Monday, March 20, 2017

American Airlines CEO: How Do We Beat Delta? We Bet on New Aircraft

American CEO Doug Parker said his airline has a revenue gap with Delta and is on the way to making it up -- thanks largely to its modern fleet.

In 2016, American's 2016 revenue per available seat mile was 6.2% behind Delta's, according to a chart Parker displayed at last week's JPMorgan transportation conference.

For American, "all the leverage is in closing this gap," Parker said. "It can be done and it's happening.

"You only do that with the most aggressive fleet modernization in the history of the industry," he said.

"We are outspending Delta and we can catch them," he said. "American had the second-oldest fleet in the industry; now we have the youngest."

At the end of 2017, the average age of American's aircraft will be 9.8 years, down from nearly 14 years in 2012. (American has nearly 950 aircraft). The average fleet age is 10.4 years at Southwest, 14.4 years at United and 16.6 years at Delta.

This year, American will take delivery of 57 new aircraft. By the end of 2017, it will have taken delivery of 395 new aircraft since the 2013 merger with US Airways, while retiring 391 old aircraft. New aircraft are more fuel-efficient and can be more appealing to passengers.

Buying aircraft costs money. Between 2014 and 2017, American's capital expenditures, mainly for aircraft, totaled $22.7 billion, while Delta spent $12.3 billion and United spent $12.2 billion.

But Parker's point was that airline investors should try long-term thinking.

"You care more about the month's {revenue per available seat mile} than I do," Parker said. "You guys are thinking too short term. It sounds whiny {but} we need you to think long term."

A fourth chart showed that 80% of American investors today are "low turnover," up from 44% at the time of the merger.

The best-known of these investors is Warren Buffett. Buffett's Berkshire Hathaway is now the largest or second-largest owner of the big four U.S. carriers. It owns about 9% of American shares, 9% of United, 8% of Delta and 7% of Southwest shares.

Buffett "is not the only one," Parker said. "Now we're getting firms coming in that are buy and hold."

One other point: The revenue gap with Delta was shown on a chart comparing revenue adjusted for stage length. The chart showed that American lags Delta by 6.2% and lags United by 12.2%. Arguably, calibrating United's revenue with American's average stage length, about 1,200 miles, overstates United revenue. In any case, Parker's presentation focused on the comparison with Delta.

Delta Chief Financial Officer Paul Jacobson has countered Parker's argument at two recent investor conferences, where he has said that operating older aircraft benefits the airline, its investors and its passengers.

"Many of you who are new to the Delta story would look at Delta's fleet age, which is among the oldest in the United States, at least in the domestic markets," Jacobson said at a Raymond James conference.

"It would probably defy logic for me to tell you that despite having the oldest fleet, we have the highest reliability, we have the lowest maintenance unit cost, and we have the highest customer satisfaction among all of our peers," he said.

"While our average fleet age is old, we have a very healthy mix of both new aircraft and older airplanes which not only gives us the ability to utilize the savings of the newer airplanes, but also gives us added flexibility in the case of a downturn," he said.

In a downturn, Delta could stop flying older, paid-for airplanes at virtually no cost, Jacobson said. In fact, it could even use those airplanes for parts, which would "ultimately lower the cost of operations for the remaining aircraft that are flying," he said.

Another Delta advantage is lower debt. In a recent letter to American's pilots, leaders of the Allied Pilots Association Charlotte base wrote that American's debt load, which stood at $22.5 billion on Dec. 31, "is more than all the other network carriers combined."

Parker discussed the high debt load on American's third-quarter earnings call in October. "Borrowing money at 3% interest to buy aircraft is good policy," he said.

"That leaves us cash balances that are in excess of the target," he said. "We think the right thing to do with that is to return it to our shareholders. But the way we protect ourselves is having a much higher liquidity balance than others."

(Ted Reed - TheStreet)

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