(Editor’s Note – Most of this post was written over this weekend, but I’ve made a few minor changes to reflect AA’s major announcement today.)
In September 2009, American Airlines parent AMR Corporate announced that it was taking “significant steps to face near-term challenges,” including changes in the airline’s route network. American would “eliminate unprofitable flying and reallocate resources” to Chicago, Dallas, Los Angeles, Miami, and New York – the “cornerstones” of American’s network that were “critical markets.”
But despite these network and other changes, American’s financial performance continues to lag its peers. AMR’s operating margin in the third quarter was a mere 0.6%, far lower than Delta’s 8.8% margin. Meanwhile, American’s operating margin in the third quarter was 440 basis points better than the third quarter of 2009, while Delta’s operating margin rose 607 basis points.
American has lagged Delta in revenue production as well. Its consolidated passenger revenue per available seat was 12.78 cents in the third quarter, a 20.4% increase from the same period in 2009. While a double-digit unit revenue increase is certainly strong, it is less than a 29.2% increase in consolidated PRASM for Delta over the same period.
So far, the airline’s bankruptcy filing does not appear to have a large effect on American’s network strategy, as it said today on its website that it plans “to maintain a strong presence in domestic and international markets, including our cornerstones in Dallas/Fort Worth, Chicago, New York, Miami, and Los Angeles.”
While the idea of an airline cutting back on loss-making routes and focusing on core markets is certainly a valid strategy, it appears that American’s cornerstone strategy had not provided enough benefits to allow the Dallas-based carrier to keep up with its peers. Two cornerstone markets worthy of extra review, in my opinion, are Los Angeles and New York.
Los Angeles
American might be putting more emphasis on Los Angeles, most notably launching a slew of regional routes in recent months, but other carriers view the city as important. United has historically viewed the city as a hub, Delta has been building up there, and Virgin America has added service on key American routes, like New York or, more recently, Chicago and Dallas. What remains unclear is how American expects to become a dominant player in this market.
Two New York Strategies
In late 2009 US Airways announced a similar plan to American’s cornerstone strategy, saying that it would focus on Charlotte, Philadelphia, Phoenix, and Washington, DC. The carrier announced at the same time that its Boston, Las Vegas, and New York-LaGuardia crew bases would be closed. The news came after the carrier had made the initial announcement about its slot swap with Delta, which entailed a large shrink of US Airways’ LaGuardia operation.
“The problem in New York is the fragmentation in New York. We weren’t big enough in New York,” said US Airways CFO Derek Kerr at a recent investor conference when asked about its slot swap deal with Delta. He continued: “as we look at it, if you’re not number one in your market or a strong number two in your market, you’re going to lose money in those markets.”
While that “problem” in New York is being solved with the slot swap, it isn’t necessarily in American’s favor. After the transaction closes and the divesture of 32 slots is completed, Delta’s share of LaGuardia slots will increase from 24.2% to 44.7%, according to the government’s tentative approval of the deal, released earlier this year. American’s share would remain constant at 20.6%, the second-largest position at the airport.
And while American’s competitive position at LaGuardia will continue to be squeezed, the carrier faces stiff competition at other New York airports. According to DOT DB1B market data for the first quarter, American trails behind Delta, Continental/United, and JetBlue in terms of its share of originating domestic passengers from the total number of passengers leaving from JFK, LaGuardia, and Newark.
Where Scope Falls Into All of This
Scope relief from American’s pilots, represented by the Allied Pilots Association, might be a necessary factor for the airline’s cornerstone strategy to succeed. The scope clause, which covers important topics like regional flying and domestic codehsaring can have significant implications for American’s future.
American’s existing scope clause is one of the most restrictive in the industry, allowing only a very limited number of large regional jets and turboprops and its network. As a result, American has less flexibility than other carriers when it comes to matching aircraft size with demand. The airline has proposed a solution where larger regional jets would be operated by mainline pilots with special pay rates and work rules, but it remains unclear if this idea will move past the proposal stage.
Another very important part of scope, domestic codesharing, also plays a large role in the success of the cornerstone strategy. The carrier specifically mentions in a summary of its proposal to the APA why this is important:
We would like to expand our network in the northeast. However, we face slot constraints, so we cannot add flying in peak demand times without cutting flying in the same time window. As a result, we cannot grow our northeast operations without domestic codesharing.
American notes in its scope proposal that it seeks to place the AA code “on a Shuttle between BOS, LGA, and DCA.”
Under the proposed scope clause the carrier would also be allowed to “place the Company code on a domestic airline based at JFK” (JetBlue?), and this would be implemented “for the purposes of feeding AA international growth at JFK.” Outlining the proposal further, American said that before codesharing begins, it must launch six new mainline JFK departures, half of which must be international or transcontinental flying.
In terms of West Coast flying, American is also seeking an expansion of its relationship with Alaska, saying in its summary:
Today, Alaska puts more passengers onto our network than we put onto theirs. This enables us to serve many markets more successfully than we could without this codeshare. An expansion of the Alaska Codeshare Agreement would allow us to maintain a significant network presence in the northwest and along the West Coast, while fully utilizing our aircraft in the most productive manner across our domestic network.
According to the carrier’s scope proposal, the number of markets that can be added to the codeshare would be calculated off a baseline of “mainline block hours in the LA Basin and Bay Area.”
Concluding Thoughts
Two of American’s cornerstone markets – Los Angeles and New York – are highly competitive, and in the case of the latter, slot-controlled to restrict growth. A revised scope clause with the APA would enable American to become a stronger competitor in these markets by operating larger regional jets, and also enabling the expansion of codeshare agreements.
Whether American’s pilots think that these moves are in their best interest is another story. It would indicate that they do not, as American’s contract proposal was quickly rejected, but the carrier’s bankruptcy filing certainly can change the tone of negotiations.
Latest Comments