
American CEO Says Airline Industry Losses Are a Thing of the Past
The airline industry has fundamentally changed from its once intense cyclicality to the point that American Airlines (AAL) - Get Report CEO Doug Parker now contends, "My own personal view is you won't see losses in the industry at all.
"Our industry has been fundamentally and structurally changed," Parker said Wednesday at American's annual meeting, held in the conference room of a New York law firm. "Things are different now.
"When down cycles come, you won't see losses," he said. "The bad years won't be cataclysmic. They will just be less good than the good years."
Parker cited some favorite comparisons: In 2005, the cost of Brent crude oil averaged $55 and three-year average GDP growth was 3.4%. In 2015, the cost of Brent crude averaged $54, nearly the same; three-year average GDP growth was 2.1%, a bit slower; and industry capacity had gained about 7%.
The three sets of numbers, Parker said, represent the industry's "three biggest drivers" -- fuel cost, the state of the economy, and industry capacity. And despite their similarity a decade apart, the U.S. airline industry lost $28 billion in 2005 and made $19 billion in 2015.
"Those aren't just two different numbers," Parker said. "Those are life and death. This is the difference between an industry that was dysfunctional and on the edge of insolvency at all times to one that is vibrant and growing."
It is worth noting that no one has been more instrumental in the industry's transformation than Parker himself. At the start of 2005, he was running America West Airlines, a small, low-fare carrier (eighth largest in the U.S.) that suffered from low credit ratings, losses of $1 billion over the previous five years and a generally poor outlook.
Ten years later, after two mergers, Parker was running the world's biggest airline, which posted a record $6.3 billion profit in 2015. Importantly, his decade-long pursuit of mergers -- including several efforts that failed -- stimulated industry consolidation that enabled the remaining carriers to trim redundant capacity, impose fees for services such as baggage carriage and seat selection, and more closely align pricing with costs.
Through it all, Parker maintained an informality that was on display as he joked his way through Wednesday's meeting. At one point, citing comparative statistics for operational performance on the day following merger-related reservations system cutovers, he noted that on the day in 2007 when US Airways and America West merged their systems, operational performance was poor.
"The guys who were running America West, they really screwed this up," he said. "Glad those guys aren't around anymore."
Besides humor, Parker displayed another intriguing quality: the continuing evolution of his thoughts on the airline industry. What does he see as the consequence of creating a consistently profitable industry? The need now, he said, is for American "to be an amazing place to work.
"There appears to be a race now for the best employee relations {and} we're going to win," Parker said. As an example, American decided in March to offer employee profit-sharing, even though that is not part of its labor contracts. "It's in our shareholders' best interest," Parker said.
Now let us consider three differences between the American annual meeting and the annual meetings of United (UAL) - Get Report and Delta (DAL) - Get Report on Wednesday and Friday, respectively. First, only American's annual meeting lacked pickets. United flight attendants picketed and Delta pilots are scheduled to do so.
Second, Parker is the only CEO at any of the big three airlines who also ran the annual meeting in 2015. In the past year, Jeff Smisek was pushed out at United and Richard Anderson chose to retire as Delta CEO, remaining as chairman.
Third, American's meeting was Webcast, United's was not and Delta's isn't scheduled to be.
The conclusions, I imagine, are first that not only does Parker believe he can manage the industry's fractious labor relations model better than competitors, but also he may be right. Second, Parker now speaks for the airline industry. Third, he wants the public to hear what he has to say.
We should probably listen: He has been right so far.
This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.









