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Op-Ed: Wrapping up AA’s media day

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Op-Ed: Wrapping up AA’s media day

Op-Ed: Wrapping up AA’s media day
October 02
15:00 2017

LONDON — When American Airlines CEO Doug Parker took the stage, he opened by asking investors and the media to take a “leap of faith.”

A leap of faith that not only would entail AA “never lose money again,” but a leap to change how to look at their share price and overall financial performance.

A slide summarizing AA’s long term strategy.

Mr. Parker has had a long-standing, quasi-informal bet with a curmudgeonly airline analyst at one of the larger investment capital firms. Said analyst will be turning 60 years old on 11/25/18. Doug wants to get the share price up to $60 a share by then, or he owes the analyst a ridiculously expensive bottle of wine.

When the merger was completed, the share price was hovering around 20 dollars. Today, it’s around $48. They’re over 50% of the way there.

There is evidence that American Airlines is right and their share-price is considerably under what it ought to be relative to their profits/earnings. They are focusing on maintaining seven billion dollars in cash on hand. When it comes to the economics of the firm, yeah – the share needs to go up.

AA’s revenue is outpacing the industry.

Thing is, the Titanic was unsinkable too. Until it wasn’t.

Airlines are a cyclical business. An airline can have its share be underpriced at a specific moment, and AA makes very compelling arguments about how to redefine their share forecasts.

For example, AA would very much appreciate if analysts stopped freaking out every time someone said the word capacity. They would also like buy-side analysts to revise their revenue models to smooth over any, for lack of a better term, minor black swan events that have effect on short term revenues –  reasonable requests, for sure.

But again, the Titanic sank. You should never say your firm cannot lose money. Mr. Parker may very well be right, but anyone who was forced to read too many Classics realizes that the Pantheon despises those who tempt fate.

Doug Parker has been a phenomenal integration CEO and has led American Airlines to places it could never have gone alone or without restructuring, but the board will be the first to be sending him to his retirement yacht with no bonus the second something goes wrong under his watch because all the trading algorithms will remember that he said they could never lose money, and yet billions of dollars could be wiped out.

Moving on to issues not surrounding financial accounting.

AA sees a billion dollars in Basic Economy.

In the same briefing given by American Airlines President Robert Isom. The topic of the rather controversial Basic Economy fare bucket was addressed head on.

According to Isom, “Basic Economy is not a price cut.” At the same time, AA sees at least a billion dollars in value being created by Basic Economy.

Why?

Basic Economy is a “superior product” relative to the ULCCs. In the words of Isom – “It is better matching the amenities of the product to that of a ULCC at the same price.” Isom was insistent that the AA product offers things the ULCCs do not: snacks, drinks, wifi, and service recovery options when things go wrong. He also pointed out that American Airlines was more comfortable and had a higher service standard. When, again, AA’s culture also was a privileged asset that further added value to Basic Economy.

Having said all that, he was keen to mention that 50% of American customers buy up to Main Cabin anyway.

In terms of passenger statistics, 87% of American flyers are once a year travelers. 76% of the total customers travel domestic only. There was no mention of how this compares to the other two legacies.

AAs product on an informal demand curve.

With respect to the new international Premium Economy. AA had expected to only collect a 50% premium relative to Main Cabin. They were wrong. Without going into specifics he stated that the cabin is “working well”, and will probably be able to collect much more than 50% than originally forecast.

All of this led to a discussion on ancillary sales.

Without the ability to factor in Basic Economy as it is so new, seat selection has seen a 21% growth – while baggage has seen 4%.

In terms of alliance and codeshares, everything was exactly as expected. Leverage IAG partnership, work with IAG to strengthen the relationship with Aer Lingus. Formalize the JVA with LATAM.

The oddball was China Southern. No JVAs are allowed by the U.S. government without an openskies agreement in place. Hence, American had to make an equity stake in China Southern. Code sharing will commence around December of this year with more news to come as American works with both the U.S. and Chinese regulators as well as their OneWorld partner Cathay Pacific.

In terms of technology, AA is losing fewer bags than ever. They have optimization technology in place to better connect passengers to their bags. From this technology they were able to create the customer-facing side of notifying the passengers as to where they bag was in real time.

They are using similar technology to now allow passengers who have opted for the flight notifications in the AA app to recover themselves in the event of misconnects or similar situations. They call it dynamic reaccommodation.

Most importantly, checked baggage will be automatically rerouted as well. Naturally, in the early stages of this program – there are many conditions. For example, the system only works on flights operated by American Airlines or Eagle. And, AA will also be rolling out free inflight texting very soon.

Regarding the customer facing side of product, AA has partnered with Casper to roll out new in-flight bedding and pyjamas. Casper is “disrupting the sleep industry” per several American Airlines executives. Even better, all two class regional airliners will begin getting in-seat power in all classes starting the second quarter of next year.

AA’s corporate culture on display.

With respect to the customer-facing employees, AA has learned that financial compensation is not enough to get the workforce to take better care of their customers. They were opaque as to what they wanted to do to move forward to meet their goals of improved service would look like as well as what those goals actually were.

Beyond the financials, and the already covered fleet, everything else American Airlines said was either in line with their peers or going further into depth on things that had already been discussed.

The overreaching tone was that they see Delta as a larger competitor than United, but no one would go on record to say it – or even directly mention Delta or United as competitors throughout the day.

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Bernie Leighton

Bernie Leighton

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