AA announces more new destinations from LAX

[silverbird007]

WT so would you suggest that AA just go ahead and liquidate?

 

[wings396]

No he is just saying that they will never be on par with his beloved Delta. The competition isn't going to let AA expand into new markets without a fight, but all of the others dare not go toe to toe with Delta at the same time. The madness never ends......

 

[WorldTraveler]

I simply have said that new AA cannot expect to undo years and years in which competitors have gained in key markets against both AA and US and that it is not realistic to expect that gap can be quickly closed.

And if new AA takes the path of engaging in battles on multiple fronts against multiple competitors, it might very well find that it has ignited a response even more intense than what has been seen over the past several years.

And no it is not just DL. AA has clearly decided it wants to regain its position in ORD... but I am far from sure that UA is planning on that. WN has designs on the N. Texas market. B6 continues to grow in the Caribbean. NK hasn't decided they are thru with DFW.....

And let's not forget that AA is not out of BK yet and isn't making money - and they still have to pay huge merger related costs including nearly across the board pay raises to labor, something that has never been done this early in a US airline merger. And new AA's costs are not and will not be industry lowest.

Keeping those perspectives in mind might go a long way to knowing what AA can realistically expect to do.

 

[eolesen]

I simply have said that new AA cannot expect to undo years and years in which competitors have gained in key markets against both AA and US and that it is not realistic to expect that gap can be quickly closed.

And if new AA takes the path of engaging in battles on multiple fronts against multiple competitors, it might very well find that it has ignited a response even more intense than what has been seen over the past several years.

Ironic. Couldn't the same have been said about DL's attempts to grow in NYC?

 

[mistified]

Ironic. Couldn't the same have been said about DL's attempts to grow in NYC?

BINGO You beat me to it. I guess the competitive landscape is now set in stone never to change again??

 

[traderjake]

WT so would you suggest that AA just go ahead and liquidate?

Only if it helps Delta.

 

[WorldTraveler]

The difference between DL in NYC and AA in those markets should be obvious... but let me explain to those for whom it isn't....

DL has grown in NYC over 7 years in markets that are far larger than any of the markets involved here, they did it in part thru a slot transaction that US agreed to, and they succeeded because they had costs lower than any of their network competitors including AA from whom they gained much of their share in NYC before the slot transaction where they gained share from US.
None of those characteristics are true about AA in LAX.... they are trying to target a number of markets over a short period of time in markets that do not support daily nonstop service now and have about enough traffic to fill one aircraft if you combine all carrier traffic at all times of day. There is nothing materially that has changed at LAX in terms of space at LAX which is the biggest limiting factor for the growth of any airline. AA’s costs are not the lowest and will not be including from DL and WN. And finally, I have yet to hear a cogent response from anyone here as to who AA expects will give up share at LAX in order for AA to gain it.

Whether it is ORD-DUS or CMH-LAX, there are carriers that have share in those markets that will have to give that share up in order for AA to win.

I said months ago and will say again that the notion that AA can start adding service in markets and expect to regain what was lost is not at all realistic.
As always, I am more than happy to allow time to determine whether I am correct or not... but I hold out the example of AA’s entry into RDU-LAX as an example of precisely what will happen in many AA markets. AA may end up in RDU-LAX but they now have DL to compete with in BNA-LAX.

When you compound this same effect of AA’s expansion being matched by competitive responses from other carriers in multiple markets, AA could find that the very few “monopoly” markets it has left won’t be monopoly markets anymore and the strengths that AA has will be eroded by competitive responses from other carriers while those other carriers will still have their strength markets plus will have a bigger part of AA’s markets.

The fallacy of AA’s post BK expansion has long been that other carriers will simply roll over and let AA expand w/o a competitive response. I can assure you that won’t happen.

 

[MAH4546]

AA is the strongest carrier with business in LA bar none, which is why it's entering these markets. In the past year it has been extremely agressive and successful in securing new and resecurring old corporate travel contracts, and just scored it's biggest coup earlier this year by grabbing CAA, which previously had no preferred carrier.

Just because DL has failed recently making LAXIND, LAXCMH, LAXRDU and LAXBDL work daily and year-round, and UA has similarly been unable to maintain consistent daily LAXPIT service, doesn't mean AA can't. Neither of them have the corporate strength of AA in Los Angeles.

And good luck to Delta on LAXBNA when CAA, WME, Paradigm, Warner Brothers, Viacom and Universal all use AA. AA has nothing to worry about.

Delta has made zero progress grabbing important contracts in LA. It has tiny little The Weinstein Company, and nobody else.

But to be fair, it has found success in NYC and recently stole one of AA's biggest, Conde Nast.

 

[eolesen]

Corporate contracts are rarely longer than 2-3 years if I recall.

It's entirely possible that, with the impending merger and the addition of the BOS-LGA-DCA Shuttle, AA has managed to recover some contracts in and with interests in NYC which had signed with DL.

 

[mistified]

There is nothing materially that has changed at LAX in terms of space at LAX which is the biggest limiting factor for the growth of any airline. AA’s costs are not the lowest and will not be including from DL and WN.

Yes something has materially changed at LAX. The international terminal is expanding dramatically. It's almost complete. Also can you please provide some data to back up your assertion of the new AA's cost relative to peers?

 

[eolesen]

Point of order.... LAX's renovation of TBIT is moving along, but nowhere near complete.

The first few gates of the 18 on the west side officially opened last month, and there are supposed to be a total of 9 open by the end of summer, with the other 9 being opened by the end of the year.

As the new west gates open, existing ones on the east will likely close so they can start work over there.

The full project won't be open until late 2014/early 2015.

 

[mistified]

Point of order.... LAX's renovation of TBIT is moving along, but nowhere near complete.

The first few gates of the 18 on the west side officially opened last month, and there are supposed to be a total of 9 open by the end of summer, with the other 9 being opened by the end of the year.

As the new west gates open, existing ones on the east will likely close so they can start work over there.

The full project won't be open until late 2014/early 2015.

I agree with all you say. However considering how long ago the project started, and that 2014/2015 is right around the corner, I would call that almost done ??? Materially changed because they are already using new gates?? Shortly more to come??

 

[eolesen]

Again, I'm willing to bet they took an equal number of gates on the east side out of service. That means nothing has changed materially except for it being a much nicer passenger experience.

I got to see one of the new hold-rooms a few months ago when flying out on LH. There's twice as much seating and floor space as the adjacent gate I were departing from.

I'll be in TBIT later this week. Should be able to take a walk around and find out.

 

[WorldTraveler]

Several key principles to discuss here including the notion that MAH raised that because a carrier has more service from a city they have more success and conversely if there are less flights and have not grown there is no success.

I know it is long and I don’t want to hear anyone commenting about that… if you don’t want long, then skip this post.

The reality is that DL has had the largest share in several of these markets which are being added and has done it without year round nonstop service or the full allocation of an aircraft. The goal of a business is to maximize profit, not to operate flights or run up the count of destinations an airline serves from a city. The difference in DL and AA’ profitability shows the difference in understanding these concepts. AA can add capacity and may shift some revenue to these markets but that doesn’t mean they will see improved profitability because of them.

All the corporate contracts in the world don’t answer the question how AA is going to grow revenues if several of these markets support only one 737-800 size aircraft per day now even with that demand spread across several carriers throughout the whole day. Corporate contracts do not grow the market; any corporate contract is intended to gain a higher percentage of the market with one carrier at higher fares than what the market gets when divided between multiple players. Further, all of these passengers are not going to all of a sudden move to AA’s single daily flight which means that AA will need lower fares in order to push passengers onto those flights and off of the variety of flights and carriers that those passengers currently travel since all of those markets have no clear dominant carrier and are fairly small.

AA is trying to grow in secondary markets where demand is far lower than the amount of capacity AA is adding and in many cases where AA does noht have the possibility of being the dominant carrier. ORD-DUS is a good example; they are flying between two heavily Star markets directly opposite a Star flight. LH and UA will ensure that if the market grows, they get a disproportionate amount of the increased revenue. In the LAX domestic markets, WN could have grown the demand in those markets in the past but even WN acknowledges that the days of stimulating demand to grow markets are gone due to high fuel prices; costs are too high to stimulate demand in most markets and yet that is the only hope AA has to regain share. Further, AA is NOT the lowest cost competitor now and won’t be after the merger so attempts at stimulating markets will mean that other carriers can be profitable when AA cannot. New AA will end up with the 2nd highest CASM in the industry, probably right behind UA, exactly where the two have been for years since deregulation and exactly why DL and many low cost carriers will continue to grow at AA and US’ expense just as they have done against AA and US, in AA’s case because of costs and in US’ case because of a lack of mass. US will be giving up its cost advantage in exchange for mass but will be competing against DL and other low cost carriers; you need only look at AA and UA to see how successful a “bigger but with higher cost” strategy has worked. It hasn’t.

And although you and others want to label DL’s previous attempts to grow at LAX failures, you do so by looking only at specific markets and not the big picture. DL’s focus for 20 years has been to protect and grow its east coast franchise; that is why it pulled back its north-south presence on the west coast gained from Western. AA also pulled back its west coast presence BTW. In return, DL has watched Eastern go out of business and gained a large portion of EA’s east coast share, it has gained against AA and US on the east coast esp. in NYC, and it has increased that lead and put UA’s presence in NYC in its crosshairs with the slot deal. DL’s system gains on the east coast have been far larger than what it gave up on the west coast; and notably, AS and WN have gained on the west coast, not AA or UA. The relative shares of AA, DL, and UA at LAX are largely unchanged when adjusted for each of the big three’s mergers. Note also that we have yet to see how AA/US network will change as hubs close as they undoubtedly will.

DL’s success at LAX has been to maintain share, protect LAWA from seizing its terminal during BK, and strengthen position in key markets esp. NYC and TYO. DL is actively pursuing its own plans to grow its LAX presence beyond the announcements that have been made. Before this announcement of new service by AA, DL was the fastest growing network carrier at LAX for schedules this summer. AA is just matching DL’s growth but in different markets.

BTW, do you realize that DL and UA’s average fares are higher than AA’s at LAX because DL and UA have more high value Asia/Pacific revenue than AA? And DL, not UA, is the highest revenue US carrier to Asia from LAX. DL’s revenue in the LAX-TYO market (both airports) is 4X larger than AA’s in the LAX-LHR market.
In the combined LGA/JFK market (the part of NYC where AA and DL most directly compete) between 2007 and 2012, DL pax share increased from 20% to 33% and even if you include NW’s share in 2007, from 24% to the current 33%. AA’s share has fallen from 26 to 19% (note how those two numbers “synch up” and even if you include US’ share today, new AA will be at 25%. The share that DL has gained in NYC from both AA and US is far larger than what AA will gain in these few secondary markets…

As for LAX, despite what some want to believe AA is NOT far out in front of every other competitor now nor will they be in the future.
Don’t forget that DL will be gaining revenue and market share at both NYC and LAX through the Virgin Atlantic JV and equity stake – and DL is fully expecting to gain corporate revenue that it has been unable to secure based on its current size at LHR.
Increased competition between AA and DL esp. is coming to LAX even though it has taken place elsewhere in the US. DL now has more than a 30% share of the LGA/JFK-MIA local market and those numbers are only thru the 3rd quarter of last year, before AA’s operational meltdown last fall. Given that DL will be up to6 flights/day on MIA-LGA this summer with a higher percentage of local traffic than AA who feeds a lot of traffic from LGA to Latin America, all the indications are that DL is having no problems growing in AA’s largest markets. BOS-MIA and an increase in LAX-MIA might not be far behind. Since you and E like to tout the power of FF bases, you should consider that DL still has a very large frequent flyer base in S. Florida including in MIA as reflected by the fact that DL has about 1/3 of AA’s share of the MIA domestic market even though AA has 7X more domestic seats than DL. The same is true up and down the east coast. It is precisely because of the power of DL’s combined hubs at JFK and NRT that AA went from a viable player in JFK-NRT to having to cancel the service. You severely underestimate the power of DL to seek out opportunities for growth in key markets – not because DL couldn’t but because they have been very focused about picking battles one at a time and ensuring they win them before they move on to the next..

Of course the growth in competition between AA and DL at LAX could result in AA trying to launch LAX-ATL and DL launching DFW-LAX, the two biggest markets for each carrier. Given that ATL-LAX is about 800 miles longer than ATL-LAX and ATL-LAX already has DL and WN in it while AA has a virtual monopoly on DFW-LAX, it isn’t hard to figure out who would lose the most if the contest gets escalated to that level.
And then we still have this little Brazil route case playing out which, along with AA’s merger with US and the decision by TAM to join oneworld will be pivotal in reshaping the MIA-Latin America market and in eroding the monopoly that AA has had between MIA and Latin America. AA of course is trying to counter this with LAX-GRU. No one will deny how important MIA-Latin America is to AA’s network but their strategic position will diminish greatly if they gain a competitor in some of those key MIA-Latin America markets. Given that DL has strong partnerships with carriers in Latin America and a strong presence in MIA plus the financial bandwidth to focus its strategic efforts on MIA-Latin America, it is a question of when and not if. With AA trying to fend off UA in ORD, WN in N. Texas and Central America/Mexico, B6 on the east coast…. AA’s ability to win in one of the most significant strategic battles that AA will face is being stretched thin…. And AA will be doing this while its own costs are rising as a result of the merger.

Finally, don’t downplay that what is happening in LAX plays into the relationship with AS, which AA and DL both share. We have heard debates for years about which carrier is more important to AS; DL has made it clear it does not want to share AS with anyone and is forcing AS to make a choice at the risk of DL adding its own services in key AS markets. Given that between DL and its JV partners, including VS, DL will have more than 20 longhaul international flights from the west coast, DL has made it clear that it will not limit its ability in key int’l markets by relying on feed from a carrier that will protect its own interests – as it should – but which could very well be contrary to DL’s. DL also won’t allow the money it gives AS to feed DL flights to be used to add service or to allow AS to codeshare on other carriers’ flights, including AA plus other foreign carriers. AS knows that DL puts hundreds of millions of dollars worth of connecting passengers onto AS flights from DL int’l flights each year and could easily pull that revenue at significant loss to AS. AA is thus being forced to “up the ante” of its own operation which could well be driving some of these new routes; the cost to AA of losing the AS codeshare is far bigger than it would be to DL who has already started adding flights in key AS markets which feed DL int’l flights.

At its core, AA’s attempts to regain share in markets like LAX will be subjected to a very basic and fundamental difference between how DL and AA’s route networks were built. AA’s network was built by connecting the largest markets in the world, including NYC and LAX, while DL’s network was built around connecting dozens of smaller cities to DL’s hubs which are in smaller markets and from there serving the largest markets. DL’s network strength is spread out over far more cities than AA’s. DL’s growth has come from moving into the largest markets, many of which have been historically strong AA markets. AA’s growth is coming from moving “down” into much smaller markets.

DL has very successfully pushed its way up into the top tier of markets, esp. in NYC and TYO and DL carries very decent revenue even in markets where DL is much smaller including Latin America and LHR. DL is systematically increasing its presence in key markets such as LHR and Latin America while AA and US are merging to try to marry AA’s presence in large markets with US’ presence in smaller markets. US’ current network model is more like DL’s than AA’s or UA’s but US doesn’t get the revenue that DL gets in part because US doesn’t have the mass.

So, US is going to trade the cost advantage it currently has in order to gain mass while AA will continue to be vulnerable to DL and low cost carriers increasing their presence in key AA markets because of lower costs.

As for the question regarding new AA’s costs… they aren’t really that hard to calculate even in round numbers. AA’s CASM in BK has yet to match DL’s or US’. The merger will add hundreds of millions of dollars in increased labor costs for new AA and offset most of the labor benefits that AA gained in BK. AA’s fuel bill will go down with newer planes but DL and UA each have hundreds of new domestic planes on order – although half the number of orders and even lower costs, esp. for DL which is adding a lot of used aircraft that have comparable fuel burn. AA’s debt related aircraft costs alone will easily be $1B a year more than DL or UA’s because of AA’s newer fleet. DL and UA both have more large RJs than AA and AA is not getting rid of costly 50 seat RJs near as fast as DL will be. Further, DL will be absorbing many of staffing the 717s with its own personnel thru improved utilization of personnel. DL has already made statements that indicate its CASM will drop; AA/US are not pushing this merger on the basis of reduced costs – which it will not deliver.

I know this is a long post but it addresses key issues which continually to come up not only about LAX but also about the revenue generation aspects of the way AA has run its business… and it validates why AA has fought a revenue problem for a decade even though a lot of people here try to believe the problem doesn’t exist.

There are a lot of people who somehow think that this merger is going to solve all of the problems which AA has suffered from over the past decade plus. Yet, AA’s ability to generate revenue in key markets, esp. to/from Asia is little changed. AA is seeing increased competition in key markets most notably now to/from LHR and most certainly later to/from Latin America.
Finally no one should forget that the AA/US merger was driven far more by US’ need to gain mass and be admitted to the top tier of airlines than it was by a belief that the merger would generate benefits comparable to other mergers. Anyone who doubts this should note that the AA/US merger is touting far smaller revenue benefits than the DL or UA mergers did – and much of the revenue benefit of the merger is being offset by higher costs.

Absolutely AA and US should continue to fight and look for ways to improve their lot… but no one should doubt that there are key structural and strategic impediments – not the least of which is the headstart that DL, UA, and WN have had with their mergers – that AA/US won’t overcome easily, if at all.
AA/US’ ability to succeed in new market additions like LAX is absolutely related to understanding these key principles.

 

[wings396]

If even you are able to identify and understand these "key principles", I'm sure that the combined management team at AA/US is able to do so as well. As much excitement as the coming of the 717 fleet may bring you, don't be shocked if the new AA builds up the E-190 fleet at some point as well. If I'm not mistaken these 2 A/C are very similar in size and capacity, and should have roughly the same CASM's. I'm also willing to bet that the overall Mtc costs on those 717's will be higher over the long run as well.