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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