What Was American Airlines Thinking? Additional Airline Earnings Echo Previous Industry Trends as Southwest Assigns Seats.
Last week, PRISM took the temperature of the traveling consumer as airlines began to announce their financial results. Further company reports this week have echoed larger themes related to higher fuel costs, robust travel demand and lower fare discounting driven by competition from low-cost carriers.
Notably, American Airlines (AAL) had an additional citing specific to an operational decision that equated to a decline in profits. The world’s second largest carrier put its tail between its legs on its earnings release while acknowledging the institution of a booking policy that rubbed many passengers the wrong way. The company cited record revenue as many in the segment have, however, profits were down nearly 50%. The decline is partly attributed to imbalance of supply and demand however, the backfire from American’s forceful attempt to make its corporate customers book directly from their website and forgo utilizing travel agencies, was an additional contributing factor that ate into its profits.
Without question travel agents were irate by the former rule. “To assume that all customers prefer to buy direct through AA.com is arrogant at best,” wrote the American Society of Travel Advisors in a fiery statement. This policy impacted travel agencies across the country regardless of size and ultimately the resounding displeasure was felt by American who has now retracted its new rule claiming, “they dug themselves into a hole”. Hailing from American Airline’s home base, the Charlotte-based travel agency, Corporate Travel Management’s (CTM) Director of Business Development, Steven P. Taggart stated, “Despite the challenge presented by American, we continued to successfully execute our operations and provide best-in-class customer service to all clients. We agree with American’s decision to retract its former policy change which should allow travel agencies to satisfy customers and operate in a more efficient manner, as they had previously.”
Some low-cost carriers have chimed into the conversation related to travel policies and consumer demand. Southwest Airlines (LUV) ended its 53-year open seating tradition and introduced red-eye flights in the announcement of its Q2 financial results that beat expectations but reported a decline in profits. Management stated, “We are taking urgent and deliberate steps to mitigate near-term revenue challenges and implement longer-term transformational initiatives that are designed to drive meaningful top and bottom-line growth. As we announced this morning, our implementation of assigned and premium seating is part of an ongoing and comprehensive upgrade to the Customer Experience, one that research shows Customers overwhelmingly prefer.”
Spirit Airlines (SAVE) provided guidance last week as they lowered their second quarter outlook on weak non-ticket revenue. Spirit projected $1.28B in Q2 revenues vs prior $1.32B – $1.34B, also disappointing consensus (FactSet $1.33B). However, the estimated ticket revenue per segment remains intact with previous expectations. The underperformance in non-ticket revenue is being attributed to incremental pressure on ancillary pricing as competition heats up and consumers no longer care to spend extra on baggage and food.
