Today is a very good day. We are completing one of the most successful turnarounds in aviation history. We are building a strong, competitive and profitable new American poised to lead again.
Tom Horton, American Airlines CEO
American Airlines reports strongest monthly financial performance in its history
Excluding primarily bankruptcy-related items, AMR Corporation, the parent company of American Airlines, earned a net profit of $352 million USD for the month of July 2013 ($292 including these items). Combined with June, AMR reported a net income of $551 million for the start of the summer months, according to an article published yesterday in the Dallas Morning News.
What a difference one year has made. American reported operating revenues of $2.48 billion, compared to $153 million in July 2012. Excluding reorganization items, AMR recorded a net margin of 14.1%, which is a far cry from where they were in 2011 and 2012 when American was reporting P&L margins in the negative percentiles. The average global profit margin for the global airline industry is 3.4%, and roughly 5.2% within the United States, according to the Bureau of Transportation Statistics (BTS).
While the numbers are telling, the key discussion points present some very interesting dialogue not only pertaining to the latest DOJ saga barring American’s merger closure with US Airways, but also in general in terms of how Chapter 11 re-organization for US airlines really is the panacea to allowing competitors to fight back and punch above their weight class.
And, specifically pertaining to the future of the US Airways merger, those two implications may come hand-in-hand, for better or worse, affecting the outcome of the November trial date as both carriers head to court to challenge the anti-trust lawsuit filed by the DOJ.
American was the last of the major US “legacy” network carriers to file for Ch. 11 on November 29, 2011. Prior to that date, all of the “majors,” including United Airlines, Delta Air Lines, US Airways, Continental Airlines, Northwest Airlines, America West Airlines, and Trans World Airlines, had all filed for Chapter 11 since the late 1990’s. Of those aforementioned airlines, all but the first three have merged with a fellow competitor, resulting in major network consolidation and decreased capacity within the US transportation industry.
The truth is, the US airline bankruptcy trend really started to hit the major players in the wake of September 11. US Airways filed twice (in both 2002 and 2004) and Delta and Northwest filed within hours of each other in September 2005. United spent the longest time reorganizing in Chapter 11 from 2002 until 2006. American toyed with the option of filing for bankruptcy in April 2003, but instead executives collaborated with union officials to push through $1.8 billion in wage cuts and other concessions.
It was a painful decision conducted in an effort to avoid entering the court, but truthfully, the practicalities became clearer over time as American’s competitors chose the alternative path to file. One by one, each carrier was given the chance to re-write labor agreements, shed aging fleet, rid themselves of union contracts, and then, in turn, channel these cost savings into revamping facilities, aircraft, products and services, as well as open up new routes that would have previously been economically unviable without reorganization.
In his letter to employees yesterday, CEO Horton mentioned how American has gradually been resuscitated thanks to these benefits one by one, saying, “momentum is building at American.” Horton discussed the fleet renewal program with the launch of the Boeing 777-300ER, Airbus A319, Embraer E-175 and Airbus A321T (to be used on transcontinental flights from New York JFK to Los Angeles and San Francisco). American has or will commence new intercontinental routes from its cornerstone hubs to South Korea, Colombia, Brazil, Paraguay, Peru, Germany and Ireland, among others.
Indirectly, the additions of LATAM airlines and Qatar Airways to the OneWorld global alliance will reap major benefits for frequent flier members, through enhanced partnerships and network breadth.
All in all, it’s been an arduous 24 months, but the carrier has really done an excellent job in terms of re-invention (well, except for the new livery and logo, but that loses importance in the grand scheme of things).
The sword is now double-edged. With things on the up-swing, the leaned-out American now has the bandwidth to do exactly what rivals Delta, United and US Airways had done to it over the past decade and fight back to steal market share.
That brings into question the “need” for the merger. Justifiably, these financial results provide ammunition for anti-merger proponents to further squash an AA-US link-up.
However, the weight seems to be lifted on whether each individual could survive without a merger, and instead the spotlight is concentrated around demonstrating how the combined carriers will benefit shareholders, employees and customers.
In American’s case, filing last could also mean filing least, as United-Continental, Delta-Northwest and US Airways-America West could all fall back on the “we merge or liquidate” argument. American, on the other hand, doesn’t have that same luxury, again, especially in light of the recent financial performance.
Without US Airways, American will still be the #3 carrier in the US, but bigger doesn’t necessarily have to mean better. It will still maintain presence in important business markets such as New York, Los Angeles and Chicago, while also maintaining profitable connecting hubs in Dallas/Ft. Worth and Miami. Threats from Low Cost Carrier competition has largely subsided in recent years with carriers such as JetBlue and Alaska increasingly “hybridizing” their product as they mature and Southwest Airlines experiencing major cost creep as it acquires AirTran Airways. Virgin America is too small of a force for American to be concerned with, and faces its own unique challenges in terms of trying to achieve a consistent string of quarterly profitability rather than take on the legacy competition head-to-head and steal market share.
Moreover, ultra low-cost carrier competition in the form of Spirit Airlines or Frontier will not skim profit margins from American, evidenced quite recently by Spirits invasion of AA’s largest hub at DFW. Within two years, Spirit has built up routes from DFW and challenged AA head-to-head on many former monopoly routes, and DFW has become Spirit’s largest base, in terms of weekly seating capacity, just behind Fort Lauderdale. Yet, despite such changes, particularly as American was lying on its back during Chapter 11, AA’s recent financial results have indicated that the two carriers can co-exist peacefully in North Texas and target different types of travelers.
Moving forward, the next big step for American will take place on Thursday, when Bankruptcy court judge Sean Lane will conduct a hearing to consider whether he should proceed to confirm American’s reorganization plan.
There will be exciting months ahead, no doubt. The two carriers will have to strike a delicate balance between advocating the need to merge while, hopefully, continuing to post profits.