In August, American Airlines pilots ratified an absolutely massive new contract, boosting compensation by more than 46% and costing the airline nearly $10 billion over the next four years. Since then, I’ve wondered whether that contract is tenable, given that the airline’s margins are already razor-thin. Well, it looks like American Airlines is indeed struggling with labor costs, even as competitors like United and Delta are profitable.
Stagnant revenue, higher costs
American Airlines reported a $545 million loss in the third quarter of this year. That’s mostly because, while revenue remained similar to last year’s figures, costs soared due to a $983 million bonus payout for August’s new pilot contract.
United Airlines and Delta Air Lines, by contrast, both saw revenue increases of 12% and 11%, respectively, earning a profit of $1.1 billion each for the quarter.
Revised route strategy
In response to essentially no revenue growth, American Airlines is evaluating its new route strategies. CEO Robert Isom emphasized a shift in focus, saying, “We’re going to fly where we make money.” That comports with recent route announcements from the airline, in which it avoided launching prestige routes and rather focused on serving reliable seasonal destinations.
Conclusion
American Airlines’ Q3 financial results highlight the impact of increased labor costs due to a new pilot contract. In many ways, this is not a surprise, since we knew that the new contract would amount to a big pilot payout, but it still means that American lags it’s competitors’ profitability and has to find new ways to make more money. Focusing on profitable routes is one way to do that, but I expect we’ll see other revenue initiatives coming out over the next few months.
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So if pilot pay is now equal across the big three, why the difference in profitability? Is the problem pilot costs, or bad management?