American Airlines Had a Rough Quarter, but Points to 2024 Tailwinds

American Airlines wants investors to see the forest and not the trees when it comes to earnings.

The Fort Worth, Texas-based carrier lagged its peers in the third quarter with an operating profit margin, excluding special items, of just 5.4%. That came despite record revenues of $13.5 billion and an operating profit, excluding special items, of $728 million. With those items, which were related to one-time payments to pilots under the new contract they ratified in August, American’s operating loss was $223 million.

Not exactly the dandy quarter Delta Air Lines and United Airlines had with double-digit profit margins.

That’s why American’s executives, when asked about the headwinds the airline faced, emphasized the many “tailwinds” ahead.

“We do have some headwinds on salaries and benefits,” American Chief Financial Officer Devon May said during the airline’s third-quarter earnings call on Thursday. For one, the airline continues to negotiate a new contract with its flight attendants that it forecasts could add roughly 1 percentage point to non-fuel unit costs next year.

“We have some real nice tailwinds as well into 2024,” May continued.

Those tailwinds include significant growth opportunities in both premium and loyalty revenues. Resuming flights to many higher-yield small- and medium-sized markets where competitors Delta and United have shrunk. International expansion. Returning corporate travelers. And the list goes on.

Travel Outlook

American, recall, is the largest domestic U.S. airline. It will fly roughly a fifth of all domestic capacity in the country this year, according to Cirium Diio schedules. Demand in the market, however, is described as “steady” by American and its competitors. And by steady, they mean up slightly from 2019 levels.

A steady domestic market where there is a lot of new capacity coming online is why discounters like Frontier Airlines and Spirit Airlines forecast losses in the third quarter. And, that was one reason American’s profits lagged its peers during the quarter. American’s total domestic revenues fell 1.9% year-over-year to $8.6 billion.

International demand, on the other hand, “continues to drive revenue growth,” American CEO Robert Isom said Thursday. International revenues increased 5.4% year-over-year to $3.8 billion in the third quarter. This is a segment that American is eager to expand but has been limited by aircraft delivery delays at both Airbus (the A321XLR) and Boeing (787s). American retired more long-haul aircraft — Airbus A330s, and Boeing 757s and 767s — during the pandemic than its competitors.

Now, those planes are arriving and American is planning growth. The airline will add a second route to Auckland, from Los Angeles, this winter, and several new destinations in Europe next summer. That expansion will help it capture more of that surging international demand, and better utilize its large, long-haul planes by finding routes for those aircraft to fly in both the winter and summer.

And managed business travel, which has been slow to come back from the pandemic, increased compared to 2022 in the third quarter, Isom said. He notably did not say by how much. Trips by travelers from these large corporates was hovering at around 80% of 2019 levels at most airlines in June.

Specific to the final quarter of the year, American forecasts a 5.5-7.5% year-over-year decrease in total unit revenues, or TRASM. The metric is a rough, but not exact, proxy for airfares. Travel demand around the Thanksgiving and year-end holidays is forecast to be “steady.”

Premium and Loyalty Promise

American executives were keen to emphasize the revenue — and profit — tailwinds they expect in the premium and loyalty segments. Premium revenues overall were up 6-7% year-over-year in the third quarter, and by 7% among AAdvantage loyalty program members.

The airline is making a big investment in expanding its premium offerings to capture more of these revenues. New business and premium economy seats — the latter being widely considered one of the most profitable cabins on an aircraft — will arrive with American’s first A321XLR next year and then be installed on its Boeing 777s and 787s. By American’s own count, premium seats across its fleet will increase 43% by 2026.

And, on the loyalty front, revenues increased nearly 23% year-over-year to $1.7 billion in the third quarter. However, American Chief Commercial Officer Vasu Raja was quick to highlight that that is roughly $400 million less than the “industry leader” — known to be Delta — earned despite AAdvantage being a larger program by number of members. This gap, he indicated, is something the airline plans to close.

“The real thing that we’re seeing is the opportunity in the quarters and years ahead,” Raja said of loyalty.