American Airlines has announced a significant reduction in its profit forecast for the year, citing a flawed sales strategy and an oversupplied market. The airline’s CEO, Robert Isom, has committed to ensuring capacity aligns with demand moving forward.
Adjusted Profit Forecast and Market Reactions
American Airlines expects to earn an adjusted 70 cents to $1.30 per share this year, a sharp decline from the $2.25 to $3.25 forecasted in April. This new projection also falls short of Wall Street’s expectations of $1.10 to $2.60 per share, as compiled by LSEG. The airline anticipates a unit revenue drop of up to 4.5% in the third quarter, despite high travel demand.
Second Quarter Performance and Market Oversupply
In the second quarter, American Airlines reported a 46% decrease in profit, totaling $717 million or $1.01 per share, despite a 2% rise in revenue to $14.33 billion. The oversupply of flights in the domestic market has led airlines, including American, to scale back capacity growth. American plans to increase capacity by approximately 3.5% in the second half of the year, down from the 8% growth in the first half.
Strategic Adjustments and Future Outlook
CEO Robert Isom emphasized the importance of reacting to market conditions and prioritizing profitability in the coming quarters. “As we take a look into the fourth quarter and then beyond, we’re going to react to the marketplace and making sure that we’re competitive, but at the same time, doing what’s right for profitability,” Isom stated during the earnings call. He also highlighted the need for diligence in capacity management through 2025.
Reversing a Flawed Sales Strategy
American Airlines has reversed its 2023 direct-to-consumer sales strategy, which had alienated corporate customers and travel agents. The strategy, intended to increase direct bookings, backfired and is expected to cost the airline about $1.5 billion in revenue this year. The company has taken “swift and aggressive action to reorient its sales and distribution strategy,” according to an earnings release.
Comparison with Wall Street Estimates
For the second quarter, American Airlines exceeded Wall Street expectations in adjusted earnings per share, reporting $1.09 compared to the expected $1.05. However, it fell slightly short in revenue, posting $14.33 billion against the anticipated $14.36 billion.
Industry-Wide Challenges
American Airlines is not alone in facing these challenges. Southwest Airlines also reported a 46% drop in quarterly profit and announced “urgent” measures to boost revenue.
American Airlines’ revised profit forecast highlights the impact of strategic missteps and market oversupply. As the airline adjusts its capacity and sales strategies, the focus will be on aligning supply with demand and restoring profitability.
