AA Still Upselling Flyers From Basic Economy, Shares Its Most Profitable Hubs

Jan 25, 2019

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American Airlines released its full-year 2018 earnings Thursday morning. As CEO Doug Parker put it in his earnings call introduction, it was a “challenging year for [the airline] financially.” That’s putting it nicely. AA reported a $1.9 billion pre-tax profit — down 45% from $3.4 billion in pre-tax profit in 2017.

While the introduction of premium economy awards led the AA headlines for mileage collectors today, there were quite a few fascinating tidbits that were shared as part of the earnings call between American Airlines management, stock analysts and media.

Here’s a quick rundown of what we learned:

Aircraft and cabin investments: Over the past few years, American Airlines has invested heavily in new aircraft, renovated lounges and refreshed cabins. Not all of these investments are good for passengers, though. That investment is continuing in 2019 with $3 billion in aircraft purchases plus $1.7 billion in aircraft retrofits — such as Wi-Fi and premium economy installations — new lounges and other non-aircraft purchases.

Fuel expenses weighed on AA: CEO Doug Parker noted that the airline’s fuel expenses were $2.2 billion higher in 2018 than if fuel prices were the same as in 2017. And the airline was only able to raise fares by $800 million to offset rising prices, leading to a $1.4 billion reduction in profit from rising fuel costs.

For comparison, Delta also saw fuel costs rise by $2.2 billion, but reported that “the company overcame approximately 90% of the increase in fuel expenses through higher fares.”

DFW Flagship Lounge: In the earnings call in October 2018, AA management said that the DFW Flagship Lounge would open in the first quarter of 2019. In Thursday’s call, it was noted that the DFW Flagship Lounge would open in the second quarter (April-June) instead.

Credit card successes: AA noted it had record numbers of co-branded credit card acquisitions in 2018 — crediting its two-issuer approach. The brand new American Airlines AAdvantage MileUp Card “exceeded expectations.”

Premium economy buy-ups: While American Airlines management didn’t provide many details about premium economy — such as how many seats it’s able to sell at full price — AA did brag to investors that its premium economy fares average twice the economy price.

Basic economy changes didn’t hurt: In July 2018, AA management admitted that Google Flights carry-on bag filtering — and similar tools — kept the airline from being able to compete with its no carry-on restriction on basic economy ticket. Effective Sept. 5, the airline removed the carry-on restriction, meaning that all passengers could carry-on a bag. At the time, I wondered:

It’ll be very interesting to see how big of a change this makes to American Airlines’ basic economy-to-Main Cabin buy-up rate. Airline management have bragged to investors about how many passengers have opted to pay a higher Main Cabin fare to avoid basic economy restrictions. Without one of the biggest restrictions for general travelers removed, we can only imagine that this buy-up rate will fall. The question is just by how much.

Well, the news is good for the airline and its investors. The move paid off. AA reports that it’s still getting more than 60% of passengers to buy up from basic economy to Main Cabin even after removing this restriction. Even better (for the airline and investors) the average buy-up has increased by $5 to an average of $26 fare increase from basic economy to Main Cabin.

International affairs: AA reports that there’s been no impact from Brexit at this point, and the trade war with China hasn’t affected the airline.

Continuing Venezuela operations: AA operates 3x daily flights to Caracas, Venezuela — which is currently in severe political turmoil. The airline confirmed that it plans to continue operations to Venezuela and pointed out that it’s a tiny portion of the airline’s global operations.

The cost of the shutdown: Both Delta ($25 million) and Southwest ($10-15 million) have put dollar costs on the impact of the partial shutdown of the US federal government. AA admits that it too has been affected by the shutdown, but — perhaps wanting to avoid the headlines about it — refused to put a dollar value on the impact at this point. In follow-up questioning, CEO Doug Parker emphasized that “we would just encourage the government to get open.”

Most profitable hubs: AA is opening 15 new gates and adding over 100 additional daily flights out of Dallas/Fort Worth (DFW) starting in April 2019. This was referenced by management as part of how the airline plans to be more profitable going forward. During the Q&A session, one stock analyst pressed management for details of just how big of an impact this would have.

Although AA management said it wouldn’t share specifics about how profitable its hubs are, AA’s President Robert Isom confirmed that Dallas/Fort Worth, Charlotte (CLT) and Washington Reagan (DCA) are still the airline’s three most-profitable hubs. The only details we got: DFW’s profit margins are twice the system average.

Live TV roll out continues: In September, AA flipped the switch to start streaming 12 live TV channels to more than 100 aircraft on select Airbus A319 and A320 aircraft with Gogo 2Ku. While live TV is eventually going to make it to the entire domestic fleet, we haven’t gotten an update since the original announcement. During the earnings call, AA management noted that live TV is now available on 270 aircraft.

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