Much has been written about Delta’s surprise deal to buy 20 percent of LATAM, inject money into the company, and take 14 excess A350s off the airline’s hands. It’s a big win for Delta in its weakest region, and it lets LATAM ditch airplanes it doesn’t want while raising needed cash. This is Delta doing what it does well, and that makes it less interesting to analyze then the other side of this deal. This is a big development in the airline industry on the whole, but most notably, it has the potential to be a watershed moment for LATAM’s spurned lover, American… if the airline can rise to the challenge. That’s a very big “if.”
Losing LATAM Isn’t the Problem
Though you may assume otherwise, losing LATAM isn’t really the issue here. American remains the biggest airline between the US and Latin America. It has long-standing ties with consumers and travel agents throughout Latin America. And of course, it has THE hub in that region’s unofficial capital: Miami. LATAM brought some connectivity to American, but American needed it less than any other US airline. The pending joint venture between the two would have been helpful, but then again, Chile already had to be carved out thanks to competition concerns. It was an imperfect union. American could benefit from its partnership with LATAM, but it doesn’t need LATAM.
American’s bumbling response seems to be trying to make that point, but it fails miserably. The airline’s statement was milquetoast. “LATAM and the Cueto family have been terrific partners….” Then American goes into familiar territory and blames others, in this case, the decision by the Chilean Supreme Court to not allow the joint venture. Finally, the airline tries to play down the situation by saying the deal was only worth $20 million a year anyway, so it didn’t matter. If it didn’t matter, then why did American invest so much time and effort into creating the joint venture in the first place? This is a weak statement, but more importantly, it paints the picture of an airline that doesn’t know what it’s doing.
Furthering that narrative, the airline on Friday tried to make a swift, bold move by shutting down the codeshare with LATAM immediately, but that was poorly thought through, if it was thought through at all. The ending of that codeshare so abruptly just hurts American’s customers and partners who need to buy new tickets, change existing tickets, or deal with schedule changes. It was a move meant to show strength, but it instead just showed, at best, a decision that failed to consider the customer impact. This response is actually quite symbolic of what’s been going on at the airline at large.
Strategic Aggressiveness is Needed
While losing LATAM in a vacuum isn’t an issue, losing LATAM to Delta, an also-ran into Latin America that is now all-of-a-sudden a formidable competitor, is hugely problematic for American, especially if Delta builds up Miami as expected. (Someone has to feed all those LATAM flights in Miami.)
This is Delta throwing down the gauntlet, making smart strategic moves, and threatening American in its strongest international region. This kind of strong move to achieve strategic goals is exactly what American needs to be doing. It should start by actually having a cohesive strategy. Apparently the old Latin strategy was to create a joint venture with a partner it now says contributed very little. That’s a head-scratcher.
Publicly, American can start with a bold statement. What people want to hear both inside and out at the company is “We are not going to take this lightly. We are going to fight for Latin America and we are going to win. We are American Airlines, and nobody is going to push us around. Get ready for war.” Then they need to slather on war paint and sharpen their swords. Or, you know, something like that.
Then, American needs to evaluate Latin America and fill in the gaps. Delta is selling its stake in Gol, so American can start by buying that to feed its already massive Brazilian network along with providing additional secondary destinations for customers. Then it can move on to harder things, for example, like convincing Copa to join forces instead of being in third position with United behind Azul and Avianca.
But this isn’t just about Latin America. Delta has fundamentally re-drawn the map around the globe. If long-entrenched partners who were about to implement a joint venture can be broken up, then anything can be up for grabs. Traditional alliances aren’t the anchors they once were; LATAM even says that once it leaves oneworld, it will stay independent. The fight is on, and American needs to enter the ring.
The Perfect Storm for Management
It’s rather strange to think that this gut-punch of a LATAM departure may actually be a blessing in disguise for American. It needs to be the catalyst that is going to force the airline to make huge changes and face its demons. Will American continue to stagnate, or will it step up? The answer must be the latter. The question is… who will make it happen?
American’s management team has already been on the ropes for a variety of reasons, but Wall Street has recently been particularly concerned with the airline’s high debt load. Whether it’s an actual issue or not doesn’t matter. What matters is that Delta just came out saying it’ll raise more than $2 billion of debt to fundamentally re-shape Latin American aviation. American, saddled with higher debt, doesn’t have that same kind of flexibility. This should get Wall Street howling, and maybe this time the board will be listening.
Today, American is like the woolly mammoth in the tar pits. Those pits are full of labor issues, operational problems, organizational messes, and just general malaise. So far, American hasn’t been able to extricate itself nor has it seemed from the outside to really be trying all that hard. Senior management has given plenty of excuses and has tried to get people to patiently wait for better times ahead. Patience, however, has been running thin. This should be the event that causes patience to run out entirely.
I would be very surprised if we don’t see management changes at or near the top soon thanks to this turn of events. In fact, I’d say some kind of shake-up is necessary here. The board can’t be happy, and Wall Street is going to keep ramping up pressure. We already know employees aren’t happy. The only way to get things moving in the right direction is to make big changes, and they need to happen very soon.
The current leadership at American Airlines lacks vision for the carrier’s future, does not seem to offer much strategic initiatives beyond simplifying the fleet rather than optimizing what it can offer, not to mention capitalizing on it being newer than the other 2 US carriers overall (hence the high debt load), and American seems to be run by not just by the myopic and provincial mindset of the old USAirways, but seems to be sliding back to what it was pre-bankruptcy. Too big but in some ways, not big enough. Delta, and now UA are clipping AA’s wings in many markets. Hopefully, American’s management will wake up and fight for the franchise. It is a great one and one that has the potential to be so much more than it is now.
AA has a relatively young fleet, yet it’s one of the few airlines in the world where you pray that you will get an old aircraft! They’ve cheapened the new ones to the extent that they are uncomfortable and generally not competitive with DL or UA’s offerings. Anyone who is “in the know” will avoid AA if there are other options available. And, this is true not just of their economy class but of business/domestic first as well.
And that’s symbolic of the overall malaise that AA has created for itself: take what should be a strength and make it a weakness.
The funny thing is, from a lounge perspective, AA likely has some of the best premium and first class lounges of any domestic carrier with Flagship First Dining. They are also the only domestic airline I know emulating the idea of a totally separate check in counter and expedited security experience for first class fliers. Unfortunately as others have pointed out, if you aren’t spending loads of money with AA, you are essentially an after thought.
There’s already an announcement today from American stating they are increasing a number of frequencies, though they seem rather far off. It’ll be interesting if there are any actual changes in product to compete as well.
Doesn’t take a genius to spot Americans management really are letting things slide at their airline into very, very challenging conditions.
Premium cabin Long haul service is resoundingly panned.
Domestic travel experience lacking in reliability and comfort compared to DL/UA.
Staff not happy
Delta coming for them in South America.
United dropping a bunch more premium cabin into LHR and a third runaway looking more likely than ever which will kill off the golden goose of the JV with BA.
AA going nowhere good in NYC and LA. United increasing capacity in Chicago.
Wholeheartedly agree with cranky that the airline needs an aggressive intervention and fast. If it comes after the economy turns, the airline will lose *a lot* of money
Mostly agree but that third lhr runway is as far away as it’s ever been…
Agree with you on some, but not all:
Most all of AA’s shorthaul mainline have some form of charging throughout all cabins (coming soon to those that don’t), whereas UA doesn’t put it beyond the exit row on pretty much all except the 739.
UA has been on the 30-inch-pitch bandwagon for a while, and has neglected TVs since before AA decided to do it.
UA’s basic economy rules are still the most restrictive of the big three.
UA has an overreliance on RJs.
Average premium cabin on shorthaul mainline is smaller (12 seats on A320 and 738 instead of 16, for example)
Many of the negatives I mentioned are relics of Smisek that are either being changed or planned to change, but for now I still think it’s DL>AA>UA. Then again, recent changes (eg PlusPoints and non-expiring miles) due have them pulling ahead.
Yeah but Oscar is getting very competitive on pricing. I fly once a year to HSV from SMF to visit my best friend. HSV the most expensive O&D in the nation. Average Delta is like $450 RT and AA $525. UA came in this year at $315!!!
So they maybe behind in hard product, but an almost $150 RT savings will trump that while waiting for the changes. And I might add the crew was very friendly at UA.
consider learning some facts before spewing fake news? Most, if not all, 738 are 16F, and plans have already been announced to bring 319 to 12F and 320 to 16F, in line with competitors.
You claim DL is so premium, yet on their flagship 359 it’s barely 32J. UA’s 788 is 36J, 764 36J, 78X 44J, high-J-763 46J, 789 48J, true Polaris 77E 50J, 77W 60J. I know basic addition isn’t your strong suit, but the last time I checked, all of those are greater than 32.
*typo 764 is 39J
@John, @Will in SMF, @Henry LAX
The core issue here is the historical nature of AA, DL and UA’s networks, what they got out of their mergers, and where they are able to place themselves in the marketplace.
United historically built its hubs in large metro areas; while they get a higher share of international revenue than AA and DL from its hubs than from the hundreds of non-hub cities in their network, they have a much weaker domestic position than AA and DL in their hubs. All of those metro areas are highly competitive on the domestic side and UA simply cannot put the size of aircraft into those markets as AA and, even more so, Delta can put into its hubs.
Delta, on the opposite extreme, built its hubs, as did NW, around medium sized cities. Delta has spent the last ten years “pushing up” into the largest markets even as Delta has higher market share and revenue from its hubs than AA and UA have from theirs.
AA is somewhere in between DL and UA in terms of hub structure.
Delta has been more successful “pushing up” into larger markets than AA and UA have been in pushing down into the small and medium sized markets in which DL is the largest carrier. USAirways added a lot of small/medium capacity to AA’s network and it is no surprise that those markets are the highest yielding and AA is focusing its growth on that part of its network rather than the large markets. In total, DL has grown faster by “pushing up” into large markets while growing its hubs, including connecting them to the world. The perfect example of DL’s success in that strategy is its dual hubs at MSP and DTW compared to ORD at which AA and UA hub. DL gets more than 40% more revenue from the combined DTW, MSP and ORD local markets than UA does and even more than AA. In terms of the entire Midwest including all of the markets attached to those hubs, DL gets even higher Midwest revenue than United. DL has more service from its twin hubs to both Asia and Europe; DL has 7 flights from DTW and MSP combined to E. Asia while UA has 3 and AA has none. Despite being historically strong in the Eastern US, Delta is now the #2 airline based on total revenue and ASMs on the west coast due to its dual hubs in LAX and SEA, a situation that would have been unthinkable a few years ago.
Because DL’s interior US hubs are less competitive and DL can essentially set the capacity levels for the city (all of which are also single airport cities), DL has a higher percentage of flights from its hubs on mainline aircraft, all of which have first class cabins. This has also allowed Delta to get rid of more 50 seat aircraft, which do not have first class cabins.
The difference in the number of premium seats on international aircraft pales in comparison to the difference in the number of premium seats on the domestic fleet. Further, DOT data shows that Delta gets average fares on its international aircraft as high as higher than United in similar markets which says that Delta has a better balance of premium and coach revenue. As much as many on here want to believe otherwise, Delta very likely gets higher average fares in coach on its international aircraft because it provides more personal space since it has no 9 abreast 787s or 10 abreast 777s. Delta undoubtedly did the math when it decided not to convert its 777s to 10 abreast and also to choose the 8 abreast A330 and 9 abreast A350 over configurations that AA and UA use on their Boeing widebodies. The same DOT data shows that Delta gets more total revenue on flights compared to AA and UA likely indicating that DL has the right balance of premium and coach seats to get the highest amount of revenue from each cabin.
Delta simply has more premium seats across its network than AA and UA because it has both the B717 and A220 and has a lower percentage of 50 seat regional aircraft.
UA’s strategy of converting CRJ 700s to CRJ550s with high percentages of premium seats is specifically designed to address UA’s lack of premium capacity in the domestic market. The same is true w/ their strategy of adding used A319s and 737-700s. The problem with all of those fleet types is that they have the highest operating costs in their class so, while UA can add premium seats, it is doing so in the most cost-inefficient manner. There are also rumblings – I am not sure if true or not – that the FAA may require the CRJ550 to be staffed w/ two flight attendants which will destroy the economics of that aircraft. If so, UA is forced to buy a true small mainline aircraft which it has resisted doing or else be right back where it was strategically.
The reason why you see cheap UA fares out of cities like HSV is because UA is trying to push its way into smaller markets which AA and DL have dominated. Given that UA is, in general offering an inferior product (a higher percentage of its network is on 50 seat regional jets than AA and twice the percent of DL), they are not going to get the highest fares.
So, while this topic is about Latin America and specifically DL/Latam, it shows that overall network strategy including in domestic markets has a significant impact on the success of the DL/Latam partnership and why DL and Latam have more to contribute to each other than any other airline could.
and hats off to CF for capitalizing on a topic which will undoubtedly generate 10k plus page views even on the articles about DL/Latam so far.
Very thought provoking article.
A senior management change at AA?
I guess we have to ask to whom?
Where would the talent come from?
Tvmccabe – Well that’s the million dollar question. There is no obvious answer. If the board decides to make a change at the top, it probably has to look outside the industry for the CEO. But then it can bring in an industry person to be the second lieutenant. There are more options around that level.
AA’s Board and AA’s CEO already let Scott Kirby escape to United and have been taken to task for it by Jamie Baker at JPMorgan Chase. UA’s TRASM has been rising since Kirby arrived, concurrent with AA’s starting its decline.
Maybe there are no better people out there?
Letting Kirby leave may may have been a not so good decision; however, to imply that UA’s fortunes rose when he landed (no pun intended) there may not be accurate. I may be wrong but I recall the relatively lower PRASM and/or TRASM performance was a concern during the previous regime. So, imo, with the under performance it is easier to grow TRASM.
Although the previous UA regime was trying to shrink to solve the weak PRASM issue, and thus UA was punching well below their weight in the marketplace to use Doug Parker’s actual phraseology to analysts. Kirby re-wrote and reversed the strategy 180 degrees, and was at first beat up by Wall Street for it. They didn’t like adding ASMs. But Kirby ultimately got praise from the street when they saw it actually started working with UA’s mid continent HUBs, and targeted International additions on the two coasts.
Meanwhile AA is just shrinking in JFK and EWR as DL and UA put the pedal to the metal in that marketplace. I suspect UA is also winning in ORD. If Delta moves into MIA as the author suggests with their LATAM purchase, AA will be fighting on quite a few fronts, not to mention Southwest’s enormous success in Dallas with the repeal of the Wright Amendment. Sounds like some hand to hand combat to come in different markets.
Due to more than 5 years of American missteps, Delta and United have successfully redefined the US global aviation market to exclude American or at least leave such a small part for American that they are at best a niche carrier. American has some great domestic hubs and pieces of a viable international network but not enough works together to generate decent profits. AA is a financial zombie that continues to try to act as a global carrier even as its arms and legs are being cut off.
AA has also completely cut Midwest to Asia flying and now will operate just one flight to Narita despite supposedly being in partnership with Japan Airlines. The greatest “victory” Delta gained in losing JAL was for them to choose AA as a partner.
An American-USAirways merger was never a match for the global powerhouses that Delta and United became after their mergers; the low cost regional niche carrier mindset w/ which AA is being run and the combination of strategic failures by AA means a management shakeup leaves little for AA to work with. The global market is only so big and divided between so many carriers. AA is increasingly on the outside looking in.
Given that AA alone among US airlines faces bloated costs due to 30,000 more employees to generate less revenue than DL, the future for AA is bleak, at best.
There has always been a fairly high failure rate among airlines and esp. after mergers. Too many people were lulled into a sense of invincibility after the mergers in the US airline industry post 9/11 (AA/US nearly a decade later).
Sadly, AA is likely to end up in bankruptcy again because it can’t deal w/ its balance sheet or operating cost disadvantages any other way.
In the meantime, Delta and United will carve up American’s global network, leaving American with just a handful of key countries and partnerships.
AA’s future was set at the time Parker convinced the AMR board to support a USAirways merger over a standalone plan. There is increasingly nothing left to build a viable plan for AA as a global carrier which will result in the eventual bankruptcy of AA and further shrinking of its network and workforce.
Delta’s ability to stick a spear deep into the heart of the only thing – Latin America – where AA had a unique structural advantage simply hastens the day when the house Parker built comes tumbling down.
Everything began with a mistake of the Chilean justice courts. The rest of the story has two great winners: Latam and of course Delta; in a near future, perhaps we will have more Latam flights to ATL Hartsfield, main Delta US hub. Adendum: From the moment Delta formalizes its position as important shareholder of Latam, Delta must sell its shares of the Brazilian airline Gol. Kind regards from Santiago de Chile, dear friends and partners in travel of Cranky Flier, Luis Rafael Jofré
If a single, solitary decision by a court in Chile is enough to stick a dagger in the side of an Airline, either Chile is SIGNIFICANTLY more important globally than most think, or you undervalue the level of mismanagement that’s going on at American.
It`s fair play and competitiveness come true against a mistake which deny the right to SCL passengers the right of passengers who embark en LIM and SAO. In my Linkedin and Facebook profiles, Jon, you[ ll find some of my opinions refered to this Latam success. Many thanks for your opinion abouth Chile and Chilean entreprenneurs, LRJ
AA’s attempt to form a joint venture with the largest carrier on a continent in which AA is the dominant carrier follows directly after AA’s joint venture with BA. In the UK, there was sufficient competitive capacity that a reshuffling of the deck was possible to provide a somewhat competitive presence.
The Chilean government – one of the best examples of free market principles in Latin America – knew there could never be a competitive response. They did the right thing.
Interestingly, AA in typical kneejerk reaction is adding capacity to Europe and from Boston to Heathrow, a market they exited on their own metal. AA’s subpar margins will only sink further as they dilute their own fares and suppress their own margins just as they lose connecting capacity.
AA simply does not have any strategic vision and the more they do, the more they prove that to the detriment of their future, their stockholders, their employees and their customers.
According to you paragraph “The Chilean government —one of the best examples of free market principles in Latin America— knew there could never be a competitive response. They did the right thing”. The Chilean Supreme Court of Justice, Tim, expressly ignored a previous judgment of the Chilean Court of Free Competition that favored the approval of the BJA business joint agreement of Latam with AA, BA and Iberia, LRJ
Practically speaking, how fast can codeshares be dropped? Is it just a matter of zeroing out all availability for all fares or is there any more regulatory or technical issues? I assume any already-booked travel stays intact but I’d expect problems if you had to be rebooked for whatever reason.
For potential big changes at American, what would those be? Yes you could bring in new leadership, but what could they do differently? I’m not doubting that they could or should do something new, but I don’t see it in the post and don’t know myself either. The labor problems in particular don’t seem like they would change under other management, and some other issues like the 737MAX weren’t really avoidable or American’s fault to begin with.
Amateur assessment here:
1) Make labor peace — Oscar had the same problem at United. There has been a concerted effort to ease tension with employees. You’ll never get completely over labor problems but labor problems have a nasty way of showing up in the service an airline provides. One example: When Commander Jeff (Smisek) was fired at United, the on-board staff morale improved almost immediately.
2) Service — American’s service is, at best, pedestrian. There’s nothing that distinguishes American Airlines from its competitors. Literally nothing. I’m not an airline expert but there has to be a hook to pull people in. I get in Miami, Dallas, Philadelphia and Phoenix why people fly American. But in Chicago and Los Angeles, passengers have a choice and American is lagging United and Delta, depending on the locale.
3) Reputation — For years, the Legacy Airline stood for something. You might have paid a little more to fly American, United, Delta or their predecessors, but the brand stood for something special. You knew what was being given in service, care and commitment was a cut (even a paper cut as time went on) above their competitors. Not the case with American. It’s the little things that build reputations and make people come back. Oscar gets it. Delta gets it. Not sure Dougie and the American team “et it.”
Jason – That’s right, they just zeroed it out. The codeshare is still filed, but you just can’t buy tickets on it unless it’s a market that American doesn’t serve. For example, you can’t fly LATAM between the US and Latin America anymore on an AA code, but if you’re connecting beyond to, say, Cusco or Mendoza, then AA is still selling tickets on those flights because it doesn’t serve them any other way.
CF – How do we know that the cancellation of forward codeshare bookings wasn’t or isn’t part of the arrangement LATAM worked out with Delta? There has to be a cut-off point somewhere. I read elsewhere that it was LATAM who initiated this. I also read it was American. Obviously that was all speculation. Maybe you know the whole story by now. Either way, I do agree with you that it was a bit too abrupt.
Desert – Those are two different things. The codeshare was zeroed out by American and has nothing to do with LATAM. The interline may have been done by LATAM but nobody has been able to confirm anything. That was reinstated this morning.
Cranky for (AA) President!!
Make America(n Airlines) Great Again!
He might not want it. In fact, he strikes me as having more smarts than that.
This acquisition has also given us the best aviation headline of the year:
The number one problem at AA is its leadership.
Isom and Parker have purged ‘Legacy’ AA people and procedures en masse and replaced them with America West policies and people.
American Airlines *can not* be run like HP.
The ham handed response to letting Delta slide into bed with LATAM is only the latest debacle to be laid at the feet of America West.
This! I cannot like this post enough. This is America West all over again after Parker took over there. Very frustrating.
Oh Lord, pls bring in Hogg.
Terence – The CEO of a US airline must be a US citizen.
I did not know this.
I guess that old AA CEO from Canada was also a US citizen?
IO – Don Carty? Yep, he became a US citizen in the 1980s.
I don’t follow the industry as much as many readers of this blog do, but I’m waiting for a hedge fund or financial tycoon to buy a sizable stake in AA and release a 200+ slide deck on their turnaround for it.
When that happens, I’ll have some faith that changes will be coming at AA, and start watching for signs of progress that might make me end my personal practice of booking away from AA. Until then, I will assume that AA is continuing on its downward path to irrelevance.
I appreciate the analysis that the LATAM news may be the catalytic event for senior leadership changes at AA. They have been needed for some time, at least from this frequent passenger’s perspective.
Cranky, on the question of who would take over, what are your thoughts, at least conceptually, on Tom Horton? I do not know how he is perceived by employees, but from what I have read he is regarded as leading American’s post-bankruptcy restructuring very competently. (Also, I would say that in the period between American emerging from bankruptcy and merging with USAirways, there was a sense of vision, optimism, and investment.)
BRMM – That’ll never happen, nor should it. If American decides it needs to replace top leadership, it then needs to move forward not backward.
Based on what I’ve read over the weekend (and that’s all I have to go on), there’s one huge factor being overlooked in this transaction. And in my humble opinion (which could be dead wrong and is worth precisely what you’re paying for it), it’s the main factor. That factor is the failed joint venture approval. To me, that’s the key in all of this. LATAM is headquartered in Santiago, Chile. And an airline headquartered in Chile simply wasn’t going to accept a joint venture that didn’t include its home country. It’s that simple. I’m a big believer in Occam’s razor. The simplest explanation is usually the right one.
My rationale: I saw a YouTube video of a panel discussion at TCU which dealt with American’s bankruptcy. On that panel were airline reporters and analysts that included Mary Schlegenstein, Terry Maxon and Holly Hegemen, all pretty plugged-in people. During that panel, Maxon raised the point that part of the reason American hadn’t participated in merger activity and had issues getting its joint venture with British Airways approved was that it was, at that time, the world’s largest airline. Only after it fell to number two or three (depending on the time frame) could it get the necessary approvals. I think there’s a lot of merit to that argument. And that’s the case here. Regulators tend to frown on doing anything that will bolster the competitive position of the largest carrier(s) in a region. And the American/LATAM joint venture was joining the largest carrier, by far, from the U.S. to South America with the largest carrier in South America. It simply wasn’t going to happen. So I really think (and again, could be dead wrong) that LATAM bailed, and Delta took advantage of the situation. More power to them.
As for American, I think the negative reaction is a bit overblown. It seems to be fueled by people who want the airline to be liquidated. I’m guessing American can find other codeshare partners in South America (Gol being the most obvious). And its huge presence there will give any new joint venture that might arise all the heft it needs to be very competitive.
In my opinion, which again, could be dead wrong, American’s biggest problem is labor, not management. I live in the Phoenix area. I watched America West grow from three aircraft to what it became. I’ve also watched Doug Parker and his team up close. I personally know people who worked in management there. I’ll take America West any day over the experiences I had flying on the old American (I never flew pre-merger US Airways). I can still tell when I have America West people on a crew. They don’t treat their passengers like lepers. I really believe that American’s board could hire Ed Bastian and the entire Delta management team and they’d still have issues with bad operations and unruly labor unions. The only long term cure for American’s ills are attrition and retirement.
Don’t forget, Parker is paid in company stock, so the decline in share price has affected him directly. But one advantage to the airline with the decline in stock price is that it can buy back more shares with the same amount of cash. Who knows, American may be deliberately tanking its share price to do just that, and position itself to go private, or be taken over by Warren Buffet (I’m being a bit facetious).
For those concerned with American’s debt, its board (which has to approve such things) is apparently happy with using the company’s cash to buy back stock, as opposed to paying down debt. American’s board and management have far greater access to far more financial data than we do. Does that mean American’s perfect? Absolutely not. It really needs to get its act together, but in my opinion (and, again, I could be dead wrong), more of the fault lies with labor than with management.
As I’ve written before on this forum, these kinds of problems have happened before with transportation mergers. The Union Pacific/Southern Pacific merger was plagued by severe operational issues for many years after its merger. It survived and is now thriving. Sorry for all the bloviation.
I have always enjoyed your posts on here. You seem to have a pretty good grasp of the issues involved in the industry.
First, regardless of what branch of the Chilean government made the decision, an AA-LA joint venture would have been uncompetitive. The fact that the case went to the highest level of a branch of government shows that there were real questions. Despite the consolidation in the airline industry, there are still at least 3 distinct global US airlines and the largest US airline in S. America and the largest S. American airline were asking for the ability to combine forces; such a combination could have never been in the best interest of consumers, regardless of the industry.
Based on the Delta-Latam deal, Latam had a lot of needs and Delta is meeting them, many with hard cash. Some people have been justifying AA’s debt and its new fleet – even though they spend more for fuel and maintenance than Delta – and yet it is announcements like this latest that show what Delta can accomplish with industry leading profitabililty and market capitalization and one of the best balance sheets among global legacy airlines.
As for people wanting to see AA liquidate, I’m not sure who you think that is. I certainly am not interested in seeing that. I have repeatedly noted that the only way that AA will fix its bloated costs is very likely by a trip through chapter 11. Far too few people understand C11 even though it has been used repeatedly by multiple airlines and many other companies to successfully restructure; Delta and United have done what they needed to do in C11.
American did not deal with the issues it needed to deal with in bankruptcy because Parker used the AMR bankruptcy process to inject himself into a battle for the future of the company. He then combined the smallest and weakest legacy carrier post 9/11 on an international basis with American given that American’s greatest need was to be able to compete effectively with Delta and United which both created strong international carriers. American and USAirways simply could not have created an airline with the scale to match DL and UA’s international networks – and that is exactly where we are today.
Given that the DL-Latam deal puts a competitor in the single global region and American’s Miami hub (the only single US carrier hub to a global region from the largest gateway to that region), American now has nothing strategically which it can offer that other carriers cannot duplicate. Given that Delta has been very successfully in growing its own network in American strength markets or at AA’s expense, there is very good reason to be concerned that AA’s abililty to generate the level of revenue necessary for a global/legacy carrier is limited.
Add in, though, that AA’s labor costs cannot be fixed without getting rid of tens of thousands of employees that DL and UA simply do not have – allowing DL and UA to have higher margins – and it is very likely that competitors of all kinds will simply continue to poach AA’s best customers and routes. C11 is the only process I have ever seen to deal w/ the level of cost and workforce excesses that AA has right now. I would love to see someone tell me a different way, but I haven’t ever seen it.
And in a C11 case, it is very likely that AA will end up much smaller, in part because AA cannot defend its network when in C11. Delta may well have seen a C11 filing down the road and decided that the JV rejection created the best moment to act but recognized the value of a larger presence in Latin America decades ago – going back to Pan Am. Sometimes in business, you keep a strategic to-do list updated and act when there are opportunities. The opportunity with Latam arose because of AA’s attempt to combine with its largest competitor in the region.
All the attempts at trying to fight back won’t change the reality that DL has the resources to pull off a deal of this magnitude in its archrival’s backyard and met Latam’s needs in the process.
A leveraged buyout or more share buybacks don’t fix huge network, strategic and cost issues.
C11 can’t fix network and strategic issues but it can fix cost and balance sheet issues.
AA’s strategic situation just went from worrying to critical.
@Tim — Chap. 11? Have you actually read AA’s financials? They make several billion a year and are now increasing their earnings at a 20% clip and you’re worried about them going broke? Really?
It was Chile’s Supreme Court that dealt the latest (and now fatal) blow to the joint venture. LATAM took the only logical course available to it. It cut ties with American and made a deal with a carrier that had a better chance of getting the joint venture deal done, Delta. That’s was smart on all sides. All the capacity in the world is useless if it doesn’t generate adequate income to justify its expenses. I believe American’s statement that this breakup isn’t a big deal for them. The joint venture is what added value, not the sheer size of the carriers.
There’s a thing in sports during football season. It’s called “overreaction Monday” because fans lament the outcome of that Sunday’s games as if their lives depended on the outcomes. This is similar. I really don’t think this change makes American’s situation dire. American is profitable. It enjoys a profit margin that many airlines would have loved 10 years ago. It may not be as profitable as Delta or United, but it’s still profitable. This isn’t 2008. It wasn’t all that long ago that the pundits were writing off United. That’s changed. American can fix its problems without filing for Chapter 11 protection to address its bloated workforce. There’s a process called attrition that can do it just fine. It’s just going to take time. The airline can afford to do that, since it’s profitable and apparently has decent cash flow. The airline could always lay off workers if it was desperate. Apparently, American’s board doesn’t believe the situation is quite as dire as you and many others do, or else it would have taken some action already. Chapter 11 can’t solve a revenue problem. it can only help the balance sheet.
American’s board has to approve its capital expenditures, debt levels, and share buyback programs. Much of American’s current debt can be traced to its former management that didn’t adequately invest in the airline. It waited longer than others to replace its older aircraft and is paying the price now. American’s investor presentations constantly point out that its capital expenditures are going to be cut almost in half from current levels beginning in 2020. That will generate more cash flow. And in business, as well as individual finance, cash flow is what really matters. If American was borrowing to pay its expenses, I’d be worried. But that’s not what’s happening. American is acquiring assets (which could include a stake in a couple of South American airlines, in which it can probably get a stake for a lot less than $1.9 billion).
Is Delta doing better than American? You bet. Does American need to get its operating act together? Absolutely. But I really think (and today’s developments reinforce this view) that all of this has been in the works for at least three months, based on what I’ve read elsewhere.
Again, I could be dead wrong about all of this. We’ll see what happens. It should be interesting, to say the least.
I think there’s WAY too much pessimism about AA here. Just a year or two ago, everyone said the same thing about UA. But then Scott Kirby got kicked out of AA, joined UA, and took a page from the AWA playbook to boost UA’s revenues. Suddenly, despite a bunch of bad luck stories like David Dao, UA was turned around!
Hardly anyone seems to be paying attention, but Parker and friends are ALSO using that old playbook to boost revenue. The massive DFW expansion, similar to what UA did at their Mid-Continent hubs, seems to be a success. It was masked last quarter by the mechanics slowdown, but AA still managed to make a surprisingly large amount of money under the circumstances. And now that the slowdown is over — AA routinely operates with a 100% completion factor on days with reasonable weather — we are likely to see those new DFW connections boost the bottom line. And it’s not like AA is stopping there: they’re also significantly boosting capacity at their two other very profitable hubs, CLT and DCA. Is there another USA airline doing more than this to boost domestic revenue?
No one has given AA’s management team ANY credit for their brilliant legal strategy against their dysfunctional mechanics unions. They went to court in Texas and beat those unions to a pulp without gloating once. Now the mechanics are showing up for work, there’s some hope for a new labor contract, and AA’s ops have gone from bad to good.
It’s obviously easy to spend money, and DL’s management team certainly likes to spend it. But not always wisely. Remember that oil refinery in Philly? That hasn’t worked out so well. I think everyone would agree that the 80% premium they paid to LATAM — basically valuing that unprofitable airline the same as AA — was very expensive. If AA had a choice to spend $1.9 billion on a LATAM share or buy back $1.9 billion of their own undervalued shares, which should they have done?
good counterpoints (for lack of a better word) to what others have written thus far.
To me, it does look like Doug et al. have not been able to lead labor, legacy AA labor groups that appear to be a difficult; I’m not saying it is entirely on Doug but they did sign-up to be the leaders. Doug et al do appear to be good people, it’s just that this may be more than they can chew.
I don’t know that anyone person can sufficiently wrap its arms around what all this means for all parties involved (including UA). Perhaps we should consult an oracle :-)
@iahphx and @desert ghost
the problem with your replies and the logic behind them is that AAL (AA’s stock ticker) does not compete on the basis of what AA did in previous iterations of the industry but what AA does now COMPARED TO ITS PEERS AND COMPETITORS.
The very reason why AAL’s market capitalization (the value of all of its shares) is less than one-third of Delta’s when the two were equal shortly after AAL emerged from bankruptcy is because AAL has far more debt and has far lower profits. AAL simply cannot wait a decade or more to fix its labor cost problem through attrition. In fact, they aren’t even doing that now – they are hiring mechanics even though they have 50% more than DL and UA. And, no, the excuse about AA doing more in-house maintenance does not work. Delta sends far less maintenance to contractors than it receives in contract work from other airlines.
and specific to Miami and Latin America, this IS a big deal for AA because they now have a viable competitor in a market which they had completely to themselves. There is no abililty to justify losing a monopoly from a strategic standpoint.
touting AA’s success in beating labor in court is not going to fix the situation of serious labor-management issues which are driven by a bloated workforce and nothing else. American, unlike Southwest, cannot throw massive pay raises at any of its employee groups just to make the problem go away.
And, Delta’s refinery delivers about $300 million in benefits to the airline per year, including consistently lower fuel prices. If you don’t think so, please let me know what Delta and then what American paid per gallon for jet fuel on a final cost basis in the most recent quarter.
AAL has spent nearly ten billion dollars on share buybacks and yet its shares have been the absolute worst performing among large jet carriers over the past 5 years. Buybacks have not fixed AAL’s problems and won’t fix them in the future. The only thing that will fix AAL’s problems is for it to generate industry-comparable financial results. “billions” of dollars in profits don’t work when your same-size competitors are delivering far higher than that.
Chapter 11 bankruptcy is not about profitabililty but insolvency. AAL is spending billions of dollars per year simply servicing its debt and making debt payments. Unlike any other airline, AAL also has billions in REQUIRED pension contributions over the next few years. AAL does not have cash left after paying all of its obligations; Delta has been consistently generating about $3 billion per year in free cash (above obligations).
Finally, Kirby has had a great run of increasing UAL’s profits over 2018 but it is far from certain that it can be sustained in part because Kirby was able to harvest a lot of low hanging fruit which was ignored by previous managements. Now that UAL is adding much of its capacity with used A319s, 737-700s, and CRJ550s – the highest unit cost platforms in their respective classes, it is far from certain that UAL’s profit growth will continue at the pace it once did. UAL stock is middle of the pack so far this year.
To reiterate my original opinion without the extraneous stuff, the LATAM situation has nothing to do with American’s financial situation. It was about the joint venture. It was never going to be approved by the Chilean Supreme Court. LATAM knows the political situation in Chile. It had no choice but to seek out another partner if it wanted a JV. That’s all there is to it.
fair enough – but American’s financial situation does matter given that it will have to defend itself against its largest domestic competitor by revenue and also its former alliance partner.
DL’s decision to pursue Latam right now undoubtedly includes a calculation about AA’s ability to counter; AA simply does not have pockets as deep as DL’s even as AA faces major strategic challenges in other parts of its network including in NYC and LAX which involve Delta.
btw, Ghost, remember that DL announced JFK-EZE several years ago, AA immediately added a 2nd flight, fares plummeted, Delta pulled its flight in fairly short order, and AA cancelled its 2nd flight.
DL has seen what AA has done in situations like what will happen with Miami and Latin America. They clearly are willing to wait out AA’s capacity dumps which will certainly hurt AA as much or more than other carriers.
btw, remember also that in the list of AA’s most profitable hubs and where it plans to grow, MIA is not on the list.
I’m skeptical that DL will initiate any significant build-up in Miami. I think that they’ll probably add flights from MIA to most of their focus cities, but I don’t think they’ll upgrade MIA to focus city status itself. My reasoning:
– Competition for O/D traffic: Even though MIA is a fortress hub for AA, there is a tremendous amount of competition for domestic routes at nearby FLL – NK, B6, and WN are all competing for traffic there. Hardcore business travelers in the area are almost all AA loyalists, and it will be hard for DL to price competitively enough to fill planes and still turn a profit.
– Insufficient feed traffic from LATAM: LATAM is not actually that big at MIA. They serve Buenos Aires, Lima, Santiago, São Paulo, and a handful of smaller Brazilian markets. That’s it. A large chunk of passengers on those routes are going to or from Miami and won’t need to connect. There’s not enough connecting traffic to fill planes.
The combination of the above issues mean that DL probably will have much more profitable ways to use its planes and pilots elsewhere.
My prediction of what they do instead:
– DL adds a couple more flights from various hubs and focus cities to MIA, possibly including CVG, AUS, and/or BNA. RDU probably becomes year-round.
– DL coordinates with LATAM to route at least some connecting traffic through MCO. LATAM already flies to MCO from São Paulo and Lima, and Delta serves a ton of destinations from there, including many that aren’t hubs or focus cities.
1. Do you think AA should’ve matched Delta’s $2B investment if they’d been offered the chance? I just don’t know that it would’ve been a wise choice for American’s investors to pay for a network/carrier that AA can largely duplicate on its own, with connecting flow of its own from nearly any place LATAM flies to in the US
2. After LATAM was forced by the Chilean courts to pursue a sub-optimal JV, it seems like this decision had to happen by LATAM and Delta simply was the first one to knock at the door. In American’s defense, what could they have done? It was clear that any JV would have large carve outs and restrictions going forward and it hadn’t even reached any real movement for approval by the DOJ gaining their approval, much less restrictions by the DOJ.
I get that this does seem like a management lapse by American but I’m not actually sure that’s true. I’m sure LATAM would’ve preferred a full JV with American. That goes without saying but they seem forced into this by the Chilean courts.
Plus, I’m actually not that sure that American will be worse off, at least in Brazil. If they end up with GOL, GOL has many many slots/routes at gru and gig (nearly all focused on domestic Brazil vs LATAM where they aren’t ) as well as better feed at secondary Brazilian cities that American will need to serve those cities out of Miami. I’m not sure this is really all that bad for American. It just means the profitable long-haul flying will be on AA metal vs LATAM.
Chile and Peru, sure. There’s not a great domestic carrier there outside of the ULCCs in the markets.
It’s a great coup for Delta but I’m not convinced it’s a zero sum game here and all pro delta.
Will – I should be clear that I’m not convinced this ends up being horrible for American either. You may be reading deeper into what I’m saying that I intended. But it requires leadership, and this has put a big spotlight on some of the leadership failings over the last few years. It could be the straw that breaks the camel’s back, so to speak. Even with that being said, here’s the answers to your questions.
1) I can’t imagine American could justify matching it because it has such a large presence in Miami. I do question LATAM’s decision to make this move, and I’m talking about that tomorrow. But from American’s position, it would be hard to justify. More importantly, however, is that it’s not clear American could even do it since it has a high debt load. At the very least, it highlights the high debt load which Wall St has already been mad about.
2) The Chilean cut out was problematic, but American wouldn’t have been as impacted by that as LATAM would have been. It is entirely possible that being free of LATAM will be better in the long run. American can focus its efforts on expanding its own flying (hello, A321XLR) and finding smaller partners to fill in the holes.
Good points and thanks for the clarifications. I’m excited for the article tomorrow!
It would have done nothing for AA to invest in a carrier with which they could not have a joint venture and their investment itself might have been blocked or limited by the same competitive bodies as stopped the joint venture.
Also, it has received much less discussion here, but Chile also blocked the joint venture application with British Airways and Iberia. Delta just happens to have a joint venture/equity partner in Virgin Atlantic and Skyteam does include Air Europa, which does fly to S. America. Although it doesn’t get the coverage AF/KL or VS do, Air Europa could become much more strategically important to DL now.
Apparently Delta did NOT approach LATAM.
Apparently, Delta did NOT approach LATAM.