What We Learned From American Airlines Yesterday

american airlines

I’ve never heard someone who just made $1.5 billion sound as depressed as American Airlines (AAL) CEO Doug Parker did yesterday, but I guess that’s the airline business. Maybe it’s because the number was down from the $2 billion that they earned in the third quarter of 2015. Or maybe he looked at their costs for next year. Either way, there was a major focus on the financials, less so on strategy (and nothing on the frequent flyer program).

American Airlines: Ticket Prices Moving Up

american airlines
Trading airlines stocks could be hazardous to your wealth                                             Photo Credit: Yahoo Finance

Ticket prices are a function of two macro factors: How well is the economy doing and how much supply is out there. The rule of thumb, which is a very rough one, is that ticket prices will go up if GDP is greater than supply growth.

The third quarter saw the first significant deceleration in capacity, and it will likely continue into 2017. American Airlines is looking for 1% capacity growth next year, with domestic growth flat and international up 3.5%. More importantly for them, however, after two years of negative RASM (Revenue per Available Seat Mile; the figure measures how much AA gets to fly one seat one mile and combines ticket prices and load factors), it looks like Total RASM (which includes non-passenger revenue) will finally turn positive next year.

There are two odd calendar shifts in 2016, both of which have affected the fourth quarter. First, the Jewish Holidays moved from September to October, boosting traffic in the former and hurting it in the latter. Likewise, the end of the Christmas holiday period moves into January (New Year’s Day is a Sunday.), meaning that December will lose a bit of leisure traffic and January will pick it up. Despite the calendar, the fourth quarter is shaping up to be better than the third year-over-year.

But So Do Costs…

Great, we’ve got the good news out of the way. The bad news for the airline (but good news for employees, and probably passengers) is that costs are moving up, as American distributed hefty raises and profit sharing to its crew. Given what the workers have been through over the past couple of decades, with numerous pay cuts and bankruptcies, it’s hard to argue they didn’t deserve it.

The income statement is going to feel the pain, though. Mainline costs are going to be up 8-10% per seat mile in the fourth quarter and in the 4% range for all of 2017. And that number doesn’t include fuel. The only consolation to American is that the pain that they are feeling this year will be felt by its competitors next year. Might as well get it out of the way.

Oh, One Other Thing…

In a sporting event, they say that you know that a referee did a good job if you didn’t notice them. One can say the same thing about airline mergers, where slow and steady wins the race. There were virtually no glitches this year, as an experienced management team folded the two airlines together. Now that the company is on a single operating system, it should be easier to move crew around and adjust for schedule “difficulties.” The airline’s operating performance should improve next year.

Leave a Reply

Your email address will not be published. Required fields are marked *