AA Experiences “Most Challenging Quarter” in Years; Reiterates Fares Must Increase

Jul 26, 2018

This post contains references to products from one or more of our advertisers. We may receive compensation when you click on links to those products. Terms apply to the offers listed on this page. For an explanation of our Advertising Policy, visit this page.

American Airlines revealed its quarterly earnings Thursday morning. While these earnings exceeded analyst expectations, its pre-tax earnings dropped nearly in half compared to the same period in 2017, due to increased fuel costs.

In his opening remarks on the investor earnings call, AA CEO Doug Parker said this had been the “most challenging quarter” since the merger with US Airways. This was in part due to the 3,000+ flight cancellations the airline experienced when its wholly-owned subsidiary PSA Airlines had to ground thousands if flights because of a computer system failure.

However, the main drag on the world’s largest airline’s earnings came from a spike in fuel costs. Parker noted that fuel cost increases alone cost the airline over $700 million in pre-tax earnings. The airline expects nearly $2 billion in higher fuel costs in 2018 than it originally forecast.

In the discussion targeted toward investors, American Airlines management reiterated that it believes the airline is capable of its goal of $5 billion in pre-tax net profit — even if it has earned a little over $1 billion in the first half of 2018. Airline management insists that the recent spike in fuel costs shouldn’t prevent hitting this goal.

Instead, management doubled down on its belief that the airline can generate this level of earnings even if Brent crude oil costs $75 per barrel. While cost reductions can help the airline marginally toward this goal, the primary driver of these increased earnings can only come from one source: higher airfares.

In questioning from analysts and press, airline management would only say that it was “optimistic” that the airline can “recover the increased cost of fuel” and it sees “revenue more in line with fuel cost increase.” So far, airline fares in the US have only risen marginally even as fuel prices have jumped. When pressed on the timing of this cost recovery, Parker would only say that fares would have gradual increases — which seems to be inconsistent with the airline’s goals of hitting its stated pre-tax profit levels.

Joint Ventures

American Airlines is still seeking to form joint ventures with Qantas, Aer Lingus and LATAM. While insisting that these joint ventures will have a “material benefit” for investors (i.e. significantly more profits), Parker insisted that these agreements would provide “fantastic benefits for travelers.” While JVs could provide some cost benefits, it’s likely that they will be more beneficial to shareholders than to consumers.

For the Qantas joint venture, the airline says that regulatory approval “could happen this year.” AA management believes regulators are simply caught up on Aer Lingus’ “low-cost, low-fare” structure, delaying the approval until an “early 2019 decision.” For LATAM, AA is waiting to hear from a “Chilean tribunal,” and expects to need to file a new application once this approval is granted as the original application is more than two years old. Still, AA believes it’ll get a sign-up by the “second half of 2019.”

Aircraft Deferrals

In its quarterly earnings release, American Airlines disclosed that it’s deferring 22 Airbus A321neo aircraft, lowering capital expenditures by $1.2 billion over the next three years (2019-2021). This deferral is in addition to the already-announced deferral of 40 Boeing 737 MAX aircraft.

Responding to questions from analysts, AA management pointed out that it’s growing capacity while using the same number of aircraft. How’s the airline doing that? By squeezing more seats into hundreds of aircraft, through “Project Oasis.”

Further Segmentation?

While it was generally overshadowed by the other news coming out of the earnings call, AA management casually referred to “further cabin segmentation” as a way to help the airline’s bottom line. It’s hard to imagine how much more segmentation American Airlines could pull off. The airline already has seven different cabin segments: Basic Economy, Main Cabin, Main Cabin Extra, Premium Economy, domestic first class, Flagship Business Class and Flagship First Class. It’s hard to imagine what else the airline could do — but it seems management is hard at work considering the options.

Delta SkyMiles® Platinum American Express Card

Earn 90,000 bonus miles and 10,000 Medallion® Qualification Miles (MQMs) after you spend $3,000 in purchases on your new card in the first three months of card membership. Offer ends 11/10/2021.

With Status Boost™, earn 10,000 Medallion Qualification Miles (MQMs) after you spend $25,000 in purchases on your Card in a calendar year, up to two times per year getting you closer to Medallion Status. Earn 3X Miles on Delta purchases and purchases made directly with hotels, 2X Miles at restaurants and at U.S. supermarkets and earn 1X Mile on all other eligible purchases. Terms Apply.

Apply Now
More Things to Know
  • Limited Time Offer: Earn 90,000 Bonus Miles and 10,000 Medallion® Qualification Miles (MQMs) after you spend $3,000 in purchases on your new Card in your first 3 months. Offer expires 11/10/2021.
  • Earn up to 20,000 Medallion® Qualification Miles (MQMs) with Status Boost® per year. After you spend $25,000 in purchases on your Card in a calendar year, you can earn 10,000 MQMs two times per year, getting you closer to Medallion® Status. MQMs are used to determine Medallion® Status and are different than miles you earn toward flights.
  • Earn 3X Miles on Delta purchases and purchases made directly with hotels.
  • Earn 2X Miles at restaurants worldwide, including takeout and delivery and at U.S. supermarkets.
  • Earn 1X Miles on all other eligible purchases.
  • Receive a Domestic Main Cabin round-trip companion certificate each year upon renewal of your Card. *Payment of the government imposed taxes and fees of no more than $75 for roundtrip domestic flights (for itineraries with up to four flight segments) is required. Baggage charges and other restrictions apply. See terms and conditions for details.
  • Enjoy your first checked bag free on Delta flights.
  • Fee Credit for Global Entry or TSA Pre✓®.
  • Enjoy an exclusive rate of $39 per person per visit to enter the Delta Sky Club® for you and up to two guests when traveling on a Delta flight.
  • No Foreign Transaction Fees.
  • $250 Annual Fee.
  • Terms Apply.
  • See Rates & Fees
Regular APR
15.74%-24.74% Variable
Annual Fee
Balance Transfer Fee
Recommended Credit
Terms and restrictions apply. See rates & fees.

Editorial Disclaimer: Opinions expressed here are the author’s alone, not those of any bank, credit card issuer, airlines or hotel chain, and have not been reviewed, approved or otherwise endorsed by any of these entities.

Disclaimer: The responses below are not provided or commissioned by the bank advertiser. Responses have not been reviewed, approved or otherwise endorsed by the bank advertiser. It is not the bank advertiser’s responsibility to ensure all posts and/or questions are answered.