American is Hitting its Goals. Is That Enough?

Robert Isom wants to build America's most boring airline. The problem: American still trails United and Delta on key metrics.

Dear readers,

Like many of you, I don't know what to make of American’s post-pandemic direction. I admire management for not blindly following Delta and United into the premium segment, even if catering to more lucrative customers is often the best way to offset higher costs, like expensive pilot contracts. And I like that American is following a clear strategy: focusing on short-haul flights from Sunbelt hubs, operational reliability, loyalty, and direct distribution. As JetBlue has taught us, airlines almost always fail when they cannot identify (and follow) a strategy.

We should not be surprised that American already is claiming victory, because prematurely announcing success is a core tenet of business. Executives who spoke Thursday on American's fourth quarter earnings call said business is humming thanks to their deft management. They noted that revenues from domestic and short-haul international routes remain strong, despite a 6.1 percent decrease in fourth quarter domestic PRASM year-over-year. They underscored that AAdvantage members increasingly are buying up to more expensive products. And they said American has been the nation's most reliable carrier in the last 18 months, a development that should delight customers and reduce the airline’s costs from irregular operations.

All of it is believable. But then you look at the numbers, and compared to the competition, American remains behind. Excluding special items, American posted an operating margin of 5.1 percent in the fourth quarter, compared to Delta's 9.7 percent and United's 7.7 percent.

This underperformance is a theme. In the summer quarter, American's operating margin, excluding special items, was 5.4 percent, far lower than Delta's (12.7 percent) and United's (12.2 percent.) Maybe we can give American credit for closing the gap in the fourth quarter, but it’s still a sizable chasm. As Conor Cunningham of Melius Research wrote Thursday in a mostly complimentary note: "American has performed well when the industry has been messy but remains behind Delta and United in terms of financial performance."

I know American's defenders will say that it is too early to crown winners and losers, since this cycle (and American's strategy) is only about two years old. But it's worth mentioning that United's full-on premium shift also is new, and it has led to improved relative financial performance in a short time.¹ Meanwhile, Delta has thrived in this segment for 15+ years and through multiple cycles, including the lean post-financial crisis years, the boom times of the 2014-19, the short but prosperous ‘revenge travel’ year of 2022, and the post-Covid recovery. All this is to say: premium positioning has been way more durable than many would have predicted after Delta went upmarket. Through almost all the peaks and valleys, Delta has outperformed.

I know I am biased, and it’s partially because I'm no longer American's dream customer. I live in Los Angeles,² an important but shrinking market for the Sunbelt-obsessed airline, and I'm willing to pay more for a true premium product, not just that good-enough product American calls domestic first class. In-seat screens, fancy seat stitching, and winged headrests might seem unnecessary to American's bean counters. But MBA strategy 101 tells us these relatively small investments can increase a consumer's willingness to pay, which in the long run is a good thing for an airline — unless that airline wants to sell a commodity product.

I want your take. Is it only a matter of time before American catches up to (or leap-frogs over) United and Delta? Or will it lag for as long as it pursues this approach?

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Now let’s look at some of the more interesting comments from American’s fourth quarter earnings call, including updates on the airline’s direct-to-consumer strategy, its basic economy product, the Miami hub, and upcoming revenue trends.