American’s CEO Doesn’t Think Airlines Will Ever Lose Money Again

Richard Branson once famously said “if you want to be a millionaire, start with a billion dollars and launch a new airline.” Historically the airline industry has been extremely unprofitable for a variety of reasons. These include fluctuating oil prices, fragmented markets, foreign competition, terrorism, aging fleets, and at times airlines seemingly not being run by businesses.

I have a lot of respect for Doug Parker, who is American’s CEO. Whether or not I agree with many of the changes American is making, I respect Parker because he has been in the airline industry just about his whole career, and has gone from being CEO of America West, to eventually becoming the CEO of the world’s largest airline. That’s impressive.

So I always take interest in what he has to say. Brian Sumers at Skift has the story of how Doug Parker recently told investors that he doesn’t think airlines will ever lose money again:

“My personal view is that you won’t see losses in the industry at all,” said Parker, speaking June 8 at American’s annual meeting. “We have gotten to the point where we like other businesses will have good years and bad years, but the bad years will not be cataclysmic. They will just be less good than the good years.”

To illustrate his point, Parker compared American’s 2005 to 2015. In both years, he said, the price of oil cost roughly $55 per barrel. Also in both years, U.S airlines had just about the same number of seats in the marketplace. But in 2005, the overall U.S. economy was growing more rapidly than today, measured by gross domestic product.

Yet in 2005, in what might be considered slightly more favorable conditions, American lost roughly $28 billion, while a decade later, in similar conditions, the carrier earned $19 billion.

“That’s the difference between life and death,” Parker said. “This is the difference between a business that was dysfunctional and one the edge of insolvency at all times and one that this vibrant and growing and taking care of its customers and employees.”

American-787

I commend Parker for sharing his opinions, and I find this to be rather insightful because of the implications of what he’s saying.

I’m sure I’m not the only US airline loyalist who feels like airlines just doesn’t really care about loyal customers anymore. I think now we know why — airlines seem to have gotten arrogant, and genuinely think they don’t need loyal customers in order to turn profits anymore.

I’m not denying that US airlines are being better run than in the past. They absolutely are, and that’s largely coming in the form of segmenting customers and charging fees, which I don’t blame airlines for. Planes are also more fuel efficient, which is driving down operating costs.

But it’s mind-boggling for the CEO of the world’s largest airline to suggest that they “won’t see losses in the industry at all.”

Airlines are doing well right now, and there’s merit to his 2005 vs. 2015 example. But if oil prices go higher, if there’s another major terrorist attack involving planes, if there are more entrants into the market, if there’s more foreign competition, etc., I don’t think profits across the industry are a sure bet.

Parker’s perspective seems to completely ignore how cyclical industries can be. If it’s true that all airlines will be turning profits you can bet that more airlines will be launching, the market will get saturated, and then we’ll get into another round of consolidation.

Over the past decade we’ve seen an incredible amount of consolidation, so the airlines are in a really good place right now. It just seems like the airlines are losing sight of the big picture of where the industry has been the past several decades.

I find Parker’s perspective interesting, and think it’s probably fairly reflective of how confident airlines feel about their situation at the moment.

What do you make of Parker suggesting that airlines won’t lose money at all anymore?

Comments

  1. They will continue to turn these profits as long as competition isn’t allowed to thrive in the US. We read stories of Delta making sure Atlanta doesn’t build another airport, to keep competition low. Newark has pretty much no competition as United is allowed to take over more and more gates (or trade gates with Delta in JFK).

    Until foreign airlines are allowed to come in and compete, they will continue the profits. But, once a low budget carrier comes in that can truly compete internationally with the big three from the US in price, or as middle eastern and Asian airlines come in and take up more market space and force the big three in the US to either compete on price and quality, that is the only time we will see change/the big three not making profits.

    Plus, with all this record profit they are making, they should pay back their bailout money, but that’s a whole separate issue.

  2. Agree with Jay. Anyone who thinks they will always make money, in an industry where this has decidedly not been the case, is an idiot. The only way to make this true is control the market like they’ve done.

  3. @Jay
    While I don’t think it’s wise to say they will never lose money, I do have some questions about what you’re talking about.
    Even if it were allowed, why on earth would any foreign airlines want to come into the US to compete in the US domestic market? they ALL have cost structures that are much higher than those that US carriers have. There’s no way their cost structures would allow them to compete in the price driven US market. They’d lose their lunch immediately. Also, it’s not like most carriers (the BAs, the LHs, etc) have tons of aircraft just lying around. Unless they wanted to substantially reduce their flying in their current home markets, they’d have to DRASTICALLY increase their fleet sizes. That’s expensive. And adds to the already high cost structures they have. Where would they even fly in the US? setting the concerns you raised about competition/ gate space in various US airports, how would any of them even gain the scale to be cost effective or establish a presence in what IS a very competitive price driven domestic market? I think the good “service” you (and I) have come to expect from these carriers would go out the window as they cut costs to even be able to survive in the US market.
    Essentially, I always see straight up assertions about the amazing benefits that would occur if these carriers could come into the market. Frankly, I think it would be the opposite. They’d be chewed up and spit out and be thrown right back out.

  4. Agree with Jason. Even if if foreign carriers were allowed to fly domestically in the US (which will NEVER happen), given all the factors he mentioned, I can’t see a carrier having much success if they tried. You might see the odd JFK-LAX route or something similar, but a true domestic challenge to the US domestic market by foreign carriers simply won’t happen.

  5. @Jason
    I didn’t say they wouldn’t lose money, I just said they would continue to turn these record profits unless something changed. So they will still make money, just not nearly at these levels we have seen. But I agree with you in that sense, that to say they will never lose money isn’t true.
    And I apologize for sounding confusing about the second part. I don’t mean for these other airlines to come in and fly our domestic routes. I am talking about them coming in and flying more international routes.
    From that, you could have two different types of airlines come in more. Airlines such as a Ryanair, that could come in and fly cheaper routes than we are seeing from a United/Delta/AA. With those airlines continuously downgrading their service in economy (which they have the right to, it’s fine), if competition from a Ryanair (or a Ryanair type airline) was allowed to come in and offer the flight for less, people are going to go with Ryanair. We see it with WOW and Norwegian airlines.
    On the other hand, you could have airlines like Emirates, Qatar, Etihad, etc., that are these luxury type airlines, where they offer competitive prices for their business class product, would get more business than the United/Delta/AA counterpart. This would force United/Delta/AA to either lower their business class product prices, or raise their standards.
    Either scenario puts pressure on them to either lower price (or become more competitive) or to up their standards, and could at least put the fear of them losing some of their profit (as per what this article is about).
    Hopefully that makes more sense.

  6. @Jay:

    You know, Southwest Airlines actually does exist, as much as every OMAAT fan forgets they exist because they will never, ever have lie-flats and serve you champagne and caviar.

    As well as Alaska, Virgin America, Jet Blue, Spirit and Allegiant.

  7. @Jason – the part of your comment that totally misses the mark is the vast majority of airline profits worldwide are in the US. If there was a free, unregulated market, the foreign airlines would love to pick off routes from the legacies. The only thing keeping the legacies honest are the fact that F9 and NK keep coming along and picking off routes.

    The US may be price sensitive but go look at any airfare for US – anywhere vs. anywhere – US. You’ll find it’s almost obviously more expensive to do the former. The US (and maybe India) are the only halfway strong major economies in the world right now. Europe is in trouble. China is reeling. Brazil and Russia are basket cases. All natural resource dependent countries (Australia, China, Middle East) are reeling massively. So who is going to drive demand outside the US except for one-way tickets from Brazil – Miami?

    The US domestic airline market remains extremely strong. Load factors are high.

  8. @eponymous
    You’re right those airlines do exist and when they are cheaper, I fly them, every time. But depending on where you live, they are not that great in price.
    Someone say between EWR and PHL, really only has Southwest as an option. Jet Blue charges insane prices from those places. Alaska and Virgin have very limited flights out that way.

    But Spirit/Allegiant/Frontier are all great options for low cost carriers. And they are great flights for domestic options. What I was saying before is these international airlines coming in to compete on international routes. My apologies for not making that clear.

  9. Also, let’s see. Emirates, Qatar, Etihad, Cathay Pacific, Ethiopian, Norwegian, WowAir, Air Berlin have all added USA service in the past decade (some of those being LCCs), none of them being part of the antitrust JVs (like Lufthansa, ANA, JAL, BA, Iberia are).

    So what exactly are you asking for?

  10. At some point the economy will shift downward (it’s anybody’s guess if it’s a shallow or a deep trough and how long it lasts). Business and leisure travel is usually the first item to be reduced.

    In 2009, I found all types of ridiculously inexpensive fares. For example,DFW to EYW Thanksgiving week 2009 for less than $200. Driving home to see family would have cost nearly the same. I was in Key West instead that week. We can’t predict the future, we can only try to capitalize on opportunities as they present themselves to us.

  11. Anybody here have any thoughts on AA, DL, & UA stock prices? They are way off quite a bit in the last few weeks on oil’s rebound. Barring a disaster, I think oil has found a new temporary home around $50 and think at these levels the airlines look attractive. Anyone agree.disagree. thx

  12. It’s ridiculous to say they’ll never lose money. Perhaps they won’t lose money in a strong economy, but any industry with a massive fixed asset and cost base will lose money in a sharp downturn. Too many seats, too few customers – and it takes time to adjust.

    Whilst allowing foreign competition almost certainly won’t happen (I can see Canadian and Mexican airlines possibly being permitted, but not Asian or European), I would note that fares within Europe are far cheaper than fares within the USA, so there’s clearly a lack of competition within the US market.

  13. The difference is that we have very favorable interest rates that make owning and leasing very expensive assets like airplane much cheaper. I wonder if his tune changes as interest rates rise (like they were in 2005).

    Plus with comments like that I expect his pilots union to jump at the opportunity to “spread the wealth”.

  14. I hope he is right. If so, that MIGHT, in the future, negate the need for U.S. taxpayers to again hand airlines a multi-billion dollar gift.

  15. Just booked a $39 base fare round trip from ORD to LAX same day turn. Pretty sure they are losing money on that one.

  16. What an idiot. All it will take is the combination of high oil prices and a recession, and the airlines will start hurting again. And I also predict that under those conditions, they will start adjusting their rewards programs in the opposite direction they are going now, because they are going to have to fight for every customer.

  17. Well, he fails to see risk and failed to properly evaluate the items you point out and more. This “perception of risk distortion” is often a byproduct of SSRI patients. Everything in the world looks great through rose colored glasses…

    Accurately estimating complex interrelated risks requires a hardheaded approach that is able to “connect the dots” which is often difficult for these types.

  18. I’m looking forward to the day that he’s wrong and AA’s Board of Directors holds him accountable for it. All he’s done is turn a solid carrier to sh!t.

  19. People should really stop talking about foreign owned airlines competing in the US domestic market. For a variety of reasons (some valid, some not) it simply WILL. NEVER. BE. ALLOWED. What purpose does beating a dead horse serve?

  20. Wow Lucky, you are writing like some of those “austrian school of economics” guys, criticizing every single aspect that Doug Parker just missed to explain. But don’t get me wrong, I really love it.
    I agree that Parker is perhaps underestimating the real causes that are driving the airlines towards those levels of profitability.

  21. I found Parkers commentary to be fanciful, as a 30+ AA member having Survived the BK and devaluations, coupled with.post 911
    Personal Privacy intrusians basef on a Unconstitutional ‘law’ disfunctionally named Patriot Act…
    I have retired from the fray…lucky me…and jave so many others of my generation. New modems are now becoming available that further isolates the neef for ‘personal interaction’…thus the requirent for air travel by the Majority of active flyerd is rapidly diminishing….

    And finally, AA is transitioning to a revenue based program….well, so am I…

    no longer shackled to a particular program, my choices have widened considerably, and will now take precidence to the ‘mileage game’ offered by the Majors, replaced by a judiciously applied CC promotion…

  22. ” If it’s true that all airlines will be turning profits you can bet that more airlines will be launching, the market will get saturated, and then we’ll get into another round of consolidation.”

    I’m not so sure this is the case. The “barriers to entry” in aviation are higher than any other business.
    We’re unlikely to see another successful carrier launched for many decades.

    Successful development of teleportation would definitely cause losses for airlines, however.
    In fact, I am working on it in my garage and am ready for a Kickstarter campaign.

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