AA Down Under and Trans Pac?

[Jacobin777]

DOT profitability data for the 3rd quarter has now been released and once again it shows AA sustaining significant losses in order to build a Pacific network. AA had a negative 12% operating margin on the Pacific while DL and UA each had about 13% profit margins in the same region. AA's Pacific network was the only region among the big 3 that lost money in the summer 3rd quarter.

AA is already pushing the limits of its ability to sustain losses in light of higher operating costs with the merger. Adding routes in markets that are not absolutely necessary is very unlikely to happen and even some of the current routes may be cut under Parker.

You conveniently fail to mention AA's TPAC numbers have improved vastly y-o-y. You also fail to mention how AA crushes DL in Latin America.
 
You also conveniently fail to mention how DL has lost $600-$700 million trying to built up New York.
 
Please, don't let facts get in the way.
 
Apropos, how's that Trainer Facility doing? Oh yes, still losing money.

 

[eolesen]

I'd be surprised to see LAX-AKL. New Zealand only has a population of 4M, and aside from tourism, there ain't a lot going on there.

NZ maintains at least two AKL-LAX RTs (plus 1x each to SFO & HNL), but they're the only one left in the AKL-Mainland US market. Both QF and UA pulled out, and HA runs a round robin HNL-SYD-AKL-HNL.

Perhaps there's room for another carrier, but it wouldn't be on my top 5 list of additions from LAX.

 

[WorldTraveler]

no other airline has sustained losses in a region as large as what AA is sustaining in Asia. If you have evidence otherwise, then post the evidence. Arguing that DL sustained or is sustaining losses in any particular city or on any particular route requires evidence, such as the data that airlines provide the DOT and which I am quoting.

The reason why AA's losses in the region are relevant is because no partner airline wants to expand its network via a carrier that loses money - because joint ventures involve revenue sharing. QF and other carriers have no appetite to have a joint operation with a carrier that cannot make money on its own operations. QF is not a stable company in terms of its own finances.

QF and AA are undoubtedly doing well by adding the first major Aussie-US route that doesn't touch the west coast but there is a limit to how far you can push that well.

Also isn't a surprise that CX is not interested in a joint venture with AA.

if you want to throw in Trainer, let us know how much lower the cost of jet fuel is this year vs. last because of the supply of fuel that DL has put on the market. You might also want to hold off on the rest of the carriers to report to see what they have paid for fuel vs. DL. Ten million dollars of refinery losses to reduce hundreds of millions of airline fuel costs is a calculation anyone can understand.

 

[Jacobin777]

no other airline has sustained losses in a region as large as what AA is sustaining in Asia. If you have evidence otherwise, then post the evidence. Arguing that DL sustained or is sustaining losses in any particular city or on any particular route requires evidence, such as the data that airlines provide the DOT and which I am quoting.

The reason why AA's losses in the region are relevant is because no partner airline wants to expand its network via a carrier that loses money - because joint ventures involve revenue sharing. QF and other carriers have no appetite to have a joint operation with a carrier that cannot make money on its own operations. QF is not a stable company in terms of its own finances.

QF and AA are undoubtedly doing well by adding the first major Aussie-US route that doesn't touch the west coast but there is a limit to how far you can push that well.

Also isn't a surprise that CX is not interested in a joint venture with AA.

if you want to throw in Trainer, let us know how much lower the cost of jet fuel is this year vs. last because of the supply of fuel that DL has put on the market. You might also want to hold off on the rest of the carriers to report to see what they have paid for fuel vs. DL. Ten million dollars of refinery losses to reduce hundreds of millions of airline fuel costs is a calculation anyone can understand.

 
There are multiple sources that DL has lost the amount I have stated.
 
"Mr Bastian declared that “we look at 2014 as the year New York will be profitable as an overall set of hubs, and that’s a very important benchmark for us”. Underscoring the improvements in Delta’s New York performance, Mr Bastian said the carrier’s losses in the market four years ago fell in the range of USD600 million to USD700 million."
 
http://centreforaviation.com/analysis/delta-air-lines-2014-network-strategy-entails-bypassing-tokyo-and-leveraging-partnerships-145281
 
Also, "losing money for years" is rather non-sequitur because we don't know how much money AA has lost the past 5-10 years on its TPAC routes.
 
Again, without being tautological, AA's y-o-y losses have improved dramatically.
 
Finally, WT how do you know that CX doesn't want to or isn't going to have a joint venture with AA? Got any proof?

 

[eolesen]

AA's Pacific region only represents 6% of its RPM's, compared to 14% and 21% for the Atlantic and Latin regions respectively.

I'd be much less concerned about a negative margin in the Pacific knowing there are margins of 18% and 22% respective in the other two regions

Instead, I think I'll give credit to AA on the impressive profitability of the 85% of AA's international network (35% of AA's total RPMs).

WT, you're free to continue to make a big deal out of that remaining 6% of the system RPM's (15% of the international network) that's running negative.


When it comes to the bottom line, AA's international margins net out positive, and a respectable positive at that.

 

[WorldTraveler]

I just noted on the DL thread because 700 mentioned the topic there, but AA's operating loss on the Pacific for the last quarter was $48 million.... remember in the first quarter, AA's Pacific system loss on a margin basis was twice as high.

yes, AA's int'l operations are net positive but no other airline is sustaining a region with $200-300M per year losses.

When you consider that AA got about $1B in concessions from labor and then sustains losses that are about 1/4 of that amount in the Pacific, that is not something that can be sustained financially or with labor

AA has to fix its revenue problem on the Pacific, plain and simple.

it is also worth noting that there are just 3 airline/region combinations that had positive margins above 20% - AS on its domestic network and DL on both its Atlantic and Pacific networks. AA's margin on Atlantic and Latin was mid-teens, same as US on the Atlantic - the highest margin regions for each carrier.

jacobin,
you still don't know what DL's margins in NYC are today... I have no doubt that DL was sustaining losses in NYC - but the entire airline was much less profitable.

Also, DL noted that LGA RASMs are up 15+% this quarter and they said a big part of the drain on JFK is feeding int'l flights with 50 seat RJs.

 

[FWAAA]

Excellent point, eolesen.   Negative margins (even huge negative margins) on a tiny portion of your business aren't the end of the world as long as you maintain adequate positive margins on the bulk of your business.   
 
WT:  So if AA needn't waive the white flag and exit the TPAC business, then what would you suggest AA do?    My guess is that your response would be for AA to slow down its TPAC growth as you've repeatedly stressed that AA has added tons of new TPAC capacity despite the relatively low yields that AA is getting to/from Asia.
 
Here's the problem that I see with very slow, measured, conservative capacity additions in the Pacific region:

The pro-merger crowd insisted that AA had to get a lot bigger if it was to successfully compete against UA and DL, both of which had total revenue about 50% to 60% or so more than AMR.    The pro-merger advocates said that AA would not get any new corporate contracts and would lose most of what it had and eventually cease to exist.    Both UA and DL were substantially larger in some of the big cities, primarily in the East.   Finally, both UA and DL have substantially larger TPAC networks compared to AA.   Horton's initial Ch 11 plan was to grow organically to solve some of the domestic size disadvantage.   Presumably, that would increase revenue as well.    The employees and creditors went instead with the Parker plan of a merger with US.   That solved the revenue shortfall compared to UA and DL.   It also solved, sort of, the size problem in the East, although as we know, plenty of shrinking at DCA and LGA, so new AA won't be as big as the sum of pmUS and pmAA in some of the big Eastern cities.   Oh well.   
 
Neither Horton's plan nor Parker's plan (the merger) directly solved that third issue - the huge head-start that UA and DL have in the Pacific due in large part to their acquisitions/mergers (the PanAm and the Northwest Orient TPAC networks and NRT fifth freedom hubs).    When you repeatedly decry the huge negative margins of AA's Pacific operations, and imply that AA should slow down its new capacity adds, my conclusion is that you're not posting that out of a fiscally-prudent concern for AA's finances.   Rather, you're rooting for DL/UA to hold onto their legacy positions as the big fish in the Pacific.   
 
If the all-important corporate contracts depend on AA fixing the inadequacies in the East (which have been solved as best as AA will be able to do) and depend on AA fixing its shortcomings in the Pacific, then won't those customers want to see AA catch up relatively quickly?   Over how many years should AA slowly add TPAC flights?   UA is still on its heels and now is the time to aggressively go after that business.  

 

[eolesen]

Another point made on the DL thread... as US doesn't have a Pacific network, they were flowing all of that traffic onto other partners, including UA and NH.

That's traffic which will now be flowing onto AA and JL.

 

[WorldTraveler]

we really don't know how much Pacific traffic US was pushing onto UA but some people believe it is not alot over the Pacific. There is no doubt that US was pushing traffic onto UA and vice versa but that is just one more reason why I am pessimistic about UA - which is losing alot in alot of reasons - US plus TAM, AA is moving more aggressively to solve its small RJ problem, and AA manages to have better customer retention than UA.

again, as for the notion that AA's Pacific network is just a small drain on profits, once again, AA's losses on the Pacific amount to about $250 million/year. No other airline is sustaining those kinds of losses.

No, I am not advocating for the status quo that favors DL and UA on the Pacific. I am advocating for a strong and stable AA and not one that uses AA employee concessions to subsidize money-losing Pacific operations.

AA's growth is not slow... two new transpacific routes on a network that has less than ten is not small.

As for how quickly AA should grow, the answer is how quickly they can be profitable on their CURRENT transpac operation.
A clue to the answer to that question might come that AA is not even flying ORD-NRT on a daily basis during the summer of 2014. If a carrier can't fly a route on a daily basis in the summer and make a profit, then you have to wonder why they fly it and at what point AA realizes that AA can't sustain losses on the majority of its transpac system. For years, I have noted that AA's ORD transpac flights have 10-15% lower average fares than UA.
Thus, also, the notion that UA is s soft in the belly while true doesn't seem to apply to Asia which is exactly where AA needs UA to be weak, but they aren't.

The answer to AA's future in Asia is getting their present system up to par regarding revenues. Cost reduction will help but revenue is and remains the major problem.

 

[eolesen]

ORD-NRT is daily on JL, and either 4x or 5x on AA.  DFW-NRT is double daily only on AA, so ORD is one of the markets where the JV gets balanced out.

 

[Jacobin777]

jacobin,
you still don't know what DL's margins in NYC are today... I have no doubt that DL was sustaining losses in NYC - but the entire airline was much less profitable.

 

 
..and the point is it took DL years to get NYC to potentially profitable. Why is it a problem for AA to do the same?

 

[Crash Pad DCA]

http://www.bloomberg.com/news/articles/2015-03-05/at-american-air-asian-routes-and-labor-peace-are-top-priorities
One year after American Airlines merged with US Airways, Chief Executive Officer Doug Parker has settled on his most important destination: Asia. American is playing catch-up with United Continental and Delta Air Lines in the growing market for air travel in the region. Its share of U.S.-Asia flights has grown to 12 percent, from 10.6 percent in 2013, but still lags behind the 45 percent held by United and 36 percent for Delta. In a Jan. 27 earnings call, American President Scott Kirby called Asia “the one area that we’ve been outperforming the industry by a pretty wide margin for the last year.”

 

[commavia]

http://www.bloomberg.com/news/articles/2015-03-05/at-american-air-asian-routes-and-labor-peace-are-top-priorities
One year after American Airlines merged with US Airways, Chief Executive Officer Doug Parker has settled on his most important destination: Asia. American is playing catch-up with United Continental and Delta Air Lines in the growing market for air travel in the region. Its share of U.S.-Asia flights has grown to 12 percent, from 10.6 percent in 2013, but still lags behind the 45 percent held by United and 36 percent for Delta. In a Jan. 27 earnings call, American President Scott Kirby called Asia “the one area that we’ve been outperforming the industry by a pretty wide margin for the last year.”

 
Indeed - and with the current growth path, that's undoubtedly set to grow.
 
And not to mention - I actually think those numbers somewhat under-represent the competitive gap that AA has closed, too, because that pie chart is based on RPMs, but not really network breadth.  Through the JAL JV and AA's own substantial organic growth in non-Japan Asia, AA has today has already dramatically improved the competitive positioning of its network relative to what I consider the benchmark competitor, which is Delta - since United will and necessarily should always be the leader and AA (and Delta) is/are structurally incapable of ever matching United's Pacific network.
 
But again, clearly, as Parker himself is quoted as saying in this latest journalistic rehashing of old news, AA is focused on Asia - growing there, and being profitable there.  I take them at their word - and as such, suspect there's more to come.

 

[jimntx]

I'd be surprised to see LAX-AKL. New Zealand only has a population of 4M, and aside from tourism, there ain't a lot going on there.

NZ maintains at least two AKL-LAX RTs (plus 1x each to SFO & HNL), but they're the only one left in the AKL-Mainland US market. Both QF and UA pulled out, and HA runs a round robin HNL-SYD-AKL-HNL.

Perhaps there's room for another carrier, but it wouldn't be on my top 5 list of additions from LAX.

I have flown Air New Zealand.  Unless, AA is ready to step up its game--particularly in coach-- or, NZ has seriously cut their services and cabin ambience, NZ is t an airline to have to go up against.  My wife and I flew LAX-SYD on NZ in 1995.  Even in coach it was a comfortable, room aplenty, good food flight.  Because my wife smoked, we were on the very last row of coach in front of the bulkhead.  Our seats still reclined as much as all the other coach seats.

 

[jimntx]

 
..and the point is it took DL years to get NYC to potentially profitable. Why is it a problem for AA to do the same?

Have you learned nothing yet from the airline expert for the ages?  It is a problem for AA because AA is not DL.  If DL cuts service on a route, it is a strategic realignment of resources.  If AA cuts service on a route, it is proof-positive that AA can not compete in that market.  DL has no problems...ever.  If DL loses money in a city for years, it is strategic investment.  If AA loses money for 1 month in a city, it means AA has taken the first step to Chapter 7.  Now, any more questions?  Do try to keep up.