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Three years after merger, it’s make-or-break time at American Airlines

American Airlines President Robert Isom said 2017 will be a key year for the company.
American Airlines President Robert Isom said 2017 will be a key year for the company. pmoseley@star-telegram.com

Three years ago, Robert Isom flew from sunny Phoenix to an icy Fort Worth, ready to help American Airlines and US Airways merge to become the world’s largest airline.

Isom, a former US Airways executive who became chief operating officer of the new company and was named American’s president in August, said he’s incredibly proud of what has been accomplisheed since then. The integration of the airlines so far has been a smooth transition to a single passenger reservation system, one frequent flier program and one flight operations system.

But as the new American Airlines enters its fourth year, Isom said it’s time to deliver on the promise of the merger, which means running the Fort Worth-based carrier better than it has ever been operated before.

“I think 2017 is a key year for us to really run a great operation and I think it’s a key year for us to make sure that we’re performing from a commercial perspective as well,” Isom said in an interview with the Star-Telegram on Friday, the anniversary of the merger. “The good news on both of those fronts is we couldn’t be going into 2017 with better momentum than what we have right now.”

After reporting record profits in 2015, American’s business encountered a little turbulence this year. Revenue in the first nine months of the year dipped 3 percent, and operating income fell 12 percent as increased competition squeezed fares and kept planes less full.

On Friday, American reported some better news, telling investors that it was raising unit revenue estimates for the fourth quarter. It now expects unit revenues, a key measure of its business, to range from down 1 percent to up 1 percent, compared with a previous forecast ranging from down 2.5 percent to down 0.5 percent. American’s stock (ticker: AAL) rose 3.3 percent to close at $49.64, the highest it has been all year.

Isom said the company is seeing strength across all lines of its business including corporate and leisure travel. And last month, the company reported its best operational November ever with the fewest cancellations and best on-time departure rate since the merger.

“We’re closing out the year really strong,” Isom said. “A lot of it is due to the initiatives we have put in place that are now taking root.”

Getting there on time

As the chief operating officer when American and US Airways merged, Isom focused on running the day-to-day operations of the airlines.

During his tenure as COO, American also built and opened an integrated operations center in Fort Worth and rebanked its flight schedules in Chicago, Miami and Dallas/Fort Worth.

Even though Isom, 53, was promoted to president in August, making him the No. 2 executive at the company under CEO Doug Parker, airline operations and making sure that flights depart and arrive on time remain a top priority.

In November, the carrier completed 99.7 percent of its flights, canceling only 231 flights the entire month. Isom added that the carrier is losing fewer bags as it sees 30 percent-plus improvements in baggage performance.

“We’re finally getting to run a single airline,” Isom said. “We’ve been through the integrate, the stabilize, and the good news for us is we’re now looking to optimize.”

But November was a good operational month for most of the U.S. airline industry as there were no major winter storms to disrupt travel, particularly during the busy Thanksgiving week. And American’s competitor Delta Air Lines reported it has had 200 days in 2016 when not a single mainline flight was canceled and 67 days when all of its scheduled mainline and regional flights were completed.

Aviation analyst Robert Mann said American’s operational reliability and on-time performance continue to be a problem at the carrier.

“They keep thinking they’re doing a good job, but in fact, they’re not catching the performance of Delta or United,” Mann said. “If American is going to have the No. 1 network, in order to get a revenue premium as opposed to a deficit where they are currently operating, they are going to have to get back to an operational performance level that commands that premium.”

Looking back, ahead

Reflecting on the last three years, Isom said the company accomplished several merger milestones, such as moving to one reservation system and getting its single-operating certificate from the Federal Aviation Administration, while at the same time receiving hundreds of new airplanes and retiring hundreds of old ones.

American successfully negotiated joint bargaining agreements with its pilots and flight attendants, though it still has labor issues that need to be addressed. The flight attendants need to be shifted into the new flight operations systems, and the company is still negotiating new contracts for its fleet workers and mechanics. Isom hopes both items can be completed in 2017.

“From a commercial perspective, we are one airline. Behind the scenes, we had been two airlines with our aircraft and our pilots,” Isom said, noting that the last major piece of the integration will be its maintenance systems, likely in a few years.

With some of the larger merger hurdles cleared, American is starting to roll out initiatives that could help boost revenues and profit margins.

In the early part of next year, American will begin selling premium economy seats on a few international routes. The new seat class, installed on its Boeing 787-9 aircraft, will offer more legroom, enhanced meal service and amenity kits to customers who want more than is provided in economy but who don’t necessarily want to pay for a business class ticket with its lie-flat seats.

While it invests in high-end passenger amenities, American also plans to unveil a basic economy ticket to help the airline compete with ultralow-cost carriers like Spirit Airlines and Frontier Airlines.

Isom declined to discuss any details about the basic economy product, which will be revealed early next year, and he declined to say whether the carrier plans to follow United Airlines, which will charge for overhead bin space if a customer buys a basic economy ticket.

“No matter what we offer, we have to make sure we’re ready to service and sell and make sure that our team is ready to handle it,” Isom said about the new ticket classes.

The revenue initiatives may alleviate some concerns investors have had about American’s lack of growth in its profit margins.

“The current expectation heading into 2017 is that margins will be squeezed given the increase in labor and jet fuel costs, unless air fares go up,” Cowen and Co. analyst Helane Becker wrote in a research note to investors on Friday, although she added, “American will likely lead the industry in unit revenue performance in 2017.”

Shares of American are up 30 percent in the past three months, and the carrier has benefited from increased business travel since the presidential election. But if American fails to deliver on its new revenue products or if operating costs continue to rise, Wall Street investors may be tired of waiting for the synergies promised by the American-US Airways merger to materialize.

“It’s probably going to be make-or-break time at American, and 2017 may be that year,” Mann said.

Andrea Ahles: 817-390-7631, @Sky_Talk

American Airlines CEO Doug Parker talks about the carrier's plans to fly to Cuba, pending government approval. (Video courtesy of American Airlines) March 2, 2016.

American Airlines showed off its new premium economy class which is currently available on international flights from DFW to Sao Paulo and Madrid. (November 3, 2016) Video by Andrea Ahles and Brandon Wade.

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