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.
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.