An American Airlines Airbus A321-231 aircraft parked at Las Vegas’ Harry Reid International Airport in January. (Photo by Artur Widak)
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American Trails Rivals in Pre-Tax Profit Margin
With American Airlines under constant assault for its failure to match peer profit margin, two of the carrier’s top executives said Thursday that they fully expect to close the gap.
Profit margin, expressed as a percentage, refers to the difference between revenue and cost. In recent years, American has trailed peers Delta and United. In the second quarter, American said its pre-tax margin was 5.8%. Delta reported a pre-tax margin of 11.6%, while United reported 11%.
American Execs Say the Carrier Can Catch Up to Delta and United
Speaking at an investor conference, American CFO Devon May said, “I think we’re going to be able to shift that margin gap pretty significantly,” while Vice Chairman Steve Johnson said the carrier has performed well on the cost side and is making gains on the revenue side.
The improvement “leaves us really encouraged about the revenue gap to other airlines,” Johnson said. He noted that “historic revenue performance accounts for more than half” of the revenue gap.
Credit Card Deal With CitiBank Will Boost American Revenue
Key to Johnson’s enthusiasm is the credit card deal American signed with Citibank in December 2024. The deal, which takes effect in 2026, eliminates Barclay’s as an issuer of American cards, giving Citibank exclusivity. That should enable the bank to fully compete with American Express and Chase, who issue Delta and United cards respectively, Johnson said.
The arrangement “allows us to grow that business much faster than we have in the past,” Johnson said. It “is creating an environment where we could grow the program in card members card spend but also the eco system for earn and burn and rewards,” said Johnson, noting “That was impossible with two card providers.”
Delta leads in credit card revenue, with $2 billion in the second quarter. American and United do not report the figure, but all three have indicated that at some point they expect about $10 billion in annual credit card revenue.
Johnson also cited American’s new app, move towards free wi-fi, new airplanes and better food as improvements that will boost revenue, although none are unique to American.
American Chooses Focuses On EBITDAR Margin Rather Than Pre-Tax Margin
When May spoke about margins, he focused on EBITDAR margin, which differs slightly from the more standard measure of pre-tax margin, in that earnings before interest, taxes, depreciation, amortization, and rent or restructuring costs are excluded. Regarding EBITDAR margins, May said that American and United “were in a very similar spot” before the pandemic.
The difference may seem subtle, but Dennis Tajer, spokesman for Allied Pilots Association, which represents American pilots, said “The earnings before all these other things leaves out the cost of doing business. It’s like saying ‘I got A’s and B’s on my homework.’ Yeah, but you’re failing all the tests. It’s not the measure of the full performance of the company.
May also emphasized, as CEO Robert Isom did on the second quarter earnings call, that American has less international presence than competitors. However, “we’re happy to the largest domestic carrier in the United States,” he said. Executives from all three carriers said Thursday that domestic performance is improving.
American Battles United For Dominance at Chicago O’Hare
Johnson noted that during the pandemic, American focused growth on Dallas and Charlotte. In terms of departures, both are now among the top three single airline hubs in the world, along with Atlanta. He said American now seeks to build its presence in Chicago and New York, cities where it trails competitors in presence and also apparently in credit card holders, an important shortcoming in wealth center cities.
On the United Airlines call, CFO Michael Leskinen seemed to question American’s reliance on Southern tier hubs (including Miami and Phoenix). “If you are earning a lot of money in some of your southern hubs, and the margins are strong, fantastic,” he said. But “If you’re losing money in hubs consistently year after year after year, that’s not going to work.” United CEO Scott Kirby has repeatedly indicated that American loses money at Chicago O’Hare, where it competes with United.
“If you have a winning record in Charlotte and Dallas, but you still lose away games, the standings still show a losing record,” Tajer said. The airlines are now about whether you win or lose in a hub, it’s the entire franchise. Right now American management is striking the right themes, but the magnitude of the output is very disappointing. They have plenty of ground to make up: is it a margin gap or a margin canyon?”
Year to date, American shares are down 24%, while Delta shares are up 2% and United shares are up 13%.
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