CF: AA Isn't as Weak in Asia As You Might Think

[FWAAA]

What is painfully obvious as much as some people want to argue otherwise is that AA had a cost problem relative to DL for at least five years and in that period, DL has had a field day targeting AA's top markets.

<snip>

It is precisely because DL's costs have been well below AA and UA for so long that DL has been able to gain so much revenue.

I agree with much of your post but I just had to highlight these parts. For many years, the employee-posters here have argued emphatically that AA did NOT have a cost problem and AA's bankruptcy was merely the product of "mismanagement that flew AA into the ground." That's a paraphrase from the pilots' and FAs' union leadership talking points and a paraphrase from hundreds of posts on this forum for the last several years.

And some blowhard ignorant A-holes will probably jump on the above and conclude that I "hate labor" and that I'm "anti-union." Nothing could be further from the truth. Anyone with the ability to read financial statements can see that AA's labor costs were higher than the competition.

The professional "analysts" like Jamie Baker, Ray Neidl and Helane Becker and the rest of them had no difficulty seeing that AA's costs were higher than DL or UA following their mergers. Lower cost airlines tend to grow and higher cost airlines tend to shrink, and AA's been in that higher cost category since at least 2006 (when NW and DL lowered their costs). Little wonder AA contracted as B6 (a very low wage airline in the beginning and still lower than AA post-bankruptcy) expanded rapidly at JFK and BOS.

And, as you point out, DL has grown at AA's expense since its post-bankruptcy merger. 2012 marked the third straight year of huge profits at DL (more than $1.5 billion pre-tax. pre-profit sharing profits in each year), resulting in $950 million in profit sharing plus another couple hundred million in performance-target bonuses for rank and file employees over those three years.

AA went from being a very high-cost airline to being a slightly lower-cost airline once the merger-related payraises take effect. Lower enough to enable AA to thrive and avoid another Ch 11 filing? My opinion is no.

 

[Super FLUF]

Lots of wasted bandwidth here. All everyone needs to know is that Delta is the bestest airline and full be forever and ever. Nobody else can compete, and nobody else should try. Delta has the best management team in the history of airlines. ATL is the best location for a corporate headquarters. Delta has the best airline fleet hands down. Delta also has the best FF program, business, and 1st class service. Delta also has the best livery for aircraft. Delta has the best plastic wings for the kids. Delta has the best name too....."DELTA".....it just rolls off the tongue and makes you instantly think of sky Gods and an invincible airline empire.

All hail Delta.

 

[WorldTraveler]

I'm not sure whether I would say that AA is headed for another bankruptcy or not because the competitive situation will determine a lot. As I have repeatedly noted, and you have said as well, UA's situation is far from settled, their costs are going to continue to increase as they settle more and more merger labor contracts, and they are going to lose market position because of moves by both AA and DL.

Unfortunately, labor at AA has been too focused on their own paycheck at the expense of building a long-term viable company. I don't expect AA employees to fork over money and watch it go into executive pockets... but AA's costs have been out of line since 2003 when the company made the failed assumption that other carriers would fail and AA therefore didn't need to cut as deep as it should because they could grow. They sold this labor contract (pre-merger) based on growth levels that no one could believe were real and now Parker has come along and wants to undo most of the labor cost savings that AA gained in BK, as painful as they might be.
US employees will be gaining huge pay raises, robbed, and that is why this deal is flawed from the outset. Parker was willing to pay huge pay raises in order to get his hands on AA but the revenue increases are far more illusory than real.
Add in that AA's order book for new aircraft hasn't diminished yet AA is now going to have to pay pension benefits for its frozen plans to the tune of $600M per year or more, and AA's balance sheet isn't going to be much better off than before.
DL, despite showing record profits for the US airline industry, is "settling" for 15 year old M90s and 717s since the entire DC9 family has been shown to be able to fly for 30 years or more. Strangely, the M90 and 717 have operating costs on par with the 320/738 and 319.

I'd like very much to think this merger will work... but it doesn't fix the structural problem which is that AA and UA have higher costs than the rest of the industry, including DL which has been able to grow its business for much of deregulation at AA and UA's expense.

but instead we have people here who are more worried about the joint venture that WT has w/ Spectator than being able to admit that WT is right after all.

Fluff,
it didn't seem like wasted bandwidth when you started a thread yesterday touting your faith in the possibility that AA could clean DL's clock. Two days after a healthy dose or two of reality, of course it is all wasted bandwidth.

how about you instead grasp hold of the concept that the airline industry is competitive. Highly competitive. AA supported deregulation. SO did DL.

You want to make light of DL now that they have figured out how to pull ahead of the pack.

The Air Force might rehire you. US firepower is untouched in the world. You don't have to worry about the competition there.

 

[traderjake]

I'd like very much to think this merger will work...

I'd like very much to believe you...

 

[robbedagain]

WT not all of us employees will get the huge raises, unless a miracle happens and the remaining unions at us all settle with us mgmt like quickly... as far as the pilots go yes they will be brought up to aa but how soon i do not know. as for the structrual costs id suspect bec DL is non union except for pilots therefore theyre able to keep their employee costs down yet given the profit sharing and other added bonuses probably make up for it in the long run wouldnt you think? but it also remains to be seen if in the future that dl eventually becomes union and see what happens.. or what if any swa will do any kind of damage in atl against dl vs how FL did against DL in atl. i think that if this merger is done the right way it can work.​

to me the creditors probably just want their money in return and they feel that they can get it in this merger​

 

[WorldTraveler]

yes, the creditors went for the option that provides them with the greatest chance of return.
The enormous amount of labor discord that has marked AA for years had to factor into the creditors' decision.

Add in that US has been running a solid airline recently, and it isn't too much of a stretch to see that the creditors see more upside under Parker than they did with Horton and company.

You can postulate what might happen to DL but they remain largely non-union and WN is reducing service in Atlanta, not increasing it.

Again, DL and WN have a history of NOT competing directly against each other any more than they have to and the reason is because DL has the lowest costs of any of the network carriers; WN can find other places to grow where it is much easier.

But focusing on costs is a very legacy carrier mindset to success; WN didn't grow to be the size they are because they continually cut their costs to the bone. It is well known that WN has some of the highest paid employees in the US airline industry. They are productive but that is only part of the formula.

WN does an incredibly good job of generating revenue. DL came out of BK w/ the same goal. You might have missed it but I noted that in the last quarter that DL had the highest mainline revenue per available seat mile of any US carrier, except for WN which was only a couple percent higher (in reality, if you look at revenues on a comparable basis, DL is probably higher because DL operates much longer flights and longer flights produce lower RASM and CASM).
The point is that DL has figured out that the way to win is not to keep cutting costs in order to win. The key is to invest in the product and in their people. And then DL goes into the market place and kicks anyone's backside that manages to get in the way. It is precisely because DL is a low cost but high revenue carrier that they are posting profits as large as AA's losses.

You can hope that DL's momentum might be slowed, but DL is making moves to not only improve its revenue and compete more directly with AA in its key revenue markets such as LHR, Brazil, and Mexico but DL is also committed to getting even more costs out of their network, which already has the lowest CASM of any legacy airline.

AA/US doesn't need hope that they can slow DL's competitive assaults; they need a solid business plan. Because Parker was so determined to get his hands on AA and its revenues, he was willing to agree to cost cuts that will inflate AA/US costs dramatically while you unfortunately probably won't get any of it.

The creditors are only too happy to have a solution that gives them the prospect of recovery in the next couple years. By the time they have cashed out, the real work of the merger will just be getting under way. You and other AA/US employees will wake up to the reality that the merger is not producing the results that you were promised, the creditors have taken their money and run, and competitors such as DL are still eroding AA's revenue.

After 35 years of deregulation and over 100 bankruptcies, you would think that there would be something different than the same failed, rehashed strategies that have governed the industry for years.

Until something changes, there will be people like you and trader who really want to be a part of a winning team but can't cut thru the noise and bias of people who continue to deny the reality that is happening around them and then cloak their denial of reality as opinion.

I wish you well. It should be a lot easier for good people like yourself to make a decent living.

 

[robbedagain]

wt youve mentioned ual has a higher cost how much higher are they compared to aa secondly while i understand about the dl/sw situation i think its only a matter of time before swa might try anthr go at it with dl but i did not know they were reducing atl service

 

[eolesen]

Since WT took the time to respond, I thought Brett should see it. Here's his response:

He seems to be fighting a completely different battle. I'm talking about general utility to US-based travelers. He seems to be focused on who generates more revenue. Completely different story. It seems like he wants to use whatever numbers make Delta look superior even if it's unrelated to my point.

Regarding codeshare vs JV, he's still hung up on the revenue piece. I include JVs because the two carriers then have the ability to price and schedule jointly. This isn't a matter of who gets more money in my post. It's a matter of how you can craft price-competitive connections.

I've underlined my favorite line.

 

[ChockJockey]

Deflection?
You have got to be kidding.

DL flies...*snip*

DL came out...*snip*

By any measurement, DL has been...*snip*

DL is well aware...*snip*

DL bought...*snip*

Because DL...*snip*

DL has been...*snip*

DL knows...*snip*

I've tried reading your posts, but when I do my eyes just glaze over and I scroll past them. I don't think I'm missing much though because I'm not very interested in DL.

 

[Mach85ER]

E,

Make it stop. If you do, I'll walk a day with a sandwich board in front of the LGA terminal saying "Carty, Arpey, Horton, an unbroken chain of great airline CEOs"

 

[WorldTraveler]

No, M85, it probably won&rsquo;t stop because E is one of several people here who are so hellbent on defending AA mgmt despite the fact that 10 years worth of data of every imaginable kind show that AA mgmt has destroyed huge portions of AA&rsquo;s revenue generating enterprise, the same enterprise that Crandall carefully built (which is why they like him) to give AA one of the best revenue generation capabilities in the US industry. But the most beautiful house on the block will not remain that way if it is not maintained and protected against assaults including weather, vandalism, and attempts to rob it. AA mgmt has spent a decade focused on one thing and one thing only and that is fighting with labor and attempting to get more and more concessions out of them while at the same time completely ignoring the core aspect of the business which is to generate superior revenue.

IN complete contrast, DL has been laser-focused over the past five years in gaining the necessary size in key global markets &ndash; many of which have historically been dominated by AA, keeping their costs the lowest of the legacy carriers to ensure that DL can successfully compete with any network carrier in the US, and running an outstanding business.

The results are very plain to see and NYC is the best example. DL came out of BK with the clear strategic objective of becoming the dominant carrier in NYC. Even before the slot deal was approved, DL had overtaken formerly NYC-based AA in order to be the largest network airline at LGA and JFK. Not willing to be content with its newfound success in the NYC state side of NYC, DL gained access to half of the slots at LGA, the preferred airport in NYC for short-haul travel, and in so doing, DL has managed to shift significant amounts of revenue from EWR and JFK to LGA. DL&rsquo;s focus on the top LGA business markets is obvious; with just six months of data available, DL has gained one-third of the market share in the LGA-MIA market at average fares comparable to AA in addition to nearly one-fifth of the local revenue in the LGA-ORD market, a historic backbone of AA and UA&rsquo;s networks. At JFK, DL is set to overtake AA and UA this year in JFK-SFO and JFK-LAX by carrying more total revenue between the two cities, dashing the notion that it is possible to be a niche carrier in another carrier&rsquo;s hub.

I am so grateful, E, for you sharing my comments with Brent or Brett or whoever he is. I didn&rsquo;t go looking for his article, didn&rsquo;t post it here, and am not about to respond to it on his blog. Since you posted his responses, I&rsquo;ll note just a few items.

Your notion that joint ventures are the only type of commercial relationship that translate into success is flawed, plain and simple. Simple codeshare relationships do involve payment by the operating carrier to the marketing carrier. You want to tout the ability to jointly plan capacity offered under a joint venture, but there is abundant evidence that JVs don&rsquo;t come close to translating into success in the marketplace. And while you write about the Pacific, how do you deal with DL&rsquo;s equity positions in AM and G3, carriers in countries where JV&rsquo;s are not possible? As a stockholder with a seat on the board, DL has gained the ability to influence the activities of that carrier not only where it impacts DL but also in other markets; no JV can provide that level of cooperation.

Your elementary approach to counting flights instead of seats or revenue as if to find some basis on which you can argue that AA is not as bad off across the Pacific as everyone else knows is the kind of &ldquo;analysis&rdquo; that the kids do on a.net. And even then you could only make your case by cutting out parts out of the networks of AA&rsquo;s competitors while including those of AA&rsquo;s JV partners. You truly don&rsquo;t believe that anyone with half a brain can&rsquo;t see thru that in a NY minute, do you?

AA&rsquo;s joint venture with JL has been in operation for at least a year, more than enough time to be able to see whether the JV has translated into improved revenue for AA. What is clear from DOT data is that AA has improved the performance of its ORD and DFW to NRT flights. Yet in the largest and most competitive USA-Japan markets, NYC and LAX, AA&rsquo;s performance is no better off or worse than what it was before the JV. Explain to me how:

In the NYC (including all 3 airports) to NRT, DL manages to collect average fares that are 20% higher than the market average, even though DL has no JV partner. UA and AA and their JV partners receive average fares below DL&rsquo;s, although JL&rsquo;s average fare jumped dramatically as AA cut its own JFK-NRT flight and JL dramatically reduced its own capacity. All those capacity cuts did is to ensure that DL still is the dominant carrier in the NYC-Tokyo market even though both Star and oneworld carriers each have multiple flights per day. What is even more staggering is that DL gets a higher average fare on NYC-HND traffic and carries more of it than AA which operated the route nonstop.

At LAX, the situation is not much different but on an even greater scale. DL&rsquo;s average fare is 35% higher than the market average while AA&rsquo;s is just over HALF of what DL gets. If the JV was supposed to increase AA&rsquo;s ability to compete in the top US-Japan markets, it isn&rsquo;t working. And while the Asian partner may be carrying some of the traffic, there should be some sort of improvement to AA and UA&rsquo;s performance because of the JVs but years and years of data don&rsquo;t show it. The same story exists at every gateway up and down the west coast &ndash; and all of that was before DL won the right to fly SEA-HND; DL will bookend the huge west coast US-Japan market with service to both Tokyo airports. DL&rsquo;s strategic focus in Japan for this year appears to be to push UA out of SEA-NRT or force NH to dramatically reduce its capacity.

Brett, your simplistic analysis missed the reality that DL&rsquo;s Japanese route network has the network and marketing strength of an Asian carrier but is operated by a US carrier; DL is able to gain the highest revenue traffic for its Japan flights from both sides of the Pacific and DL is building on historic strengths in the marketplace that go back decades, long before some of the carriers operating on the route even existed. No schedule data will show that, but that is the reality of the marketplace which you want to pretend doesn&rsquo;t exist.

DL is not attempting to fly from LAX to anyplace else in Asia other than Japan for the simple reason that DL&rsquo;s ability to win in the US-Japan market is well established &ndash; and highly profitable. You do realize that DL carries more onboard revenue on its sole LAX-NRT flight than AA carries on both of its two LAX transpac flights? DL&rsquo;s LAX-HND flight, though far shorter, and operating with clearly undesirable slot times, carries more revenue than much longer competitor flights into China? It may be sexy to draw lots of lines on a route map but DL has decided to stick w/ the strategy that puts the most money in the bank.

Finally, a look at DOT data for US carrier TPAC systems provides the most accurate summary of whose Pacific strategies work and whose do not. AA&rsquo;s TPAC profit margin was vastly lower than DL and UA&rsquo;s, with the latter two carriers fairly comparable. Yet, it doesn&rsquo;t take a rocket scientist to realize that UA&rsquo;s TPAC costs are going to soar in the next year and beyond as they implement contract terms as part of their merger labor agreements. UA&rsquo;s profitability will most certainly drop dramatically when they have to start paying pilot wage rates even remotely close to DL&rsquo;s. and the UA pilot contract still is one year behind DL&rsquo;s in pay rates.

A simple schedule data pull won&rsquo;t show that information.

The same BASIC analysis &ndash; of the income statement shows the difference between DL&rsquo;s approach to its network and AA and UA&rsquo;s. DL is not interested in serving markets just because they look good on a route map. DL&rsquo;s focus is on generating the maximum revenue possible and serving markets where it can make money. That is probably why DL posted a profit that is larger than the combined profits of AA, UA, and US.

E, the obvious reality is that you and others have tried for years to silence me through intimidation and use of the post voting system. When I joined this forum, I swore no allegiance to any one &ldquo;side&rdquo; in the airline industry and I made no commitment to not share information which might prejudice one side and favor another. For years, I have been highlighting the abject strategic failures of AA mgmt.

I don&rsquo;t really care what kind of relationship AA&rsquo;s employees have with mgmt, but I do care and will continue to highlight how well AA does in the marketplace. AA labor was convinced that Parker&rsquo;s strategy for the company will work, yet Parker is willing to undo many of the gains that AA has painfully won in BK and which were necessary in order to win in the marketplace.
When FWAAA who has been as loyal to AA as perhaps anyone on the internet comes to the conclusion that AA&rsquo;s viability is compromised post-merger in agreement with me, then it has to be worth considering that we just might be right.

All the new aircraft in the world won&rsquo;t make a hill of beans worth of difference if AA cannot obtain revenue comparable to or superior to its peers. If DL can convince its passengers to shell out thousands of dollars more than AA and UA to ride across the Pacific on a broom, then DL wins. It&rsquo;s rather simple. Instead of buying billions of dollars of new int&rsquo;l aircraft, DL has spent a fraction on cabin and fuel-efficiency upgrades. There will be hundreds of high quality used widebody aircraft coming on the market in the next five years and DL will refresh its fleet w/ those aircraft. Brooms aside, being content with one generation of technology behind everyone else can translate into billions of dollars in cost savings with relatively little impact on the ability to deliver a competitive product.

I&rsquo;m sure this thread will be long dead by the time we know what will happen with the new Brazil routes, the success of DL&rsquo;s latest push in LAX which will affect AA due to its higher costs, not AS, as well as the first full year&rsquo;s worth of results of DL&rsquo;s expansion into AA&rsquo;s top revenue markets at DFW and MIA. Since there are people here that mistakenly attempt to use the post voting system as a weapon to silence me, I will be ABSOLUTELY CERTAIN to ensure that the results of DL&rsquo;s next found of competitive assaults against AA are well documented.

Opinions masquerading as analysis and feeble attempts to manipulate the post voting system by me or others won&rsquo;t change the outcome of what takes place in the market, which is after all where the success of AA and DL and every other free market airline will be determined, and with it, the success or failure of their employees.

I will remain laser-focused on discussing the issues that matter, regardless of whose toes I step on.
It is not personal. It is business.

BTW Robbed,
UA's CASM was about 5% higher than AA's for the last quarter - and that was before all of the labor cost increases related to merger labor agreements began to kick in. UA showed the settlement costs of the new pilot agreement (about a half billion dollars) as a special charge because it won't happen on a regular basis but it is still real money, not an accounting adjustment. UA's pilots have been paid well below average for years and their pay - as well as that of other UA employees will - rise dramatically in the next few years.

Your question highlights UA's vulnerability which I and others have noted. UA is moving very quickly to becoming the highest cost carrier while losing strength in key markets around the world.

AA's future might well be better off because they maintain some sort of advantage over UA; perhaps Parker is calculating that AA can pay for the increased costs from the merger by winning revenue over from UA.

AA might retain an advantage over UA, but it won't change the fact that DL is a lower cost competitor than both AA and UA and WN, AS, and B6 are lower cost than the network carriers.

As FWAAA aptly noted, the outcome of competitive assaults in the airline industry are almost entirely determined by cost structure. He who has the lowest costs wins and he who wins grows while he who loses at the market level shrinks.

 

[diamondcutter]

Wt , you regurgitate the same over and over . Jimmity Crickit (WT) thank you for being lazer focased . DL rules, and I'm sure you will post why!!! Twirl you cane and give us all another lesson .

 

[WorldTraveler]

ChockJockey,
whether you can read and understand what I write here is immaterial; you may be happy to do your job and live your life without knowing all of the details I have provided and I certainly have not forced you to read this post.
But how well AA fares in the marketplace against its competitors including DL has enormous impact on your future.

Diamond,
Again, I didn't start two threads this week highlighting poorly done analysis and faulty logic based on the notion that AA would beat DL as a result of the merger.

But others did post these articles, I responded with thorough detail regarding why the logic used in the articles was flawed in the past and didn't translate into the su ccesses that were expected to happen.
I believe the classic definition of insanity is doing the same thing over and over again expecting different results.

AA and UA are doing the same thing over and over again and yet somehow expecting different results.

Personally, I want you and your coworkers to succeed. But you are foolish if you don't understand the threats to your futures and your livelihood from competitors which AA and UA can't seem to figure out how to win against. On another level, which is certainly not the one you are playing on, there are those who continue to hope that AA will win in the marketplace and even go so far as suggesting that AA will regain lost ground against competitors that have handedly won against AA for years.

If you don't like the facts I write, you might start by telling those who want to try to bring flimsy evidence showing how AA will win in the marketplace to refrain from engaging in their own foolish actions.

Then, you will just have to put up with occasional little data points that I might drop into threads such as how much share AA is losing in markets like LGA-MIA or LGA-DFW or how AA's profits compare to the competition, but it certainly won't take thousands of words to make those points.

 

[Super FLUF]

it didn't seem like wasted bandwidth when you started a thread yesterday touting your faith in the possibility that AA could clean DL's clock. Two days after a healthy dose or two of reality, of course it is all wasted bandwidth.

Please show me where I "touted my faith" in anything of the sort. I merely posted an article.

Sorry but I am just amused by the psychology going on here. You work for another airline, but feel the need to go onto another airline's web board to tell the employees how wonderful your airline is.

Furthermore, you write several thousand word Unibomber manifestos that are nothing more than OPINION, yet you try to wrap and present them as some sort of "expert analysis." What is your airline analysis curriculum vitae? What is your formal training and experience in airline analysis?

Please post a link to your web site so I can be awed by your vast in-depth analysis and your impressive client list.

Until I see any of that you are just another swingin' dick looking to feel important and relevant through amateur hour "analysis" and shameless Delta cheerleading.

 

[diamondcutter]

Thank you for proving my point.