American Airlines Is Profiting More From Blended Travel Than It Did From Road Warriors

The rise in blended travel is reshaping American Airlines. Travelers who combine work and leisure into one trip are not only the fastest growing segment of the carrier’s business, but they are also driving changes to everything from how it sells flights to its loyalty program and big investment in premium seats.

The Fort Worth, Texas-based carrier’s dramatic introduction of new so-called New Distribution Capability direct booking channels earlier this year is, in part, a response to blended travelers’ demand for more control and flexibility over their own travel. Those same travelers are driving a significant increase in membership to American’s loyalty program, AAdvantage, and new sign ups to its lucrative co-branded credit card agreements. In the first quarter, the airline recorded 60 percent more new AAdvantage accounts than four years earlier.

“The more that we can give [customers] a contemporary retailing experience, like what they get [with] anything else they buy, the more value,” American Chief Commercial Officer Vasu Raja said during a first-quarter earnings call Thursday.

Blended travel — when travelers tack on vacation to their business trips — has taken about 15 percentage points of share, for a total of about 35 percent of all bookings at American, from pure corporate travel, he said. And that shift is significantly more lucrative for the airline: “The blended yields we see coming in are 8-10 percent higher than the very business trips they replace.” Yields are essentially a proxy for airfares.

Not everyone is happy with American’s shift to the New Distribution Capability or more direct sales. Travel agencies not using those American channels have said they are seeing significantly higher fares for the same flights on the airline than before the switch that occurred in April. However, that could be chalked up to the as-yet incomplete rollout of the new New Distribution Capability system, or travel agencies failing to adopt to the new technology required.

Raja said Thursday that more “selling and servicing tools” will be available to agents through the summer.

But, in the end, American may care less and less what travel agents say. According to Raja, only 10 percent of revenue came through agency channels in the first quarter — a share that is shrinking as more travelers book directly, particularly through American’s website and app.

“The marketplace has changed,” American CEO Robert Isom said of corporate travel.

International Leads

International longhaul travel is in the midst of the surge in pent-up demand that American and other U.S. airlines saw domestically last year. As such, American is focused on recovering its longhaul network in the second quarter. Capacity in longhaul markets, for example to London, São Paulo, or Tokyo will increase 82 percent compared to last year; overall system capacity will be up 3.5-5.5 percent year-over-year.

“This summer in longhaul is going to be a seasonally, and probably historically, strong longhaul summer,” Raja said.

Competitors Delta Air Lines and United Airlines have similarly reported record demand for longhaul travel this summer. All three major U.S. carriers are deploying as much capacity as they can on flights to Asia, Europe, and South America. In the second quarter, Delta and United will fly 43 percent and 40 percent more longhaul capacity, respectively, than they did last year, according to Diio by Cirium schedules. American? Just 9.5 percent more.

American’s longhaul growth is so much mote muted because one critical fact: It has fewer of the planes that fly long routes than it did four years ago. The airline is down roughly 45 widebody aircraft due to the combination of its pandemic-era decision to retire its Airbus A330s and Boeing 767s early, and Boeing’s issues delivering new 787s on time. Delta retired fewer widebody planes during the pandemic and has benefitted from only having Airbus models on order; United did not retire any planes during the crisis.

“The longhaul business … it’s the most volatile part of a relatively volatile business,” Raja said. “It’s the most capital-intensive part of a capital-intensive business and it can be very complex operationally too. So what we found is that actually by being a very focused operator, a simplified fleet, things like that, that enables us to go and respond to demand a lot more appropriately.”

American has outstanding firm orders for only 33 787s leaving it likely with fewer widebody jets for years to come. The airline also has an order for 50 long-range Airbus A321XLR jets that it could use to launch new, thinner routes to Europe or South America — think Philadelphia to Berlin, or Miami to Recife, Brazil — during the second half of the decade.

In addition, Raja repeated that American is focused on flying travelers to partners’ hubs where they can connect on to other international destinations rather than serving every possible point with its own aircraft. He cited increased frequencies to London Heathrow, a hub for partner British Airways, from American’s mega Charlotte and Dallas-Fort Worth hubs as an example.

Constructive Demand

Overall travel demand, including domestic, is “strong” but also “constructive” heading into the summer, American Chief Financial Officer Devon May said Thursday. That was a more tepid endorsement of the sentiment for future travel than other U.S. airline executives. However, for American that is likely more a measure of the fact that domestic travel demand — it’s largest business segment — is simply flat compared to last year’s torrid growth.

Take total unit revenues, which the airline measures by the amount of revenue generate by each seat mile it flies, are forecast to fall on a year-over-year basis for the first time in more than a year in the second quarter. American anticipates a 2-4 percent decline in total unit revenues compared to 2019.

And domestic revenues will likely be helped by the numerous constraints on U.S. air travel this summer. The shortage of captains, particularly at regional airlines, has roughly 150 aircraft in American’s regional fleet still parked. And air traffic control staffing issues in New York mean American and partner JetBlue Airways will fly fewer flights — but more seats according to Raja — through JFK, LaGuardia, and Newark airports this summer than last year.

And the Numbers

American reported a $33 million net profit excluding special items in the first quarter. That equals a 3.7 percent operating margin, which was significantly better than United’s negative 0.4 percent margin and slightly behind Delta’s 4.1 percent margin. Revenues jumped 37 percent year-over-year to $12.2 billion, total unit revenues increased 25.4 percent, and unit costs excluding fuel decreased 1.4 percent.

The cost savings are significant given the airline industry’s rapid run up in expenses since Covid. American, however, does not expect the declines to continue. Citing an expected new — and costly — contract with pilots, May said unit costs excluding fuel will increase 3.5-5.5 percent compared to 2019 in the second quarter.

Looking ahead, American anticipates another profit in the second quarter with a forecasted 11-13 percent operating margin.