American Airlines CEO Robert Isom had a good week. Fourteen months after taking the top spot, the airline raised financial guidance after a busy Memorial Day weekend when American did not cancel a single mainline flight. What’s more, two weeks after American reached an agreement in principle with its pilots union after years of negotiation, Isom can envision a future of even more efficient operations, which should bring cost savings.
“Any time you can come out and say that, hey, the midpoint of your second quarter guidance has improved by almost 20 percent, that’s a good way to start the day [and] I’m really pleased with how the company is performing on the things that we set out to do,” Isom said in a presentation at the Bernstein Strategic Decisions Conference Wednesday.
Of course, Isom discussed operations, as he has consistently since at least 2005, when he first gained notoriety for fixing US Airways’ troubled operations at Philadelphia International Airport after that carrier merged with America West Airlines. “Going into the pandemic, American wasn’t known for its punctuality,” he said. “And so we set off to do that.” He cited “some rough lessons learned last summer,” and noted “continued improvement up to this Memorial Day weekend,” which American cited as its best holiday weekend ever for completion factor.
Additionally, Isom seemed to take a more measured, more relaxed tone than he had in his early days as CEO, when his pacing, in appearances on CNBC and earnings calls, seemed hasty and his zealousness was high. In the words of Dennis Tajer, spokesperson for the Allied Pilots Association (APA), which represents American pilots: “He spoke with calmness and confidence, which was different than before. Before there appeared to be nervousness. During this presentation he got his captain’s voice.”
During the presentation, both Isom’s calm and his polite display of the swagger that once characterized American were on display during two inflection points: Discussions of the carrier’s relatively low need for new aircraft, and of its relative immunity from the industry’s engine maintenance backlog.
American has the youngest fleet among its peers, a particular advantage during a time when new aircraft are in short supply. “I’m sure glad I’m not out there buying a lot of aircraft right now,” Isom said. “It’s a lot of work. Fortunately we went through all of that prior to pandemic and during the pandemic.” Now, American will need 30 to 50 aircraft a year, he said. Chief Financial Officer Devon May said capital expenditure will be $3.5 billion to $4 billion annually, down from a total of more than $30 billion between 2014 and 2020.
Meanwhile, Isom noted that in Tulsa, American has the world’s largest commercial aviation maintenance base, with 4,500 mechanics and a capability to service narrowbody engines, and it also has “a great relationship with GE.” He said the maintenance backlog is “probably a constraint out there for others.” However, he noted, “We’re the world’s largest airline in many respects: we’ll be taken care of.”
Questioned by Bernstein analyst David Vernon, Isom disclosed, as expected, that American will appeal a federal judge’s rejection of its Northeast Alliance with JetBlue. “We’ve got a legal system that allows for appeal and we’re going to do that,” he said. Dismantling the alliance, if that occurs, would have no material impact on American results this year, he said, since New York accounts for only about 5 percent of American’s network. However, Isom believes that unraveling it would harm consumers because the alliance enabled a stronger competitor in a market where American and JetBlue have a structural disadvantage to Delta and United.
When Vernon asked May about the ruling’s impact, “Is it a zero or something you can manage around?” May responded, “We have a really big network. New York is an important part of that network but it’s a relatively small part.”
One area where American has not flourished, at least so far, is in its share price performance.
Year-to-date, American shares are up 16 percent, while United is up 27 percent and Delta 11 percent. During the presentation, Isom reiterated his concern that, “We’ve proven we can run a reliable airline. It hasn’t really had a tremendous impact yet. For those saying, ‘Hey, I don’t believe the story,’ just wait.”
Perceptions of American may be improving. During his questioning, Vernon indicated that his outlook for the carrier is positive. Also, in an April report note, J.P. Morgan analyst Jamie Baker wrote: “As anticipated, American came out swinging during its call … We would characterize American management as recently revitalized.” But Baker also voiced concern that a new marketing strategy of “leaning away from the historic corporate customer” is a “potentially risky strategy: that may chase away premium passengers.” Since the earnings call on April 27, American’s share price has risen 15 percent.
A new pilot contract, while costly, should benefit American. Isom said it will enable improved utilization of the mainline fleet. “The contract will allow him to utilize the airplanes he has and the airplanes he wants to get,” Tajer said. “The combine for harvesting new revenue in the airline industry is airplanes.” He added that Memorial Day weekend was “uniquely successful for American in particular but, even more broadly, it was the beginning of the physical rehab of airline reliability.” However, he said, the industry awaits the full test of a summer travel weekend with poor weather.
