Things in the Sky

Late last week American said it would add an extra-legroom product to its fleet. The airline has previously said that it would “offer an Economy Class premium seat product, which will include additional legroom” on its 777-300ERs, but now we have many more details. Here’s the first bit of the press release:

American Airlines today announced plans to outfit its entire mainline fleet with Main Cabin Extra, which will offer more leg room as well as priority boarding. American plans to begin installations this year, and over time will update all of its existing aircraft. New Boeing 737-800 aircraft being delivered to American will come equipped with Main Cabin Extra seating beginning this fall. Anticipated future aircraft, including Airbus A321s, and A319s, and Boeing 777-300ERs and 787s, will also offer Main Cabin Extra.

I think this move can make sense for American. Its two biggest competitors in New York and Chicago (Delta and United) already offer a similar product that is complimentary for the highest-tier elites, so this move could help with the airlines competitiveness. The airline will reportedly be removing seats to make room for the extra legroom, but I’m guessing American thinks the revenue generated from this new product will make it worthwhile. In addition, there’s a report that American will be reducing the number of flight attendants on its 737-800s from four to three.

American joins the (growing) list of airlines that offer some kind of extra legroom product, including United, Delta, Frontier, and JetBlue. So far the only major legacy carrier to not provide such an offering is US Airways, whose management previously said it had “just reached a different conclusion about those economics.”

This move also got me thinking about premium economy as a whole. United States-based airlines haven’t done much in this area except offer the same economy seat but with more legroom. Plenty of international carriers – Air New Zealand,  British Airways, Qantas, and Virgin Atlantic among them – have embraced this concept further with premium economy cabins with their own seats.

Some domestic airlines, however, do have some offerings that offer some additional perks in addition to a seat with more legroom. Virgin America’s Main Cabin Select or Frontier’s Classic Plus Fare come to mind first. Virgin’s product offers additional legroom (seats are at the bulkhead and exit rows), one checked bag, free food, free entertainment, and priority check-in. Frontier’s Classic Plus fare allows passengers to sit in extra-legroom seats (other passengers can purchase the same seats for a fee), but also includes features like free TV, an alcoholic beverage, two free checked bags, and priority check-in and security.

Anyway – I wonder why the American carriers have so far shied away from premium economy cabins (especially on long-haul flights) and if there’s anything that could change that in the future.

Earlier this month, American CEO Tom Horton said in a letter to employees that it planned to achieve $3 billion in annual improvement to the business. $2 billion of this benefit is slated to come from cost savings, while the remaining $1 billion would come from enhanced revenue generated by “network scale, fleet optimization, and product improvements.”

Yesterday American Chief Commercial Officer Virasb Vahidi sent another letter to employees providing additional detail on the $1 billion in incremental revenue that American wants to generate by 2017.

Vahidi estimated that changes in American’s fleet will provide “almost two-thirds” of the revenue improvement, saying that “ renewal of our fleet is instrumental to our plan because it means more profitable flying with much more cost-efficient planes.” But the regional side is a key part of American’s future plans as well (emphasis mine):

Re-gauging is expected to provide American with the flexibility to appropriately match aircraft size with market demand. Under our existing labor agreements, we are limited in our ability to fly large regional jets, which puts considerable downward pressure on our unit revenue performance. This challenge is evident in our Chicago hub, where our primary competitor has the ability to match supply with demand by time of day, given its substantially larger fleet of large regional jets. With the expected relaxation of limitations in our pilot agreement, and capitalizing on the new small narrow-body fleet and additional regional flying, we will be able to replace our current aircraft with those whose size better match the demand in our network.

American’s current proposal to the Allied Pilots Association would allow the carrier to have more than 250 large regional aircraft  (up to 88 seats) operating in its network. Such a proposal would mark as significant change for American, whose only large regional aircraft are 47 CRJ-700s and 36 ATR-72s (as of December 31). Both types seat less than 70 passengers. It’s worth noting that this latest proposal appears to differ significantly with American’s November proposal to APA, which entailed all aircraft over 50 seats being flown by mainline pilots under special rates and work rules.

Also included in Vahidi’s letter is the continued development of alliances with other carriers, which would generate “almost a third” of the $1 billion revenue improvement. “We also intend to grow our Joint Business agreements across the Atlantic with British Airways and Iberia and across the Pacific with Japan Airlines and Qantas,” wrote Vahidi, who added that the airline has “successfully acquired and retained corporate and high-value customers, who are attracted to our integrated global network.”

American also plans to pursue more domestic codesharing (as it has in the past):

…with additional contractual flexibility, we will be able to enter into new, and expand existing, codeshare agreements, particularly in locations where slots or facilities constrain our ability to grow. This will give us more domestic feed than we have today to be able to support our aspirations for a larger international presence, as well as an expanded domestic network to compete with our competitors.

Certainly JetBlue seems like an interesting potential partner here. The two carriers already have an interline agreement, and further collaboration could help American tap JetBlue’s expansive JFK route map to help feed its international flying. American has also said previously that it wishes to further develop its relationship with Alaska.

Vahidi also mentioned brand modernization as part of American’s goals:

As part of our business plan, we are planning to refresh and modernize our brand and customer products and services by making substantial investments, with the overarching objective of making American the premier airline for high-value customers. Our disadvantaged cost structure and balance sheet have greatly limited our ability to invest in products or match our competitors’ actions in some cases. At the same time, our competitors used their profit advantage to invest in winning high-value customers. For example, both Delta and United are installing lie-flat international business class seats, and adding premium economy offerings and upgraded inflight entertainment.

None of the three areas of focus listed by Vahidi seem particularly shocking, but American does have plenty to do in every area. Two of the major issues brought up by Vahidi – an expansion of domestic codesharing and larger regional jet flying – would require a change in American’s scope clause with its pilots. American has been unsuccessful in getting this relief from its pilots thus far, but naturally those negotiations weren’t going on in a Chapter 11 scenario.

AMR’s planned spin-off of of its American Eagle regional subsidiary is being delayed due to AMR’s Chapter 11 bankruptcy proceedings.

“AMR and Eagle Holding have decided that the previously announced spin-off of Eagle Holding will be placed on hold pending the outcome of the Chapter 11 cases,” the company said in an SEC filing made earlier this morning.

The spinoff of American Eagle was originally announced back in July, the same day American announced its massive order for new narrowbodies from Boeing and Airbus.

According to AMR’s latest 10-Q, there were 299 aircraft in the American Eagle fleet, though the company noted that included in “the operating aircraft listed” there were “18 owned Embraer RJ-135 aircraft…in temporary storage as of September 30, 2011.” The company separately listed 41 Saab 340s and 3 Super ATRs that were not operating.

This latest development follows reports earlier this month that the spin-off was being delayed until 2012 until Eagle pilots voted on a tentative agreement.

During the past 15 years, the regional airline industry has changed dramatically, experiencing huge growth and size and fleet expansion into the 70/80-seat market. Much of this change can be attributed to relaxation of scope clauses in mainline pilot contracts, which specify how much and what kind of flying can be outsourced to other carriers.  The large number of CRJ-700/900 and E-170/175 buzzing around the US skies today can mainly attributed to contract negotiations last decade, when the industry was in a much more fragile state.

An important question that has arisen is the future development of scope in the coming years: will the trend of more and more scope relief continue? The negotiations between American Airlines and its pilots, represented by the Allied Pilots Association, is bringing the question to the forefront once again. The airline’s scope clause is fairly restrictive, at least compared to network carrier peers. The airline only has 47 large regional jets (CRJ-700s) operating in its regional fleet, which pales in comparison to the well over 200 flying in the Delta Connection system, for example.

American recently posted a summary of its latest proposal to APA on its negotiations website, and its thoughts on scope and regional flying are simply fascinating:

We need to be able to compete with network carriers who rely heavily on regional operators, as well as low-cost carriers. And to do that, we need to be able to economically operate smaller airplanes. But unlike our competitors, we propose solving this in a very different way. Rather than sourcing large regional jets, we propose that any incremental jet aircraft larger than 50 seats will be flown by AA pilots. To compete effectively, aircraft under 125 seats would also have special rates and work rules.

This is a radically different approach than any of our legacy competitors are taking. It enables us to take advantage of our recent aircraft order, which allows us to source small narrowbodies (like the A319 and B737-700) at advantageous prices. It also helps us compete with the low-cost carriers and regional airlines whose low costs have driven us out of many markets over the last several years. Most importantly, it helps us create more jobs and more opportunity for pilots at our airline, while not displacing any of our current pilots under this new paradigm.

The suggestion of having new flying over 50 seats* to be flown only by American pilots is a dramatic reversal of what has been happening in the industry in recent history. Such an idea also appears to differ significantly from major competitor United: an October 2010 proposal to United pilots envisioned regional jets with over 90 seats flown by regional carriers.

The big question now, of course, is what the pilots think of the concept. While the idea itself of having smaller jets come back to the mainline is probably appealing, the corresponding plan to have “special rates and work rules” for aircraft less than 125 is likely a concerning feature. In my opinion, some American pilots might find the idea to be a bit too similar to American’s B-Scale from many years ago.

While this idea is only in the proposal stage, it is fascinating to think of the possibilities here. Such a move, especially if it is ever mimicked by other mainline carriers, could have a large impact on regional carriers. In addition, a different pay scale and work rules for small narrowbodies can impact the airframers as well, as the potential mainline costs of aircraft like the E-195, CS100, or CRJ-1000 will have been lowered. (And such aircraft, generally speaking, aren’t exactly viable at regional carriers with today’s scope clauses.)

But we’ll just have to sit and wait to see if this scope proposal moves past this stage. In the meantime, however, it’s fun to speculate!

*It’s also worth noting that the proposal affects American’s current large regional aircraft. American noted that the proposed deal would “permit fleet modernization within existing constraints (existing large RJ flying capped at 47 jets; existing large turbo props capped at 43 aircraft).”

American Airlines announced yesterday that it was further tweaking its fall and winter schedule, adding that that fourth quarter mainline capacity will be 3% lower year-over-year. The Dallas-based carrier will also retire as many as 11 Boeing 757-200s next year. American had 124 757-200s in its fleet as of June 30, according to parent company AMR’s second quarter 10-Q.

American CCO Virasb Vahidi that even though “our advance bookings are generally in line with last year, we are taking these additional steps in light of the uncertain economic environment, ongoing high fuel costs and to ensure we run a reliable schedule for our customers given additional pilot retirements we anticipate throughout the fourth quarter.”

The airline has seen a high number of pilots - 129 in September and 111 in August – retire of late, perhaps a strategic move to take advantage of a retirement plan feature thatallows some pilots to lock-in higher stock prices. American is seeking relief from its pilots union to help counter the high number of retirements.

American also said that the 757 retirements are being made “in anticipation of the new Airbus and Boeing deliveries that start in 2013.” In a recent SEC filing, American parent AMR Corporation outlined deliveries from its (very large) July aircraft order, saying “twenty of the firm [Boeing] NG Aircraft are scheduled to be delivered in each of the years 2013 to 2017″ and “between 20 to 35 of the firm Current Generation Airbus Aircraft are scheduled to be delivered in each of the years 2013 to 2017.”

The company also outlines some other interesting developments, saying that “third quarter unit costs will be adversely impacted by quarter-end volatility in WTI crude oil prices and foreign exchange rates.” American noted that while “WTI [West Texas Intermediate] prices decreased, while jet fuel prices remained high, which will result in a $29 million non-cash fuel hedging ineffectiveness charge.” In a September 21 SEC filing, AMR estimated third quarter fuel expense at $3.10/gallon – it will be interesting to see what the actual number is.

American also noted that “the U.S. dollar strengthened, which will drive a $22 million incremental charge as a result of foreign exchange volatility.”