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…
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:
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?
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 AA.com 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?