American Airlines Lost $114 Million—But For Once, They May Have Convinced Wall Street Their Plan Finally Makes Sense

American Airlines lost $114 million for the third quarter. Traditionally the summer period has traditionally been strong, but quarter-by-quarter variance is no longer as stark for U.S. airlines as it used to be.

They declared ‘record revenue’ for the third quarter. But total revenue was up just $44 million over last year, and was lower in real (inflation-adjusted) terms. Even in nominal dollars, passenger revenue was actually down year-over-year. The airline hasn’t fixed its financial underperformance, but results weren’t as bad as what the market was expecting, and stock started the day up as a result.

And – recognizing that the airline does have high costs – their shift to a premium focus where they can sell seats for more to customers willing to pay more for what they’re providing makes sense. We just have to see how serious they are about investing in product and service. There was one piece of good news here during the call.

Here are (6) takeaways from the American Airlines third quarter earnings call that you won’t read anywhere else.

1. American says they’re winning back corporate travel. The airline is declaring victory in its effort to win back corporate travel. They say corporate revenue was up 14% year-over-year, and will recover their historical share of this business by end of year.

   Previously American reported a $1.5 billion hit from losing corporate revenue. When asked during the call how much of that has come back and how much remains, CEO Robert Isom waived his hands, unwilling to answer the question. I take declaring non-specific victory as a desire to no longer talk about managed business travel as the fall guy for financial underperformance (after a year and a half they can no longer blame Vasu Raja) and the numbers suggest that fixing this doesn’t solve their finances as they’ve maintained.

   Taking together that passenger revenue is down while the airline says corporate revenue has recovered tells us that corporate revenue was never the revenue problem! And achieving any corporate revenue improvement hasn’t come cheap – it’s part of what’s driving the $363 million increase in personnel and $15 million in selling expenses.

2. Maybe winning back corporate travelers is even bad for revenue? Premium leisure yields are exceeding corporate yields now in some markets. J.P. Morgan’s Jamie Baker asked about the tradeoff between pursuing corporate travel and selling premium seats to leisure passengers. In other words, couldn’t the drive to bring back corporate share be hurting them?

   Given that they’re selling out many premium cabins now, there could be a real tradeoff, and considering that they aren’t growing revenue the thesis seems consistent with the data – selling seats at high sales expense to corporate travel isn’t just incremental revenue, it’s revenue they aren’t getting selling those same seats to other passengers.

   Steve Johnson reported that corporate travelers are AAdvantage members, cobrand cardholders, and move their leisure business to American when they get their corporate business. He flags business traveler being back to 80% of prepandemic levels as potential upside rather than the other possible conclusion that the benefit here is capped.

3. AAdvantage is where profits come from. Active AAdvantage accounts are up 7% year over year. They don’t define active. Spending on co-branded credit cards increased 9% year over year. American does have a better program than United (though lacks some of United’s partnership breadth) and a better program by a lot than Delta. I’d argue that if American were as strong on the coasts they’d be generating card spend at or exceeding competitors. Their route network just doesn’t align as well with cobrand spend power.

   American lost money even while earning close to a billion dollars in revenue from their credit card deals in the quarter, and that’s revenue American previously said came at a 53% margin. They lost money overall, but lost even more than these numbers suggest on their actual flying (and some of that flying revenue is customers redeeming miles, too). Their free cashflow and ability to pay down $38 billion in debt comes from Citibank, not ticket sales.

4. New Chief Commercial Officer solidies historical ties to Northwest. American appointed Nat Pieper, CEO of oneworld, as their new Chief Commerical Officer starting next month. Pieper joined oneworld in April of last year, and had served 5 years as Senior Vice President of Fleet, Finance and Alliances at Alaska and had been SVP of Alliances and SVP of Europe, Middle East and Africa at Delta before that. oneworld’s offices are already at American Airlines Dallas headquarters.

   Pieper spent 11 years in management at Northwest Airlines (Managing Director of FP&A and Vice President, Alliances). Many of American’s leaders come from CEO Robert Isom’s days at Northwest, and in some ways customers are wrong now to think of American Airlines as America West with a new name, as much as modern Northwest, which was also strongest in the interior of the country and less so on the coasts.

5. More premium business class suites are coming. American announced that they will keep and reconfigure Boeing 777-200s, so these will get the airline’s new business class product. That just confirms what I wrote was happening on September 17.

   It’s not surprising that they want to extend the life of their Boeing 777-200s rather than retiring and replacing them. I’ve been writing for years that I expected this. New planes are expensive, and the airline has been reticent to make significant capital expenditures. They’ve even deferred new widebody aircraft. Plus, airframe manufacturer order books are full.

   However, these seats are expensive! A retrofit program is still significant capital spending, and will mean improved product for customers. I’ve said that the quick wins American is making, fixing several customer-unfriendly policies, is good but that the biggest advances in product and lounges are the result of decisions made years ago.

   We’ll believe that they’re making real progress on premium when they do real spending on planes and lounges (including lounge refreshes) – and once their CEO starts selling to employees the vision for what the airline can be and the service they’re looking to provide.

6. They’re monetizing your upgrades. Paid premium load factor is now nearly 80%, up from mid-60s before the poandemic. That doesn’t mean people paying full flight – it includes paid buy ups for as little as $40. That’s why you can no longer get an upgrade, and status isn’t worth what it used to be. American’s paid premium load factor is still lower than Delta’s, where they report only about 13% of seats up front going to upgrades.

American’s inflight experience is improving with new champagne, coffee, and bedding – and Isom called out specifically amenity kits, though the amenity kits have actually gotten worse. Isom emphasized that while they’re improving the product, it’s not much more expensive. They’re putting Lavazza coffee onto planes, but they save money on the old coffee. It’s efficient. But that just underscores why didn’t they do it before?

And that’s an important point. The challenges the airline faced aren’t new. They didn’t start with a desire to sell tickets directly, rather than through agencies, or to get agents to sell ancillaries.

American’s problems are:

• Route network: they are weak on the coasts and haven’t rebuilt Chicago, which puts them at a spending disadvantage on their cobrand card. Cobrand card spend volume used to be #1 in the industry but is now #3. They made the mistake not understanding what was driving their profits, and pulled back in New York and Los Angeles. The JetBlue partnership was an amazing play to solve New York, and Alaska should have solidified them on the West Coast, but the former unraveled and the latter hasn’t reached its potential.
• LOPA: They haven’t had enough premium seats to sell, and that’s not just business and first class seats. There aren’t enough Main Cabin Extra extra legroom seats. Most passengers are in coach, and these are both buy up opportunities and opportunities to earn repeat business from loyal passengers. American was pulling premium seats out of planes from the time US Airways took over through 2018 and then with the retrofit of domestic cabins after that. This was intentional strategy.
• Products and policies: American’s business class was already in many ways equal to or better than Delta’s and United’s, outside of American’s inexplicably bad wine. They’re fixing some of the bad policies that were focused on their own internal efficiencies rather than the needs of customers. But this was only a piece of the problem.

  It is necessary to think in terms of (1) who are their customers? and (2) what do those customers need? How can the airline solve the problems these customers face?

  Rather than seeing customer behavior as an impediment to an efficient operation (that they never really achieved anyway, in part because of the drive to underinvest in things like tracking bags when they have the most mishandled bags in the industry, not wanting to spend a dollar they don’t have to. Going forward will customer and product win, or will the CFO win?

• Service: For many years, the airline viewed itself as competing with Spirit and Frontier and believing that what customers want is cheap fares – not to pay a premium for a better product. As CEO Isom put it,

  [T]oday there is a real drive within the industry and with the traveling public to want to have really at the end of the day low cost seats. And we’ve got to be cognizant of what’s out there in the marketplace and what people want to pay.

  The fastest growing airlines in the United States Spirit and Frontier. Most profitable airlines in the United States Spirit. We have to be cognizant of the marketplace and that real estate that’s how we make our money.

  We don’t want to make decisions that ultimately put us at a disadvantage, we’d never do that.

  And as a result employees were confused about the product they were supposed to deliver. Were they trying to be Spirit, or to offer a premium experience? The airline needs to sell and reinforce to its employees that they are in a fight for their lives, and that with new contracts in place higher profits benefit them directly, and so each person’s contributions matter in delivering fantastic experiences.

There’s not much that American Airlines can do to solve their problem at congested airports in the Northeast in one fell swoop at this point (unless they managed to straight up buy JetBlue out from under its new United partnership), though there’s actually a strategy that would let them compete aggressively and execute small wins here every day. But they’re adding premium seats – but not enough extra legroom seats – and they’re improving on product and policies, we just don’t know yet how much and how long this will sustain.

We’re at an important point for American. They could really turn themselves around. They don’t have long to do it. Overall, for the year, they’re still generating positive free cashflow so they can make the necessary investments. They just need to lay out the roadmap for what that looks like, and share with customers and employees the clear vision for where they’re going.

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