American Airlines executives on a Thursday earnings call defended its distribution strategy and detailed the steps they are taking to optimize it, while its first-quarter corporate demand growth rate appeared to fall short of some of its main competitors.
“Q1 marks the end of a year of transition on our distribution strategies, in which we were really focused on actually creating the right long-term customer proposition, reducing a lot of the unnecessary expenses that went along with it,” American chief commercial officer Vasu Raja said. Now, “we get to do optimization,” which “can really bring in a lot of our travel agency and corporate partners, but very critically, it can drive revenue and profit for the airline.”
American in April 2023 began to remove up to 40 percent of its fares from EDIFACT channels in an effort to shift bookings to its direct or New Distribution Capability channels.
Raja said that these changes could have come at a “real risk to business revenues,” but American CEO Robert Isom said at the top of the call that “we have seen sequential improvement in the recovery of managed corporate travel and domestic business revenue growth outpace capacity growth in the first quarter.”
Without giving specific numbers, Raja said “total business revenue” growth was “close or approaching double digits exiting” Q1, which was driven by unmanaged corporations. Managed corporates with contracts are “growing a little bit less than that, but still high in the mid-to-high single digits,” he said. Delta Air Linesand United Airlines each previously reported first-quarter corporate growth rates of 14 percent year over year, while Southwest Airlines on its Thursday earnings call said it continued to gain corporate market share.
Raja, however, said American was serving the corporate market with 7 percent lower distribution expense than before it implemented its changes a year ago. “Sixty percent of our customers are our AAdvantage customers, and they produce two-thirds of our revenue,” and “a lot of those customers are actually leaving the agency and coming to us directly on their own,” he said.
Isom added that “engaging directly with our customers through modern internet-based technology is where the industry is headed, and we’re leading the way.” American is “at a point where 95 percent of all transactions that customers have with us can be digitally serviced,” he said. “This is a coordinated effort across everything we are doing … and we’ll make adjustments along the way.”
In other words, American, as it has repeatedly said, is not backing down. But it did take the step this week of delaying its planned preferred travel agency program start date. The reason for that move is that the carrier was “pleasantly surprised to see how many people are taking it,” Raja said, adding that a majority of American’s agencies are in New Distribution Capability transition, and the agencies that represent 30 percent to 40 percent of the carrier’s revenue “are already doing more than 30 percent of their bookings through NDC and are on a path to be in some cases close to 100 percent by the end of the year.”
Further, a lot of “big agencies” are signing on for it because they “realize the customer utility and having a digital selling and servicing experience,” Raja added. “Frankly, they see this as an opportunity to go compete against other agencies, which is great for customers.”
It also could be great for American as it will continue to reduce distribution costs and increase revenue on those transactions, he said.
“If you look at it for a long time, we endeavor to go and do things like maximize share, agency share or corporate share, but that isn’t necessarily optimizing revenue per se,” Raja said. “As we came out of the pandemic, a lot of the agency or corporate-related bookings that we were doing were coming out [at] relatively low revenue values sitting in the premium cabin. … A lot of our transition has been undoing so many things that we’ve done which were not really creating value for the customer nor creating profit for American Airlines. And we’ve done that over the course of the last year.”
American Q1 Metrics
American reported first-quarter passenger revenue of nearly $11.5 billion, up 3.2 percent year over year. Total revenue was nearly $12.6 billion, a 3.1 percent increase from a year prior. The carrier had a $312 million net loss for the quarter compared with $10 million in net income for Q1 2023. The average fuel price for the first quarter was $2.86 per gallon.
The carrier’s guidance projects second-quarter capacity to be up 7 percent to 9 percent year over year, with full-year capacity up in the mid-single digits. The average fuel cost for the second quarter is expected to be $2.75 to $2.95 per gallon. American projects average full-year fuel costs to be $2.25 to $3.25 per gallon.
