Why American Airlines Stopped Making Money

0:00 By certain operational metrics, flight scheduled or passengers flown,

0:04 American Airlines is not only the largest air carrier in the US,

0:08 but the largest in [music] the world.

0:10 And yet, by most financial metrics, margin, revenue, profit,

0:15 it is the least effective of the Delta

0:17 United American triop at actually making money.

0:21 It's a curious dichotomy, but it's not explained by simple bad luck.

0:26 Since 2020, at almost every major moment in which the airlines

0:29 management could have made the right or the wrong decision,

0:32 they made the wrong one.

0:34 It started with co in those earliest days of the pandemic.

0:38 The big strategic call each airline had to make revolved around timeline.

0:43 The aviation industry quickly understood that the demand

0:45 for short-haul travel would likely recover sooner than

0:48 the demand for long haul travel due

0:49 to a combination of government regulation and passenger preference.

0:53 Therefore, it was clear the widebody and long haul planes predominantly

0:56 [music] used for intercontinental flights would not be necessary anytime soon.

1:00 While each airline kept a portion of these planes

1:02 operational for the skeleton international schedules they continued to operate,

1:06 they each had to decide what to do with the rest of them.

1:09 United kept them all.

1:11 Some sat in short-term storage at their maintenance hubs.

1:14 Others were flown to longerterm storage at desert airports like Roswell,

1:17 New Mexico and Victorville, California.

1:19 Delta took a broadly similar approach with the exception of its trip 7 fleet.

1:23 These were old, comparatively inefficient aircraft that might not have

1:27 remained in the airlines fleet for too much longer regardless.

1:29 So Delta decided to just retire all 18 of them.

1:33 American, meanwhile, clearly had a much more pessimistic prediction

1:37 of what demand recovery would look like,

1:38 and therefore they retired all of their A330, 767,

1:42 and 757 aircraft, representing a massive 30% reduction in their longhaul fleet.

1:48 It wasn't long before they regretted this decision.

1:51 Fast forward to summer 2022,

1:53 and Americans and Europeans were vaxed and ready to travel.

1:56 Transatlantic travel was up to about 90%

1:58 of normal and airlines were able to charge

2:00 some of the highest fairs ever thanks to the pent-up nature of this demand.

2:05 People were willing to spend a lot after

2:07 2 years largely devoid of long haul leisure travel.

2:10 American Airlines, however,

2:11 was only able to operate 80% of its [music] normal schedule.

2:15 They didn't have enough planes.

2:18 Boeing was experiencing yet [music] another manufacturing issue.

2:22 The process for making small adjustments on the join

2:24 between 77 fuselage components was not working properly.

2:27 The connection between the parts was lumpier than it was supposed to be.

2:30 So the FAA halted deliveries until the manufacturer could correct the issue.

2:34 The consequence for American Airlines was that they didn't get 13787

2:38 deliveries that they were expecting before the high demand summer 2022 season.

2:42 They'd said they wanted to operate 89% of their normal schedule,

2:46 which would have been almost perfect

2:47 for the 90% demand recovery that came into reality.

2:50 But due to their aircraft shortage,

2:51 they cut historically successful destinations like Edinburgh and Shannon.

2:56 They were first on the chopping block

2:57 because they'd previously been operated by the 757,

3:00 the only smaller narrowbody plane equipped for transatlantic service,

3:03 [music] so it was better to devote

3:04 their widebody aircraft to higher demand destinations.

3:07 American also cut their floundering Seattle to London route and made even

3:11 more brutal cuts to the other continents that composed their longhaul network.

3:15 Los Angeles to Sydney and Dallas to Santiago

3:17 were gone while frequencies went down to Sa Paulo, Beijing, and Shanghai,

3:21 all in service of reallocating aircraft towards the Atlantic.

3:25 In the years that followed, transatlantic demand stayed exceptionally strong.

3:29 In 2023, Americans spent 17% more on international travel than they did in 2019.

3:35 Then the next year it went up to 27%.

3:38 Just at the moment when the aviation industry came roaring back to life,

3:42 American ended up with a smaller fleet,

3:44 meaning they could capture less of that expansion.

3:47 The money went to United and Delta.

3:49 American lost out.

3:52 But when Boeing finally resumed 787 deliveries,

3:55 AA seemed to realize that not only did they mess up the timing of retirements,

3:59 but also the composition.

4:01 Their longhaul fleet was now overindexed on newer airplanes.

4:05 Newer doesn't always mean better for airlines

4:08 because newer also means more expensive.

4:10 Airlines almost always lease or finance aircraft.

4:13 So for costlier or newer airplanes, their monthly payments are higher.

4:17 These higher payments can be worth it because

4:19 newer generations tend to be more fuel efficient.

4:21 For every hour an airline flies a newer aircraft,

4:24 they effectively recoup some of the cost of the higher

4:26 payments through the fuel that they don't burn.

4:29 So in order to make the trade from an older to newer aircraft worth it,

4:32 there's a certain number of hours one needs to fly.

4:36 American was struggling to reach those hours.

4:38 Demand is seasonal.

4:40 It's lower in the winter, higher in the summer.

4:42 So there are fewer theoretical profitable flights one can

4:45 operate in the winter and there's value in operating less.

4:49 Ideally, the airline keeps operating its more fuel efficient aircraft

4:52 at a high rate to keep offsetting the payments with fuel costs.

4:55 then reduce the usage on their older

4:57 aircraft where monthly payments [music] are lower.

5:00 So there's a theoretical correct ratio between newer

5:02 and older aircraft and Americans was too high.

5:06 Therefore, even as they faced a shortage of aircraft,

5:09 they decided to defer future deliveries of some of their incoming 787s,

5:13 pushing them farther into the future to grow at a slower rate.

5:16 American therefore still struggles to capture seasonal demand.

5:19 They have to keep their aircraft operating to destinations

5:22 with strong year-round demands like London, Tokyo, or Sydney.

5:25 Today, 47% of their long haul fleet is composed of newer generationwide bodies,

5:30 while for United, it's 32% and Delta 37%.

5:34 In 2019, American's corresponding percentage was 27%.

5:38 Meaning a smaller retirement of older aircraft could have put

5:41 them at a similar fleet composition as their more successful competitors.

5:45 But American management made the wrong call,

5:47 putting them in a worse financial position.

5:50 Meanwhile, the airline was floundering over the Pacific.

5:54 Asia and Oceanania demand is never on the scale of Europe,

5:57 but there's still plenty, and more of it has always gone to United,

6:00 Delta, and foreign airlines than to American.

6:03 They've never really had a good way to service the Pacific.

6:06 They do technically have a West Coast hub at LAX,

6:09 but LAX isn't actually a very good place to have a Trans-Pacific hub,

6:12 mostly because everyone has a hub there.

6:15 It's literally the only airport officially designated as a hub

6:18 by all three of American, Delta, and United.

6:21 The consequence is that none of them

6:23 have a super large domestic network from LAX.

6:26 And with a smaller domestic network,

6:27 there are fewer origin cities that have well-timed American services

6:31 to LAX to allow for direct connection to their trans-Pacific long hauls.

6:34 United has a much bigger network from SFO,

6:37 so they use that as their primary trans-Pacific

6:39 hub while offering more minimal service out of LAX.

6:42 Delta, meanwhile, focuses on Seattle,

6:44 meaning they have bigger domestic networks out

6:46 of these other hubs than American does out of LAX,

6:49 allowing them to win the war for the shortest itinerary

6:51 between the endless configurations of origins and destinations over the Pacific.

6:56 Seemingly having come to a reckoning,

6:58 American emerged from the pandemic with a far

7:00 smaller [music] Trans-Pacific portfolio out of LAX,

7:03 having paired back from nine long haul destinations to just five,

7:06 dropping Beijing, Shanghai, Hong Kong,

7:08 Sao Paulo, and Tokyo Narita, adding Brisbane,

7:11 and keeping Sydney, Auckland, Tokyo, Haneda, and London.

7:14 Part of the reasoning was that they were

7:16 flirting with the idea of competing in Seattle instead.

7:19 Delta was strong there, but so is Alaska,

7:22 a short hall only airline, at least at the time.

7:25 Just one month before the pandemic,

7:27 American and Alaska inked and announced a partnership that included,

7:30 most notably, sales cooperation on Seattle flights,

7:33 allowing passengers to buy an itinerary with a domestic

7:36 leg operated by Alaska and an international

7:38 leg serviced by American on one of their brand

7:40 new long haul flights out of the airport.

7:43 They were going to start with a flashy new route to Bangalore,

7:46 a southern Indian city with a massive

7:48 tech sector that's economically interlin with the US's.

7:51 There's a good bit of demand for travel between Bangalore and the US,

7:54 but no airline had yet made that link non-stop.

7:57 American would be the first,

7:58 made possible largely thanks to Seattle's position just

8:01 a tiny bit closer to the very far away city.

8:04 They couldn't comfortably make it from LAX year round with maximum payload.

8:08 So, Seattle was the perfect place for them

8:10 to operate this new 15-hour [music] flight.

8:13 London would start soon after, feeding passengers to the hub

8:15 of their primary European partner airline, British Airways.

8:18 They later announced a third route, Shanghai, slated to start,

8:22 at least at first, in March [music] 2021.

8:25 Only one of these routes saw the light of day.

8:28 Bangalore was originally pushed back rather

8:30 understandably due to CO's demand shock.

8:32 Then there were those 787 delivery delays and a prudent prioritization

8:36 of their tried [music] and tested routes over this new endeavor.

8:39 But then Russia invaded Ukraine.

8:41 Western nations sanctioned Russia.

8:43 Russia closed their airspace to the country sanctioning them.

8:45 And the flight time to India for US Airlines was now a couple hours longer,

8:49 making Bangalore out of range from Seattle.

8:52 The London flight did start operating,

8:54 but it didn't really change much since British Airways,

8:56 which co-chairs with American,

8:58 already operated multiple departures out of Seattle.

9:00 The Shanghai flight, meanwhile,

9:02 was perpetually pushed back due to China's longer

9:04 than average CO restrictions that all but killed demand.

9:07 Then eventually, the airline decided to start a couple of flights

9:10 a week to the Chinese [music] city out of Dallas instead.

9:12 The decision might have been made with knowledge of what was coming.

9:15 Later that year, Alaska announced its intention to merge with Hawaiian Airlines.

9:21 Hawaiian had been struggling largely due to a cratering in demand from Japan.

9:25 A mix of a poor exchange rate, inflated hotel costs,

9:28 and longer CO restrictions had been reducing

9:30 the number of Japanese vacationers to Hawaii.

9:33 The struggling status meant Alaska was able

9:34 to merge with the airline on favorable terms.

9:36 and their plan was to siphon some of Hawaiian's widebody

9:39 aircraft away to build a longhaul network out of Seattle,

9:42 essentially replacing American's role in the partnership.

9:45 Steadily, cooperation was paired back,

9:47 and perhaps as part of that, American eventually announced

9:50 the cancellation of all of its long-haul routes out of Seattle,

9:53 and were still faced with the same problem of a poor Trans-Pacific strategy.

9:59 They'd ended up in a worse position than when they'd started.

10:01 They were even further behind than before co.

10:04 They just wasted time, resources, and money trying to make Seattle work.

10:09 And it just didn't.

10:11 And that wasn't even the only failed effort to build a new hub.

10:14 Coming out of CO, Austin, Texas was booming.

10:18 Its status as a trendy tech hub was burgeoning pre-COVID.

10:21 But the emergence from the pandemic seemed to supercharge

10:23 the phenomena as Texas [music] relaxed social distancing restrictions early,

10:27 and the capital became a magnet for remote workers

10:29 looking for warm weather and comparatively low cost of living.

10:32 Naturally, this large influx of transplanted

10:35 high earners drove airport [music] traffic up.

10:38 Whereas the country overall only experienced full demand recovery in April 2023,

10:42 Austin saw it a year earlier in April 2022.

10:46 Its airport was not considered a hub by any of the big three US airlines.

10:50 They all serviced it, but only as an outstation,

10:53 predominantly with flights to and from their hubs.

10:55 Americans saw this as an opportunity and in summer

10:58 2021 started to massively expand their network from the city.

11:01 Whereas they started the year servicing just eight destinations from Austin,

11:05 they ended with almost 40,

11:06 driving an [music] almost five-fold increase in seat count.

11:10 Part of the logic was to counter Delta's growth at the airport.

11:13 They' named Austin a focus city just before the pandemic,

11:16 but then hadn't done much to grow their network there yet,

11:19 so American wanted to preempt that.

11:21 The airport had a rule that essentially in order

11:23 for an airline to retain use of a gate,

11:25 they had to operate at least seven daily departures out of it.

11:28 Of course, the airport was built before Austin's

11:31 massive boom and was therefore operating close to capacity.

11:34 If American could operate enough flights out of Austin,

11:37 it could take up enough gates to [music] prevent Delta from growing,

11:40 ensuring it majority market share until the airport's

11:43 major expansion project wrapped up in the 2030s,

11:45 by which time all the new Austinites

11:47 would have become loyal American airline flyers.

11:50 At least that was the theory.

11:52 The problem was, despite tremendous growth,

11:55 the Austin market didn't yet have the demand

11:57 to support a five-fold increase in seat [music] count.

12:00 American attempted to rectify this by operating

12:02 many of these services with smaller regional aircraft,

12:05 but then that ran a foul of their long-standing

12:08 agreement with the union that represents their pilots.

12:10 They'd agreed to only operate a certain

12:12 quantity of non-hub flights with regional aircraft,

12:14 given that regional pilots are paid less than their mainline colleagues,

12:17 and Austin was now pushing them above that limit.

12:20 By 2023, the Austin bubble was beginning to burst.

12:23 [music] Housing prices had inflated to such a high

12:25 that it no longer had that cost of living advantage,

12:28 and half as many people moved to the city than the year prior.

12:31 With this stagnating growth,

12:33 Americans already belleaguered strategy made even less sense.

12:36 [music] And just like in Seattle,

12:38 they were forced to give up, dramatically pairing back [music] their schedule.

12:42 Once again, they just wasted time, resources,

12:45 and money trying to make Austin work, and it just didn't.

12:50 And incredulously, as they were floundering

12:53 over the Pacific and inundating Austin, American also wasted time, resources,

12:57 and money on another failed strategy in the Northeast.

13:00 They called it the Northeast Alliance.

13:03 Just as American has long been the weakest of the big three at LAX,

13:06 so too did it fall behind in New York.

13:09 They have the smallest market share of the highly valuable market

13:12 and little ability to rectify that given the capacity constraints at JFK,

13:16 LaGuardia, and Newark.

13:18 Their solution was collusion.

13:20 They partner with JetBlue, co-chair their flights, share revenue,

13:23 and coordinate their networks to be compatible with each other,

13:26 gaining the scale to meaningfully compete.

13:28 In practice, what this looked like was,

13:30 for example, American terminating its Orlando route,

13:32 allowing JetBlue to up its flying to the city

13:35 and reallocating the American aircraft to other expanded routes.

13:38 In total, they cut 18 destinations,

13:40 but 10 of those were really just handing them over to JetBlue,

13:43 while American focused on expanded longhaul

13:46 service with new flights to Santiago,

13:47 Athens, Tel Aviv, [music] Doha, and New Delhi.

13:50 It was a complex networkwide reconfiguration that the airlines argued

13:53 added up to greater than the sum of its parts.

13:56 And that argument was existentially [music] important because the Department

13:59 of Justice didn't love the look of the alliance.

14:03 They thought it was bad for competition.

14:05 Therefore, the DOJ sued [music] on antitrust grounds.

14:09 In court, the alliance's strategy was to argue

14:11 that it was actually good for competition rather

14:14 than bad since American and JetBlue were weak

14:16 competitors to United and Delta in the city,

14:18 and therefore that one strong competitor would help

14:21 weaken the duopoly more than two weak ones.

14:24 Ultimately, the judge was not convinced,

14:25 [music] stating that this was the wrong argument to be making entirely,

14:28 as American antitrust law focuses on preserving

14:31 competition rather than building it through strengthening arrival.

14:35 So, the pair were forced to terminate their partnership, and as part of it,

14:38 their networks reverted to more or less what they'd been previously.

14:42 Here, too, in yet another instance, American had just wasted time, resources,

14:47 and money trying to make the Northeast Alliance work,

14:50 [music] and it just didn't.

14:53 With revenue faltering, American looked for ways to cut costs.

14:56 And one solution that proved attractive was declaring war on travel agencies.

15:01 While widespread use of travel agents was largely ended by the internet,

15:04 agencies are still used by companies to handle their corporate travel.

15:08 These agencies will ensure that bookings follow company policies around cost,

15:12 fair class refundability, and more.

15:14 And American believed they had leverage and therefore rolled out a series

15:17 of changes attempting to get these agencies to work more on their terms.

15:22 In particular, they really wanted agencies to stop

15:25 using the antiquated GDS [music] booking system.

15:28 This had been the predominant way agency

15:30 and airline systems communicated with each other for decades,

15:33 but it was costly to operate and lack certain capabilities.

15:36 American wanted them to switch to the new NDC system,

15:39 but agencies were reluctant to spend tons of money

15:41 redeveloping their IT when it didn't benefit them.

15:44 From the agency perspective, the status quo worked.

15:47 From Americans perspective, it did too,

15:49 but it was costlier than the newer alternative

15:51 and provided less opportunity for upselles and [music] incilligaries.

15:55 The biggest stick in this fight was American

15:56 pulling the cheapest 40% affairs from that old system,

16:00 only allowing them to be booked through the new one.

16:02 That essentially meant that agencies

16:03 that lacked compatibility with the new [music]

16:05 system would only be able to book their clients higher price tickets,

16:08 making them uncompetitive.

16:10 Then they only added to the disincentive by eliminating

16:13 mileage earning on bookings made through these non-compliant agencies.

16:16 [music] There were myriad other carrots and sticks in this campaign,

16:20 but in broadstrokes, it was American believing that they could cut

16:23 out the middleman and [music] create a better,

16:25 more lucrative relationship with corporate customers.

16:28 They were unsurprisingly wrong.

16:32 On mass, agencies chose not to comply with Americans

16:35 demands and rather just avoided booking on American.

16:38 And corporate customers didn't circumvent agencies on mass.

16:41 They just kept the status quo and gave more business to Americ's competitors.

16:45 By summer 2024, American reversed their changes,

16:48 but the endeavor was estimated to have led to $1.5

16:51 billion in revenue [music] loss in its first year,

16:53 and the consequences of burn bridges undoubtedly still remain.

16:57 Yet again, American wasted time, resources, and money trying to make this new

17:02 corporate sales strategy work, and it just didn't.

17:06 As American distracted themselves with fruitless new strategies for Seattle,

17:10 Austin, the Northeast,

17:11 and corporate sales, there was also the matter of what they weren't doing.

17:14 They weren't focused on their Chicago hub, allowing for its continued decline,

17:18 while United expanded its market share in the valuable city.

17:21 The airline offered 21% fewer seats from Chicago in 2024 relative to 2019,

17:27 while United's capacity remained roughly equal.

17:29 As a consequence, not only did American lose

17:32 the loyalty of plenty of the city's customers,

17:34 but they [music] lost highly valuable gates, too.

17:37 Much like in Austin, the city of Chicago allocates its gates based on usage,

17:41 and American was underutilizing theirs.

17:44 Therefore, the city took four from the airline, whereas United,

17:47 after a reshuffleling that included plenty of the airport's other airlines,

17:50 would gain five and be able to further build up their hub.

17:54 American escalated this all the way into a prolonged lawsuit,

17:57 but eventually they lost that, [music] too.

18:00 American hasn't been in such a poor financial position

18:03 relative to its rivals for over [music] a decade now.

18:06 Quarter after quarter, it's earning billions less than Delta and United.

18:10 Understandably, this has lit a fire under what's left of its management team.

18:14 Vasu Raja, the chief commercial officer

18:16 that oversaw the squeeze on travel agencies, was shown the door in June 2024,

18:21 and the airline started to steadily rebuild its corporate sales team.

18:24 A steady drip of 787s are being delivered,

18:26 building capacity in that still hot long haul market.

18:30 With those deliveries, the airline is writing one of its past issues.

18:34 Business class is by far the most

18:35 profitable part of the plane [music] and demand

18:37 for business class travel has been tremendously strong

18:40 in recent years as consumer spending on travel grew.

18:42 But Americans planes have always been underindexed on these seats.

18:46 Their 779s, for example, only had 30 business class seats to United's 48.

18:51 That left revenue on the table, but with these new 77 deliveries,

18:55 American has rolled out a new configuration with 51 liflat seats.

18:59 They're also fixing the hole left by retiring their 757s as they

19:03 get ready to operate their first A321 XLRs in the coming months.

19:07 Like the 757, these are narrowbody aircraft configured for long haul service

19:11 with liflat business class seats and large fuel tanks enabling long range.

19:15 And their introduction will allow American to improve

19:17 the economics or expand to lower demand European destinations.

19:22 But these changes more or less get American back to where it started pre-COVID.

19:26 And pre-COVID, it was already in the worst financial position of the big three.

19:31 Over the past 5 years, the airline has hardly solved any of its major problems.

19:36 It's only attempted to, and through these attempts, made the problems worse.

19:41 American Airlines will need to find some major answers soon,

19:44 lest it risk getting left in the dust,

19:46 allowing the American airline industry to turn [music] into a mere duopoly.

19:52 Decision-making in the airline industry is clearly quite a quantitative affair.

19:57 In the example of COVID,

19:58 it required complex modeling of an unprecedented pandemic to determine

20:02 when demand might recover and therefore what to do with aircraft,

20:05 staff, and other assets.

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