‘Too much capacity’ fueled American Airlines’ Q2 guidance cut

American Airlines (AAL) has slashed its second quarter guidance and announced the departure of its chief commercial officer, Vasu Raja. This double whammy has raised concerns among analysts and investors. Raymond James Managing Director Savi Syth joins Catalysts to share her outlook on the company’s path forward.

Syth notes her surprise at “the level of the guidance cut” but acknowledges that the factors propelling the decision are not entirely unexpected. She cites “too much capacity” within the industry as a contributing factor and critiques the execution of certain decisions on the corporate sales front, deeming them “probably not wise.”

Turning her attention to the departure of American Airlines’ Chief Commercial Officer, Syth says, “I think they’re still in the early stages of evaluating it.” She raises concerns about the company’s decision to implement various strategic changes simultaneously, describing the approach as “not smart.”

For more expert insight and the latest market action, click here to watch this full episode of Catalysts.

This post was written by Angel Smith

Video Transcript

American Airline shares are sinking this morning after cutting its sales outlook for the second quarter.

The line also announcing that Chief Commercial Officer will leave his role next month and this comes after United Airlines reiterated its adjusted earnings outlook for the second quarter.

American Airlines has certainly been struggling to keep up with its competitors.

United Airlines and Delta, both of which are up single digits this year compared to the losses that we’re seeing here from American Airlines.

What happens?

That’s we want to bring in Savi S Raymond James managing director joining us here for more on this si it’s great to see you.

So when you take a look at the losses that we’re looking at in American Air here this morning shares off just around 16%.

The biggest drop that we’ve seen since June 2020 just your reaction to this guidance cut.

And what exactly that means in terms of the positioning here for America, I think we’re, you know, surprised by the level of the guidance cut, but the the factors behind it is probably not surprising to us and we’ve called this out before um too much capacity.

Uh American inclusive and, and the industry.

Um and then also Americans can have made some decisions on the corporate sales front.

Um Some of them are smart but just the way they execute it, it uh I think was uh probably not wise and I think they’re recognizing that.

So I’m really encouraged by, you know, Rob Eisen’s comments this morning as to what the kind of go forward solution is.

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Do you think this is an American specific problem or is it a broader demand problem here?

Yeah, I think it’s interesting where demand is holding.

The interesting thing is that I think there is more price sensitivity, peak, uh peak periods, you know, the summer.

Um you know, we saw Labor Day Weekend is really strong demand and, and not a lot of price sensitivity during that time, but in the off peak, there’s just too much capacity.

And you know, some of the things that Americans said that they will go and do is look at that, you know, capacity that they’re adding into those off peak shoulder periods s when it comes to also the fact that their chief commercial officer is leaving this abrupt departure.

What do you think that tells us our signals about the strategy shift that we’ll likely see here at American?

Yeah, and, and I this morning kinda out outlined some of those changes and, and I think they are, you know, they’re still in the early stages of evaluating it.

Um you know, this big aggressive push on NBC that they did.

I think that was right.

There’s a lot of frustration as to how slow the, um, you know, the, the community has been in adopting NBC, but doing it at the same time that you slash your sales force and make some other changes, I think was not wise.

So I think they’re looking at providing better support uh to their partners.

Um, and I, I think another kind of good move that they’ve talked about is they were going to differentiate how much miles you earn based on uh which distribution channel you booked.

And they, they, they decided not to go through with that, that was planned for June.

And from the sec filing, it seems as though American has a potential revenue problem when you compare American to some of the other major airlines, what’s missing or what’s hurting them more than some of those other carriers.

So they, they talked about, you know, close in bookings uh or close in pricing being weak and that’s really that corporate traveler.

So what you saw in the first quarter was all of its kind of major uh us competitors that would have any kind of corporate exposure.

Um They’re showing, you know, double digit increases in corporate reven you as especially the tech sector and some of these sectors that haven’t traveled so far post COVID are starting to come back and American really only saw you know, mid to high single digit growth.

So that’s where they’re seeing that shortfall and that’s why they need to kind of go back and revisit their corporate strategy.

Si do they cater more towards the budget carrier?

Just given the fact that they’ve underperformed non revenue?

Um I, I don’t, I wouldn’t say that necessarily, you know, they, they are taking a very different path with their product in the domestic market, but they still have a first class product.

They still have, you know, extra leg room seating.

So they do have a premium offering.

Um So it, it might be more of a function of, you know, the, the areas that they are exposed to a lot of sun destinations, that’s more leisure uh based.

Um But again, I think, and, and the fact that they don’t have as much um or they’re relatively less uh kind of strong in, in some of the coastal markets where you’re seeing the recovery now.

But I really think it comes back down to, you know, their large corporate strategy I think was execution was not good since, since they rolled this out last year.

Um And they’re hurting from that now and it is reversible but it will take time.

So you mentioned that shift away from corporate clients.

But what about the loss of that jetblue partnership?

How impactful has that been on the company?

Yeah, I really like some of the things American has tried.

They’ve been you know, very creative on our revenue strategy front.

And, and one of those was kind of the, the Northeast Alliance and, and, and the, the alliance that they have with, with Alaska, which is continuing.

Um So they’ve tried some, you know, creative things to do and, and the Northeast Alliance would have been a good move.

So unwinding that is probably a little painful and, and also adding to the drag.

Um and it’s unfortunate that they couldn’t continue with that.

And so just taking a step back and putting demand aside these airlines, many of them in addition to America and obviously most of them dealing with the rise of geopolitical tensions.

You also just got, you have the simple fact that costs are rising here across the board and then when you also step back and talk about the scarce supplies right now of new aircraft, how overall is the industry positioned heading into the second half of the year?

Yeah, it’s, it’s definitely been challenging.

Um It’s, it’s been a long road, you know, coming out of the pandemic uh for this industry.

Um And you’re right, you’ve seen this across the uh you know, us is that you’ve been a lot of inflationary pressure.

Um and then the, you know, the supply chain um and, and other kind of infrastructure including in the air traffic control.

It’s been a lot of pain points.

The airlines are trying to move through, I think 22 24 was, is the kind of the first year you’re starting to see a little bit of normalizing.

Uh but clearly in terms of OEM deliveries and maintenance downtime, it’s still a lot of issues and they’re continuing.

But, but the industry adapts and I, and I think right now the the best answer is to, to be a little smaller in terms of capacity.

So you can kind of protect the uh the operation and then you can manage through some of these kind of supply chains.

Sabi Saith Raymond James, the managing director.

Thank you so much for joining us.

Thank you.