E,
Thanks for your responses.
Yes, I agree that WN is not the pricing leader that they once were and that could also be why the DOJ is not as convinced that trusting them to “police” the legacy carriers is a valid strategy any longer. As much as they or others want to say otherwise, they eliminated FL which was a lower price leader in many key WN overlap markets. F9 is on the ropes. B6’s network is so heavily JFK and BOS focused that they really aren’t a major influence in overall domestic pricing outside of those markets. WN, like any business, is going to do what they can to maximize profits and that means there is no reason for the to price below what they need to – and that “need to” level is only a bit lower than the legacy carriers. WN also gets a lot of credit for being a low fare carrier because it doesn’t have ultra-high walk-up fares but still manages to get average fares comparable to or better than the network carriers.
And you are absolutely correct that WN can’t get those kinds of average fares competing with ground transportation; they compete for the same passengers as the legacy airlines and they do it very effectively.
Where we disagree is the impact of the fall of the Wright Amendment on AA at DFW. Here are a few factoids for those who doubt:
WN now has almost identical passenger shares to AA when you look at DAL and DFW as a single unit to the cities of MCI, STL, and BHM, cities which WN has managed to have excluded from the Wright Amendment already. After DL closed its DFW hub and until WN rec’d exemptions for those cities, AA carried 80%+ of the passengers from DFW/DAL to those cities. When WN entered those markets, fares fell dramatically and with it so did AA’s revenues in those markets. Fares have come back but WN held onto low fares long enough to obtain parity with AA in terms of revenue.
You frequently say that business demand in the Metroplex is well spread out but if that is true, why does WN carry the vast majority of the passengers and revenue from N. Texas to cities within the Wright Amendment perimeter (Houston (all airports), SAT, MSY, ABQ etc?).
The distance (realistic commuting if not the physical distance) between Love Field and DFW is shorter than the distance between any other two airports in a metro, one of which has a large low fare carrier presence and one of which is a legacy carrier hub. Ex… HOU/IAH, ORD/MDW, MIA/FLL, EWR/JFK, BWI/DCA…. DFW is far more susceptible to losing traffic to DAL than other multi-city airports because of geography.
WN will have enough gates at DAL that they can mount a very effective operation, just as they have at MDW. WN has 738s arriving in significant numbers over the next couple years which will carry about as many people as AA/US’ 321s and 757s at comparable or better CASMs. WN’s gate utilization at DAL will likely be higher than for its operations at some other airports. Their execs have already said that they will reduce schedules to some inside Wright cities in order to accommodate growth to new cities – but will be able to replace some of the capacity lost to frequency by using larger aircraft. And WN will maximize DAL for local operations even more than it is today, pushing connecting traffic over other focus cities.
It is precisely because of the Wright Amendment that DFW is protected from large-scale low fare competition. If you look at US metro areas with or without multiple airports, every one of them has at least a 10% low fare carrier presence in the major domestic markets either from the same airport as the network carrier or via the low fare carrier hub, EXCEPT the Metroplex.
And yet in some cases, the hub carrier still manages to obtain higher average fares in the area and still have abundant low fare competition. Starting in the SE, DL has a domestic revenue premium to the low fare carriers in ATL, DTW, MSP, and SLC - and yet low fare carriers have at least a 10% share in multiple markets from those hubs – and there is room for low fare carriers to expand. Same for UA at IAD, EWR, ORD/CHI, and DEN. True for US at PHL and AA at ORD/CHI. And in each of these cases, air fares at these legacy carrier hubs are heavily influenced in multiple markets by low fare carriers.
But it is NOT true at MIA, DCA, CLT, and DFW. MIA and FLL are different enough markets and AA’s fares are often not linked to fare activity at FLL. LFCs have a minimal presence at CLT. We’ve talked about DFW. And although LFCs do have slightly above 10% share at DCA, much of it is concentrated in a single market – DCA-BOS by B6 and there is also a portion that involves F9 –which is very unstable and which no one would hold out as being an effective long-term competitor.
There are major structural differences between AA/US and other mergers and the DOJ was effective in increasing LFC presence at EWR, the airport that was the biggest concern in the UA/CO merger. UA/CO ended up giving the entire PMUA slot portfolio in order to gain merger approval.
In reality, a large chunk of the DOJ’s objections will likely fail when the Wright Amendment falls but so too will a lot of AA’s revenues. MIA is a very expensive airport for domestic service which will continue to make it unattractive for LFCs. CLT is cheap but there are very few gates available for competitors.
Because hubs also generate market strength in the region around the hub, the DOJ’s concern is related to regional market dominance but can be correct by hub-specific actions. There are significant changes that the DOJ will be looking for in order for them to be able to say that AA/US will be acceptable and they differ by hub.
It also doesn’t change that even if the DOJ’s objections are overcome by the fall of the Wright Amendment, there will be a massive revenue shift in the N. Texas market from AA to WN. They can be a very competitive competitor and it is precisely because the DFW market is so large and doesn’t have meaningful LFC competition that WN sees such huge opportunity. Considering how profitable DFW is for AA today and how this trial pushes out AA’s ability to emerge against WN, the confluence of the DOJ’s actions and the fall of the Wright Amendment have ENORMOUS strategic implications for AA – independently or in a merger with US.
As for fleet, AA and DL have actually have very similar fuel burn per ASM figures right now; DL so far hasn’t gained a huge bump in fuel efficiency relative to AA. Looking into the future, you and others are correct that THEORETI CALLY, AA should have a cost advantage over DL because of its larger fleet renewal. The M90s and 717s have comparable fuel burn to current generation aircraft which AA is buying. The 717 has better fuel burn per seat than the 319 which I know AA intends to use on longer routes which the 717 cannot fly but the 717 is much more fuel efficient than the CRJs and DL intends to use the 717s to most directly reduce CRJ flying. The M90 has almost identical fuel burn to the 320 and 738 so DL is getting an aircraft for about $30M less per plane that will cost them increased maintenance for about 5 years and after that the maintenance difference between DL and other current generation aircraft is not much different. The acquisition cost difference between 60 M90s and 60 738s is about $2B; DL isn’t going to spend $2B more on maintenance for those aircraft in 5 years. DL is buying 100 739s which should have comparable, if not better, economics to the 321s or 738s that AA is buying; DL will be using its 739s to replace life-limited 757s and 320s while AA will be doing that for the M80s. AA and DL will likely both each still have 50-75 757s in 5 years. The real difference comes down to that DL is, as of now, choosing to keep its fleet of M80s which AA is saying it will not. If you look at DOT data, actual fuel burn difference per seat per flight hour is about 20% per block hour. However, DL’s M80s operate on flights on average about 45 minutes shorter than AA’s M80 fleet. The average DL M80 flight is about 500 miles because DL’s route system is so much more heavily centered on the more densely populated eastern US. Every flight spends about 30 minutes on the ground before and after takeoff and the difference in costs for the M80 compared to other aircraft on the ground is negligible. But DL still has plenty of M90s which fly on average several hundred miles further than the M80s while the 320s and 738s fly even further. The fuel burn advantage for newer aircraft just doesn’t overcome the higher acquisition costs on flights for the hundreds of flights per day for which DL uses the M80 and DL doesn’t believe it is worth spending billions of dollars to replace aircraft for which it gains a 5 year maintenance holiday at best.
More significantly, though, DL uses the M80s and even its DC9s in markets where it has maintained its market presence and pricing power. DL is the largest carrier in nearly all of the markets where it uses the M80s and gets a revenue premium compared to its competitors. Thus, it is far less necessary to have a cost advantage if you can generate a revenue advantage. Even in NYC where AA and DL use comparable aircraft, DL has a revenue advantage because of its size; AA has significantly reduced its presence in several JFK-Caribbean and markets while DL has jumped into those markets using the very same 738s that AA has. What gives other than that DL has gained the size in NYC where it can retain business which AA says it cannot?
And part of the reason why AA is under such pressure to replace aircraft now is because it has accumulated debt for 10 years just because of its losses.
And that brings us back to DFW, DCA, MIA and CLT – merger or not. There are vast competitive changes coming to N. Texas whether AA merges or not. In order to get this merger passed, US will have to give up significant access at DCA, at a minimum, and likely CLT, the latter in the form of gates that other carriers can use to add new service above what US operates and the former in terms of slots – or a transfer of revenue generating opportunity . MIA is probably not dramatically changed other than that its high costs favor expansion by network carriers like DL that are growing in MIA and can do so because they have already have a presence there and can attract the higher fare passengers necessary to cover the higher airport costs – but that is not likely affected one way or the other by the merger.
For years, people on this and other boards have resisted the notion that AA has had a revenue problem despite overwhelming evidence from analysts and market specific data to show that to be the case. Just as AA goes thru BK to gets its costs in line with its current revenues, it faces another massive assault on its revenues in the form of the Wright Amendment falling – which happens merger or not - and potentially having to give up revenue generating capacity in DCA and CLT if the merger does go through. New aircraft will reduce costs but far too many people seem unwilling to acknowledge that other carriers are making fleet changes that will reduce their costs as well – and those carriers don’t face the revenue challenges that AA faces in the future.
The simple fact is that AA spent ten years in an unfinished restructuring and lost enormous ground in key markets while competitors have moved much more aggressively and decisively to gain their own competitive advantages over AA. AMR’s creditors are now turning to a merger to help create the mass they believe is the best way to overcome the revenue disadvantage that AA faces – but it doesn’t change the fact that two-thirds of industry capacity and AA and US’ largest competitors – DL, UA, and WN are all capable of mounting a very aggressive assault on AA and US (individually or merged) over the next few years which is exactly during the time that AA and US need to be able to effectively compete.
As for the arguments that the market will be worse off in the long term in unlikely case that AA and US both fail, the DOJ would likely counter that they can’t overlook the very real anticompetitive aspects of this merger to eliminate the possibility of a failure that may or may not happen and to make the American people pay the price. And more significantly, given the indications of what the industry has done since the past 3 mergers and the internal statements which have now been uncovered, there is not much reason to believe the merger would produce any benefit for consumers anyway.
