AA's CFO says Integration going well

[WorldTraveler]

AA just released its August traffic results.

System load factor was down almost 1% driven by a 3.5 percentage point decrease in AA's int'l system load factor. AA increased int'l capacity by 4.2% so most of their int'l capacity could not be filled at current fares.

http://finance.yahoo.com/news/american-airlines-group-reports-august-120000673.html

AA's RASM is reported to be flat to up 2%. UA does not report monthly RASM any more but DL said its RASM for the month was up 2%.

DL and UA both reported reduced LFs on their int'l systems and both also increased capacity. AA's int'l system LF decrease was the largest of the big 3 US int'l carriers.

AA also reported the lowest cargo traffic behind DL and UA.

AA said that its third quarter pre-tax margin excluding special items would be between 10 and 12%; other big 3 and big 4 US carriers have estimated margins of 15% or higher.

 

[autofixer]

You are a USAIR ff you don't get it. AA is going downhill rapidly with these idiots running the show.

Josh

AA who was in bankruptcy with no exit financing and was in danger of being sold off piece meal?  

 

[WorldTraveler]

I believe Josh was talking about the level of service and not the finances.

And, no, AA wasn't ever really in danger of being sold off piece meal. There was always the possibility that could happen if someone offered a high enough value for the most prized assets but companies almost always have a higher value as an ongoing enterprise than they do as pieces... and the whole process of valuation that has to be done during BK is to show just that.

AA passed. No one really doubted they wouldn't.

AA also had healthy bank accounts, even if it almost entirely borrowed money. AA's biggest opportunity in BK was to cut labor costs and that is exactly where they focused the bulk of their cost-cutting efforts in BK.

Parker convinced AA and US labor to both support the merger based on trying to minimize labor cost cuts, or to restore them as soon after the merger as possible. We are now in the phase where Parker is now being asked to make good on his promises.

It also doesn't change that the revenue fundamentals of the AA/US merger were far different from both DL/NW and UA/CO.

The first four legacy carriers to merge all had high value networks and costs that were roughly in line with the industry.

US' int'l network was based on lower than industry average fares and labor costs.

HE also built the new AA's network based on trying to NOT shrink the combination of AA and US' networks even though it was well known that US carried high volumes of traffic that other carriers could not or would not carry because their costs were too high while US had low enough labor costs to make carrying a lot of that traffic work.

That was on top of AA's own strategy to grow its presence in Asia by adding capacity that had to be subsidized dramatically - in hopes that one day AA would have a viable transpacific route network.

It is now precisely why we see traffic reports like AA just released. AA and US have yet to make the cuts to their int'l network - which both have tried to grow - to match the revenues they need to have in line with their costs.

AA is the only one of the big 3 carriers that had lower LFs in all 3 of their global regions for the most recent month.

Further, labor costs will continue to increase as the integration process continues - on top of general integration costs.

The basic premise of the AA/US merger was to merge a carrier that had a heavily domestic presence with an int'l presence that was driven heavily by low fares and low labor costs and merge that carrier with a carrier that had industry standard costs post-BK and industry-standard revenue generating capabilities.

AA/US created a massive domestic network. However, the math has yet to add up to show that AA is going to create an int'l network that is competitive with DL or UA.

AA/US may integrate well what they have... but it hardly means that the promise will be delivered on of a carrier that has a profitable and relatively comparable int'l presence to DL and UA.

 

[eolesen]

DL and UA both reported reduced LFs on their int'l systems and both also increased capacity. AA's int'l system LF decrease was the largest of the big 3 US int'l carriers.

Sure, and yes AA had the lowest cargo traffic. But you never quite get around to showing by how much. Just the snippit..

There's a 10% difference in CTM's between AA and UA, and I'd guess that's a reflection of both stage lengths and the higher belly capability on the 744 fleet. The difference at DL is about 15%. Good for DL, but let's see if that lead remains as DL removes 744's from operation over the next few quarters, and as AA continues to adds widebody lift.

 

[WorldTraveler]

The 744s are really not as great at cargo as a lot of people like to think. DL is well aware of the cargo needs on its routes and isn't going to shoot itself w/ another type of aircraft unless the costs are so much lower as to make cargo not worth it.

The reason why DL and UA's cargo is so much higher is because of DL and UA's larger presence to Europe and Asia. Remember that large portions of AA's Latin system is operated by narrowbody aircraft which provide little capability for cargo

and you miss the point.

AA CANNOT continue to add capacity to its int'l system if that capacity doesn't generate acceptable returns. As I said and you confirmed by your graphic, AA's int'l LF dropped more than DL or UA and AA's load factor on its int'l system was 5 points lower than DL or UA's. No carrier can generate similar bottom line results unless they have a proportionately lower CASM or generate revenues proportionately higher.
AA does neither.

note also that DL is the 2nd largest carrier (ahead of UA) in the US driven by DL's larger domestic and Atlantic systems but DL was also larger than UA to Latin America. Of the big 3, AA was larger domestically and in Latin America.

 

[lpbrian]

A 777-300 carries a lot more cargo volume wise than a 747

 

[WorldTraveler]

precisely... but just because the aircraft carries more cargo doesn't mean that it is creating more lift on the system.

remember that in the case of some markets, AA is reducing the number of 777-200 flights but operating the remaining flights on 777-300s instead of -200s.

 

[AANOTOK]

AA just released its August traffic results.

System load factor was down almost 1% driven by a 3.5 percentage point decrease in AA's int'l system load factor. AA increased int'l capacity by 4.2% so most of their int'l capacity could not be filled at current fares.

http://finance.yahoo.com/news/american-airlines-group-reports-august-120000673.html

AA's RASM is reported to be flat to up 2%. UA does not report monthly RASM any more but DL said its RASM for the month was up 2%.

DL and UA both reported reduced LFs on their int'l systems and both also increased capacity. AA's int'l system LF decrease was the largest of the big 3 US int'l carriers.

AA also reported the lowest cargo traffic behind DL and UA.

AA said that its third quarter pre-tax margin excluding special items would be between 10 and 12%; other big 3 and big 4 US carriers have estimated margins of 15% or higher.

WT, that is a perfect example of exactly why you are disliked so much around here. I would be willing to bet that it started in the first grade and has continued ever since.
While what you post may be fact, it is your delivery and timing. That article more than likely burnt your hands getting it off the press so quick, and there is zero doubt in my mind that while you were typing, your were doing it right handed while holding up your left hand and exposing the middle finger. On top of that, I can almost say with certainty that while doing all this you had a smile on your face similar to the one The Grinch had the day he was stealing Christmas...

 

[WorldTraveler]

and my question to you is "why does it matter HOW I deliver it if it is the facts"... and these are facts that AA put out, not me.

I've been doing this internet chat thing for many years and I obviously crossed the point where getting the praise of others doesn't motivate me nor does receiving derision work either.

I get the whole thing that AA and US people wanted this merger to be the greatest thing since sliced bread. I get the 10 years that AA spent in restructuring. I really do get it.

But none of that changes that the fundamental aspects of the AA/US merger were dramatically different than the DL/NW or UA/CO mergers and, quite frankly, what was left made it very obvious that the end result of the merger could not be the same as DL and UA's merger - from a network standpoint.

So, no, I haven't been sitting around like the Grinch waiting to high five the printer as soon as bad news comes
out.

But it is becoming increasingly apparent that the concerns that some of us raised - and I have by my own admission been one of the harshest and most critical critics of AA's strategies - are indeed surfacing as the merger moves into the next phases.

I wish you all well.... but I'm not going to pretend to stop saying what I know to be true after more than 10 years because someone doesn't want to hear the truth - regardless of how it is presented.

I am more than happy to celebrate AA's successes with you when they occur. And on an operational basis, the AA merger IS going better than the UA merger. But all of us knew that Parker would not make the same IT mistakes that UA made, and more significantly, AA hasn't crossed many of the same points in the merger process than UA has crossed.

Still, AA is starting a new chapter and I have no doubt that for both AA and US this chapter will be more stable and in many ways more successful.

It is simply time to tame a lot of expectations about what AA will accomplish and how much it will change the structure of the US airline industry, much of which really is not at all changed by the AA/US merger.

 

[FWAAA]

Couple points about cargo.
 
AA's cargo volume did not fall off as much in 2013 as did UA's volume, so the very large percentage increases in 2014 at UA are expected, due to the huge decline last year.   UA is simply getting back to where it was in 2012.    When you're starting from a smaller base, the percentage gains look big.   
 
While AA does fly a large number of 737s and 757s to Latin America, there are plenty of 777s and 763s to EZE, SCL and Brazil.   One truism is that you can't fly all that much cargo on a 7000 mile or 8000 mile flight to/from Asia because most of the payload capacity is eaten up by the fuel you must carry.   Not as big a problem on 5000 mile flights to/from S America.    The exception, of course, is the 77L, which can carry significant cargo long distances.
 
Another point is that US Airways was not a cargo airline by any stretch.   In 2013, its overall revenue was more than half of the overall revenue at AA, yet the cargo revenue at US was a much smaller proportion compared to AA's cargo revenue.   It's possible that US management (who are now all of the decision-makers at AA) don't see cargo as worth chasing. 
 
The final point is that for the last several years, all legacy airlines have been saying, quarter after quarter, that cargo revenues are flat or declining due to lower cargo yields and lower cargo volumes.  You can find statements like that in nearly every quarterly report.  Not a day goes by but what some internet-know-it-all posts on Flyertalk (and sometimes even this website) that "Cargo revenue on that flight pays all the bills and the passenger revenue is just gravy."   Very rarely (if ever) is that true.   The expense involved with carrying cargo westbound to Asia if you don't stop in ANC is enormous due to the circular fuel consumption calculations (have to carry a lot of fuel just to burn to carry all the fuel) on those very long flights (talking those flights over about 6,000 miles or so).   And while there are customers in Asia willing to pay top dollar for perishable commodities from the USA,  it's not "all profit" because that fuel is still near $3/gal.   

 

[IORFA]

I will say I saw that the Usairways peeps decided to add a refrigerated cargo building in PHL. So they may see the benefit of cargo now that they have seen AA's numbers from within. I take it to mean that it will at least stay the same importance or increase for the future.

 

[FWAAA]

I will say I saw that the Usairways peeps decided to add a refrigerated cargo building in PHL. So they may see the benefit of cargo now that they have seen AA's numbers from within. I take it to mean that it will at least stay the same importance or increase for the future.

Good point - I didn't realize that.   Perhaps cargo will play a bigger part at new AA than it played at old US.   
 
In 2013.  AA's cargo revenue (not including US) was $676 million, same as 2012, on $25.8 billion of revenue.
In 2013,  US' cargo revenue was $154 million on $14.6 billion of revenue.   
 
Cargo revenue was 2.62% of AA's total revenue in 2013 while at US,  it comprised just 1.05% of total 2013 revenue.  
 
Compared to checked bag fees and ticket change fees, etc.,  cargo is small potatoes.   

 

[WorldTraveler]

FWAAA,
if it comes down merely to Cargo Ton Miles, then the longer stage lengths have as much or more to do with the difference than anything. DL and UA simply operate more longhaul int'l flights due to their larger presence in Asia, presence in Africa and larger presence in the Middle East, and a more continental focused European based system.

But, feel free to confirm, but I believe that the cargo revenue numbers in the most recent quarter showed DL as the largest carrier of the big 3 so if route network provides opportunities, then DL has been able to use it to create revenue.

As for your comments about longer stage lengths limiting cargo lift, I'm not sure there is much evidence of any major routes being cargo restricted on a regular basis by the big 3. There are certainly some routes and some of those are aircraft related and can or have been partly helped by switching to other aircraft types.

Don't forget that cargo between the US and Asia moves much heavier TO the US than it does from the US and the flights are shorter coming east which allows for more cargo to be carried.

As you note, the 777LR has enormous abilities to carry cargo over long distances - and that is exactly the aircraft DL uses on many of its longest routes including SYD, DXB, and JNB, all of which carry decent amounts of cargo.

But the flip side is that a larger aircraft does not necessarily create a cargo market. I have noted several times that AA, DL, and UA often carry similar amounts of cargo per flight out of S. America regardless of the aircraft type that is used. AA does indeed heavily use 777s but they have multiple flights/day in many markets so the growth in the market does not necessarily grow just because larger and more frequent flights are in the schedule.

And the 764 is capable of carrying comparable amounts of cargo on the 10 hour flights which are the vast majority of TATL and Latin America widebody flights.


The point is valid regarding the overall global air cargo capacity = and it is absolutely true that the market has not reached equilibrium as evidenced by AF/KL's decision to shrink its dedicated cargo fleet. Newer generation aircraft do have much better cargo capabilities than some in the past so it is very possible that the number of dedicated air cargo aircraft will shrink as cargo moves to belly capacity which benefits the US carriers, none of which operate dedicated freighter operations any more.

Finally, it is very possible that AA's air cargo operation will grow as US participates more in the air cargo business...but there was cargo business from US' hubs before even if US wasn't going after it. It isn't a given that competitors are going to walk away from that business if they have been carrying it before.

But, an increased focus on cargo doesn't matter if flights don't make sense from a passenger standpoint - and the traffic report highlights that AA has added a lot of capacity that is not being filled and has a LF that is significantly below other competitors which means the capacity either has to be filled to comparable levels at comparable fares than what competitors or doing or the capacity has to come out of the system.

Given that AA/US appear to be focused on bringing up the average fares which were pulled down by US, the likelihood is far greater that capacity will have to come out of AA/US' system than that significant amounts of belly capacity will be waiting to be filled.

 

[MetalMover]

WT, that is a perfect example of exactly why you are disliked so much around here. I would be willing to bet that it started in the first grade and has continued ever since.
While what you post may be fact, it is your delivery and timing. That article more than likely burnt your hands getting it off the press so quick, and there is zero doubt in my mind that while you were typing, your were doing it right handed while holding up your left hand and exposing the middle finger. On top of that, I can almost say with certainty that while doing all this you had a smile on your face similar to the one The Grinch had the day he was stealing Christmas...

He missed the one upside of 12% increase in the Pacific..
 
http://www.thestreet.com/story/12873007/1/why-american-airlines-aal-stock-is-falling-today.html?puc=yahoo&cm_ven=YAHOO

 

[MetalMover]

WT, that is a perfect example of exactly why you are disliked so much around here. I would be willing to bet that it started in the first grade and has continued ever since.
While what you post may be fact, it is your delivery and timing. That article more than likely burnt your hands getting it off the press so quick, and there is zero doubt in my mind that while you were typing, your were doing it right handed while holding up your left hand and exposing the middle finger. On top of that, I can almost say with certainty that while doing all this you had a smile on your face similar to the one The Grinch had the day he was stealing Christmas...

Oh, i think he was doing something ELSE with one hand!