American Airlines cuts growth after sales strategy fails

American Airlines planes stand at the gate at Los Angeles International Airport (LAX) on July 26, 2023 in Los Angeles, California.

Daniel Slim | AFP | Getty Images

US airlines will scale back capacity growth in the second half of the year and consider a raft of other changes, CEO Robert Isom said on Wednesday, after the carrier cut its revenue and profit forecast and said it is parting ways with its Chief Commercial Officer, Vasu Raja.

American will increase capacity by about 3.5% in the second half of the year compared to a year earlier, compared to about 8% year-over-year growth in the first six months of 2024.

Shares tumbled 15% on Wednesday as investors weighed the airline's missteps as the travel industry's peak season kicked off. Some analysts questioned how the airline could capitalize on what rivals expect to be a record summer.

Isom said American is considering changes to a plan Raja has led to encourage direct bookings with the airline instead of third-party sites and travel agencies, a strategy that included gutting the airline's sales force.

The changes angered some travel agents, who were unable to access some of the airline's fares as before, and Raja said last month that the airline's business booking growth was lagging behind major rivals. Delta And United.

Raja will leave the company next month.

“We've used a lot of sticks. We need to put down some more carrots and make sure our product is available where customers want to buy it,” Isom said Wednesday at the Bernstein Strategic Decisions conference.

American said in February it would limit some travel agency bookings from being eligible to earn AAdvantage frequent flyer miles. Isom said Wednesday that the airline would reverse that decision.

“That's off,” Isom said Wednesday. “We don't do that because it would cause confusion and disruption for our end customer.”

Shortfalls in revenue

After the market closed Tuesday, American said second-quarter unit sales could fall as much as 6% from a year earlier, compared with last month's forecast of a decline of no more than 3%. Airlines make most of their money in the second and third quarters, but some areas have done better than others.

“A significant miss, driven in part by booking closures, further exacerbates AAL's ability to capture the full value of a robust summer season,” Bernstein aviation analyst David Vernon said in a note.

During an earnings call last month, Raja said American's business bookings rose by mid-to-high single-digit percentage points in the first quarter, compared with increases of about 14% touted by Delta and United.

United reiterated its second-quarter profit expectations on Tuesday minutes after the U.S. update of its forecasts, although it did not provide revenue guidance. CEO Scott Kirby, an American Airlines alumnus, will also speak at Bernstein's conference.

“American's reduced guide speaks far more to its flawed initial forecast than any broad shift in passenger demand,” JPMorgan aviation analyst Jamie Baker said in a note on Wednesday, adding that United's repeated forecast was an encouraging sign for Delta.

American has also prioritized Sun Belt cities and its major hubs in Texas and North Carolina over coastal markets.

U.S. air travel hit a record over the Memorial Day weekend, and United and Delta executives have forecast a record summer, with very strong transatlantic bookings. There have also been weaknesses as airlines have increased capacity, such as in Latin America.

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