Airlines Getting Back Into Formation for Coming Turbulence - The Wall Street Journal

July 23, 2020 12:24 pm ET

American Airlines AAL 3.70% ’ chief executive, Doug Parker, recently described the carrier’s aggressive pandemic strategy as “Let’s go fly, for God’s sake.” Now, the carrier already prefers to describe itself as “nimble” and “adaptable”—a change that investors should welcome.

As the stock market opened Thursday, shares in American—the last major U.S. full-service carrier to report earnings—fell more than 1%, even though the company beat analysts’ profit estimates. Revenues were 86% lower than a year before, but still exceeded market expectations by 13%, due to American’s decision to bring back a lot more flights than its competitors in June.

On the opposite side of the philosophical ring is United Airlines, UAL 4.93% which has been the slowest to bring back seats in the hopes of making a larger profit margin on each one. The Chicago-based carrier, however, narrowly missed profit expectations when it reported Tuesday.

The market hasn’t ruled in favor of either. The shares of both have performed roughly in lockstep as investors weighed American’s higher leverage against United’s larger exposure to international routes that remain closed, such as the trans-Atlantic market.

Second-quarter reports have shown that almost all U.S. airlines have done well in reducing their daily cash burn relative to what analysts had feared. This is in part because a lot of their fixed costs are less fixed than they seem. Aircraft maintenance expenses, for example, drop when the fleet is parked and older jets are retired. Estimates by the International Air Transport Association placed “semi-fixed” costs at 27% of carriers’ revenues and expected that they would be cut by a third in the second quarter. The actual reduction may very well have been larger.

Budget operators have it easier. Southwest Airlines LUV -1.56% suggested Thursday that it will break even in terms of cash during the third quarter, and Spirit Airlines SAVE 1.14% has said that this was already the case in June. Yet for all airlines alike, the low-hanging fruit of cost-cutting has already been plucked, particularly given that they are trying to avoid mass layoffs once the federal aid runs out in October.

American Airlines posted revenues that exceeded market expectations by 13%.
Photo: daniel slim/Agence France-Presse/Getty Images

From here on, the game will mostly be about getting just the right amount of supply to meet demand. Demand is already stalling, though. United, Spirit and Delta Air Lines DAL 1.98% all are scaling back summer plans amid rising Covid-19 cases. United believes that air-travel demand won’t be able to surpass 50% of its 2019 levels until a vaccine is found.

On Thursday, American said that it is also reducing its ambitions for August and plans to set capacity for the month 60% below its 2019 level, which is in line with its peers. Investors should be relieved: It shows that the carrier’s stubborn stance in June and July was less of a long-term strategy and more due to its dominance of two of the largest domestic hubs, Dallas-Fort Worth and Charlotte. It saw the need to bring back more connections in order to optimize the overall network.

“We are really happy with that tactic. It’s not going to make a big difference six months from now; we are not trying to be bigger than everyone else,” Mr. Parker said.

When it comes to the lockdown period, it remains to be seen which of the two crisis-management tactics will be lauded in business-school case studies in the future. For the next few months, though, American would do well to follow the textbook approach.