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American battles Max delays and labour tensions

American Airlines is taking steps to strengthen its business as it continues to feel the impact of labour tensions and delays in the return to service of the Boeing 737 Max.

“The point that I want to make is that 2019 should have been much better for American,” president Robert Isom told investors during the 4 September Cowen & Company Global Transportation Conference in Boston. He adds that the airline has not produced the margins and earnings it had hoped to see this year despite record second quarter revenue.

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The ever-changing return to service date of the Max has impacted American’s operations, Isom says. “It has put us in a position where we have not been able to pursue our fleet harmonization…and it has also been frustrating for our team.”

The carrier recently pushed back its timeline for reintroducing the Max to 3 December, one month later than its previous estimate. However, the overall timeline for reintroducing the Max to the skies remains uncertain.

American’s December schedule accounts for “metering in” the 24 737 Max aircraft it already has, Isom says, noting that the carrier is “not making any assumptions about new deliveries at this point”. The airline has another 16 Max jets on the books for delivery this year.

The Max is not American’s only issue - ongoing labour tensions with mechanics have also impacted American’s operations this year. The airline claimed that its mechanics unions, the Transport Workers Union (TWU) and the International Association of Machinists and Aerospace Workers (IAM), were supporting an illegal work slowdown that resulted in the cancellation of hundreds of flights. The TWU had said it had not instituted a slowdown, but on 12 August a Texas judge issued a permanent injunction against the two unions.

The airline has been seeing “considerable” operational improvements with regards to aircraft out of service, completion factor and operating performance since the injunction, Isom says. It will return to the negotiating table with mechanics on 16 September, he adds.

These operational issues have impacted American’s progress with its reconfiguration programme for its 737NGs that raises their capacity from 160 to 172 seats. “That has been delayed; we’re only about a third of the way through,” Isom says.

When complete, American expects the cabin standardisation programme to help improve its earnings, along with other initiatives such as instant upgrades and pre-paid bags. The carrier is also focusing on growing its hubs in Dallas-Fort Worth, Charlotte and Washington DC in 2020-21 by taking advantage of new gates being made available at those airports. The carrier will also retire its remaining 26 MD-80s on 4 September as part of its fleet update.

“The good news on all of this is that these are temporary headwinds, and we will get to a labour contract that will end any type of labour action,” Isom told investors. “We are also confident that the Max will be flying certainly in 2020 and beyond. Doing those things alone will get us back to improving shareholder value.”

In August, American's stock price fell by more than 30% over a 30 day period, causing JP Morgan analysts to note that the company had triggered their proprietary trading rule.

"We are unable to reconcile recent equity pummeling with current fundamentals," wrote JP Morgan in a 25 August note. "We remain optimistic that the combination of increasing economic pessimism and American's idiosyncratic challenges (labour and leverage at center stage) have conspired to create an unwarranted selloff," they added.

Since the stock fell to its 2019 low of $24.45 on 27 August, it has recovered 10% to $27 at the end of trading on 4 September.

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