American Airlines stock hit two year low. It’s down about a third this year. The market doesn’t seem to think their strategy is going to deliver results. Investors appear to be mirroring customer sentiment, judging from the comments and interactions I have with readers. It also appears to be mirroring employee sentiment, judging from what I hear from American’s front line.
The total value the market places on American Airlines right now is less than $16 billion. In contrast United’s market cap is $22 billion. Their stock has gone in the opposite direction from American’s this year. Southwest’s market cap is $34 billion and Delta’s is $35 billion.
American’s stock performance has been so bad it’s even spawned conspiracy theories. One analyst who tracks the stock told me earlier this year he thought Doug Parker could be tanking it on purpose, because while he’s compensated in stock he benefits more if it rises in the future.
The market clearly believes that American Airlines is on the wrong track. I’ve pointed out that,
- The airline lacks a mission statement What is everyone supposed to rally around? What are they trying to accomplish that’s larger than themselves? (In fairness they have four rather milquetoast ‘strategic objectives’.
- They’re moving their product in the opposite direction from Delta. They have a premium revenue problem but are diminishing their premium product and getting rid of their most premium seats.
- American is ceding the most important premium market in the country. They’ve also eliminated their only real opportunities to reach India, Pakistan, and North Africa. There are whole important segments of the world that the world’s largest airline seems uninterested in competing for or even helping customers to reach.
- The stock market seems to prefer airlines that treat customers well
American’s CEO Doug Parker bet an analyst that their stock would hit 60 next month. That’s looking unlikely.
Investors are buying their expected future flow of income generated by the company. American isn’t a growth company. They claim they’ll never lose money again but in an era of rising costs will they be able to generate enough revenue to offset?
Delta has a plan to grow. It isn’t the U.S. market. They have stakes in airlines like Virgin Atlantic, China Eastern, Gol, and Aeromexico. They’re betting on growth markets elsewhere in the world.
United may have had nowhere to go but up, but it’s not just the direction of the stock that changed United is now viewed as a substantially more valuable company. United.
American Airlines seems to wish they could run their operation without having to worry about customers when what they need is an intense focus on the customer, so that passengers prefer to fly American, choose American over competitors when schedule and price are similar, and even are willing to pay a premium to fly American the way people seem to be willing to pay more to fly Delta today.
To be sure American’s problems aren’t strictly limited to customers and revenue. Wall Street hasn’t been happy with higher capital expenses at American either — from new planes to an expensive to headquarters. American has argued that their competitors will need to buy new planes too, and indeed Delta doesn’t see the used market being as ripe as they once did.
What American really needs though is a clear strategy, a path to growth, a story about how they’re going to grow their revenue over time rather than simply spinning off profits within a normal range (“$3 billion to $7 billion a year”) which investors then need to discount based on risk.
It’s entirely possible that their stock has been overly beaten up, and that it will revert towards its mean. That doesn’t change that the airline isn’t a growth company, and if they want to deliver shareholder value they need to figure out how to profitably grow the business.