In American Airlines’ Sour Week, United Vaults Ahead

At an investor conference Wednesday, the focus was on American Airlines CEO Robert Isom, who had to explain just-released disappointing second quarter guidance, the departure of a top executive and the failure of an effort to limit corporate travel agency access to low fares.

The presentation that followed Isom’s was by United Airlines CEO Scott Kirby. It didn’t get as much attention.

That’s understandable. Kirby said, as he has said for months, that United now competes with Delta to be the leading U.S. airline. “There are two airlines that are probably going to be close to 100% percent of airline profitability this year,” he said.

But this time, American’s unfortunate week seemed to underscore Kirby’s thesis that United has joined Delta in creating a premium product in a commodity business. Kirby implied that one outcome could be that that American may have to pull back capacity at some of its hubs. In fact, in Chicago, American has already downsized since the pandemic.

“Airlines can’t fly places that they lose money,” Kirby said. “I look at everyone that’s not Delta or United, and they have large chunks of their route network that lose money. I know where, I know how much; they can do the same for us. We make money in all seven of our hubs. We’re pretty unique at that.”

For other unnamed airlines, he said, “There is a mathematical and economic inevitability that they’re ultimately going to stop flying in places that lose money.”

Kirby didn’t focus on American’s reduced guidance, which he attributed to “just a forecast issue, not weakness.” As for the failed distribution initiative, he said, the impact was small. “If you looked at kind of the margin gap between Delta and United on the one hand and American on the other, it’s a single-digit percentage of that,” he said.

More important, he said, is that United has permanently moved ahead of American in profitability and appeal to premium passengers. He used the example of seatback entertainment.

Eight years ago, Kirby said, “I was president of America, and we were putting seatback entertainment system on every one of our airplanes. Everyone in American thought that was a stupid idea. The day after I left, they reversed it and they spent money to take it off the airplanes because it would reduce weight and save fuel burn. We put it on at United. We’re putting it on every single airplane.”

Kirby flew to the conference on a United aircraft. “As I always do when I fly on one, I walk from back to front,” he said. “Two thirds of the customers on the airplane are watching movies.” When they are pleased with the movies, he said, they rank United higher in other areas including flight attendants and gate agents. They even rank their TSA experience higher.

Current aircraft shortages are a blessing in disguise for most airlines, Kirby said. “A lot of airlines that are unable to get aircraft right now, it’s the best thing going for them. They need more loss-making routes like they need another hole in the head.”

Eventually, however, those carriers will have to cut routes. “I don’t know what the catalyst is going to be,” Kirby said. However, “Airlines don’t keep flying places. I don’t really get it but people think about ‘strategic flying.’ They fly, but eventually economic reality triumphs over hope, and that’s what’s going to drive the change.”

At this point, Bernstein analyst David Vernon observed, “If an airline’s flying out of Chicago and losing money today, they could eventually get the product right and get the equipment right and maybe improve that.”

Since before the pandemic began in 2020, American executives have said on nearly every earnings call that the airline wants to boost capacity in Charlotte and Dallas, where the carrier makes money. They rarely mention Chicago.

United is poised to push above pre-pandemic levels of traffic at O’Hare International Airport this summer, while American is far below its pre-pandemic level, Crain’s Chicago Business recently reported, citing data from Cirium. In July, United’s ORD July seat capacity will be about 3% above July 2019 levels, while American capacity will be 17% lower.

During the week ending Friday, American shares fell 17%, while United shares rose 2% and Delta shares fell 1%. Year-to-date, American shares are down 14%, United shares are up 30% and Delta shares are up 26%.