Why American’s Revenue Plans Aren’t Good Enough and a Merger Is Needed

I came across a really interesting research note on American last week that I thought was worth discussing here. Jamie Baker at JP Morgan put out a note entitled “AMR v6.0: Additional Thoughts on Consolidation.” There’s been a lot of talk about how American is focusing on its cornerstone markets, but Jamie points out that it’s really everywhere beyond those cornerstones where the problem lies. With this view, a merger is the only real path to compete.

Jamie sees American’s revenue problems as a “decade-long marginalization of its domestic market.” What’s particularly interesting about this is that it has nothing to do with the local markets in the cornerstone plan, where American is trying to strengthen itself in its five key markets of LA, Dallas/Ft Worth, Chicago, Miami, and New York. Instead, it actually shows how the cornerstone plan is insufficient in serving the rest of the US. The idea is that with consolidation, Delta and United can now service non-hubs much better than American simply because of all the possible connecting choices going every direction.

Over the last couple of years, American has lost ground with its unit revenue when compared to competitors. Part of this, Jamie blames on American’s less the competitive schedule in non-hubs. Using a list of “small to moderate East Coast cities,” Jamie shows how inadequate American can be. Jamie used Buffalo in his example, probably because of the stark contrast in that market, but I’ll even go off the list. Let’s look at Knoxville, Tennessee. Here’s how service breaks down.

Nonstop Legacy Airline Routes from Knoxville

As you can see, thanks to consolidation, both Delta and United have ample service to get people anywhere in the US and into the global network. American? Not so much. For travelers heading west or north, there’s Chicago and Dallas. But what about those who want to go to the northeast? Nothing. Europe? You’ll backtrack through Chicago or Dallas and its more limited options. Plus, that longer journey time will make the options appear lower in reservation systems. What about intra-South? Nada. Even American’s Latin America stronghold loses out. American is pulling its single daily Knoxville to Miami service this April.

While there are a lot of cities you can pick that show the same exact thing, I picked Knoxville for two reasons. One, it wasn’t even on the JP Morgan list so it shows how easy it is to find these opportunities. Two, it’s the aircraft used that make this very telling.

American likes to blame all its problems on not having scope clause relief. It needs to outsource 60-90 seat airplanes so it can compete with the ones that Delta and United have, right? Well, Knoxville is mostly full of fifty seaters. In fact, every single United flight in there is on a fifty seat airplane which American could use if it so chose today. Delta has three CRJ-900s and 1 DC-9 in there, but everything else is on a fifty seater.

Maybe American want to argue that it needs enough larger aircraft capacity elsewhere in order to generate the connections to even be able to fill more fifty seaters on this route. I’m not sure I buy it, but let’s say that’s true. Then what?

American can add seats to Dallas and Chicago if it wants, but that doesn’t solve the problem. Sure, a Miami flight could come back, but I don’t think that Miami is where American really wants to see much in the way of larger regionals. The Latin market primarily needs larger airplanes that American operates today. If American wants to add more domestic flights from Miami on larger regionals, it could, but that’s still not a good connecting point for intra-South traffic. (And those ever-rising Miami airport costs will put serious pressure on those flights anyway.) Lastly, there’s New York. There aren’t really slots to be had in New York, so even if American wanted to connect that up, it couldn’t without either making it go at a bad time or giving up another flight.

How can American fix it? Well, merging is one answer. There has been talk of both Delta and US Airways as dance partners. Let’s focus on US Airways since I’ve heard so many people suggest that the route networks don’t really match up. US Airways gives American Philadelphia, and that is a good jumping off point to other cities in the northeast as well as to cities in Europe. Looking for intra-South connections? Charlotte will do the trick. In fact, Charlotte is so close that it can act like Atlanta. It’s a good hub to connect just about anywhere. That not only makes American competitive, but it probably leapfrogs it ahead of United in Knoxville.

That is just one example of the potential power of a merger. It makes American much more relevant for people in cities on both sides of the US. As Jamie notes, American is still strong in the Midwest. With Dallas/Ft Worth at the bottom and Chicago/O’Hare up top, that’s no surprise. But it’s the east and west where American lacks enough presence. Anyone remember the codename of the US Airways/America West merger? Project Barbell. That’s because it was strong on the coasts but not in the middle . . . . Sounds like a good fit to me.

49 Responses to Why American’s Revenue Plans Aren’t Good Enough and a Merger Is Needed

  1. Gary Leff says:

    Sorry, Brett. It makes no sense to focus on New York and Philadelphia. Do you contend American ought to concede NY in a merger with US Airways? And how does it make sense to do Los Angeles and Phoenix?

    The combined carrier would still be weak in the Northwest. I could see combining with Alaska, though Alaska has been getting closer and closer to Delta and it would certainly have to be American swalling Alaska rather than the other way around, something they’re hardly in a position to do.

    Of course, American tried Reno Air but that didn’t help.

    And you want them to do CLT but they tried RDU, surely they shouldn’t focus on a city purely for connecting traffic. Don’t forget what did TWA in — they hubbed in STL. Didn’t help American much, either! You want hubs where you can capture a disproportionate share of HIGH YIELD O/D traffic. That’s not really CLT and it isn’t PHL vs JFK.

    And tell me — mergers are really costly, why can’t American build a new hub if that’s what’s needed? You’re arguing it ain’t the scope clause.

    You merge when (1) an airline is an undervalued asset, largely due to strategy or incompetent management or access to capital when there are opportunities to expand — your previous argument that American management was incompetent was the best argument for merger, not really replicated here, though that’s a reason why AA would be more valuable post-merger not why the acquiring airline is better off, or (2) when a carrier has access to something you can’t replicate on your own, access to constrained slots that are key to a strategy for instance.

    Consolidation is a wonderful thing for all airlines, reducing competition. but it’s a public good, it isn’t something that the acquiring airline captures the bulk of.

    Look, Continental was backed into acquiring UA since they thought US was gonna do it. One of the few really stupid things that CO management did, making the decision for the wrong reason, but UA was generally pretty badly managed and CO management is better, the legacy UA will likely be more valuable as a result of better management.

    Consolidation didn’t work for AA when it acquired TWA. It’s not THAT obvious that Delta is better off having acquired Northwest.

    How did the Aircal acquisition work for AA? How did their BNA operation work out for them?

    Consolidation and connecting traffic hubs are not an unambiguous good! And building up TYS isn’t inherently good either.

    It’s about profits, not market share AA isn’t generating profits now, but it strikes me that your plan above is more about growing market share than about the spread between revenue and expense.

    • Sorry Gary. Your case is weak at best. First, no major legacy is really strong in the northwest, that’s why both American and Delta code share with Alaska. Alaska will be fine on its own. There’s room for niche carriers in a consolidated airline world. If Alaska does merge, I see its best partner as Hawaiian, not Delta. Another quick point to consider: How strong is the newly merged United in the southeast? It’s about as strong as American in the northwest. No airline has a totally comprehensive system, not even Southwest. They all have to focus on key markets.

      Then, Brett didn’t suggest that American “concede” New York. I believe the New York and Philadelphia operations could be complimentary, with each airport fulfilling a slightly different function, not unlike Newark and Dulles for United.

      Los Angeles and Phoenix are both major U.S. cities (top 6 in fact), and, despite the “conventional wisdom” Southwest does not dominate Phoenix. In fact I disagree with Brett (from an earlier piece) that a combined US / AMR would cut Phoenix substantially. It would certainly remove some capacity, but not as much as I feel Brett thought (I could be wrong, however).

      The reason RDU didn’t work was ATL and CLT. Both were strong, established hubs and AMR couldn’t get enough mass to be competitive. There probably isn’t enough traffic to support three major hubs in the region. The fact that AMR tried to establish a southeast hub shows me it felt there was a hole in its system, one that can now be filled in by a merger.

      TWA, Reno, Air Cal, et. al. are not relevant to today’s airline landscape. All of that’s in the past. The AMR of yesterday wasn’t competing with the vast networks Delta and United now possess because of their mergers. Airlines are about networks or niche markets. Airlines are not growth industries anymore, they’re mature; and if anything, need to shrink. Between mergers and maturity, it’s a different ball game.

      I doubt an AMR / DAL merger would pass muster without major divestitures, adding additional costs and complexities to an already costly and complex process. Sometimes the simple solution is the best for all concerned. Most airline analysts believe a merger is virtually inevitable. I agree with them, and Brett, that the best solution is a US Airways / American tie up.

    • CF says:

      Lots to dissect in Gary’s response, so let me go point by point.

      Sorry, Brett. It makes no sense to focus on New York and Philadelphia. Do you contend American ought to concede NY in a merger with US Airways?

      I’ve suggested that since the beginning. If you’re a distant third place in a market, no matter how big, I think it’s waste to be there. This gets tricky with your oneworld partners, notably BA, who have big business in NYC, but you can’t run your business based on what your partners want. I see NYC as a losing proposition for AA.

      And how does it make sense to do Los Angeles and Phoenix?

      It’s been touched on, but LA gets downsized dramatically since again, AA is not going to “win” that market. Phoenix works fine but I still think it would need to shrink as the combined airlines costs climb up somewhat. Still, no reason they can’t both exist in different forms.

      The combined carrier would still be weak in the Northwest. I could see combining with Alaska, though Alaska has been getting closer and closer to Delta and it would certainly have to be American swalling Alaska rather than the other way around, something they?re hardly in a position to do.

      Just because a merger doesn’t cover every corner of the country doesn’t make it a bad merger. I still think AA should make a play for Alaska, but it’s tough to do right now.

      And you want them to do CLT but they tried RDU, surely they shouldn?t focus on a city purely for connecting traffic. Don?t forget what did TWA in ? they hubbed in STL.

      Completely different story. Charlotte is a gateway to a lot of smaller southern cities, so while it may be largely connecting traffic a lot of that connecting traffic is high yield and behaves like local traffic. Charlotte is the only true competitor to Atlanta as a southeastern hub. St Louis was a weak midwestern hub that had to compete with a million others doing the same thing. Charlotte makes money today. That speaks for the viability of the city as a hub. Does it lose some service if Miami is in the picture? Probably some Latin and Caribbean, sure.

      And tell me ? mergers are really costly, why can?t American build a new hub if that?s what?s needed?

      Because the last thing this industry needs is more capacity. Building a new hub is a mistake. But reshaping existing capacity to form a better network? That makes a ton of sense.

      You merge when (1) an airline is an undervalued asset, largely due to strategy or incompetent management or access to capital when there are opportunities to expand ? your previous argument that American management was incompetent was the best argument for merger, not really replicated here, though that?s a reason why AA would be more valuable post-merger not why the acquiring airline is better off, or (2) when a carrier has access to something you can?t replicate on your own, access to constrained slots that are key to a strategy for instance.

      I didn’t recall saying this was the sole argument for a merger. There are plenty of good reasons for this merger to come together, but I was solely commenting on this one piece of research.

      It?s about profits, not market share AA isn?t generating profits now, but it strikes me that your plan above is more about growing market share than about the spread between revenue and expense.

      It is all about profits, and American doesn’t have any. This argument is about growing high yield traffic to create a profitable airline. How do you do that? You provide options which make your airline more attractive to the high yield traveler. American may want to do that in its 5 cornerstones (three of which it is not the leader) but that won’t solve the problem everywhere else in the country. Adding a new hub and growing the network can work, but then you grow capacity too much so you kill yourself trying to fill all those seats with garbage fares. Consolidation is the only way to make for a more competitive airline when you’re dealing with behemoths in Delta and United who can provide those options to mid-size markets.

      • Brett, I looks like I misread your piece. You would concede New York. I don’t know if I agree ou with yabout about that. A lot hinges on the definition of “concede.”

        If you mean “abandon” New York, I disagree (although I could be wrong). I think AMR / US can have a “substantial” (although smaller than the current size) presence in New York and find a profitable niche. Regardless of the terms we use, It seems we agree that New York and L.A. (and Chicago?) need to be “right sized” (whatever that means).

        Maybe another slot swap might be in order. Speaking of slot swaps, do you have any inside information about which carrier (DL or US) instigated the LGA DCA transaction?

        • CF says:

          I didn’t really talk about that much in this piece but I wrote about it more in a previous piece. What I would do is not abandon New York, but I’d give up on trying to “win” the market and pare back dramatically to only important city pairs. Then I’d sell the slots off to JetBlue and keep a codeshare with them to retain some local benefit.

          Chicago is more of a question mark to me. American made significant inroads on United for awhile, but I imagine that is quickly reversing, if it hasn’t already. I think there’s probably a place for American there, but I don’t have a great feel for what that looks like.

          And LA needs help too. Basically, I love DFW and Miami but the rest is shaky.

          • Ron says:

            Has it ever been the case that one airline dominated New York or Los Angeles? These are the two largest markets in the country, and they seem to have enough demand to provide opportunity for many airlines to do well without requiring a chokehold on the market. So what does it mean to “win” or “concede” these markets?

          • Thanks for the clarification.

          • CF says:

            No airline has dominated either in modern history, but the market dynamics are changing in New York. United now has the most functional true hub in the New York area after Continental built it up on the foundations of PEOPLExpress. And Delta, fresh of the acquistions of slots from US Airways, is creating an operation across LaGuardia and JFK that gets New Yorkers just about everywhere they need to go. So you have two true strong airlines in New York that are consolidating power. American used to be much more competitive but the market is different now.

            For LA, it’s a different story. LA is more fragmented and it can continue to be that way. I think what American had in recent memory wasn’t a bad-sized operation. But then last year they threw a bunch of large regional jets in there to places like Oklahoma City and smaller regional jets to cities like Reno. That seems like a waste to me, and the airline isn’t done. It’s acquiring more gates in the new Bradley Terminal concourse to grow further. It might seem like this is the same thing that other airlines have done in New York, but I think it’ll be much harder to really consolidate much power in LA.

          • On further review, I’m thinking you may be correct, Brett. I even stated as much below when I wrote, “Three of AMR?s ‘cornerstones’ (Los Angeles, New York, and Chicago) are mediocre to weak at best.” Of course, the real answers are found in AMR’s internal accounting reports. If there is a significant pull down at JFK, it may take an objective, unsentimental management to do it.

            It seems that AMR could do what US did with the slot swap; keep only the most profitable domestic and international routes, and sell off the rest (after all the “slot swap” was a mutual asset sale). Post merger (assuming there is one) US/AMR will have a good presence at LGA, with service to most of the important destinations. It can do exactly the same thing at JFK.

            Among the routes I would keep are from JFK to both Sao Paulo and Tokyo. If you look on Great Circle Mapper, the shortest route from Tokyo to Sao Paulo goes right over New York; so in many ways, this is the best routing between those points.

            P.S. Did you see the stories about US (DL and UA, too) buying potential domain names for a future merger site? The plot thickens, even though I think merger talk is still a bit premature. You never know.

          • CF says:

            Yes, I saw the domain name stories. It’s just the airline being smart about buying these things up in case something happens. It certainly doesn’t mean it’s a done deal as some are reporting.

  2. Ben says:

    I guess my question is how would AA’s New York hub fit with US Air’s Philly hub. How would the flights be divided up? With that fancy new terminal, I don’t see AA wanting to scale back in New York. But US Air does have a nice thing going with its international operation in Philly, so it seems dumb to just abandon that. As for the rest of the network, I think keeping Phoenix and DFW would work. They are much further apart than Detroit and Minneapolis, two hubs that Northwest succeeded with for years, and Delta doesn’t seem to be missing a beat with either city now

    • CF says:

      I still think New York gets scaled back dramatically. It’s not worth competing when there’s no way to get out of third place. Some say that you need to be in NYC, but I disagree. You need to have a presence there, but you’re never going to provide the same utility in NYC as Delta and United so you’re just going to waste your time. Resources are better allocated elsewhere.

      • A good example to support Brett’s argument is UA (c 2002). UA was once attempting to be a major player at JFK (at least in the long-haul market). When the travel market collapsed post-9/11, UA (wisely, in my opinion) conceeded it wasn’t going to be successful competing as the then #3 carrier at JFK (and #4 in NYC) and pulled-out to instead focus on IAD/ORD. You also saw AA and DL step-up their marketing efforts in NYC around that time, while UA less so.

  3. M says:

    BHM is another same way. 3 MD’s to DFW, and 2 50 seaters to MIA. Domestically, they just are not competitive, unless you are headed to Texas and don’t like Southwest or WN’s schedule. I wouldn’t expect them to take on the DL/WN duopoly in BHM, but for a business traveller they are a distant 5th in BHM right now, even behind US Air in my opinion.

  4. Fred says:

    If American were to merge with US (or Alaska as Gary suggests), wouldn’t it be them calling the shots instead of American? Sure, US Airways is called US Airways, but most of the key people are from America West iirc, which was the stronger one of the two when they merged. And that’s assuming that the other carrier wants to merge (Alaska wouldn’t)
    And in the end, I don’t think American wants that just yet. I’m not saying it’s a good idea or a winning stratetgy, but American can and probably wants to hold out a little longer before resorting to a merger. Best would probably be to cut back quite a bit first like US airways did.

    • In the end I doubt it’ll be American giving up on holding out, in the end I expect US Airways to make a semi-hostile bid directly to the debtors, al la their Delta offer, but I can’t see AA’s employees as being against this as much as Delta’s were..

    • CF says:

      Agreed, Fred. American definitely doesn’t want this because the current management team doesn’t want to lose its role. But there are ways around the current team – first and foremost through the creditors.

  5. Is AA still suffering from the Crandell effect where it thinks what ever it does it’s right no matter what? Would they even listen to anyone else to hear what they have to say? If focusing on LAX/MIA/ORD/DFW/NYC didn’t make you king of the hill before bankruptcy, how will it help now?

    AirCal, RenoAir, TWA gave AA the chance to grow and service more of America (their namesake), but they chose instead to destory those carriers. AirCal & RenoAir gave AA the change to grow in the west/northwest, TWA’s aircraft could have been used to strenghten other holes in the AA map, but they chose to still forcus on LAX/MIA/ORD/DFW/NYC and look where that got them.

  6. Kevin says:

    US also serves DCA from Knoxville, 3x/day.

  7. SEAN says:

    The three US Hubs PHL, CLT & PHX don’t mesh well with AA’s hub structure & domestic network. MIA/ CLT, PHX/ LAX & PHL/JFK are either short hop flights as in the first two cases, or are completely unessessary in the third case since NYC & Philadelphia are only two plus hours driving time away from one another & there are plenty of other transit options between them. Although PHL & CLT do have a multitude of international flights to europe that can be a benefit to AA’s global network. The majority of US’S international service does go to & from PHL.

    • Sanjeev M says:

      Yeah but 1 hour flying time makes a huge difference, both from passenger schedules and aircraft block times.

      The other thing is airspace congestion. Some airports e.g. CLT, PHX are less congested. More importantly during IRROPS, its easier to reroute people when you have multiple hubs. Case in point there was a DL NRT-MSP that was redirected to DTW cause MSP had closed. By the time passengers had landed they’d been automatically rebooked on their connections.

      1. MIA/CLT not a problem. MIA for O&D and CLT for connections. I would fly MSY-CLT-DCA but not MSY-MIA-DCA or MSY-DFW-DCA. CLT is perfect for accessing the Mid-Atlantic and Northeast and Southeast.

      2. PHX/LAX, once again LAX is O&D and PHX is connections. PHX connects you to everywhere in California. Some people say PHX overlaps DFW but PHX is 2 hours closer to the west coast. I will fly SAN-PHX-MSP but not SAN-DFW-MSP unless the price is too good, which means less yield for AA.

      3. PHL/JFK I would say this is beneficial to gain a critical mass in the Northeast where US has so many FF’s on a leash. Once again JFK is O&D and PHL is connections although this is more balanced like UA EWR/IAD.

      4. LGA/DCA I know many wanted US to hold on to 20 daily PHL-LGA so AA could use the slots, but that’s over with. DCA should only help AA.

  8. CP says:

    I have mixed feelings about Cranky’s argument. I get the general thrust behind AA’s ‘cornerstone’ strategy; it seems in-line with what a number of other airlines have done to be profitable in the past few years (that is, focus on the strong markets), USAirways among them. I don’t have enough data to determine if AA’s argument that its cost structure (vs. its revenue-generation capability) is the barrier to profitability, but it does make sense that AA’s costs would be vastly higher than the carriers that have cut costs through bankruptcy.

    As a business traveler who’s bouncing between different cities every day, and who generally thinks AA does a great job (especially with domestic premium travel), I will say Cranky is right that increasingly AA offers much fewer options, when compared with its competitors, on getting in/out of various cities. When I look at the “matrix” view in our corporate travel system, it often says “view 36 options” under DL, (now) “view 30 options” under UA, and offers far less options under AA because of the smaller number of hubs. AA still offers a decent option in many instances, but there is an impression it offers fewer options.

    TYS has been an example in my experience. The US DCA-TYS nonstops are often $700+ ONE WAY, so for cost reasons I look into a connecting itinerary. US (through CLT) and DL (through ATL) will always win, because AA has to loop me through DFW or ORD, which don’t make sense for a city an hour by plane from DC. So, even though I’d prefer to fly AA, I will book CL or US on that route.

    American’s lack of a domestic partner doesn’t help here. For instance, I’ll book US on the route above because I can earn United miles (and contribute to status-building).

    That said, I am sure that EVERY airline has some cities where it offers no good options (or cities in which AA has the vastly superior options). Cranky’s argument seems to be that AA just has many MORE of these cities.

    The post certainly got me thinking, if nothing else!

    • CF says:

      US Airways and American are different beasts when it comes to the cornerstone idea. Yes, US Airways has done the same thing but the team there is smart enough to realize that it’s never going to compete to be the main airline of choice for people all over the US. So it focuses on the areas it can serve best and has no ambition to grow beyond what works. American, however, is the leader of a global alliance and should be able to get the heft needed to compete with Delta and United on the world stage. To do that, it has to think about how it serves all of the US – how it can create the most utility by getting people into the network.

      I think what you say about US Airways is right. The membership in Star Alliance brings a lot of traffic into the airline. But for American, it should be able to push more traffic into the network.

  9. I find it interesting that American’s “cornerstone” strategy is so universally panned, yet the same basic strategy seems to work pretty well for US Airways. I feel the difference, as was pointed out on US Airways’ last earnings call, is that US’s “cornerstone” markets are ones in which it has a strategic edge of some sort, and that includes Phoenix.

    Because of this simple point, it could be that much of the “conventional wisdom” is wrong. A US / AMR merger could benefit American more than US Airways. Even though US’s hubs aren’t the “best” it does have some kind of competitive edge in all of them. Three of AMR’s “cornerstones” (Los Angeles, New York, and Chicago) are mediocre to weak at best. The only two where AMR has an edge are Miami and DFW, and MIA’s may not be the best because of airport issues.

    Outside of a duopoly scenario, no merger is going to give AMR or US Airways a major presence in Asia or expand Europe dramatically. And the analysts’ whining isn’t going to change that. But a better domestic network can provide the necessary feed to allow for organic and profitable international growth.

    No airline has a totally comprehensive network. All have to focus on their key markets. American has some strong markets. US Airways has some. But neither can match the newly merged Delta or United’s networks. And as Brett has pointed out in his piece, networks do matter. That’s why each needs to consolidate with another carrier; and the simplest solutions is to merge with each other.

  10. Has anyone considered the benefits of US switching alliances and joining Oneworld? That avoids all the cost and other drawbacks of a merger, but gives AA a lot more appeal to frequent travelers. As one of the comments points out, I don’t care so much that AA occasionally doesn’t offer a great schedule on the route I want to fly, but it does hurt that they don’t have a partner who does. Increasingly, I find myself being sucked into Star alliance because UA or US almost always has a good schedule between whichever two cities I’m traveling. If I could fly US and get AA miles, then I’d be much more loyal to AA and I’d have a lot more schedule options from which to choose.

    So then I guess the question is whether US would switch to Oneworld. I’m less clear on what their incentive would be or whether Oneworld would be better for them than Star — anyone have a POV on that? If Oneworld is a less attractive option, is there something AA could do, short of a merger, to give US a stronger incentive to switch?

    • Fred says:

      I don’t think that US switching to Oneworld would make a huge difference for American, since they would still be competitors just as much as before. US is probably happy with Star anyways.
      What might be more realistic is if AA switched over to Star Alliance (which is much stronger in general). The big losers if that happened would be Oneworld of course, but AA needs to take care of itself, not its alliance.

      • Doug says:

        They wouldn’t be competitors (as much) if they were code sharing. Domestic code share, if AA can get the scope change, alleviates the need to merge to a large extent. On the other hand, the reduced feed from oneworld carriers into CLT is a valid point. I seriously doubt AA is going to switch to Star; BA / IAG won’t let that happen.

    • CF says:

      I think it would help American in the same way that a partnership with JetBlue helps American. It provides more options, but it doesn’t let the airlines come together to really combine networks. So it’s a nice medium solution but not a true one. For JetBlue, a merger makes no sense because even after bankruptcy, American’s costs will be much higher. But with US Airways, it should be much closer together.

      For US Airways, I don’t know why they’d make the switch without merging with American. The network is tuned today to take feed from Star Alliance and US Airways gets a great deal of benefit. Could the same happen with oneworld? To some extent, but there are fewer airlines sending feed over so it’s probably not as good. The switching costs would probably be a nail in the coffin.

  11. Andrew says:

    I have lived on the East Coast for most of my ~30ish years of being alive (DC, PA, NC, FL), and I’m approaching my 300th flight flown. I’ve flown every legacy (US/UA/DL/NW/CO) at minimum a dozen times each, plus at least a dozen each on WN, B6, and FL, along with some flights on AS. Some of them I’ve flown a lot more, obviously, but what I’m saying is that I’ve had a pretty wide variety of experiences with different carriers.

    The ONLY airline that I haven’t flown at least a dozen times is AA. I have flown exactly ONE segment on AA out of my 300 flights, and the only reason for that was because I wanted to see if I could book the AA flight as an AS codeshare and credit the miles to my DL account (I booked the flight on the AS website, and was able to enter my Skymiles number since AS codeshares with DL, even though the flight was actually on AA metal. When I checked in at home, my Skymiles number was successfully printed on my AA boarding pass, but then I ended up checking a bag, and they reprinted my boarding pass at the airport, and that one didn’t have my DL number on it…so experiment failed, although part of me wonders if it would’ve worked if I would’ve stuck with my original BP! Anyway, I digress…)

    It’s not like I’ve purposely avoided flying AA. They simply don’t fly to many of the East Coast destinations I’ve needed to fly to, or if they do, their price has always been way more expensive, or their routings way more inconvenient. So no, I don’t really have any hard evidence to support Cranky’s argument, but anecdotally, I completely buy it, based on my 1/300 track record with them.

  12. As others have pointed out, the “cornerstone” strategy is not necessarily a bad idea. However, this strategy has been undermined at AA by two main factors.

    First, it seems that they do not have as many flights from their spokes to their “cornerstones” as does their competition. I will speculate that this is due to retraction of many of these runs (or retraction of frequency) for pure cost savings purposes that did not consider the spoke’s overall connectivity to their hubs.

    Second, except for DFW, AA’s hubs are not dominant “fortress” hubs in their markets. DFW is their only true fortress hub that also offers extensive domestic connectivity to a large number of spokes. MIA is a fortress hub but offers little or no useful domestic connectivity due primarily to its geography. AA has the #1 spot at LAX but only 16.5% of the passenger market share (including Eagle) and three very strong competitors at its heels (#2 UA has 12.1%, #3 WN has 11.4% and #4 DL has 10.8%). However, those numbers do not allocate any of Skywest’s flights (#5, 6.1%) to UA and DL so their overall market share numbers are probably much closer to AA’s than indicated above. At ORD, they are #2 to UA and have vastly inferior facilities. Finally, without knowing for certain, I am guessing AA is also a distant 3rd in NYC (behind DL and including UA at EWR).

    That’s a rough spot, indeed, especially when compared to the other major US airlines. UA is #1 at 7 of its 8 hubs (SFO, ORD, IAH, EWR, IAD, DEN, CLE) and a close #2 at LAX. They are likely the #2 in overall NYC market share as well. DL is #1 in 6 of its 7 primary markets, including NYC (ATL, LGA/JFK, DTW, MEM, MSP and SLC) and is only a few percentage points from the top at LAX despite being #4 overall. US is #1 in all three of its hub cities (CLT, PHL, PHX) and #1 at DCA which, despite not being a traditional hub, is a huge cash cow for the airline.

    Bottom line – AA is at a significant competitive disadvantage in its cornerstone markets relative to their peers which might very well render its cornerstone strategy ineffectual.

    Bottom line #2 – AA + US makes a lot of sense from a hub perspective. PHL + JFK can coexist in much the same way as IAD + EWR are coexisting for UA. PHX strengthens its already strong west coast position (forget about the Pac NW, it is a true red herring to this discussion as nobody is strong there except AS and AA has the strongest tie-ins with AS) and provides it with the dominant, fortress, successful southern hub in CLT it has sought for decades.

    • David says:

      I disagree about MIA – it is a sleeping giant, albeit with issues. I just flew round trip BWI-MIA and MIA was efficient, clean and buzzing with activity. Like other domestic travelers, I flew into Concourse D and the terminal was packed and the gates were illuminated with many domestic and international destinations. CF commented on the airport’s cost issues recently (not getting Virgin Amer was especially telling -should have been a slam dunk), and that is definitely a concern. MIA should be able to support ample domestic hub and spoke traffic to cities in the Mid West and on the East Coast. If nothing else, it could feed traffic to numerous Central, South American and Caribbean flights.

      • Absolutely, MIA can funnel AA Latin American and Caribbean traffic nearly anyplace in the US and does so extremely effectively. I’ve utilized that feature on AA myself. I was referring to “domestic connectivity,” which seemed to be at the core of the analyst’s report and the example Cranky provided. To wit, adding flights from Knoxville to Miami does not help AA connect more passengers from Knoxville to anywhere else in the US or the world, except for the very small cross section of Latin America and the Caribbean. Adding flights from Knoxville to DFW, ATL, CLT or IAH does.

        Unfortunately for AA, DFW is the only fortress hub that provides extensive domestic connectivity. ORD does to some extent but AA isn’t even the largest carrier there so I’ll give them partial credit and say they have 1.5 of these “domestic connectivity” hubs. UA has 6 (SFO, DEN, IAH, IAD, CLE and EWR), DL has 7 (ATL, DTW, MSP, MEM, NYC (JFK+LGA) and SLC) and all 3 of US’ hubs count (CLT, PHL and PHX).

        Revised bottom line – AA is at a significant competitive disadvantage relative to its peers in terms of connecting spokes to domestic (and even worldwide) destinations.

  13. I always thought when AA took over TWA, they should have reduced ORD down to flts to hubs and a few key cities and used STL for mass connections service. It would have gotten them away from UA in ORD plus STL being more in the middle of the country would have helped move more people better. As some others have pointed out using AA to connect via ORD/DFW/MIA can mean going out of your way more to do so.

    • Sanjeev M says:

      But the concept of a reliever hub doesn’t work if there’s no significant O&D. See DL at MEM or US at PIT. AA at STL is just another reliever hub from TWA that didn’t work cause the O&D declined and WN won on costs.

    • We really don’t know if AA’s STL strategy would’ve worked given what AA could have planned for. The 2001/2002/2003 downturn in air travel was something that no one in the airline industry could’ve predicted.

    • CF says:

      Exactly what Sanjeev said. That was AA’s plan the whole time – create a big connecting hub in St Louis and save O’Hare for locals. St Louis just didn’t work out because there was no pricing power on the connecting markets and not enough local traffic to sustain it. Back to another point, Charlotte, on the other hand, has a lot of connecting traffic but US Airways does have pricing power in a lot of those markets because there is limited competition, primarily with Delta.

  14. BSW says:

    Over the weekend someone registered 20 domain names regarding a US-AA merger. It’s unknown if this was one of the airlines or someone attempting to cash in on an eventual merger. More here http://domainnamewire.com/2012/03/11/american-airlines-merger-with-u-s-airways-is-a-go-suggest-domain-registrations/

  15. Don says:

    I believe the merger option with JetBlue and another carrier is what will happen. Or merge with JetBlue and Alaska. Right there gives you dominance on both sides where AA needs it. That way you capture those smaller markets re-take San Juan and the East Coast. Then tie up loose ends with US Airways. I refuse to think logical when talking aviation.

    • Doug says:

      I agree but they don’t have to merge with JetBlue and Alaska; they just need to code share and that’s one of the scope changes they are seeking. Combine that with lower costs that allow them to grow organically and they are all set.

  16. David says:

    Did anyone else see the tiny blurb in today’s Wall Street Journal? Evidently, US Airways is buying AMR merger related web site monikers…interesting.

  17. SEAN says:

    Off topic, UA has a flight 1737 that travels PDX TO LAS via EWR. I’ve sene weird routings before, but this takes the cake. I realize nobody would fly the whole route, but still it’s nuts.

  18. Ed Kelty says:

    If there is to be another merger in the near future, I’d like to see US Airways and Alaska. Both are competent carriers and could provide a coast-to-coast network with some mid-continent weakness. Possibly, add Hawaiian. Of course, Alaska would not want to give up it’s heritage and maybe shouldn’t. Code share would be the alternative.

  19. Pingback: Travel News: Week of March 19, 2012 | Johnny Jet

  20. Pingback: The Best Slide I’ve Seen Showing American/US Airways Merger Benefits to Mid-Size Cities - >> The Cranky Flier

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