American Airlines Is Too Profitable for Its Own Good

[Jacobin777]

I guess DL never stops unprofitable routes because they have the best of everything ever in the airline industry and they can make everything peaches and cream and can turn any pumpkin into a magnificent stage coach....blah blah blah.

+1!

 

[WorldTraveler]

except in case you missed it, DL did just announce they are dropping SFO-NRT but they are adding SEA-ICN in its place... or SEA-LHR in place of SEA-KIX with SEA-HKG as net growth.

either way, DL has indeed cut routes and I certainly have never said that AA wouldn't or couldn't.. they have done it many times in Europe on top of BNA, RDU, STL, and SJC. They apparently now, however, find it worth their while to spend a couple hundred million dollars per year on losses for flights to Asia in order to build a presence which they now can't buy - and which they may or may not succeed at.

The point that is unique about AA's actions from every other US airline - unless you can show me another example - is that AA is coming out of BK losing significant amounts of money flying to a region of the world by choice, something no other airline has done before.

The fact that JFK-IAH and other JFK routes have been cut says AA can and will make cuts where necessary and when their strategic objectives are not being met. For now, AA's strategic objective is to build a Pacific route system and they are willing to lose hundreds of millions of dollars - one out of every five dollars in revenue over the past six months - and aren't afraid to do so even after obtaining major concessions from labor and other creditors.

 

[FWAAA]

AA's flight between JFK and IAH was a place-holder to squat on one of more than a dozen prime-time departure slots, some of which it obtained from B6.   So AA ran a several month experiment to see if it could attract enough Houston connecting traffic to pay for the fuel and crew.   No big surprise that it didn't last.    When AA begins cancelling LAX/SFO/SAN to JFK, then let us know, because that will be big news.   
 
Problem with Houston is that it's within the LGA perimeter, and both UA and DL more than satisfy that local traffic demand.  UA, of course, also serves IAH from its hub in New Jersey.    JFK-HOU is served twice daily by jetBlue with E190s.   My gut feeling is that AA would have to offer practically free airfare to fill that plane with local traffic.   How many business travelers want to trek out to JFK when their destination is within the LGA perimeter?    People in Queens and Long Island (who are closer to JFK) probably don't visit Houston all that often for pleasure.   And those who do, have very low cost jetBlue twice a day.  

 

[WorldTraveler]

valid theory but where are those slots going now esp. since AA is giving up on other JFK markets?

 

[FWAAA]

valid theory but where are those slots going now esp. since AA is giving up on other JFK markets?

I don't know exactly, but I'd bet money that AA isn't relinquishing any JFK slots.   Perhaps they'll start a once-a-day 5 pm flight to Atlanta.
 
Seriously, though, it looks like the transcon frequency expansion beginning next year may use a few.   Right now,  JFK-LAX features four departures in the 3pm to 9pm range and by next summer, the schedule shows six departures in that prime-time range.   Same with SFO, as right now there are two departures to SFO in that 3pm to 9pm range and the schedule for next summer shows three in that late afternoon-early evening range.    Two additional to LAX and one to SFO, so there's three throw-away flights like IAH that will be cancelled to free up slots.
 
As I'm sure you're aware,  AA has more than 20 prime-time departures from JFK to non-essential destinations during that key 3pm to 9pm timeframe.    I'm not talking about BOS or MIA or SAN or LAX or LAS or SFO or SEA.   Once-a-day flights to ORD and DFW (along with IAH) that aren't essential.   Such as flights to BNA, ORF,  TPA and BWI.    

I trot out this stat every time someone says "JFK is slot-constrained and thus, AA cannot expand at all at JFK" nonsense.   When the merger was announced, some US Airways employees and frequent flyers repeated this as gospel.   There's even a quote by Parker asserting that AA cannot grow at JFK.   What a doofus.   

 

[WorldTraveler]

I suppose the definition of "non-essential" is related to what you see JFK becoming for AA, but all of those cities are served by other carriers - and many by both B6 and DL - from JFK so if AA decides they aren't interested in serving those markets, it further marginalizes AA in a market where it is becoming more and more irrelevant. And given that UA also serves all of these markets from EWR, it is hard for AA to present itself as a full-service option for NYC when it doesn't serve many of the top markets from the key airports. Even if AA decides they will focus their efforts to those cities in NYC from LGA, they are either matched or out-scheduled by competitors.

If you believe that JFK is moving toward just being a focus city for AA, then it is easy to argue that these cities and others are non-essential.
The problem with the theory of a focus city is that aviation history has repeatedly shown that one carrier cannot expect to hold its own as a focus carrier in a market where it has to compete with other carriers that have much larger hubs. AA might hold onto LAX and SFO and a few other key markets for a bit longer, but there is no evidence that a carrier can maintain a mini-hub amidst the much larger operations of other carriers. And even in markets to AA's hubs, other carriers are taking larger and larger shares of the market.

I'm not quite what you mean with highlighting the prime-time departures, but JFK is slot controlled throughout the day, as are LGA and EWR and not just as peak times as it once was.

The FAA also has use it or lose it policies for slots which means that AA has to put something in those slots -and the increased transcon flights aren't enough - or the slots have to be relinquished.

Of course we also have the whole AA-B6 slot swap issue involved and the possibility that WN might be gunning to get slots at JFK just as they are at DCA. Unlike at DCA, WN could argue that they are a new entrant that does have the power to add network pricing advantages that B6 cannot, esp. into the center part of the country.

How it all plays out remains to be seen but the indications seem to be that the DOJ is looking at a whole lot more airports than just DCA in order to get a deal done.

 

[FrugalFlyerv2.0]

II'm not quite what you mean with highlighting the prime-time departures, but JFK is slot controlled throughout the day, as are LGA and EWR and not just as peak times as it once was.
 

 
I believe that DCA is slot controlled at all times.
JFK and EWR are slot controlled from 6am to 1059pm daily
LGA is slot controlled 6am-959pm Monday-Friday and 12pm-959pm Sunday

 

[WorldTraveler]

I believe you are correct as well... there was a time when JFK was only slot-controlled in the peak afternoon hours - but not anymore.

FWAAA mentioned peak-hour slots that AA held..... my question remains how that matters if AA doesn't use its slots at all times. I don't have a list of all of AA's slots but they have cxld a number of flights that appear to be more than what they are adding with increased transcon flying.

I'm still not sure where AA is going with JFK as a hub.

 

[AdAstraPerAspera]

I'm still not sure where AA is going with JFK as a hub.

 
It's the largest airport in the largest city in North America, with the best facility at their disposal. What is there not to understand?

 

[WorldTraveler]

If you build it, they will come has never resulted in success in the marketplace.

If that were the case, AA should be swimming in profits in NYC. What has happened in the 10 years or more than AA has resided in its terminal is that they have shrunk their presence in NYC significantly and continue to do so.

As much as you and others want to believe otherwise, AA's future in NYC is far from clear or certain. The addition of PHL to the network will likely result in even more pulldowns at JFK where AA/US have a better chance of competing than in a market where AA has dropped to #3.

Despite what some people want to believe, AA's JFK operation has similar percentages of flow traffic as DL's and does not generate more revenue per passenger. AA's JFK operation is overshadowed by DL's at JFK, UA's at EWR for mixed int'l/domestic hubs and by B6 at JFK in the domestic market as well as DL's domestic hub at LGA.

AA's presence in NYC has shrunk so far that it is very unlikely they can ever return to the leadership position they once had.

There is no evidence anywhere in the US airline industry of a number 3 carrier in a market having a viable hub.

And there are a lot of markets that simply stop being viable when you start pulling one market after another out of the hub which is what AA has done over the past 10 years at JFK.

I understand the emotional pride a lot of AA people have with NYC and AA's former home but NYC will serve as the strongest evidence for why waiting to file BK was a mistake and that competitors have used against AA.

 

[AdAstraPerAspera]

There have always been multiple airlines having multiple hubs at JFK throughout the ages. PanAm, Eastern, TWA, American, and National split the market for years. Now that the economy in NYC is doing better than ever, I think there is plenty of room at that big airport for both Delta and American with B6 as well. It would be stupid to not have serve America's #1 business destination and give all the high dollar traffic to just one airline, Delta. Take away a place like New York, with all it's business travelers, and the rest of your high yield traffic will dry up and hurt the network across the board. Why do you think Southwest has been so keen to finally fill in all its glaring business gaps in recent years? It's hard to believe that someone with such a self-professed working knowledge of airline business would not know this.

 

[AdAstraPerAspera]

There is no evidence anywhere in the US airline industry of a number 3 carrier in a market having a viable hub.
 

 
F9 would beg to differ, and DEN is a hell of a lot smaller than New York City.

 

[WorldTraveler]

If you understood the airline industry, you would know that DEN is a bloodbath and a financial disaster for all 3 carriers. Averages fares in DEN are well below the US average for similar markets. F9 is hardly an example of a healthy carrier... it has been sold (or is in the process of being sold) and has lost enormous amounts of money trying to compete with WN and UA who are much bigger. WN started its buildup at DEN using its profits from fuel hedging but has still not "won the war" in DEN and DEN doesn't come close to performing financially for WN as other hubs are. WN execs have said so. UA is far from certain how they are going to win in DEN either. UA is now the 2nd largest domestic airline in DEN behind WN.

DEN is precisely the example of an airport that added enough capacity to accommodate plenty of airlines but that doesn't and hasn't meant that DEN is successful for any of them.

The same principle applies to NYC. Just because NYC is the largest market, has 3 airports, and hubs for 4 airlines, including AA, doesn't mean that they are all successful or all of those hubs will survive. It is highly doubtful that AA will become the dominant player in NYC that it once was or will be able to reverse its slide where it is now half the size of DL and UA. US brings very little to a merger because US lost a large portion of its NYC presence to other carriers years ago. US and AA have both lost so much market share and have dropped so many routes that even the combination of them is probably not going to be enough to make AA/US a viable airline in NYC. Since the other hub airlines also serve the same point to point markets that AA will try to maintain, it becomes harder and harder to envision new AA as being viable serving a handful of markets against other carriers that have much larger hubs.

You are absolutely right that AA's ability to compete long-term is heavily impacted by its ability to remain a viable carrier in NYC. It is precisely for this reason that US is looking for a merger because it pulled out of too many key industry markets.

WN is adding markets from a position of strength which is completely the opposite of what AA is doing - which is pulling out of key markets from a position if weakness. WN can afford to slowly add more presence in key markets and it will very certainly gain new slots to help build its presence in key markets like DCA and NYC but they aren't losing anything in the process and WN's core business is still fundamentally strong.

I'm sorry to rain on your parade but many of the key strategic challenges that AA has faced over the past 10 years have still not been resolved and won't be resolved with the US merger - and that is why so many people cast a leery eye at the merger in the first place. NYC and Asia are still significant issues that AA has not resolved and the DOJ could impose restrictions on the merger that could undo a lot of the benefit that AA/US have been expecting even though the long-term outlook for either carrier as a standalone are not great. That is precisely why they have been so vocal about being able to compete with DL and UA... but the key strategic issues such as NYC and Asia won't be resolved to the point that AA/US can compete effectively with DL and UA.

 

[swamt]

If you understood the airline industry, you would know that DEN is a bloodbath and a financial disaster for all 3 carriers. Averages fares in DEN are well below the US average for similar markets. F9 is hardly an example of a healthy carrier... it has been sold (or is in the process of being sold) and has lost enormous amounts of money trying to compete with WN and UA who are much bigger. WN started its buildup at DEN using its profits from fuel hedging but has still not "won the war" in DEN and DEN doesn't come close to performing financially for WN as other hubs are. WN execs have said so. UA is far from certain how they are going to win in DEN either. UA is now the 2nd largest domestic airline in DEN behind WN.

DEN is precisely the example of an airport that added enough capacity to accommodate plenty of airlines but that doesn't and hasn't meant that DEN is successful for any of them.

The same principle applies to NYC. Just because NYC is the largest market, has 3 airports, and hubs for 4 airlines, including AA, doesn't mean that they are all successful or all of those hubs will survive. It is highly doubtful that AA will become the dominant player in NYC that it once was or will be able to reverse its slide where it is now half the size of DL and UA. US brings very little to a merger because US lost a large portion of its NYC presence to other carriers years ago. US and AA have both lost so much market share and have dropped so many routes that even the combination of them is probably not going to be enough to make AA/US a viable airline in NYC. Since the other hub airlines also serve the same point to point markets that AA will try to maintain, it becomes harder and harder to envision new AA as being viable serving a handful of markets against other carriers that have much larger hubs.

You are absolutely right that AA's ability to compete long-term is heavily impacted by its ability to remain a viable carrier in NYC. It is precisely for this reason that US is looking for a merger because it pulled out of too many key industry markets.

WN is adding markets from a position of strength which is completely the opposite of what AA is doing - which is pulling out of key markets from a position if weakness. WN can afford to slowly add more presence in key markets and it will very certainly gain new slots to help build its presence in key markets like DCA and NYC but they aren't losing anything in the process and WN's core business is still fundamentally strong.

I'm sorry to rain on your parade but many of the key strategic challenges that AA has faced over the past 10 years have still not been resolved and won't be resolved with the US merger - and that is why so many people cast a leery eye at the merger in the first place. NYC and Asia are still significant issues that AA has not resolved and the DOJ could impose restrictions on the merger that could undo a lot of the benefit that AA/US have been expecting even though the long-term outlook for either carrier as a standalone are not great. That is precisely why they have been so vocal about being able to compete with DL and UA... but the key strategic issues such as NYC and Asia won't be resolved to the point that AA/US can compete effectively with DL and UA.

Hey WT,  unless something has happened very recently that I do not know about, I think UAL is still #1 at Den and SWA is #2.  Matter fact SWA took #2 not too terribly long ago from Frontier.  Unless you are talking about domestic only or something like that.  Pretty sure we are still at #2 in Denver.  But who knows, I could be wrong, and I hope I am...

 

[1AA]

I believe you are correct as well... there was a time when JFK was only slot-controlled in the peak afternoon hours - but not anymore.

FWAAA mentioned peak-hour slots that AA held..... my question remains how that matters if AA doesn't use its slots at all times. I don't have a list of all of AA's slots but they have cxld a number of flights that appear to be more than what they are adding with increased transcon flying.

I'm still not sure where AA is going with JFK as a hub.
 

 
 
JFK is a FOCUS CITY not a hub according to the marketing people I spoke too a while back.
Not sure if it ever was a hub but at work cities like JFK are or were called Gate Way Cities.
I guess LAX is a Gate Way City to the Pacific like JFK is a Gate Way City to Europe.