American cites some worry over US domestic underperformance, tweaks basic economy offerings  

American Airlines has been working to close the corporate revenue gap with its peers, concluding in early 2017 it had fewer corporate contracts than its competitors, and its efforts began to pay off. The company grew its small and medium business accounts by roughly 50% from Jan-2017 through 3Q2017.


Summary:

  • American Airlines grew its small and medium business accounts by ~50% from Jan-2017 through 3Q2017 as it bridged its corporate revenue gap with its peers;
  • This trend has continued into 2018 reporting a 10% increase in its corporate revenue year-on-year in 2Q2018;
  • However, American’s unit revenue performance lagged its peers during 2Q2018 and the gap is projected to widen in 3Q2018;
  • American says weakness in Latin America (where it has a greater exposure) and tougher year-on-year comparisons are to blame for performance levels.

The momentum continued into 2Q2018, as American posted a 10% increase in its corporate revenue year-on-year in 2Q2018, and remarked that its small to medium sized corporate acquisitions were at an all time high. However, its unit revenue performance lagged its peers during 2Q2018, and the gap is projected to widen in 3Q2018. The company’s top end of total unit revenue guidance is 3%, which is the starting point for Delta.

American stated some of the factors creating a widening unit revenue gap include weakness in Latin America (where American has a greater presence versus Delta and United) and tougher year-on-year comparisons. However, American CEO Doug Parker acknowledged: “Some of it is underperformance in the United States, which is a concern for us.”

American recently made changes to its Basic Economy offering, matching Delta in removing the carry on bag restriction for domestic and short haul international flights, which will allow passengers to bring bags for storage in overhead bins. United told the Los Angeles Times it has no plans to change its policy, which will be the most restrictive among the large three airlines when American’s changes take effect in Sep-2018. A spokesman for the airline told the publication the restriction allows for a more smoother boarding process.

American Airlines CEO Doug Parker stated there is a “big airline out there” that does not charge for carry-on baggage, and now with filters on a passenger’s Google search that ask if that passenger wants to bring carry-on luggage, and if a customer says yes, “all of a sudden American flights do not show up nearly as high as they did before because it adds [USD]20 to our fare. Nothing wrong with that,  that’s accurate. But when you get yourself in a position in this business where price-sensitive customers find themselves with lower fares on truly competitive airlines like that, we have to take that under consideration”.

The changes to American’s basic economy offering do not take effect until late 3Q2018, so any benefit will not show up in the airline’s revenue performance until 4Q2018 or early 2019.

But perhaps the bigger question is if United will see pressure in its basic economy offering and follow its rivals in eliminating the carry-on bag restrictions for its lowest fare tier.