American Airlines plunges after CEO admits misjudging demand

American Airlines Group Inc. slashed profit and revenue expectations as its top executive acknowledged that the carrier misjudged domestic demand heading into the crucial summer travel season.

The revelations — along with the abrupt departure of American’s chief commercial officer — sent the carrier’s shares plunging the most in almost four years and heralded changes to its network strategy.

“Our expectation for domestic performance has worsened materially since we provided guidance in April,” Chief Executive Officer Robert Isom said Wednesday at an industry conference. The forecast revision “is largely due to a softer domestic environment than we were expecting and our performance within that environment.”

The overhaul points to diminished prospects for American ahead of the typically lucrative summer months, which are expected to be among the busiest ever for US carriers. Isom promised to make “considerable changes” to recapture business it ceded to rivals as part of a misguided shift in its retailing strategy.

“American revenue has been underperforming the other full-service carriers and it feels like they cater to more budget flyers and don’t pull as much revenue out of the cabin,” said George Ferguson, a Bloomberg Intelligence analyst.

Adjusted earnings for American will be $1 to $1.15 a share in the second quarter, down from a previous expectation of as much as $1.45, according to a regulatory filing late Tuesday. Revenue from each seat flown a mile will drop as much as 6% from a year ago, compared to an earlier forecast of down 1% to 3%. It reduced expectations for operating margin and for non-fuel unit costs.

“The culprit was softer revenue, which handily overwhelmed slightly better cost performance,” Jamie Baker, a JP Morgan analyst, said in a note. 

While the revision injects uncertainty into an aviation industry already grappling with geopolitical tensions, scarce supplies of new aircraft and rising costs, analysts said the issues may be specific to American and not necessarily a reflection of softening demand more broadly. Baker noted that there was widespread skepticism after American offered a rosy forecast earlier this year. He also pointed to rival United Airlines Holdings Inc., which reaffirmed its forecast minutes after American’s initial disclosure Tuesday.

Alongside the guidance change, American also said Chief Commercial Officer Vasu Raja would step down in June. Stephen Johnson, vice chair and chief strategy officer, will oversee commercial operations while American searches for a permanent successor.

Raja, a 20-year company veteran who assumed the commercial role about two years ago, led the company’s move to “modern retailing,” or a push for companies and individual customers to purchase directly from the carrier through its app and website instead of going through a corporate travel manager or online travel agency. The airline’s sales department was cut back as part of the switch.

The shift angered some companies and travel management firms, and Raja acknowledged recently that its growth in managed corporate travel volumes was trailing that at United and Delta.

Isom on Wednesday appeared to fault Raja for the carrier’s recent stumble, saying “we need to reset” in reference to the management change. The airline “moved faster than we should have” on adopting its modern retailing strategy, the CEO said.

Critical bookings that are made close to travel and normally cost more have softened “due in part to changes we have made” in the carrier’s marketing strategy, Isom said. It added too much capacity after misreading summer demand, triggering fare sales in the industry and reducing revenue.

“We are evaluating strategically, holistically and piece by piece,” he said. The airline has to “re-establish our competitiveness among the top network airlines.”

American’s shares tumbled as much as 16% Wednesday in New York, the biggest intraday decline since June 2020. Delta Air Lines Inc. fell 1.5% at 10:29 a.m., while Southwest Airlines Co. slid 4.5%. The worries spread to overseas carriers as well: IAG SA, the parent of British Airways, dropped as much as 3.7%, while Deutsche Lufthansa AG declined 2.9% in Frankfurt.

Demand Uncertainty

There are hints that demand is starting to wane on some fronts, including the US domestic market. Airlines in the US and Europe had previously expected fares to surge this summer with aircraft manufacturers struggle to deliver their large backlogs and issues with Pratt & Whitney engines ground hundreds of Airbus SE A320neo jets.

Aviation executives are gathering in Dubai in the coming few days for the annual general meeting of the International Air Transport Association, where discussions will center around the challenges and pace of recovery of the industry. Conflict in the Middle East has prompted some leisure travelers to reconsider trips, while forcing airlines to change routes or give up some destinations altogether. 

Last week, Ryanair Holdings Plc CEO Michael O’Leary said that European peak summer fares may be flat to modestly higher, despite capacity being constrained, forcing airlines to run promotions and discounts. 

The upheaval at American also raises questions about its recent move to focus on Sun Belt hubs as Americans moved away from large cities in the US northeast and west to Texas, Florida and other southern states. American has said its expansive network of regional jets made it best suited to ferry travelers from growing smaller cities to its hubs in Dallas-Fort Worth, Miami, Charlotte and Phoenix.

Isom stood behind the strategy Wednesday, saying, “I haven’t seen anything that suggests the Sun Belt cities aren’t going to continue to be a real economic engine in the United States.”

Still, the changes to its retail strategy could take time to implement, said Helane Becker, a TD Cowen analyst.

“It is apparent that the company’s senior management team believe the plan is not working,” she said in a report. “Hence, the CCO is leaving. We expect it will take at least a year to get back on track.”