AA announces more new destinations from LAX

[eolesen]

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.

Did it ever occur to you that AS still might push back?

DL and its Skyteam partners won't be able to replace the feed they stand to get from EK, QF, CX, BA, and LA, and at some point, the guys in SEA might decide that staying independent is more important than being DL's puppet.

 

[WorldTraveler]

I have never said that AA and US mgmt don’t realize these principles… but that doesn’t mean that they can necessarily overcome them.

As excited as people get about this merger, it doesn’t change that the primary reason for it is because Doug Parker recognizes that US is not a viable standalone airline long-term and managed to turn LCC around sufficiently to get AMR’s creditors to believe that he can do the same thing for them.
AA had a reasonably decent standalone plan and was well on its way to executing it until the labor problems of last fall; prior to that period, AA was growing revenue as good as anyone in the industry.
But AA labor’s disgust for AA mgmt not only cut short AA mgmt’s turnaround plan, but also stopped AA’s RASM growth from which AA has yet to recover, and forced AA mgmt out and the creditors to choose Parker as a less risky choice to turn AA around.
The fundamentals of how AA and US compete in the industry or the price that Parker is paying for the merger are still very real.
AA is having to push “down” into territory that DL has long occupied in order to grow while DL is pushing “up” into AA territory and the past five years show that DL has been very successful in pushing “up” in the industry into larger markets – the backbone of AA’s network.
Parker is giving up huge cost advantages at US in order to merge with AA and wiping out many of the cost advantages US has gained in BK.
As for fleet, there is a maintenance holiday for any new aircraft…. After the first five years, maintenance costs start to equalize. DL’s strategy is that the extra maintenance costs in the first five years or so of an aircraft do not overcome the extra debt that it costs to buy new aircraft and that debt has to be carried for the life of the aircraft.
The other part of the 717 transaction that makes it a much lower cost deal than if AA buys Ejets is that DL is overstaffed with pilots and has been since the merger. They will be staffing the 717 fleet at far lower costs than other airlines would have by buying new aircraft. It is possible that AA/US might be in the same position and come to the same conclusion after a couple years when a few hubs are closed.
But even then it doesn’t change that DL is one cycle ahead of AA/US in strategic planning… AA/US will be working thru their merger while DL is finishing off a cycle of strategic initiatives such as the RJ/717 refleeting, the VS/AM/G3 equity deals, and the west coast strategy, all of which are specifically designed to counter whatever advantages that AA/US might gain in the merger.
Unlike DL, UA and WN have not moved into the next tier of strategic initiatives but they are laying the plans to do so. The largest for WN will be adding int’l flying, esp. from its historically strong bases in Texas. UA and WN are well on the way to wrapping up their mergers and will likely be “all but through” by the time AA/US obtain federal approval to merge.
Time is money whether at the bank or in the market. This principle also applies regarding how quickly strategic initiatives such as mergers are implemented. AA/US is the last major merger among large US airlines; other carriers are well ahead in implementing strategic initiatives that will help them maintain their advantage and make it harder for AA/US to gain benefits from its merger.


AS probably will stay independent but DL might also end up w/ its own feed at SEA and grow its own presence at LAX. DL's operation is about 1/4 the size of AS' at SEA so the notion that there is some huge gap between AS and DL is simply not there. DL doesn't need a massive hub but it does need feed in about a half dozen more key markets from SEA and another half dozen or so from LAX. AS will recover if DL defects but AS gets hundreds of millions of dollars in business from both AA and DL. DL is simply saying that if AS wants to feed everyone in the world, DL is not going to use AS or at least replace as much as possible.

AS is no more DL's puppet that it is AA's. The difference is simply that DL is now in a position to grow its own west coast operation now that strategically the east coast is settled except for Florida-Latin America.

 

[eolesen]

Frankly, I could care less if DL grows at LAX or SEA.

DL trying to throw its weight around could just as easily have the reverse effect. If AS feels threatened by DL's actions, they just might be the one to say "see ya!" and form a closer relationship with AA.

Stranger things have happened, and I don't think that the industry consolidation is over & done with.

 

[WorldTraveler]

You may not care what DL does on the west coast but there are AA network and strategic planning people who sure do… and likewise DL has strategic planning and network people who very much care what AA is doing on the west coast.

As much as some would like to alter history, AA and DL both participated in the same west coast consolidation of the late 80s as did US. After significant capacity growth because of the three separate mergers, DL dismantled its north-south flying on the west coast, AA ended up closing its SJC hub, and US pulled down most of their intra-west coast flying as well.

AS had a fairly strong relationship with NW at the time of the DL merger and AA also had a relationship with DL. Both AA and DL have been “dividing” AS for several years but DL is increasingly uninterested in the type of relationship it has with AS, in part because DL has a far larger west coast international presence that requires abundant and available feed…. And DL pays AS handsomely for that feed. AA and DL have been trying to “one up” each other on the west coast as part of the courting process with AS and these latest moves by AA and DL have to be viewed somewhat in that light as well.

AS and DL may very well decide that they want to go their own separate ways in part because DL is reaching a size at SEA that it can provide that domestic feed flying with its own resources, including the 717 which is ideally sized for small-gauge intra-west flying as well as the large RJ which can easily reach key Midwest markets, although there are limits on longer haul DCI flights in DALPA’s contract.

You can talk about future mergers but the simple reality is that AA’s costs NOW are higher than AS’ such that much of AS’ network wouldn’t work under AA’s cost structure. Again, there is little in the AA/US merger that is going to result in reduced costs, at least for the near term.

And it also doesn’t change that DL and UA have at least a couple year head start on further strengthening their west coast international positions esp. to Asia/Pacific before AA/US is in a position to begin to respond.
UA has several new aircraft types on order that will allow them to push deeper into Asia nonstop from SFO using smaller aircraft like the 787 while DL is building SEA right now using existing aircraft; even the 777ER can reach any point on the Pacific rim from SEA but DL has an RFP out to Boeing and Airbus for 777s – possibly the 300ER - or the advanced versions of the 330s.

IF AMR’s creditors have sufficiently cashed out in a couple years, AA could buy AS but it won’t change that its primary competitors are already into the next phase of growth on the west coast while AA is still waiting for merger approval.

And it also doesn’t change that those other two carriers will have the bandwidth to expand and challenge AA in core markets in the Midwest, East Coast, LHR, and Latin America. And those other carriers are addressing financial issues such as cost and debt levels that will take new AA years longer to address.
It will take a major strategic stumble on someone’s part to stop the momentum that DL, UA, and WN have as a result of their mergers and allow AA to catch up.

At this point, there is no sign that the basic strategic fundamentals of the US airline industry are going to change in such a way that AA/US will gain the big break that it needs in order to move out front.

 

[diamondcutter]

Frankly, I could care less if DL grows at LAX or SEA.

DL trying to throw its weight around could just as easily have the reverse effect. If AS feels threatened by DL's actions, they just might be the one to say "see ya!" and form a closer relationship with AA.

Stranger things have happened, and I don't think that the industry consolidation is over & done with.

It's just burning WT up about all the press this is getting , hence all of his many many post about it.

 

[topDawg]

Frankly, I could care less if DL grows at LAX or SEA.

DL trying to throw its weight around could just as easily have the reverse effect. If AS feels threatened by DL's actions, they just might be the one to say "see ya!" and form a closer relationship with AA.

Stranger things have happened, and I don't think that the industry consolidation is over & done with.

from what we have been hearing/seeing Delta is gearing up for something in both cities. They are damn near begging for people to come out there. SEA/LAX are about the only places they can actually get the green light to hire off the streets for. (which...I don't b**ch about all the OT we have been getting.)

just for the record I am not saying anything is going to happen in case anyone is watching

 

[WorldTraveler]

We are watching and something will happen.

 

[FWAAA]

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 don't think that AA cut its costs enough in this bankruptcy, but in 4Q2012, AA's mainline CASM was significantly lower than Delta's mainline CASM: AA'was 13.84 cents compared to 14.16 cents at DL. For the full year, of course, DL's CASM was lower but that's because none of AA's labor cost savings were realized until the fourth quarter.

I agree that Parker was too eager to return some of those savings to AA's nAAtives and, of course, the huge raises that US pilots and FAs will get that are funded, essentially, from the labor savings borne by the nAAtives. For an airline that endured Ch 11, the net result will be, IMO, costs that are too high on the day the POR is confirmed. But unless DL pulls a rabbit out of its sleeve next week, I'm pretty sure that AA's mainline CASM will be lower than DL's, at least until the US-merger labor costs increases take effect.

 

[WorldTraveler]

Actually, I AM looking at statistics for the 4th quarter of 2012 knowing full well that AA’s costs SHOULD be going down in BK.

The numbers may change with the most recent quarter which should be reported in a week or two for all carriers, but for now, DL does have lower costs than AA.
One difference that DL has in its costs compared to AA is that DL paid profit sharing and DL also does third-part work which it must exclude; third-party/ancillary costs alone account for the majority of the cost difference between AA mainline and DL.

That is why both AA and DL and nearly every other carrier publishes a CASM –EX statistic that gets down to the bare cost of operating the airline on an equal basis, including excluding for fuel which was almost comparable for AA and DL.

On that basis, AMR’s consolidated CASM –ex was 9.10 while DL’s was 9.17 for a1% cost advantage for AA.
But on a mainline only basis, however, AA’s CASM ex- was 8.58 while it was 8.45 for DL, giving DL a 2% cost advantage.

Since DL says they are going to get $1B in non-fuel costs out of their operation over the next 2 years and will be cutting significant amounts of RJ flying and replacing it with mainline flying, the mainline costs will go down even further. $1B on DL’s cost base amounts to about a 3% reduction in costs, a similar amount to what DL says it will gain in fuel savings from the refinery once it is fully ramped up for a total of 6% or more in total cost cuts.

I have heard nothing from AA/US about their targets for reducing CASM after the merger. If you have, please share them with us.

We can focus on costs but it also doesn’t change the revenue part of the equation which is that DL and UA and WN have headstarts on gaining revenue synergies from their mergers including gaining market share from AA and none of them have indicated that they intend to roll over and allow AA to regain that share. Given that UA is the only carrier that will likely be higher cost than AA, if there is share shift, it likely will be between those two…. But UA has recently stepped up the pace in getting its finances back in shape so it is far from certain what the difference will be in costs between AA and UA, and UA still has a revenue advantage, esp. in key competitive markets between the two such as ORD and on the west coast.
Maybe AA will cut its costs deep enough and will retain it long enough to make a difference – but I haven’t seen it yet and if it does happen, it won’t last precisely because of the cost increases that Parker has incorporated into the merger plan.

And as even you have noted, AMR’s debt will be much higher than originally planned in part because they will have unfunded pension liabilities from frozen pensions that UA and US do not have.

 

[kirkpatrick]

the huge raises that US pilots and FAs will get

Tongue in cheek, right? I think we FAs will get an additional 1.5% on top of the 3% we got on signing the LBFO.

MK

 

[FWAAA]

Tongue in cheek, right? I think we FAs will get an additional 1.5% on top of the 3% we got on signing the LBFO.

MK

Read it again - the piece you quoted has nothing to do with the nAAtives - the huge raises go to the US pilots and FAs, who haven't had pay raises since their merger in 2005. The US FAs just recently ratified their first pay raises since the merger of US and HP, yet they stand to get even more with the merger.

The US pilots will get raises of 25% to 33% or so, and since US doesn't generate high enough revenues to pay those, the raises to the US employees are funded with the labor savings recently extracted from the nAAtives. The irony is that AA employees overwhelmingly supported a merger with a low-wage airline whose employees (mostly the US pilots and FAs) will get huge raises funded by the nAAtives' labor cost givebacks. All that so you could be rid of the devil named Tom Horton.

As you pointed out, the nAAtives aren't getting substantial pay raises in the merger.

 

[IORFA]

No, it was to work for an airline that would be large enough, with enough strategic assets to have a chance at survival in this changed industry. Getting rid of Tommy Boy was just a "Bonus".

 

[IORFA]

I just heard May. They are doing "Train the Trainer" as we speak. Just walked by the class today. Also heard DFW first. Since this is AA, until it is announced, who really knows.

May bid ballot for DFW f/a's to proffer for Airbus training is out. Looks like it starts next month. It didn't say how long training was.

 

[WorldTraveler]

No, it was to work for an airline that would be large enough, with enough strategic assets to have a chance at survival in this changed industry. Getting rid of Tommy Boy was just a "Bonus".

did you miss that for about six months last year - before the labor turmoil and operational disruption of the fall - AA was leading the industry in revenue growth and it wasn't cutting capacity dramatically to do it?

 

[topDawg]

I don't think that AA cut its costs enough in this bankruptcy, but in 4Q2012, AA's mainline CASM was significantly lower than Delta's mainline CASM: AA'was 13.84 cents compared to 14.16 cents at DL. For the full year, of course, DL's CASM was lower but that's because none of AA's labor cost savings were realized until the fourth quarter.

I agree that Parker was too eager to return some of those savings to AA's nAAtives and, of course, the huge raises that US pilots and FAs will get that are funded, essentially, from the labor savings borne by the nAAtives. For an airline that endured Ch 11, the net result will be, IMO, costs that are too high on the day the POR is confirmed. But unless DL pulls a rabbit out of its sleeve next week, I'm pretty sure that AA's mainline CASM will be lower than DL's, at least until the US-merger labor costs increases take effect.

AA's CASM is lower for now. I would think that with the merger they are going to end up give a nice chunk of the CASM advantage back. (and it could get really ugly once AA's employees get into contract battles without AMR hiding behind a BK judge.)

Oh course, the way it seems the APA and APFA will do well, the TWU or IAM will continue to force Mechanics to take a step back.