American Airlines Goes Under The Microscope On Thursday

Topline

As it reports second quarter earnings on Thursday, American Airlines has to fight the perception that it is doomed to be the permanent bronze metal holder among the three global U.S. carriers.

American Is Under The Gun From United CEO Scott Kirby

Expectations for American have been diminished by punishing commentary from Scott Kirby, CEO of rival United Air Lines, who stressed on the United July 17^th call that U.S. aviation has been divided into two sectors: one composed of Delta and United, the “brand loyal airlines,” with the other composed of everyone else.

Kirby described his vision of “the strength of the two brand loyal airlines really winning and everyone else losing. And if I dig deeper into it and I look at every airline that’s not named United or Delta, I can find at every single one of them, a double-digit percentage of their route network that loses money.

“The only way for them to get margins that are anywhere close to their WAC is to stop flying places that lose money,’” he said, referring to weighted average cost. “And that is going to ultimately happen.”

At one point on the United call, Andrew Nocella, chief operating officer, noted “documented share gains in each of our hubs:” United is battling American for share at Chicago O’Hare. At another point, Kirby proclaimed United has “become the premier flag carrier of the United States” as it returns to JFK. This was a title American has long assumed, especially after moving into a new JFK terminal in 2005.

“The moat is broadening between Delta, United and American,” said Dennis Tajer, spokesman for Allied Pilots Association, which represents American pilots, in an interview. “So many past network and product decisions have cemented American’s place on the bronze metal road.”

American Must Better Position Itself On Thursday

On the Thursday call, “American management will tell the world how well it’s going, but compared with Delta and United, the results scream otherwise,” Tajer said. “That has to change.”

During the second quarter, Delta reported pre-tax income of $1.8 billion with a pre-tax margin of 11.6 percent. United reported adjusted pre-tax income of $1.7 billion, with an adjusted pre-tax margin of 11.0%. Expectations for American are less in both cases.

“American is in a challenging position because it is subscale and has not found an effective strategy to regain competitiveness,” Meredith Dixon, Senior Analyst at Octus, told me in an email.

“Scott Kirby has been vocal that he believes there is only room for two successful premium airlines, in part because Delta and United dominate the key New York, Los Angeles, and Chicago markets which have significant premium demand and are important for long-haul and international connectivity,” Dixon said.

“We believe the enhanced product offerings of Delta and United will be difficult to replicate, particularly as American’s leverage remains elevated compared to its network peers,” she said. “While American thrives in certain Southern markets, we are concerned these markets may not have enough premium demand or connectivity to produce earnings commensurate with what Delta and United can achieve with outsized share in the coastal hubs.”

American Wants To Be Viewed As More of a Premium Carrier

Recently, American has sought to enhance its position as a premium competitor. The carrier launched a customer experience organization in February. In June it named three members who, it said, “bring more than 90 years of combined experience in customer insights and hospitality to the airline.” Like competitors, it is adding airport lounges and premium seats.

Said Tajer, “They are investing in premium products, forming the identity of a premium product. American Airlines is doing things. But is it enough, or is it too late? For now, American is a powerful domestic short haul international airline, with hubs tailored for that, while Delta and United are more powerful in long-haul international.

Kirby and Robert Isom Once Worked Together

The conflict between Kirby and American CEO Robert Isom isn’t new.

Early in their careers, both Isom and Kirby worked at America West Airlines. Isom was hired in1995, while Kirby was hired in 1996. After two mergers, America West management took over at American Airlines, where Kirby was president and Isom was chief operating officer and executive vice president.

In 2016, Kirby was asked to leave American due to executive suite tensions. Isom took his spot as president. Kirby subsequently was named president of United, then advanced to CEO.

Isom normally doesn’t comment on Kirby, but at a JP Morgan investor conference in March, analyst Jamie Baker asked Isom whether he had any response to Kirby’s continuing disparagement of American. Isom responded, “I worked for Scott and with Scott for a long time,” said Isom. “I’ve seen him be right on a lot of stuff. He’s a brilliant man.” However, Isom also said, ”I’ve seen him wrong on a lot of stuff. In this case, he’s dead wrong.”

“Scott says this kind of stuff I’m sure because he would like nothing better than to not have American Airlines as a competitor,” Isom said.

But “We’re a premium product competitor,” he said. “American’s not going anywhere.”