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.

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49 Comments on "Why American’s Revenue Plans Aren’t Good Enough and a Merger Is Needed"

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Gary Leff
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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… Read more »
DesertGhost
Guest
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.… Read more »
Ben
Guest
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… Read more »
M
Guest

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.

Fred
Guest
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… Read more »
Nick Barnard
Member

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..

David SF eastbay
Member
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… Read more »
Kevin
Guest

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

Bill from DC
Guest

Ahhhh, you beat me to it!

SEAN
Guest
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 &… Read more »
Sanjeev M
Guest
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… Read more »
CP
Guest
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… Read more »
DesertGhost
Guest
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… Read more »
Andrew
Guest

Completely agree here, you’re spot on about the problems with AA’s “cornerstones.”

Scott
Member
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… Read more »
Fred
Guest

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
Member

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.

Andrew
Guest
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… Read more »
Bill from DC
Guest
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… Read more »
davidp627
Member
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… Read more »
Bill from DC
Guest
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… Read more »
David SF eastbay
Member

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
Guest

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.

Nick Barnard
Member

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.

BSW
Guest

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/

Nick Barnard
Member

The linked article notes that these names were registered by MarkMonitor – a company that is about protecting trademarks, so its highly unlikely that it is someone trying to cash in on the eventual merger.

Also, I just peeked around and US Airways actually acknowledges purchasing the names:
http://www.thestreet.com/story/11452907/1/us-airways-buys-domain-names-for-amr-merger.html

Don
Guest

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
Member

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.

davidp627
Member

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.

Nick Barnard
Member

Yup look a few comments up. ;-)

SEAN
Guest

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.

kelty
Member

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.

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