How Did American Become the World’s Most Profitable Airline?

27.07.2023 - 18:53 / smartertravel.com / Doug Parker / Pan Am

American Airlines today announced its financial-performance numbers for the fourth quarter and the full year.

For the quarter, the airline posted net income of $3.3 billion, including a one-time tax credit. Even without that extraordinary gain, American’s $1.3 billion net profit for the quarter was a record for the company.

For the full 12 months, American racked up $7.6 billion in net profit, and $6.3 billion excluding extraordinary gains.

That’s not just a record for American. Or for a U.S. carrier. Or for the 2015 fiscal year. It is the record: the highest profit ever generated, by any airline, ever.

So, how did American do it?

The airline’s earnings release quotes CEO Doug Parker as follows: “We are extremely pleased to report record quarterly and full year earnings. The credit for these results goes to our outstanding team members, who have provided excellent customer service.”

Does anyone believe that American’s excellent financial performance is a function of its excellent customer service? I don’t, nor does any credible industry-watcher I’m aware of. American is hardly known as an industry leader in customer service. And even if it were, it wouldn’t account for the airline’s eye-popping profitability.

So, what’s the real story here? And what does it mean for travel consumers?

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In large part, American’s robust results stem from three factors.

First, and most obvious, is the plunging price of jet fuel. The airline’s 2015 results reflect a fuel savings of more than $1 billion over the previous year. That goes straight to the bottom line.

The second and third factors are related: American’s sheer size and consolidation in the airline industry.

Following its merger with US Airways, American became the world’s largest airline, in operational terms. Common sense suggests that bigger operations should generate higher top-line revenue, which should result in larger bottom-line profits. That’s exactly how it’s played out in American’s case.

That helps explain American’s superior returns against its competitors in 2015. But those returns weren’t just the highest for 2015; they were the highest ever. That reflects the pricing power the airlines currently enjoy as a result of diminished competition. US Airways is gone. AirTran is gone. Northwest is gone. Continental is gone. TWA, Pan Am, PSA, Piedmont. The list goes on. Today, the Big Four—American, Delta, Southwest, United—control around 85 percent of the U.S. domestic market.

While airfares have eased slightly as fuel costs have declined, the airlines (and not just American) have been able to mostly maintain fare levels due to the lack of price competition. That’s the consolidation