Hey American, Ordering a Billion Airplanes Is Good, but There’s a Lot More to Do

After years of back and forth, the Department of Transportation has finally decided to do the right thing and let US Airways trade a host of slots at New York’s La Guardia for a bunch of Delta’s slots at Washington National Airport. This swap is not a simple transaction. There are a lot of logistics behind it, and it took major creativity and commitment from both parties to make something like this work. Hopefully American is taking notice. And I say that not because Delta has made a move that will once again hurt American in New York, but rather because American needs to get off its butt and start doing some bold things like this to fix its business.

American Acts Like a Sloth

After last week’s post on American’s decision to order 460 new airplanes, I had some great offline conversations with people about it. I still stand by my belief that it was a good move. I have no doubt American beat up the manufacturers to get a great deal, and it will certainly help to lower operating costs when the airplanes start coming in, probably at little to no additional cost to American. But that doesn’t mean that American’s problems are solved. If American thinks this is the solution, and I really can’t imagine that’s the case, then the airline is screwed. This doesn’t touch American’s revenue problems at all.

The news that Delta and US Airways received approval of the slot swap provids a great contrast between Delta/US Airways and American. Delta and US Airways have been very proactive at doing the right thing and improving their respective businesses. For US Airways, it’s been all about focusing the business on reliability, convenience, and appearance while re-forming the route network to fit its strengths. US Airways shut down the money-losing Vegas operation. It got rid of all the non-hub flying on the east coast that was a drain. It cleaned up its airplanes, and focused on on time performance. And now, it’s ditched its turboprop-based hub at La Guardia in favor of strengthening its position at Washington’s National Airport where it’s a much stronger player and can draw better revenue.

For Delta, the change has been no less significant. It has pulled down flying at minor hubs like Cincinnati and more recently Memphis. It’s parking smaller airplanes and cutting service to small cities that simply aren’t profitable. The airline built up a more comprehensive premium product and has worked on setting product standards from its 70 seaters on up. It has positioned itself as a technology leader in a variety of ways, and it has worked hard to improve the airport experience. Now, it can trade its Washington position in order to strengthen its already strong capabilities in New York.

For both US Airways and Delta, this is yet another effort to play to their strengths, and it’s going to provide a great deal of benefit to both. Let’s contrast that with American.

Instead of doing hard work on its own, American is relying on partners to fix its problems. It has put its eggs in the joint venture basket – saying that its partnerships with British Airways/Iberia as well as with Japan Air Lines will spike revenues. It’s built up a partnership with JetBlue to feed its flights in New York and Boston. That’s nice, but it doesn’t fix the structural problems. It’s just a patch.

If you didn’t see the investor report issued by Bob McAdoo back in May, then you missed out on a scathing review. Bob noted some very simple things, like the fact that American’s 10 worst routes lose about $450 million a year, more now that oil has spiked. He uses Chicago to London as an example. American gets a much lower fare than United but it flies larger airplanes and has more frequencies. The same goes from JFK to LA and San Francisco. The average fare to LA has dropped over $100 since 2000 but the level of service stays the same, losing money all along the way.

Instead of addressing these big problems, American pokes around the edges. Sure, it made some moves, like slowly killing the San Juan hub, and cutting some vestigial flying, but it’s been mostly minor changes. It stops flying routes like San Francisco to Honolulu and starts flying to Helsinki and calls that a strategy. (This week, it’s building up Ft Lauderdale a little. Woohoo.) It has its cornerstone strategy of focusing on LA, Dallas, Chicago, New York, and Miami. That’s fine. But instead of just culling service around those cities, it seems the problem is how American serves those cities in the first place, at least that’s what the McAdoo report makes very clear. Then there’s New York. Delta has made huge strides in New York, and it will now have a ton of new service from La Guardia to offer up to its corporate clients. American stands still.

It’s not just the route network but the onboard product as well. The most glaring deficiency is that American is the only long haul domestic airline without a plan for flat beds in business class. It rolled out its substandard business class about the time United went fully flat, so it was obsolete from the start, and nothing has changed. Even US Airways has been actively rolling out flat beds.

Even when American has been a leader, it’s quickly fallen behind. It was an early adopter of gogo inflight internet, but it only put it on a limited portion of the fleet. While Delta put it everywhere, American stuttered and is only now catching up. Hopefully some of its more forward-thinking moves, like working on streaming video with gogo will actually go past the testing stage and give the airline a leadership position in . . . something.

I’m sure many of you will say a merger is the answer, but it’s most definitely not. American’s costs are higher than any potential merger partner, so it would effectively kill an airline that works well today on its own. The math becomes 1+1=0.5 if they were to do an ill-advised combo. So the weight falls squarely on American to do the hard work. It has spent a lot of time raising cash, but it keeps losing money while others profit. Instead of slowly bleeding cash, American needs to invest that money into fixing its problems.

The airline might want to take a hint from its partner Qantas, which is about to make some major changes on August 24 in order to get its house in order. Will these be popular? Not all, but that’s not the point. The point is turning the business around at all costs.

Get bold, American. Do something to get those revenues jumping.

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31 Comments on "Hey American, Ordering a Billion Airplanes Is Good, but There’s a Lot More to Do"

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Jared
Guest
Great points, as always. But don’t you think AA staying out of bankruptcy has had something to do with their inability to transform? Delta, US Airways and United were all able to overhaul how they did business in no small part to extended bankruptcy periods. AA’s strategy of changing the moving tires on the bus is much, much more difficult. In part that’s a financial issue, but I think one positive of bankruptcy is that it forces companies to re-think all of their decisions from a higher level. Agreed that AA seems to dabble around the edges, but that’s because… Read more »
David SF eastbay
Member
I think when AA was #1 they got it in their heads that what they were doing was right and everyone would follow them. Now that they are #3 they don’t seem to know how to act or what to do. They will say they have never been in bankruptcy and make it sound like a great thing, but maybe that is not the case. The other majors that have been through it once or twice have all seem to do better and grow, and to look at themselves and do what needs to be done. AA seems to want… Read more »
Kevin
Guest

To be fair, United (not including Continental) can be viewed in the same way as American on the domestic in-flight side. ie, no wifi (except on the transcon flights). But even here UCH mentioned on it’s quarterly call that they are working on a domestic wide solution for wifi not just UA or CO, which would put AA so much farther behind the big 2.

I am sure another aspect is the slow adoption of larger RJ’s into the network to optimize capacity.

Sanjeev M
Guest

I wonder if management bonuses at AA are still high. I’m sure the numbers are out there and everyone could take a 10% cut in pay.

The Eagle divestiture will also help with costs.

CP
Guest
I agree with your point regarding fully flat beds in business, but I don’t see American’s on-board product as significantly behind its competitors on the domestic side. In fact, in some ways, I think AA’s domestic on-board product is a leader: every jet has power outlets (at least in some rows) in coach (some require an adapter, but it’s still power), the interior of the planes has a consistent look (unlike UA, which was all over the place before the merger and is now worse), and the first class product offers (1) consistently more legroom than competitors, (2) more seats… Read more »
DesertGhost
Guest
What’s AMR’s problem? Is it low revenue? Is it high costs? I’ve read both. And maybe it is both. As an observer, it seems AMR is trying to emulate what US Airways has been doing for quite some time; concentrating flying in areas of strength. It simply hasn’t been nearly as aggressive or decisive about it, despite its protestations to the contrary. I think looking at what US has done and is doing can give some insight into what American can and should do. US Airways management and employess have taken what most considered a nearly dead airline and resurrected… Read more »
Don
Guest
Not to be off topic here but doesn’t this slot swap also open up new slots at DCA for others (Bg, W, VX, etc) not to mention all the mergers happening opening more slots and gates at these restricted airports. I think it’s a great thing. Now to stay ON TOPIC. I think this is a cycle business. Everything happens in cycles. We had an age once with big airlines ruled because it was regulated. So we only had giants to choose from. DELTA was the small fish. Then dereg happened and many small airlines started popping up (Southwest, Frontier,… Read more »
Don
Guest

I meant B6 and WN. My thing posted before I could finish my edits. Stupid computer.

Zack Rules
Guest
AA should outfit the next 15 737-800’s for new Flagship service from JFK to LAX and SFO ala United P.S. It could be figured with 12 First class lie flat seats, 24 domestic First class seats and 96 economy seats for a total 132, a reduction of 36 seats per flight over the 767-200ER with 168 seats. For LAX, it would be like taking out two 762 flights and one for SFO but with the same frequency. Instead of a money losing flight to Delhi, AA should move those planes to LAX for another Asia flight, Guangzhou or Hong Kong… Read more »
Todd
Guest

Good idea, though based on my back-of-the-envelope math, only 8 or 9 rows of 31″ economy would fit on a 737-800 (i.e., 48-54 seats) based on your proposal (assuming 60″ lie flat seats and 40″ domestic first seats).

Todd
Guest

LAX-HKG seems obvious, given AA’s oneworld partnership with CX (though CX already does 3 flights / day).

tharanga
Guest

What was that at the end about Qantas? Is this publicly known, or is cranky hinting at something we don’t know?

Carl
Guest

I try hard to avoid American now. It just seems like their coach seats aren’t as comfortable as others. I don’t know if Seatguru is right, but I was on USAir’s A320 this week, and the 31″ of pitch (if true) seemed roomier than AA’s 738 31″ of pitch.

As a coach passenger, that is really all I care about.

CP
Guest

Cranky, I’m wondering if you have any opinion on AA’s aggressiveness with “direct connect” and the negotiations with the GDS vendors. Any thoughts on how that stance (which seems industry-leading, in that as far as I can tell the other airlines agree with AA but are happy to let them take the heat) plays into your thoughts on AA’s overall sloth-like behavior on the revenue front? Just curious.

Cedarglen
Member
AMerikan Airlines may update their feet and save some money on gas, but if they don’t do something to improve their Customer S E R V I C E, they will crash and burn into bankruptsy. They simply don’t give a ([fill-in] rhymes with twit) and it shows – on the web, on the phone, at check-in and on the airplane. Fare-paying PAX seem to be a serious annoyance to AA, a major inconvenience to their commuting staff and a disturbance to their ‘normal’ operations. Four hundred plus new airplanes is a bold move, but is seems like the wrong… Read more »
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