American Airlines: What We Learned on the Conference Call

american airlines

Every quarter, airlines hold a conference call to announce the prior quarter’s financial results and discuss their plans for the future. Yesterday was American Airlines’ turn. American’s call was heavier on the financials and lighter on the frequent flyer program than United’s was, but it had some interesting tidbits about the company’s gameplan.

Fares Continue to Drop…

Photo Credit Creative Commons
Photo Credit Creative Commons

One of the measures that airlines and investors use to measure performance is RASM, or “revenue per available seat mile.” The term tells us how many cents the airline generates by flying one seat one mile, and is a combination of yield (which measures pricing but only for seats with a butt in them, ignoring seats that fly empty) and load factor, the percentage of seats that do have butts in them (not taking into account how much people paid for those seats). In the fourth quarter of 2015, RASM declined 5.8%, on a combination of lower fares and lower prices. The company also announced that it expects fares to continue to drop year-over-year for most, if not all of 2016, because of a few factors. An economic slowdown is one, but there are others particular to the carrier:

Thanks to Latin America…

It’s no secret that Latin America’s economy is in the doldrums, but American put some numbers around the depression:

  • Tremendous RASM declines in the region, including -40% in Brazil and -59% in Venezuela. Much of that was currency related, the rest economic weakness
  • Revenue in Brazil, which had composed 6% of revenue in 2014, now generates only 2% of overall revenue. Ouch.
  • On the plus side, there has not been much impact to bookings from the Zika Virus. Yet.

It could be worse. Look at the one year stock chart of low-cost Brazilian competitor GOL:

Down 89% in a year, and it would be worse except for a rumor yesterday that Delta wants to acquire the company
Down 89% in a year, and it would be worse except for a rumor yesterday that Delta wants to acquire the company; Source: Google Finance

And Hub Weakness

It’s been a bad year to be an American Airlines captive hub. Miami was crushed by a lack of connecting traffic to/from Latin America. Dallas was hobbled by increased competition from Spirit. Only Charlotte maintained its high level of profitability. On the plus side, it won’t be quite as bad for AA this year. Spirit’s capacity growth in Dallas will be its lowest in five quarters, Southwest has pretty much filled its slots at Love Field and Latin America can only go to zero (I think.).

An Early Credit Card Renewal?

Screen Shot 2016-01-30 at 2.56.21 PM

Investors are an impatient group. For the second quarter in a row, management was asked about its “fuel retention rate,” or what percentage of the savings from the decline in fuel prices flowed through to the bottom line. The answer for AA has been “not much.” But it’s probably not a relevant measure, either. AA just gave its employees a raise, while others will be doing so in 2016/17. AA had above-average competition in its hubs. And AA has not yet renewed its credit card deal. It’s that last point that caught my interest.

Credit card deals are worth hundreds of millions of dollars to airlines, who sell miles to the banks. Delta got a huge increase from American Express in 2014, and I’m assuming that United got a similar increase from Chase. American’s deal with Citibank is not renewable for about two years, but I wouldn’t be surprised if we saw the companies address the issue early. Mileage deals are becoming increasingly valuable to both parties, so Citibank might want to lock up American, rather than let them look around for another partner who will give a better deal. Costco’s defection from American Express has had lingering ramifications.

Is “Basic Economy” Going to be Basic or More?

In responding to a question about American’s implementation of its Basic Economy equivalent, or fares that will be stripped of most benefits, American Airlines president Scott Kirby responded:

We will have more to come as we get better details around what the attributes of the product will be. Exact timing [is uncertain but will be] sometime in the second half of the year. But it is something we are excited about and I think it’s not transformative, but it’s at least as significant as the change to ancillary revenues was in the 2008 timeframe. So we are quite excited about the move forward on those initiatives but it will be later this year before the rollout and it will be 2017 before you see meaningful impact on revenues.

He later added that:

to go to something like basic economy takes a complete change to the distribution system…when you go to you need to be offered a basic economy, regular economy, premium economy or first-class fare. We are just not set up to sell that way, so it’s more about distribution probably than anything else.

Interesting. So it involves a redesign of distribution and will have an impact similar to ancillary revenues? It’s hard to reconcile that with “not transformative.” Furthermore, this management team dates back to America West, which shook up the industry in 2002 by significantly lowering last-minute fares and eliminating the Saturday night stay. This is a very smart management team and understands the importance of low fares. So what do they have in mind with their version of Basic Economy? Is it going to be a discounter-matching mechanism or a complete change to the fare structure? Could we see an option for Basic Economy on every flight, instead of just those that compete with the ultra low-cost carriers?



  1. Susan DeBruhl says

    Very interesting little note in there about the Charlotte airport being able to ‘maintain its high level of profitability’. As a former US flyer, that makes perfect sense to me because CLT is a very busy little airport! Its profitability could possibly be the reason why there have also been no fare sales to or from CLT while they have been so many from BOS, NY, and MIA.

    There have been so many comments tossed around in the flying community about Charlotte being phased out… but I hardly see how American could allow that to happen. Personally, I think it is a much more convenient hub for European travel than Philadelphia (I may be a bit biased). I would like to see American invest a little more in helping CLT to continue to grow.

  2. Mike Friedman says

    I’ve heard those rumors. I don’t understand them, other than to say that they’re based on a simplistic understanding of what makes a hub valuable. Lots of business travel to/from the city? Check. Serves a purpose in the network (in this case, facilitating domestic connections)? Check. Miami will continue to handle Latin America, but CLT isn’t going anywhere.

  3. Counsellor says

    But have fares actually been dropping? Or is revenue down due to decreasing load?

    I had expected fares to drop at least somewhat over last year at the same time due to lower fuel costs, but I myself haven’t seen a drop in fares. Is it just me, or have fares in fact not decreased significantly year-over-year?

  4. Mike Friedman says

    It’s actually both. Load factors are down, but average fares are down, as well. A lot of it depends on geography, though. If you live in Dallas, fares went down a lot because of competition. In Houston, fares declined because of lower oil prices causing less demand. Charlotte? Not so much.

    Lower oil prices do lead to lower fares, just not in the way most people think. Airlines don’t automatically lower prices because their costs went down. They’d rather keep the difference as profit. But lower oil does mean that airlines add capacity to the system. A flight that wasn’t profitable at $80 per barrel may be very profitable at $40. Added supply means more seats on a particular route, which means lower prices. It’s the additional capacity that drives prices down.

  5. Susan DeBruhl says

    Fares from Charlotte, and the majority of its small regional feeder airports, have, if anything, increased over the last eight months. Having flown the market for twenty plus years, this is not a trend I would like to see continue. I cannot even remember when (or if) there was ever an AA sale to/from Charlotte.

  6. Mike Friedman says

    I’ve got my OAG guide around here somewhere which gives me their exact market share at Charlotte, but I think we both know that that number is going to be awfully high. Charlotte is one of the priciest hubs in the country, since there isn’t even a secondary airline to offset American (e.g., Chicago has two airlines, most west coast cities have at least two, etc.).

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