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American and Southwest airlines both reported a plunge in second-quarter profits on Thursday in the latest sign of the US industry misjudging demand for domestic flights.
The carriers pledged to cut back flying in the second half of the year and promised changes to improve financial performance. American will continue to unwind a sales strategy that proved unpopular among business travellers and their travel agencies. Southwest, which is under pressure from activist investor Elliott Management, said it would offer assigned seating for the first time in its more than 50-year history.
Budget carriers have been hit hardest by the oversupply of capacity in the US market, forcing them to lower fares. But the largest airlines have felt the strain too, with American chief executive Robert Isom saying it had “led to a higher level of discounting than we anticipated” in the second quarter.
The lacklustre results follow massive disruption to air travel on Friday due to the worldwide IT outage caused by Crowdstrike’s faulty software update. Though most had recovered by last weekend, Delta Air Lines struggled through Tuesday to right its operations. The US Department of Transportation said it would investigate whether the carrier followed regulations for treatment of passengers on cancelled or delayed flights.
American also is suffering the continued consequences of its attempt to compel corporate travellers to book tickets directly through the airline rather than travel agencies. It said in May it would abandon that strategy, but Isom said on Thursday that in the second quarter it failed to win back the share of corporate travel that it wanted.
The Fort Worth, Texas, carrier lowered its guidance range for the year. American said it expects to earn between 70 cents and $1.30 per share, down from a range of $2.25 to $3.25.
“A reset will take some time, and we will continue to feel the impact of our prior sales and distribution strategy through the remainder of this year,” Isom said.
American reported net income of $717mn in the second quarter, down 46 per cent from the same period a year earlier. Southwest’s net income also fell 46 per cent, to $367mn.
Both airlines saw yields — the average cost paid by a passenger to fly one mile — decrease, an indicator that the oversupply of seats in the US market is causing airlines to lower fares.
Southwest, which has differentiated itself from rivals with its policy of allowing customers to choose where they sit, said it will introduce assigned seating. It will also introduce extra legroom in a third of the seats across its fleet, allowing it to charge more for them, and add red-eye flights to use aircraft more efficiently.
Chief executive Bob Jordan told CNBC in an interview that the changes to the business model had nothing to do with Elliott. Instead, it is because 80 per cent of its customers, and an even higher percentage of potential customers, prefer seat assignments.