Summer is upon us and for many, that means a trip to visit grandma and grandpa, or if you're lucky, lay on a beach sipping mai tais. This seasonal uptick in travel typically makes the second quarter big business for the airline industry, and this year looks to be no different. In fact, the TSA predicts this will be the busiest U.S. travel season on record.
It seems, however, American Airlines (AAL) didn't get the memo. The carrier announced on May 28 that it is reducing revenue expectations and, ultimately, earnings for the quarter -- from an earnings per share (EPS) range of $1.15 to $1.45 to a range of $1.00 to $1.15. The company also shared that its Chief Commercial Officer, Vasu Raja, would be stepping down. The carrier's stock plummeted roughly 15% on the day after the news broke.
Why is the airline struggling at a time when more Americans than ever are traveling?
The company's failed overhaul cost them
It's not just this quarter that American has been underperforming. This table shows its year-over-year revenue growth over the last four quarters compared with Delta and United.
| Airline | Q1 2024 | Q4 2023 | Q3 2023 | Q2 2023 |
|---|---|---|---|---|
| American | 3.13% | (0.96%) | (0.15%) | 4.72% |
| Delta | 7.75% | 5.87% | 10.83% | 12.69% |
| United | 9.71% | 9.89% | 12.48% | 17.06% |
TABLE BY AUTHOR. DATA SOURCE: COMPANY FILINGS.
Vasu Raja's departure may help us understand what's going on. The CCO spearheaded a new initiative he called "modern retailing." The new system was intended to update the way bookings are made, pushing customers to American's app or website instead of booking sites and travel agents. But it seems the project backfired on the airline. A report commissioned by the company indicated its sagging revenues were largely from a loss of corporate clients and travel agents ruffled by the changes.
As part of the initiative, American Airlines tried to rework contracts, reducing perks and discounts. Clients complained that average prices were higher and some rewards were no longer redeemable. Additionally, the sales team was gutted as part of the initiative, and clients lost their human points of contact. The system was not to the clients' liking, and many said as much, but until now, it has fallen on deaf ears.
Zane Kerby, CEO of the American Society of Travel Advisors, a trade organization for the intermediaries modern retailing cut out, called the move "extremely aggressive" and said that it "came as a real shock" the airline announced the move earlier this year.
It's unclear just how much this has damaged the company's bottom line. Its public financials don't get this granular, but the correlation is clear; American's revenue growth flattened as this program came online.
American says it is changing course but not reversing
The dismissal of Raja is a sign the company is attempting to course correct, but CEO Robert Isom insists that modern retailing is still the future. Despite not abandoning the strategy, he assured attendees at a recent conference that the company was evaluating the strategy "holistically and piece by piece." Isom admits they screwed up but that they will fix it, stating, "Our approach has driven customers away from American, we're unequivocally committed to getting those customers back."
But words are cheap. What is the company actually doing to get these clients back? American's first move is to suspend many of the changes it made to rewards and loyalty programs, especially for corporate and agency clients.
It's a long road ahead for American
Although this is a good start -- changes to its loyalty program and discounting were some of the biggest complaints -- much more will have to be done. Coaxing back clients you have alienated is never easy, and for corporate clients, organizational inertia is at play. JP Morgan Analyst Jamie Baker believes it's possible with time, but it depends on "how aggressively American chooses to pivot and how long the process takes is unclear."
So is it time to sell your American Airlines stock? The road to recovery looks like it could take quite some time; there is still a lot to prove for the company as to how it plans to recapture its corporate client base. On the other hand, its stock does trade at a discount to the industry average -- 4.9 times forward profit estimates versus 7.2 -- and the messaging coming from its CEO does indicate the company will do everything it can to make up for its transgressions.
Keep an eye on how the company navigates the next few quarters and what actions it takes to recapture lost business. The company may begin to right the ship or dig itself into an even greater hole. For now, AAL is a hold.
