Doug Parker’s Expectations Vs. Reality For 2018

American’s CEO, Doug Parker, is a funny guy. In 2017 he claimed that:

• American Airlines will never lose money again
• American Airlines will achieve an average of $5 billion in pre-tax profits annually going forward
• In good years American could achieve $7 billion in pre-tax profits
• In off years American would likely “only” achieve $3 billion pre-tax profits
• He feels that American’s “stock is so undervalued it defies logic”

The reason I’m pointing this all out is because of how smug I found these statements to be. I understand that a CEO wants to convince people that their stock is a good buy and to have confidence in a company, but “we’ll never lose money again.” Really?

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Doug Parker already lost a big bet

Several weeks ago I wrote about how American’s CEO had made a bet with an investor. In late 2017, American’s stock price was in the high $40s. Parker insisted that by November 2018, American’s stock would reach $60. In reality, the stock was at $34 as of that time.

So Parker was betting we’d see a ~25% increase in stock price. Instead we saw a ~25% decrease. Ouch.

How did Doug Parker’s other projections go?

Yesterday American Airlines reported their 2018 full year profits. How did they do? The airline reported a full-year 2018 pre-tax profit of $1.9 billion, or $2.8 billion excluding net special items.

Let’s put that in perspective for a moment. In 2017 Doug Parker said the airline would make an average of $5 billion per year, and in an off year would only achieve a profit of $3 billion.

Then in 2018, American reported a profit of $2.8 billion including net special items, or $1.9 billion excluding them. Those $906 million in net special items included:

$422 million of fleet restructuring expenses, $268 million of merger integration expenses, $58 million in severance costs as described above, a $45 million litigation settlement, and a $26 million non-cash charge to write off the company’s Brazil route authority intangible asset as a result of the U.S.-Brazil open skies agreement

So in 2018, American was anywhere from $200 million to $1.1 billion off from Doug Parker’s “worst case scenario.”

Ouch. While oil prices did temporarily increase in 2018, I think it’s safe to say that the economy was still pretty good, or at a minimum I don’t think most of us think things will be getting significantly better in 2019 or 2020.

So are we to assume that American will achieve pre-tax profits of $7.2 billion in 2019, in order to meet that $5 billion average (or $8.1 billion if we exclude special items)? 😉

There’s only one thing that “defies logic” here, and it’s not American’s stock price…

Bottom line

I’m not sure when American’s board will wake up. This isn’t about the fact that American’s CEO has consistently made outlandish claims (though it is fun to look at what he says vs. what happens), but rather holding him accountable for the way in which he has let down employees, customers, and shareholders.

It’s one thing if American had revealed some amazing vision for the future, but they don’t even have that. Looking at American’s earnings report, they talk about how one of their goals for 2019 is “making culture a competitive advantage.”

But then they rattle off a series of things they’ve done and plan to do, none of which will actually cause employees to be more aligned with the vision of the airline… because the airline doesn’t have a vision!

Doug Parker has had a good run, he has gone from being CEO of America West to being CEO of the world’s largest airline. The problem is that he’s running the world’s largest airline like America West, and that doesn’t work.

thank u, next