American Airlines is Planning for Permanent $75 Oil, Still Sees $3 Billion Revenue Upside
At the outset of an employee forum last week American Airlines President Robert Isom declared, “we’re planning the airline in a world where oil be at $75 a barrel forever.”
After the US Airways merger the airline was hugely profitable, so were other US airlines, as the price of fuel plummeted. Share prices didn’t really reflect a new reality, recognizing that opportunities to continue to grow profitability seemed limited and indeed it wasn’t clear that profitability levels could be maintained.
While American’s CEO Doug Parker declared in September that the airline would never lose money again, that their stock would hit $60 by November 2018, and that their buybacks in the high $30s a share represented one of the great opportunities of all time, he likely didn’t anticipate that today the airline’s stock would hover in.. the $30s.
He doubled down on his $60 a share bet in a March presentation. Fuel prices seem to be getting in the way.
Here’s how Brent Crude oil pricing has shot up over the past year:
American is reducing flying such as Chicago – Beijing and, Isom says, also Latin American where demand is down in places like Brazil, and they’re continuing to fly older narrowbodies longer and deferring aircraft deliveries.
And they can’t afford to lose customers to Delta because of their stringent basic economy fares any longer. Basic economy was supposed to be a billion dollar idea but turned out, in Isom’s words, to be “not as much as we thought it would be.” That’s why they’re removing the worst restriction from basic economy fares next month.
He acknowledges that Delta was offering a better product in Basic Economy than American, but “that product wasn’t seeing enough visibility from our customers, so we’re removing the bag restriction. We’re really lining up basically where Delta was.”
Since basic economy fares won’t be as uncompetitive going forward we’re going to see basic economy fares offered on more flights. American has simply not been offering them as broadly, knowing they would lose business as customers chose a better value elsewhere.
Premium economy, common configuration of aircraft, revenue management system issues, re-launch of Main Cabin Extra “we have a laundry list” worth $3 billion in revenue.
The “prospects for growth at American are more rich than anywhere” according to Isom. American is growing less than industry average this year, and probably “a lot less than the industry in 2019.” They’re growing in Dallas and Charlotte as they get more gates at the two airports. He says the 15 gates they’re getting at these airports comes “at about the price of one or two gates that it would cost to add at JFK.”
American gets 8 gates at DFW in 2019 and then 7 gates at Charlotte in 2020. They expect the regional gates at Washington National to open in 2021.
And he views their opportunity to add flying to these hubs are profitable, though it’s not clear how the new regional concourse will translate into the right to add flights at the slot-restricted airport.