Air travel demand is starting to rebound as the COVID-19 pandemic eases. American Airlines (AAL -2.13%) is implementing an aggressive recovery plan to tap into that demand.
On the surface, this plan might seem to be working. On Thursday, American reported stronger revenue results for the first quarter than its full-service airline peers Delta Air Lines (DAL 0.45%) and United Airlines (UAL 0.15%). However, this outperformance on revenue isn't translating to better earnings or cash flow results -- the things that really matter. This suggests that American Airlines' cost structure remains uncompetitive.
American Airlines prioritizes revenue
In conjunction with American's first-quarter earnings release, management noted that the carrier has reported much stronger passenger unit revenue than Delta and United for three straight quarters. Its total revenue has also been significantly higher. Last quarter, American Airlines generated $4 billion of revenue, compared to $3.6 billion for Delta (excluding its refinery) and $3.2 billion for United.
Image source: American Airlines.
Furthermore, demand has improved dramatically since late February, with net bookings nearly equaling 2018-2019 levels for the past several weeks. American Airlines is rebuilding its schedule much faster than its peers in order to cater to this demand.
In fact, the carrier only plans to operate 20% to 25% less capacity this quarter than it offered in the second quarter of 2019. (It's planning an even more aggressive schedule for the summer.) By contrast, Delta Air Lines expects to reduce capacity by 32% this quarter, compared to Q2 2019. United Airlines plans to take an even more conservative approach, with capacity down by about 45% from two years ago.
As a result, American expects to generate far more revenue than its peers this quarter, whereas the three big network carriers were fairly similar in size two years ago.
|
Airline |
Q2 2019 Revenue |
Projected Q2 2021 Revenue |
|---|---|---|
|
American Airlines |
$12 billion |
$7.2 billion |
|
Delta Air Lines |
$12.5 billion |
$5.6 billion to $6.2 billion |
|
United Airlines |
$11.4 billion |
$5 billion |
Data source: American Airlines, Delta Air Lines, and United Airlines earnings reports and forward guidance. Delta's revenue is adjusted to exclude its refinery business. Table by author.
Profitability still lags
Despite its stronger revenue results, American Airlines has consistently posted bigger losses and higher cash burn than Delta and United over the past year.
This underperformance continued last quarter. American Airlines rang up a $3.5 billion adjusted pre-tax loss. On the same basis, United Airlines lost $3.1 billion and Delta Air Lines lost $2.9 billion. Meanwhile, American's average daily cash burn of $18 million (excluding severance costs and debt principal payments) was roughly double the cash burn reported by its peers.
Looking ahead to the second quarter, American Airlines says it expects to record an adjusted pre-tax margin between -27% and -30%. Combined with its revenue guidance, this implies an adjusted pre-tax loss of right around $2 billion. That's similar to United's earnings outlook but substantially worse than Delta's projected adjusted pre-tax loss of $1 billion to $1.5 billion.
Matching United's pre-tax loss this quarter would not be much of an achievement. In 2019, American Airlines generated over 85% of its revenue in the U.S. and Latin America -- the two regions where travel demand is recovering fastest. Just 71% of United's revenue came from those regions. American ought to be outperforming its rivals on profitability thanks to its favorable geographic focus, but it isn't doing so.
Image source: United Airlines.
Costs still aren't under control
American Airlines has implemented meaningful cost cuts over the past year. It has made big cuts to its management workforce, boosted employee productivity, and simplified its fleet (among other things). It is also adding seats to many of its narrow-body jets to reduce unit costs.
However, the competition isn't standing still. Delta Air Lines and United Airlines have also identified billions of dollars of potential savings. Given that American has been generating higher unit revenue than its rivals due to its lower exposure to long-haul international routes, uncompetitive costs must be driving its persistent underperformance on earnings and cash flow.
Management appears to be either unable or unwilling to get costs in line with the company's rivals. As long as that remains true, American Airlines stock is likely to remain a chronic underperformer.
