Free Issue: Volaris Is Mexico’s Undercapacity Champion

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Pushing Back: Inside the Issue

A man on the moon? The fall of the Soviet Union? The Chicago Cubs winning a World Series? Nobody thought these things would happen. Until they did. Now, Southwest is breaking with decades of tradition by switching from open to assigned seating. It’s also adding extra-legroom seats for the first time, belatedly chasing the hot market for premium flying.

Too little too late? That’s what Elliott Management seems to think. Or a shrewdly incremental move to go along with its network changes, its capacity cutting, its expanded distribution channels, etc. Southwest, to be clear, is still making decent money, just nothing like the money it was making pre-Covid, hence Elliott’s call for the management guillotine.

Southwest knows what it feels like to suffer an epic operational meltdown. Remember the winter of 2022? Well, Delta is now in the crosshairs as it recovers from mass disruption caused by the Microsoft/CrowdStrike outage—an event that impacted other airlines too, but none nearly so badly.

Delta’s partner Air France/KLM, meanwhile, is trying to mitigate the negative revenue impact from the Olympic events in Paris. In other earnings news, American will try to mitigate the impact of an ill-conceived distribution strategy. Ryanair will try to navigate an unexpected drop in airfares. IndiGo will try to instigate a widebody war with Gulf carriers. And Volaris will try to allocate more scarce capacity to U.S. markets.

At the Farnborough Airshow, Boeing bagged a much-coveted B777-9 order from Korean Air; Qatar Airways also ordered more B777-9s. Airbus came away with new business too, including more orders from Saudi Arabia. Elsewhere, Latam is headed back to the stock market. But IAG’s Air Europa takeover might be headed for the dustbin.

Weekly Skies

American Hit by Colossal Distribution Blunder?

• Considering the difficulties of many U.S. airlines, especially low-cost carriers, American’s nearly 10% operating margin for the second quarter seems pretty respectable. It looks less so, however, in light of how much better United and Delta are faring, and how much less their margins declined y/y. American’s margin was down almost six points y/y, compared to a four-point degradation for United and just two points for Delta. In addition, American would have earned a substantially higher margin had it not undertaken the corporate equivalent of crashing its car into a telephone pole. That’s a metaphor for its extremely costly distribution stumble, which erased an estimated $750m from its first-half revenues. Ouch. For any baseball fans old enough to recall the 1986 World Series, that’s the ball going under Bill Buckner’s legs.?
• At the same time, American suffered from the same shorthaul yield weakness reported by its rivals. It blamed “an imbalance in domestic supply and demand,” which coupled with its distribution blunder, triggered a downward revision of its unit revenue forecast in May. “We know we can do better, and we will rise to meet this challenge… We anticipated obviously a stronger, more robust demand environment, plain and simple. There was tremendous growth in 2023. And as we entered into 2024, we simply anticipated that demand would perform—and allow pricing to perform—a lot better than it did.”
• American parted ways with the mastermind of its distribution strategy and proceeded to do a ‘180. It’s now adding back sales support staff and reengaging with travel agencies and their corporate clients, hoping they’ll return as customers. That said, executives noted the fallout will linger throughout the remainder of 2024.?
• Reacting to the domestic overcapacity situation, meanwhile, American is reducing its own capacity in some areas. It will now increase ASMs by just 3.5% y/y in the second half of 2024. Keep in mind that American has a far smaller intercontinental network than either Delta or United, and as such suffered disproportionately from the shorthaul malaise. Some of that malaise was concentrated in markets where American has an outsized presence, like the Caribbean and shorthaul Latin America. Also remember that American’s northeastern joint venture with JetBlue was deemed illegal on antitrust grounds. It still cooperates with Alaska on west coast itineraries, but more loosely.?
• Separately, American experienced some rough springtime weather, though it avoided any major Delta-like meltdowns from the CrowdStrike outage. A top priority—one with the potential magnitude to significantly affect earnings—is renegotiating its co-branded credit card contracts linked to its AAdvantage loyalty plan. Consistent with other airlines, it’s expanding and investing in premium services. It’s making progress in bringing down its heavy debt load, aided by the positive cash flows it’s generating, partly thanks to limited capital investment obligations—its fleet needs are currently pretty modest. It does continue to take Dreamliners, Maxs, and Neos, including some upcoming deliveries of XLR Neos useful for transatlantic, transcon, and Latin markets. On the labor front, American finally came to terms on a new flight attendant contract (subject to ratification) last week.

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