In late May, American Airlines Group Inc. (NASDAQ: AAL) CEO Doug Parker told Bloomberg News that his company would compete “aggressively” with discount carriers by adding more seats and cutting fares to keep flights full. Friday morning American said it would delay delivery of five new planes from Boeing Co. (NYSE: BA) and 35 new planes from Airbus.
Parker’s remarks in May came in response to a challenge from Southwest Airlines Co. (NYSE: LUV), which had just changed its order for 31 Boeing 737-700s to an equal number of 737-800s, adding 32 more seats per plane. Southwest said at the time that it expects capacity growth of up to 8% this year. For a low-cost carrier like Southwest, adding capacity and lowering seat prices is the path to higher profits. For legacy carriers like American, it almost always leads to lower profits.
In its filing with the U.S. Securities and Exchange Commission (SEC) Friday, American said it expects a capacity increase of approximately 1% on its mainline routes in 2015, much of which is the result of a 3% reduction in departures.
Aside from higher fuel costs, there is nothing that affects an airline’s revenue more than flying empty seats around. Analysts almost unanimously target capacity as a profit signal, and adding capacity, especially at the legacy carriers, needs to be accompanied by increased routes in order to maintain profit levels. Friday’s announcement will be greeted with cheers from airline analysts.
For Boeing, the announcement defers delivery of four 787s from 2016 to 2017 and one 787 from 2016 to 2018. American had six 787s in its fleet at the end of the second quarter and is expected to have a total of 17 by the end of this year.
American also deferred delivery of 10 A320 family planes from 2017 and 25 A320neo family planes from 2018 until 2021 to 2023. At the end of the second quarter, American had 55 A320s in its fleet and said it expects to end the year with 54. Deliveries of the A320neos are expected to begin in November of this year. American has ordered a total of 100 A321neos from Airbus with no delivery date specified. The airline had orders for 38 of the current A321 outstanding at the end of June.
American’s stock jumped nearly 4.75% to $41.58 on the news. The stock’s 52-week range is $28.10 to $56.20.