American Airlines CEO Doug Parker attends a ceremony to mark the opening of five new gates at O’Hare International Airport on May 11, 2018 in Chicago, Illinois.
Scott Olson | Getty Images News | Getty Images
“Hi from #Santiago,” wrote Delta CEO Ed Bastian in the caption of the Oct. 1 selfie post, the Chilean capital in the background. “If you’ve never been, I highly recommend. With our new partner @latamairlines, you’ll be able to explore the Americas (and the rest of the world) like never before.”
It was the corporate equivalent of seeing your ex-girlfriend’s new boyfriend post their first pictures online together.
Less than a week earlier, Delta announced a shocker: It plans to buy a 20% stake in Santiago-based LATAM, a blow to American that ended its two-decade partnership with what is now the largest airline in Latin America, a region where American is already strong. American failed to secure closer ties with LATAM after its proposed joint venture was blocked by the Chilean Supreme Court earlier this year, setting the stage for Delta to swoop in.
American’s problems go far beyond its failed pursuit of a joint venture with LATAM, which it said without Chile’s sign-off, “would have provided limited upside.” American’s management is facing a slumping stock price, strained labor relations and unhappy customers, raising questions about how CEO Parker can turn things around.
A bad summer
The rough summer “was driven by us not flying as good an operation as we’d like,” Parker said in an interview.
The airline’s latest woes have added to chatter among industry insiders about whether Parker, who is also chairman, will be able to ride out the storm.
“Morale is at an all-time low,” said Lori Bassani, president of the Association of Professional Flight Attendants, which represents about 28,000 American Airlines cabin crew members. Flight attendants are “tired of apologizing for everything that’s going wrong with the airline,” she said.
American has struggled with lengthy delays and cancellations this year, canceling more flights than any other airline in July, according to the Department of Transportation. Parker blamed the problem on the unions representing its mechanics, which the airline accused of an “illegal work slowdown” that prevented it from having enough aircraft at hand. The unions have denied the allegation.
“When we don’t provide [flight attendants] with enough aircraft to start the day … that does have an effect on morale,” Parker said.
737 Max grounding
American’s executives have also noted that the prolonged worldwide grounding of the Boeing 737 Max has hit its revenue and growth. On Wednesday, American cancelled Max flights until mid-January as the grounding drags on and said it expects a $140 million hit to its pretax income in the third quarter after cancelling more than 9,400 flights in the three-month period. Analysts expect revenue of more than $11.5 billion.
But American’s stock is down sharply this year, while other carriers that are also struggling with Max cancellations are all up.
In late August, American’s stock hit a post-merger low. Its shares are down more than 18% so far this year, while United‘s stock is up by just more than 1% and Southwest‘s has risen by more than 14% as of Tuesday’s closing prices. Delta, which doesn’t fly the Max, is up by almost 7%. All four count Warren Buffett’s Berkshire Hathaway among their biggest investors.
American will update investors on its third-quarter performance estimates before the market opens Wednesday, a day before U.S. airline earnings kick off with Delta on Thursday morning.
Despite its troubles, American is profitable, thanks to economic growth that has fueled demand for travel and rewards credit cards. Analysts expect its revenue is rise 3.3% this year to $46 billion, less than sales growth estimates for Delta and United.
More trouble could be on the way if there is an economic downturn. American has a higher debt load than its competitors — close to $35 billion, according to FactSet, about the same of Delta and United’s debt combined.
Jonathan Root, senior vice president at Moody’s, said that American’s debt load isn’t a “survivability issue” but that its higher interest burden can hinder cash flow generation.
Parker has been CEO of American — or the companies that preceded its current form — since 2001. Parker, 57, is the longest-running CEO of a major U.S. carrier and has outlived the average tenure of eight years for a corporate CEO, according to executive search firm Korn Ferry. But he’s has kept mum on the company’s succession planning.
Industry watchers have speculated on successors for Parker, should the board decide on a new CEO, with former American executive Scott Kirby mentioned as someone with the skills to run a giant, complex airline.
While Kirby led a profitable expansion as president of United, he denied any notion of rejoining American at an industry conference last week. He told the crowd he plans to end his career at United, according to travel industry site Skift.
‘Running a good airline’
Parker declined to comment on whether he’s considered stepping down and said his focus is on improving cash flow and American’s operations, particularly growing at big, profitable hubs like Dallas and Charlotte, North Carolina.
“What we can do for American and our customers and our brand and our shareholders right now is make sure we’re running a good airline, something we’re good at, by the way,” Parker said. “We had a difficult summer and that certainly hurts perception from everyone. We recognize that and we care about it. We’re very happy it hasn’t continued and we’re committed to making sure it doesn’t reoccur.”
Parker said American’s operations have recently improved, particularly after negotiations with the mechanics unions resumed last month and the peak summer travel months. In September, nearly 83% of American’s flights arrived on time, its best month since November 2017 and more than 4 percentage points higher than the year-earlier period.
Calls to customer service that surged during the slew of summer disruptions are back to normal and on some days at below-average levels, he added. Over the summer, American Airlines customer service agents called some travelers whose flights were disrupted to apologize and offered compensation such as frequent flyer miles.
The company has been studying how its brand is perceived by customers since last year, a spokesman said.
Parker has a wealth of experience — he’s been in the CEO role at a major U.S. airline for more than 18 years, taking the helm of America West days before the Sept. 11 attacks. He oversaw America West’s merger with US Airways in 2005 on the heels of US Airways’ bankruptcy and again with the US Airways merger with American in 2013 — each time leading the combined company.
But a focus on keeping costs low, a strategy at US Airways, doesn’t necessarily work for American in 2019, analysts said. Under Parker, American embarked on an initiative dubbed “Project Oasis” to add thinner seats with no seatback entertainment screens to aircraft and fit more of them on board. The project was put on hold amid the 737 Max grounding.
“Doug has never been able to shed that mindset,” said Henry Harteveldt, founder of consulting firm Atmosphere Research Group.
The structure at the top is lean, too. American doesn’t have a chief commercial officer or a chief operations officer that could take on some of the company’s challenges.
“I think American is a very hard beast to turn around,” said Samuel Engel, head of the aviation practice at consulting firm ICF. “Hats off to Parker and the team because they’ve taken it a lot farther than other teams have gone. The current challenge is a magnitude of the challenge.”
American has made some moves to improve customer experience. It has invested in its first-class lounges and added fast Viasat Wi-Fi to its planes, partly to make up for the lack of seatback entertainment.
But employee morale remains low, labor leaders say, and American could be facing higher costs soon. In addition to its turbulent negotiations with its mechanics, American is also in talks with its flight attendants and more than 12,000 pilots.
“Our very pilots are asking the same questions that shareholders are asking and passengers are asking,” said Dennis Tajer, a Boeing 737 captain and spokesman for the Allied Pilots Association, the airline’s pilot union. “When will it get better?”
Originally published at CNBC