American Airlines has flown more than its competitors during the pandemic, and it’s paying off
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The Fort Worth, Texas-based carrier’s passenger service lagged competitors both operationally and onboard. Issues ranged from catering mishaps to complaints over its decision to add seats to hundreds of Airbus A321 and Boeing 737-800 jets, reducing space for flyers in the name of efficiency.
J.P. Morgan analyst Jamie Baker called out this fall from grace in July 2018. During a quarterly earnings call, he suggested to American management that the airline’s lagging performance behind Delta Air Lines and a then-newly aggressive United Airlines had created a new industry “construct” with American “inevitably” in last place.
The coronavirus pandemic turned that playbook upside down in 2020. Faced with the worst crisis in airline history, American cut less of its schedule and did so at a slower pace than either Delta or United in March. But by April, it had decided to fly a more robust schedule for the upcoming summer, providing connectivity across the country that presumed “some recovery in demand,” as American vice president of network planning Brian Znotins put it.
Soon, American’s hubs in Charlotte (CLT) and Dallas/Fort Worth (DFW) were hopping once again. So much so that DFW was the busiest airport in the U.S. in May. There were even traveler complaints about crowded flights despite the airline never promising to block middle seats — even in the early days of the pandemic.
Then, in a clear signal that America was ready to move again, more and more people kept buying plane tickets and flights filled up. So many people were buying seats that the carrier lifted what caps it had bookings even as competitors extended seat blocking measures saying they were needed to assure customers.
Delta and United’s deep schedule cuts, it should be noted, were what most expected from airlines during the crisis. It’s basic economics: cut supply, or seats on flights, until it matches demand, in this case the number of people flying.
American’s strategy “absolutely worked in June… our revenue per [available seat miles] in June was six times what it was in April,” airline CEO Doug Parker said during a second quarter earnings call on July 23. “That would not have been the case if we flew only 20% of our capacity.”
Looking at just the “Big 3” carriers — Delta and United are the others — passenger revenue at American was at least 61% higher than its two competitors in the second quarter, their respective financial statements show. At the same time, the airline flew at least 61% more capacity than either Delta and United.
“American did what made sense for it,” Cowen analyst Helane Becker told TPG. “They were seeing strong demand in May and June so they added capacity to handle that demand… the strategy worked fine.”
America Airlines reports a $2.1B loss before special items in 2Q20.
— Edward Russell (@byerussell) July 23, 2020
Every airline did what they needed to do to get through a very tough quarter. While Delta and United flew less than American, Delta was able to command higher fares than its competitors and United drove strong cargo revenue growth across its broad global network, minimizing their respective losses.
But one thing is clear, American took an aggressive approach to the crisis and it produced results. It zigged when competitors zagged and remained the largest of the “Big 3” when the standard playbook called for deep cuts.
The strategy “taught us a lot about how our customer base is evolving and those are all things we’re putting into practice,” American chief revenue officer Vasu Raja said on July 23. “It was a one-time thing we did knowing that June and July — if there were discretionary leisure travelers — [was] the time to get them.”
Looking ahead, U.S. airlines are preparing for a tough fall and winter. The number of people buying tickets for future trips fell at the end June as COVID-19 infections rose across parts of the South and West, and new travel restrictions began spreading across the country.
“We were on a really nice clip thru the July 4 weekend… but as the narrative changed and the headlines changed, I think every airline has seen softness in bookings for future travel,” Alaska Airlines CEO Brad Tilden said on July 23. The Seattle-based carrier is now adjusting its map as it prepares to be at least 20% smaller next summer than in 2019.
Every carrier is scaling back schedules for the rest of the summer and into the fall. American plans to fly about 40% of what it flew a year ago during the three months ending in September, and Southwest anticipates being a quarter smaller at the end of the year than it was in 2019.
However in a report on July 23, Becker at Cowen said she still thinks there is “too much capacity in the market” and that more schedule cuts are likely.
“Next year we will be a materially smaller carrier, and an extremely smaller carrier internationally,” Raja said Thursday. And Parker added that what the airline did in May and June is “not going to make a big difference six months from now.”
Most airlines expect a two- to three-year recovery from COVID-19, dependent on when a vaccine or effective treatment becomes widely available.
Travelers have some idea what a smaller American will look like. There will be less international flying until at least 2021, with 19 routes gone from its map. As part of these reductions, the carrier has retired or put in long-term storage four aircraft types used largely on international flights: the Airbus A330-200 and A330-300, and the Boeing 757 and 767.
In addition, American has partnered with Alaska and JetBlue Airways to boost its competitive position along the West Coast and in the Northeast. These tie-ups will allow American to focus on more long-haul international flying from coastal gateways, including Alaska’s Seattle (SEA) hub — something Raja called “our Seattle hub” in reference to Alaska’s operation — and JetBlue’s New York John F. Kennedy (JFK) hub. It has also suggested that it could cede some shorter routes to its new partners.
In 2021, American plans to add new service from Seattle to both Bangalore (BLR) in India and Shanghai Pudong (PVG) in China; and from JFK to Athens (ATH), Rio de Janeiro (GIG) and Tel Aviv (TLV). As for shifting routes to its partners, Raja said that American plans “slot moves” with JetBlue at New York area airports, where it will stop flying regional jets with 50 seats.
American’s new partnerships will give travelers and frequent flyers more alternatives once the crisis subsides. The Alaska partnership already includes reciprocal mileage earning on both airlines’ flights, as well as the ability to earn AAdvantage elite credits on Alaska flights. Similar reciprocal benefits are expected under the JetBlue pact, though no firm details have been revealed.
However, American still faces challenges like its excessive $40 billion in debt and aircraft leases at the end of June. The amount is at least $10 billion more than at its competitors Delta and United, and could limit its ability to make future investments in aircraft and onboard product improvements.
“The current environment is more unpredictable and more volatile than anything we ever could have imagined,” Parker and American president Robert Isom said in a joint letter to staff on July 23. “But we know adversity creates opportunity, and we remain confident we will emerge from this crisis in a strong competitive position.”
Featured image by Zach Griff/The Points Guy.
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