall expenses as well as improve its credit metrics. American had $37.2 billion in outstanding long-term debt, excluding current maturities, at the end of June.
Business Travel Rebound
“We now expect a full business travel recovery in 2022,” American President Robert Isom said on Thursday. While he later clarified that he was referring to just domestic business travel, the full return of this lucrative segment is a big news for the travel industry.
Airlines rely on corporate road warriors, who often buy more expensive tickets, for an outsize portion of their revenues. And many in the hospitality industry, from hotels to convention centers and other related sectors, need these travelers as part of their own recoveries.
International business travel — really international travel in general — is forecast to return at a slower pace than domestic. This is largely due to significant disparities in vaccination rates and campaigns around the world that, when added to the myriad of border restrictions, has created a complicated checkerboard of travel rules. In addition, the U.S. maintains its restrictions on many arriving foreigners, further slowing the segment’s recovery.
But a domestic-first business recovery — as with leisure travel — is nothing to laugh at. American plans to resume more of its business-focused schedules in Chicago, New York and Washington, D.C., this fall, said Raja. That means fewer flights to pandemic vacation hotspots like Jackson Hole and the return of, for example, the hourly New York-Washington shuttle. In addition, it allows American to more fully take advantage of its expanded schedules in Boston and New York with JetBlue, as well as the new concourse at Washington’s Reagan National Airport that opened in April.
American and its competitors differ on one key point. The airline expects business travelers to “materially” return in the October timeframe, or around four weeks after most schools reopen and people return to offices. Delta and United both anticipate an inflection after Labor Day in September.
Another point missing from American’s outlook was any possible impact from the rapidly spreading Covid-19 Delta variant. On Wednesday, United CEO Scott Kirby said he did not expect it to slow the recovery but noted that the carrier does not anticipate a linear return to pre-crisis flying.
Network, Not Product
Network remains American’s big selling point in the recovery. While its larger schedule and multiple hubs is beneficial to many travelers, especially those in cities where the carrier dominates, it is a different track than either Delta or United.
Delta has long been considered the premier carrier in the U.S., for example offering personal inflight entertainment screens — even investing in developing said screens — aboard most of its aircraft and an otherwise more elevated passenger experience. United has lagged Delta but, with its massive 270-aircraft order in June, outlined plans to catch up with its peer by installing in-seat screens on domestic aircraft and making other improvements.
“We feel really good about where we’re at,” said Isom in response to product questions. “I like what our product does for customers [and] I like what it means from a sustainability perspective … It’s lighter. It’s more efficient. And ultimately, it can keep up to speed with what customers want.”
In addition, he touted new gates in Charlotte and Dallas-Fort Worth that will allow it to add even more flights at its two busiest — and prior to the pandemic most profitable — hubs. This should further improve travel options for U.S. flyers.
What Isom and other executives did not address is general traveler dislike of some of American’s recent aircraft cabin changes, particularly the addition of seats to its Airbus A321 and Boeing 737 jets. Nor did he comment on what could become a competitive disadvantage vis-a-vis Delta and United as the latter adds screens to its domestic fleet.
And The Numbers
American eked out a net profit of $19 million including $1.3 billion in federal payroll support in the second quarter. Without that aid, the carrier lost $1.1 billion. Revenues decreased 37 percent to $7.5 billion and expenses 35 percent to $7 billion compared to 2019. Total unit revenues, a measure of how much an airline makes per passenger mile flown, was down 17 percent to 13.7 cents with executives adding that they will no longer cite crisis metrics like cash burn amid the continuing recovery.
Looking ahead, American anticipates revenues down roughly 20 percent compared to 2019 in the third quarter. Capacity is forecast down 15-20 percent versus two years ago.
And in 2022, while not guaranteeing a profit, the airline expects unit costs to be below and capacity to be at or above 2019 levels, said Isom.
“The recovery is happening,” he added.
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Photo credit: American expects U.S. domestic business travel to recovery in 2022. Edward Russell / Skift