American Airlines’ Leadership Team Talks Present And Future
For many in the industry, the name Robert Crandall will forever remain synonymous with American Airlines. But as American enters its 10th year since the merger with US Airways, it can easily be argued that the most influential person over American’s future became Doug Parker when he led the merger process from his then position as US Airways CEO in a David-saves-Goliath proposal.
Parker stepped back from the CEO role in March 2022, while retaining his group board chair role. The team now leading American looks both familiar and new. Several, including CEO Robert Isom and Derek Kerr, vice chair and president of wholly owned regional carrier American Eagle, have long ties with Parker that tracked through America West and US Airways into the merger with American. Devon May, who succeeded Kerr on Jan. 1 as CFO, is another long-time American/US Airways/America West executive. COO David Seymour, meanwhile, is a long-time American exec.
Others, including CCO Vasu Raja, chief legal officer Priya Aiyar, and chief digital and information officer Ganesh Jayaram, are newer to the “New American” fold, with several bringing expertise from outside the airline industry.
Collectively, however, the esprit de corps that Parker nurtured through the formation of a post-Chapter 11 American remains clear and strong. And while the leadership team remains mindful of its competitors, there is no longer the sense that they need to compare themselves with their US network peers or, as used to be the case with Delta Air Lines in particular, catch up. In 2023, American Airlines has set its own path and is confident in the journey.
“We went through COVID to survive and now we’re moving out the other end,” Kerr said during an exclusive set of interviews with the airline’s top executives at the company’s Fort Worth headquarters in mid-December.
“The course that Doug [Parker] put us on is we talk about the green flag, but right now we’re still waving the caution flag,” Seymour said.
American has been weighed down by high debt, operational snafus and industry lagging operating margins. But Kerr forecasts the airline will be converting those headwinds into tailwinds.
Indeed, the carrier returned to profitability in the second half of 2022 and has issued guidance for a profitable fourth quarter.
American has committed to paying off $15 billion of debt by 2025. Its CapEx is declining to “the $3 billion range, when it used to be 6-7. So our excess cash flow going forward is going to be much greater than others because they have all that CapEx to deal with,” Kerr said, while noting that, “with 600 aircraft on order, we had higher leverage than everybody.”
American’s cost of debt was 3%-4%, where competitors are financing bulging aircraft orderbooks at 6%-7%.
“Our debt levels are going to come down while others are going to go up,” Kerr added.
As for operating margins, Kerr said they’re close to where they were before the pandemic. “Now our goal is to close the gap,” he said.
The carrier’s fleet replacement is also paying dividends. American has the youngest fleet among US network carriers, with an average age of 12.4 years. Since 2013, American has taken delivery of more than 600 new fuel-efficient aircraft. At the end of 2022, 48% of American’s mainline fleet was 10 years old or younger. Since 2019, American has retired 223 older aircraft. As of September, the carrier’s fleet skyline indicated 197 aircraft to be delivered, built around the Airbus A320neo family—including 50 A321XLRs—and the Boeing 737 MAX and 787.
With MAXs and 787s comprising the bulk of outstanding deliveries, it’s no surprise that the constant delivery delays have proven to be a considerable constraint.
“The problem is I had pilots ready to fly 787s that weren’t delivered, and I can’t repurpose them back to other metal,” Seymour said.
In 2022, American operated an average of 5,400 daily flights and flew 265 billion ASMs to nearly 350 destinations in more than 50 countries. Its capacity was 9.6% less in the 2022 third quarter versus 2019 but was guiding toward a 95%-100% recovery in 2023. This capacity recovery outpaces its network peers but is creating constraints on the cost and operations sides of the house.
American has been criticized for its high CASM, a notion Kerr disputes.
“We don’t have a cost issue. We have a utilization issue because of pilot training issues and trying to grow the airline back,” he said. “No one’s ever tried to take the airline from 50% of what we were at to 100% this fast. It’s taken more time than we thought.”
Kerr cites mainline fleet utilization averaging nine hours a day instead of 10, as an example.
Regional flying, which accounts for nearly a third of American’s seat count, is particularly affected.
“It’s a captain shortage not a pilot shortage,” he said. “We’re missing a bunch of people in the middle who could become captains. So that may change the dynamics of what we do going forward. Are we going have enough captains to be able to fly all the planes?”
Smaller-gauge mainline aircraft, such as the Airbus A319 with ownership costs more akin to the retired MD-80s, could find themselves replacing some regional flying, albeit with reduced frequency. Kerr sees the regional industry needing a couple of years “to shake out.”
The airline has taken hits on efficiency as well as asset utilization, but with the merger well behind them and the pandemic receding, the oneworld carrier has responded by hiring 35,000 new team members over the last two years, taking the roster to 120,000 people.
Seymour said the company is getting creative by “not letting the old processes dictate the future.” This includes shortening the onboarding time of new hires by getting them on payroll and in training before background checks are completed, skipping the traditional steps of pilots upgrading to the left seat, and paying bonuses for holiday periods, which cuts down on the number of reserves needed.
On a simultaneous track, “We’re going to go through an entire cost exercise because after what we’ve been through just to survive and when you merge two airlines, you just do whatever you need to do,” Kerr said.
Even with all the diversions, Kerr is optimistically spooling up for a more profitable future.
“I know we’re going to get out of it and be flying at full speed. You don’t have to add a lot of cost to add all those ASMs back into where we’re flying,” he said.
American says even while running a schedule that is 25% larger than that of its nearest competitor over the busiest US November Thanksgiving holiday travel period of the year, it ran its best-ever controllable completion factor. Mainline reached four days in a row of zero cancellations.
With new post-pandemic travel patterns emerging, flying didn’t abate much in the final months of 2022, yet the airline achieved its best October and November on-time arrival performances in its history.
Dramatically improved reliability was not about good luck. “Robert will tell you what he preaches is, people, process and the plan,” Seymour said about Isom’s top goal of improving reliability and “building a schedule that we know we can fly.”
To that end, the company has made considerable investments in technology. Seymour is particularly proud of the airline’s internally developed HEAT software tool, which uses predictive analytics to build a schedule that gets ahead of weather by using nuance before the FAA puts in their more “blunt ground delay programs, which don’t always work for our schedule,” Seymour noted. [Editor’s note, this interview was conducted about a month before FAA was forced to ground all US domestic flights for several hours because of a technical issue with its NOTAM system.]
“HEAT actually makes a recommendation, going through and considering crews, airplanes, connections, and customers” in prioritizing which flights to keep and which to scrub. Alluding to the potential upheaval caused by a mid-December tornado outbreak in the US, he said, “Pre-pandemic, this would have been a multiday event for us that rippled through the system.”
TechOps is joining in on the technology revolution. “We have a group within our engineering team that’s solely focused on taking the telemetry data that we get off the aircraft looking for and predicting events,” Seymour said.
Customers And Alliances
American’s commercial side of the house has been utterly transformed over the last three years under CCO Raja.
“What we do is super simple. We offer our customers the world’s biggest and most comprehensive network and the world’s best rewards program,” he said.
When pressed about perceived shortcomings like tighter seats, lack of seatback IFE on narrowbodies, downgraded catering, removal of long-haul and transcontinental first class, and other product changes, Raja responds that, “If you’re not in the market for soup, it doesn’t matter how bright the labels are.”
In contrast to its network competitors that have increased their long-haul exposure, American has pivoted from a 70/30 short-haul/long-haul mix to 80/20.
Putting on his customer-centric commercial hat, Raja asserts, “the real thing is not where do you spend capital to get a return? It’s where do you spend capital to create value for your customers?”
Financially, the return on investment on assets is better when deploying the assets domestically, he said, but added that “American Airlines is absolutely focused on flying long-haul.”
The difference since the pandemic is about increasingly leveraging partnerships and alliances. “The international network we can market now has never been bigger. We’re like 35% of all of the seats in the Western hemisphere,” he said.
America now has its Northeast Alliance (NEA) with New York-based JetBlue and a west coast partnership with Alaska Airlines, which joined oneworld in March 2021. There are more integrated ties with its joint venture partners British Airways, Iberia, Japan Airlines and Qantas—all oneworld members—and a deepening oneworld relationship with Qatar Airways.
The NEA with JetBlue has garnered the most attention and challenges from competitors and the US Department of Justice (DOJ). A decision on a DOJ lawsuit to block the NEA was expected to be announced early this year.
“It’s a marketplace where we couldn’t create the traditional kind of network scale where we go and fly more flights because of the slots,” Raja said. “But if you just put AA and JetBlue together without being able to do some level of capacity [and schedule] coordination, you don’t actually create the value for the customer.”
So far, American says the NEA has resulted in approximately 50 new routes out of Boston and New York’s JFK, LaGuardia and Newark airports; increased frequencies on more than 130 existing routes; 90 nonstop routes with increased capacity; and 17 new international routes. Even as the DOJ antitrust case against the NEA is being decided, the partners continue to add new destinations—with 10 new routes announced in December.
Raja cites the difference between American’s and JetBlue’s premium cabins as one of his favorite proof points of customer benefit.
“AA doesn’t have Mint. JetBlue doesn’t have the AAdvantage customer base. You put the two together and now you’ve got a thing which can go and compete at a totally different scale,” he said.
Yet it’s the west coast international alliance with Alaska that Raja talks about with most excitement.
“Alaska’s a short-haul west coast carrier. American can fly west coast to all of its hubs and maybe launch some international flights. But you put them all together and now you’ve got a thing that can go and compete with whatever competitor might be there,” he said.
American has been able to build relevance in the Pacific Northwest and shifted some international flying from its unprofitable Los Angeles hub to Seattle to provide feed with Alaska. The tie-up with Alaska has also helped American shift some domestic capacity out of competitive coastal markets, like Southern California, which were slower to build back post-pandemic.
American has been able to shift growth to faster-growing and more profitable sunbelt hubs like Phoenix Sky Harbor, Charlotte Douglas, and Dallas/Fort Worth. Raja said this is a factor of lower operating costs at those airports and changing demographics.
Making these alliances work to optimize flights and markets also makes them good for the customer. But they do require give and take.
“Without building in incentives such as a revenue share, nobody ever follows through on the promise,” Raja said.
The alliances and partnerships are creating a virtuous flywheel of engagement and revenue for a second product pillar, the AAdvantage loyalty program.
“What we found is that the places where our net promoter scores and our enrollments are growing the most, are where we serve it with mixed metal between ourselves and our partners,” Raja said.
By achieving true scale in opposite corners of the country where American has historically been a weak player, the company is seeing outsized engagement in AAdvantage. The New York area is now the program’s top enrollment market.
“We’ve never seen as much enrollment growth on the west coast as we have with Alaska,” Raja said.
Additional revenue and engagement is more than offsetting the loss of $700 million-$800 million annually in domestic fare change fees, which were eliminated during the pandemic. By rewarding status and engagement with flexibility, Raja believes “there’s plenty of ways where you can go create a lot more value, a lot more transparency for customers.”
Coupled with a major overhaul in the loyalty program in March and changing travel patterns toward blended business and leisure, customers taking blended trips are twice as likely to enroll in American’s loyalty program and three times as likely to sign up for its co-branded credit card, according to management. This has a direct positive impact the bottom line. According to a recent SEC filing, American’s AAdvantage program generated $1 billion in cash in the 2022 second quarter, representing a 73% gross margin for the loyalty business.
In its 10th year as the world’s largest airline, American finds itself in a place where it can comfortably relax, if not remove, the seatbelt.