American Airlines Falls Short of Expectations, Signaling a Potential Divide in Airline Customer Base

American Airlines (AAL) recently released its fourth-quarter 2024 earnings results, and the market reaction has been decidedly negative, with the stock down 7% following the announcement. While the airline beat earnings and revenue expectations for the quarter, its guidance for the coming year fell short of analyst estimates and, more importantly, lagged significantly behind the performance and outlook of its key competitors, Delta Air Lines (DAL) and United Airlines (UAL). This disparity has raised concerns about the quality of American's customer base and its ability to compete in a rapidly evolving industry.

Q4 Performance: A Mixed Bag

American Airlines delivered a mixed performance in the fourth quarter. On the positive side, the airline exceeded expectations on both earnings per share (EPS) and revenue. Adjusted EPS came in at $0.86, significantly higher than the $0.65 expected by analysts and a substantial improvement from the $0.29 reported in the same quarter of the previous year. Operating revenue also surpassed estimates, reaching $13.66 billion compared to the anticipated $13.43 billion. Passenger revenue also beat expectations coming in at $12.4 Billion compared to the $12.28 Billion expected.

However, several key metrics revealed areas of concern. While available seat miles (ASM), a measure of airline capacity, and revenue passenger miles (RPM), a measure of passenger traffic, increased year-over-year, the load factor, which represents the percentage of available seats filled, fell short of estimates. Additionally, passenger yield, a measure of average fare paid per mile, decreased slightly year-over-year. CASM excluding fuel, a key metric of operating costs, increased by 5.7% year over year.

Guidance Disappoints, Raising Concerns About Customer Base

The most significant driver of the negative market reaction was the company's guidance for the first quarter of 2025 and the full year. American forecasts a first-quarter adjusted loss per share between $0.20 and $0.40, while analysts were anticipating a profit of $0.04 per share. Full-year adjusted EPS is projected to be between $1.70 and $2.70, with the midpoint of this range significantly below the consensus estimate of $2.42.

This disappointing guidance, coupled with the strong performance and outlook provided by Delta and United, has fueled speculation about the differences in customer demographics between these airlines. Delta and United are generally perceived to cater to a higher-end clientele, including business travelers and premium leisure customers, who are less price-sensitive and more likely to maintain their travel spending even during economic downturns. American, on the other hand, is seen as having a larger proportion of leisure travelers who are more susceptible to economic fluctuations. This difference in customer mix could explain the divergence in performance and outlook between the airlines.

Key Highlights and Future Outlook

Despite the concerns surrounding guidance, American Airlines highlighted several positive developments. The airline achieved record fourth-quarter and full-year revenue, driven by strategic capacity adjustments and sustained demand. It also announced an exclusive 10-year co-branded credit card partnership with Citi, expected to generate significant value for both companies and their customers. Furthermore, American achieved its debt reduction goal of $15 billion from peak levels a full year ahead of schedule and now aims to reduce gross debt below $35 billion by the end of 2027, also ahead of the initial timeline.

American expects full-year capacity to be up in the low single digits year over year, with total revenue projected to increase by approximately 4.5% to 7.5% compared to 2024. However, the airline also noted that 2025 CAPEX is expected to be lower than previously planned and that they are experiencing aircraft delivery delays. The company also noted that Q1 capacity is expected to be flat to down 2% versus Q1 2024.

Conclusion

While American Airlines delivered solid results for the fourth quarter of 2024, its disappointing guidance and underperformance relative to peers have raised concerns about its competitive positioning and customer base. The airline's emphasis on debt reduction and operational efficiency is commendable, but its ability to attract and retain higher-value customers will be crucial for its long-term success. The market reaction suggests that investors are waiting for more concrete evidence that American can effectively compete with Delta and United in a changing airline landscape.