Despite bedeviling flight delays and cancellations, the grounding of its small fleet of Boeing 737 MAX fleet, a seemingly endless string of negative news reports, and increasingly ugly relations with its labor unions American Airlines reported a robust $662 million second-quarter profit Thursday that exceeded analysts’ recently revised expectations.
Meanwhile, Dallas-based Southwest Airlines said it earned $741 million in the second quarter on revenues of $5.9 billion, and a second-quarter record profit per share of stock of $1.37. The Dallas-based airline, which carries more passengers than any other U.S. airline, turned in that performance despite having to cancel more than 20,000 flights in the second quarter, mostly because its 34 Boeing 737 MAX planes have been grounded since mid-March. Those per share earnings exceeded analysts’ expectations by two cents.
An American Airlines jet departing from Frankfurt, Germany. Silas Stein/Getty Images
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Notably, Southwest said has dropped the 737 MAX from its schedule until January, becoming the first U.S. airline to do so. Southwest also said it will withdraw all service a Newark Airport and consolidate its New York City-area service at LaGuardia. Historically Southwest has stopped serving only a couple of other airports, and only because demand or pricing – or both – were so weak that it was racking up big losses serving those markets. The fact that Southwest also said it will add more service to Hawaii, where it only began flying in March, also points to likely poor economic performance of its operations at Newark, which likely made it the best market for Southwest, facing an unplanned shortage of airplanes, to raid for planes that can be more profitably deployed elsewhere.
American officials said they are still hopeful that the MAX planes will be flying before year’s end and that they’ve cancelled MAX flying only through Nov. 2 thus far. But they conceded that it’s possible the cancellations could continue into 2020. To partially offset the unavailability of those planes, and delays in the delivery of some Airbus A321neo jets this year American also plans to delay the retirement of some aircraft and slowing work on the conversion of other planes to add more seats, thereby keeping those planes in operation rather than putting them into the hangar for refurbishing.
Alaska Airlines is expected to report strong second quarter earnings later today.
Fort Worth-based American earned $1.49 per share in the April-June quarter. After adjusting for one-time costs, each share of the company’s stock earned $1.82. On that basis Wall Street had been expecting a profit of $1.77 a share, according to Zacks Investment Research. American’s second quarter revenue totaled $11.96 billion, slightly larger than expected.
American’s shares, which have performed poorly in relation to its rivals’ stock prices over the last 18 months, have risen around $7 since bottoming out in the first week of June. Still, they remain $24 below their peak per share price north of $58 in January 2018. That steep drop has stemmed from concerns about American’s industry-high levels of debt, it’s persistent operational difficulties, growing labor relations woes, long string of most negative news coverage regarding those issues and the company’s steps to boost the number of seats on its planes and reduce or eliminate some services to save costs.
Both American’s and Southwest’s profits were boosted, in a somewhat perverse way, by the Federal Aviation Administration’s March order to ground all Boeing 737 MAX aircraft, of which American has 24 and Southwest 34. Though a small percentage of their fleets, the loss of those planes has forced both airlines to accommodate the passengers who would have flown on them on their remaining planes, artificially increasing their load factor, or average number of passengers per flight, and their revenue per passenger mile flown. Those unit revenue figures, which are key numbers closely watched by investment analysts and investors, rose in part because the capacity constraints caused by the MAX groundings allowed the carriers to charge a slightly higher average price for their seats.
That seemingly positive result, however, not only means slightly higher average prices for travelers but also less total revenue taken in by the airlines that almost would have used those MAX planes to fly more total passengers, albeit for a fraction of a penny less per mile flown, if those planes had been available for service. Long term that translates into restrained revenue growth and, potentially, lost market share to rivals.
But those MAX groundings weren’t the only, or even the primary problem for American during the second quarter. The world’s largest airline by fleet size, passenger miles flown and revenue canceled around 7,500 flights in June alone, and struggled to operate 70% of its flights on time in June, a period when generally good weather usually allows airlines to report their best on-time and operational performances of the year. American’s management blames the majority of the carrier’s flight cancellations, which at 4% of total June operations is more than four times the cancellations of close rival United (itself no paragon of on-time operations virtue), and of those many flight delays on a work slowdown conducted, it says, by members of the two unions that co-represent its nearly 20,000 mechanics.
American went to federal court in late May to get an order requiring mechanics to stop refusing overtime in historically unprecedented numbers and to stop forcing long delays and cancellations by working slow and “writing up” minor mechanical problems that could be fixed quickly or even deferred for a few days, as they usually are. But instead of ending that activity, some mechanics ignored the court’s order and actually increased the work slowdown activity until the court issued a second ruling telling union leaders to impose hefty fines on their members who management says were participating in the job action. American officials today said they’re still experiencing a higher-than-usual number of delays and cancellations that they beleive are the result of mechanics’ work slowdown, but that the numbers of those disruptions are down from their recent peaks.
Southwest fought a similar battle with its own mechanics in the spring, with management accusing workers of improperly writing up minor mechanical problems and working slow on purpose in order to inflict delays, cancellations and economic pain on the company. Those issues vanished in late May when mechanics voted to improve a new contract that contained significant pay and other improvements.
American’s second-quarter profit also got a boost from lower-than-expected fuel prices – at $2.21 a gallon, down 4.6% from the second quarter of 2018 – and generally very strong demand for summer travel. Those same factors helped rivals Delta, United and JetBlue report very strong second quarter financial results earlier this month.
