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American overcomes Q2 challenges with record revenue

American airlines reported a $1.1 billion operating profit for the second quarter, a period marked by operational disruption, ongoing litigation with mechanics and a capacity shortfall caused by the Boeing 737 Max grounding.

During a second quarter earnings call this morning, chief executive Doug Parker attributed the strong performance to “revenue driven improvement”.

Revenue was up 2.7% year-over-year to $12 billion – a second quarter record for the carrier – despite the grounding of its 737 Max fleet, weather-related issues and legal action taken against its mechanics union.

Executive vice president and chief financial officer Derek Kerr calls the period “undoubtedly a challenging quarter for American”. Despite the challenges, the carrier produced “financial results which exceeded expectations”.

The Fort Worth, Texas-based carrier has revised its capacity growth to 1.5% for the full-year primarily due to the 737 Max being out of service. That growth rate is about half the rate at which American had hoped to grow prior to the grounding, resulting in upward pressure against unit cost, the airline says.

Unit costs excluding fuel expenses increased 4.8% year-over-year “driven entirely by reduction in [available seat miles] growth primarily driven by Max”, notes Kerr. This is up from original guidance of 2-3% cost creep. Available seat miles declined 0.8%.

American is guiding to a cost per available seat mile (CASM) increase of 5% in for the third quarter and 3% for the fourth.

IMPACTS OF MAX GROUNDING

Though Southwest Airlines announced this morning it removed the 737 Max from its schedules until early January 2020, American has made no such change. It is still keeping the aircraft out of schedules only until 3 November.

“We don’t have any new information that leads us to make changes,” Kerr says. “Based on what we know today, we should be able to hit the timeline of being back up in November.”

President Robert Isom affirmed Kerr’s notion, saying he’s “confident” of the aircraft’s return to service.

American says the grounding cost it $175 million in pre-tax second quarter income. It expects the full-year impact will be $400 million, up from a previously-estimated $350 million.

Asked what compensation American expects from Boeing due to delivery delays, Parker says: “We’ve had high level conversations…about what our expectations are, but we haven’t had a detailed conversation about how those expectations will be met.”

Boeing announced on 18 July it would take a $5.6 billion hit in the second quarter – a figure representing compensate to customers for the disruption.

To make up for capacity lost by the 737 Max grounding, American has extended the operating life of some Airbus A320s, Boeing 737s and 757s “on a short-term basis”.

American had already taken delivery of 24 737 Max jets prior the global grounding in March and was due to take an additional seven of the type during the second quarter.

“These extensions will allow us more flexibility as we deal with the grounding of the Max and the late delivery of the A321neos, and provide modest and efficient growth to our fleet,” Kerr says.

American has also been impacted by Airbus A320neo-family production delays. Kerr confirms five to 10 A320 deliveries have been pushed out, though nothing has changed since a new schedule was agreed with Airbus at the Paris air show in June.

FIGHT WITH MECHANICS UNION

In addition to the 737 Max grounding, American sued its mechanics unions – the International Association of Machinists and Aerospace Workers (IAM) and Transport Workers Union (TWU) – during the quarter for allegedly engaging in a coordinated illegal work slowdown in an effort to avoid contract negotiations.

In a legal filing in May, American alleged the slowdown resulted in the cancellation or delay of nearly 1,000 flights since the beginning of the year.

“That slowdown has significantly impacted the company’s operation and caused a high number of flight cancellations and delays in the second quarter,” notes Isom.

On 16 July the court hit the unions with a restraining order requiring they achieve productivity levels equal to 2018 levels.

It is expected that the court will rule on permanent injunction either late next week or the following week, Stephen Johnson, executive vice president of corporate affairs, says on the call today.

DOMESTIC MARKET MAKES UP FOR PACIFIC SOFTNESS

Despite the headwinds American faced during the quarter, the domestic market remained strong, while international traffic softened in certain regions.

US revenue accounted for more than 70% of American’s revenue for the quarter, with Latin America, Atlantic and Pacific revenue accounting for 11%, 13% and 3%, respectively.

“The domestic market remains very robust,” says Don Casey, senior vice president of revenue management. “We’ve been able to backfill any international shortfalls with higher-yielding domestic originating business."

The Pacific region presented the biggest challenge due to currency and economic headwinds. While there has been positive unit revenue growth in Australia and Japan, China continues to be soft due to a “weak pricing environment”.

In June, American announced it would not resume flights to Beijing and Shanghai from Chicago O'Hare.

American's domestic load factor inched up 2% in the second quarter. The carrier expects domestic flights will outperform those in other regions in the third quarter.

“Not seeing anything at this point that would make us concerned about continued strength in domestic demand,” says Casey.

American’s stock price had declined nearly 7% near the end of day on 25 July.

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