American Airlines hosted its quarterly investor conference call this morning and had a few interesting updates. As the title indicates, financial metrics are still negative, but the pace of the decline has slowed. The second derivative is now working in the airline’s favor.
American Airlines: The Results
American earned a pre-tax profit of $1.5 bn in the second quarter and a net profit of about $1 bn after adjusting for taxes (Note: The taxes are book takes; they’re not actually going to have to pay cash out of their pockets.). The company saw continued benefit from low fuel prices, even as RASM (revenue per available seat mile, or how much the airline receives to fly one seat one mile) declined 6% and guidance is for a 4.5% – 6.5% decline in the third quarter. But, unlike previous quarterly conference calls, the theme of this one was improvement, not declines. Things may actually be getting better, and they weren’t too bad to begin with.
The Competitive Landscape
Last year at this time, competition was at a peak and other airlines were growing like weeds in Dallas, American Airlines’ most profitable hub. Southwest was still adding flights out of Love Field and Spirit was putting in planes anywhere it could, undercutting AA’s high prices. American took what one analyst called the “nuclear option” and chose to match prices with its low-cost competitors. The action put a significant crimp in American’s profits, but it also slowed the growth of Spirit significantly, who no longer had a competitive advantage on price. There are now plenty more bargains for consumers in Dallas.
This year, the environment is a little different. Competitors are not growing as quickly and pricing should begin to firm, albeit at permanently lower levels. Some of that is due to two years of growth at Love Field. Some of it is due to a slowdown in Spirit. And American reaffirmed its plans to have a Basic Economy* product by the end of the year, allowing them to compete apples-to-apples with no-frills airlines. Management said it would be disappointed if they did not generate an additional $1 bn in revenue from segmentation. Nice work if you can get it.
It’s been a long time since anyone has had anything nice to say about the Latin American markets. A combination of weak currency and lousy business environment has wreaked havoc on the region’s profitability. But, with currency having reversed and the market seemingly at its bottom, American actually had good things to say about the region, particularly its largest market, Brazil. The Olympics should be another benefit. Normally, the Olympics would detract from profitability, since business travelers would avoid flying to the region. As the airline noted, though, there is almost no business travel left. Increased leisure traffic can only be a positive.
But We’ll Wait on Those Airplanes…
Things may be getting better, but they’re not yet “good.” American is deferring the delivery of its A350s that had been ordered by the old US Airways. The move will save the airline about $1 bn and push the deliveries back 2-4 years.
The Bottom Line
Even with unit revenues declining precipitously, the airline still managed to do quite well in the second quarter, traditionally one of its strongest. The question remains, though, of whether the economy has truly bottomed or if this quarter is simply offering some false hope.
*Management actually used the term “Basic Economy.” I have no idea if they will actually use the same name that Delta does for their product.