MIAMI – American Airlines (AA) has reported a 2Q18 pre-tax profit of $769 million, which is a net profit of $566 million.
“This was perhaps the most challenging quarter for the American team since our merger with US Airways in 2013,” said the airline’s Chairman and CEO Doug Parker.
American Airlines has placed quite a focus on the short and long-term as its financial strategy evolves going into the next decade.
Higher Fuel Prices
As the industry goes through a rise in fuel prices, AA has suffered the immediate effects by reporting a decrease in earnings.
Parker noted that “higher fuel prices increased our expenses by more than $700 million versus last year; and our revenues while increasing, have begun to trail the rate of increase at our largest competitors for the first time since early 2016.”
Parker expects its costs to increase “by more than $2 billion this year,” taking its toll on 2018’s earnings.
However, the CEO stated his team is “taking aggressive action now to return American to prior profitability levels even at these much higher fuel prices,” Parker said.
“We are deferring aircraft deliveries and capital expenditures, lowering our 2018 capacity growth and reducing non-fuel-related expenses,” he said.
More Dallas/Charlotte, Less Miami/Phoenix
Parker noted that the airline will focus growth on its bigger hubs in Dallas and Charlotte, rather than Miami, Phoenix, Washington-Dulles, and Philadelphia.
“We anticipate that our 2019 capacity growth will be lower than our competitors and will be focused in our top-performing hubs at Dallas-Fort Worth and Charlotte,” Parker said.
The CEO hopes that with this actions, AA will return to increased revenues in 2019 and beyond.
Carry On Fees No More
As far as the Basic Economy product the airline introduced last year, AA President, Robert Isom, announced that the airline will remove the carry-on bag restriction on short-haul domestic and international flights.
“Basic Economy is working well in the markets where we offer it, and we continue to see more than 60% of customers buy up to Main Cabin when offered a choice,” said Isom.
However, the President admitted that the carry-on restriction left AA “uncompetitive from a product attribute perspective,” and that the overall Basic Economy product “came up short” of revenue targets.
READ MORE: American Airlines to Add Basic Economy Fare
Parker added that the upcoming changes on Basic Economy are happening because “We feel the right thing to do is in get in line with the competition.” The airline will apply these changes starting on September 5.
“Removing the bag restriction will make Basic Economy more competitive, allowing us to offer this low-fare product to more customers,” Parker said.
With the fuel prices rising, and the inherent decreased earnings, AA has also reached an agreement with Airbus to defer the deliveries of 22 A321neos that were scheduled for delivery in 2019, 2020 and 2021.
Over the next three years, the carrier is expected to save $1.2 billion, with the first A321neos now scheduled for a 2024 delivery date.
In 2Q18, the carrier took delivery of one Boeing 787-9 and four 737 MAX 8s.
The carrier has also added 43 new routes over the course of the second quarter, with highlights on the new service between Philadelphia and Prague, Budapest, Chicago, and Venice; as well as between Dallas-Fort Worth and Reykjavik.
Joint Venture Updates
The airline’s executives hinted that “there’s a chance we could get Qantas approved this year,” referring to the joint venture with Qantas, which is now expected to receive approval in Q42018 or early 2019.
Last November, the DOT denied the Joint Venture, citing a “high risk of competitive harm,” which would have allowed American and Qantas to collaborate more closely on flight scheduling, pricing, and marketing on flights between the U.S. and Australia, with the carriers splitting the resulting revenue.
The two airlines, both members of the oneworld Alliance, had been previously granted a joint venture with antitrust immunity in 2011, when AA had no routes to the South Pacific.
However, under the DOT’s rules for such joint business agreements, the agreement is required to undergo a periodic renewal process.
In January 2017, Andrew Nocella, Senior VP/Chief Marketing, American Airlines, reported that his team was “excited to get this resolved with the DOT. We think there is a lot of consumer benefits and we are anxious to make our case and get a fair review going forward. So we will get that going in the near future.”
American Airlines has joint venture agreements with Japan Airlines on trans-Pacific flights, and with British Airways, Iberia and Finnair for flights across the Atlantic.
Also, looks like AA wishes to add Aer Lingus to its current transatlantic joint venture with British Airways. But the Executive Vice President for Corporate Affairs, Johnson, said that there might be a low-fare carrier added to the equation (LEVEL).
With AA’s profits down by 34.5% in this second quarter, the airline will shift its attention to making a profit where it is stronger.
The group has acknowledged the situation and taken the steps to boost its profitability going into the next quarter.
The total revenue for the second quarter increased by 3.7% to $11.6 billion, with cargo revenue growing by 19.4% to $261 million.
However, this result was offset by increased expenses of $10.6 billion, representing an increment of 10.3% due to the higher fuel costs.