New Merger Routes

[FWAAA]

some analysts think AA/US will pare several percent worth of capacity which is exactly what other airlines have done thru mergers.

http://www.bloomberg...seats-3-9-.html

True, but that's the same cabal of analysts who predicted in early December, 2011, that AA would shrink by 10% to 15% in 2012 compared to 2011. Jamie Baker said that the revenue would be split among UA, DL, US, WN and others and on that basis, he upgraded everyone.

“We are modeling for a 10% AMR capacity cut,” J.P. Morgan analyst Jamie Baker wrote in a note. “This equates to a 1% to 3% revenue improvement per competitor in 2012.”

J.P. Morgan raised its financial outlooks for United Continental, US Airways and Delta Air Lines, as well as for JetBlue Airways, Alaska Air and Southwest Airlines.

http://articles.marketwatch.com/2011-12-01/markets/30766286_1_airline-stocks-amr-bankruptcy-morgan-analyst-jamie-baker

http://www.businessweek.com/news/2011-12-13/american-seen-shrinking-about-10-with-focus-on-u-s-flight-cuts.html

Of course, AA did shrink slightly in 2012 compared to 2011 but increased revenue by $900 million. Accordingly, the analysts collectively underestimated AMR's 2012 revenue by about $3.3 billion. Whoops.

 

[WorldTraveler]

Yes, I well remember those predictions and I don’t think I endorsed them as being terribly realistic in light of what other carriers have done. However, remember that my criticism of AA for years has been that they have kept capacity in the market which has eliminated the possibility to increase RASM and more closely match revenue with costs.

AA, as you well noted, gained an industry advantage in RASM growth several months into their BK, only to be interrupted by the operational problems of the late 2nd and early 3rd quarters. Since then, AA has had industry average RASM and has been surpassed by you know who. AA’s original plan to grow capacity by 20% seemed unrealistic, something we talked much about here. Increasing capacity in an environment of escalating costs – most notably fuel – and overall industry capacity cuts made it clear that the creditors would not accept AA’s overall plan, esp. in light of the fact that AA has yet to reach the industry lowest industry CASM that it said would allow it to grow. With the merger and all of the pay raises that are being thrown around to support, AA’s costs will likely never reach the level of being industry lowest.

I have no idea how much capacity AA/US will ultimately pull from the market but the expectations of the creditors in every other BK has been that capacity would be cut in order to push pricing up. Although US has been one of the few network carriers that has been growing capacity, even at a very small percent based on its very low labor costs, it is highly unlikely that they can avoid following the formula of reducing capacity in order to push up revenues, the only way to pay for the increased costs that will be part of the formula. Since execs of both DL and UA have said they support the merger on the grounds of decreased industry capacity, it is fairly certain that the creditors are indeed requiring that there be significant amounts of capacity to come out of the combined AA/US system. We can debate where that will come but I am pretty confident that those people who have boasted about how large AA/US would based on simple addition of its current capacity will find that they are wrong Further, the massive layoffs and hub closures that have been part of consolidation in the industry will take place at AA/US as well. Add in that if the capacity cuts hit PHX hardest as some have predicted, it would weaken many of the advantages of the merger in the western US and disproportionately help competitors who have stronger positions in the west, including DL, UA, and WN.

 

[UPNAWAY]

Asia and the PAcific is where the real growth oppertunities are.

 

[eolesen]

Whether or not the creditors are interested in forcing some level of capacity discipline is debatable, especially when a third of the UCC includes the unions and Boeing, neither of which benefit from reduced flying. They obviously all will want to see the stock perform.

DL strong in the west?... If you say so, but having lived out west for a couple years, the only reason anyone considers them is to get their miles with AS. Likewise in Texas.

 

[wings396]

I agree with Dr. WT -- once they shift alliances, you can't depend on the feed from LH at the other end, nor can you count on Star Alliance FQTV's choosing you over a Star partner.

So, it would make sense to shift some of that capacity to the BA, IB, and AB hubs, and the rest into secondary cities where there might still be enough of a local market, yet doesn't duplicate and cause dilution into stronger hubs.

I'm still going to disagree with both of you on this one. UA flows just about all of their own traffic thru EWR instead of funneling people thru PHL for US. I have some pretty solid info thru a source of mine, and I can assure you that the traffic that US gets via Star in PHL is minimal.

 

[WorldTraveler]

Despite what you would like to believe, DL is in fact a larger carrier in the west than current AA in most cities. Further, even though AA is larger at LAX, DL has higher average fares from LAX for both international and domestic services than AA - in both cases beat only by UA.
You apparently aren't talking w/ the people who pay the bills for DL at LAX but the notion that DL doesn't compete effectively or make money in the west is nothing more than a.net legend, unless of course AA doesn't make money in the west either.

DL's strength in the west and at LAX may be due in part to the fact that DL carries more transpac revenue from LAX than any other US carrier and that includes Australia. DL's revenues from LAX to both Tokyo airport are far higher than AA or UA carry on their two Asian flights, leaving more than enough left over to cover the difference in revenues between DL and UA to Australia.

You can factor in the JVs AA has with QF and JL and the story might change in LAX but it doesn't change that DL is not an also-ran on the west coast or at LAX. DL serves the highest revenue markets from the west coast; add in that the chances are very high that DL will add more service on its own metal to LHR or at least get to claim half of the revenue that VS carries from the west coast and DL is still very much in the game.

Do you realize that according to DOT reports, DL carries slightly more local revenue from SFO to both Tokyo airports than UA does on its own metal despite UA's massive presence in SFO to Asia?

Yes, Asia is still a robust growing region of the world. Problem w/ LAX is that every Asian carrier has a large presence and they all have lower costs and better service than the US carriers. UA has a fortress hub to Asia at SFO and DL is rapidly expanding SEA which provides excellent coverage of the west coast, is within range of the top markets with a 767 (not unlike how CO grew EWR-Europe with 757s), and SEA actually does a pretty robust local market which DL taps quite nicely into.

Add in that if the PHX hub does shrink, AA/US' presence in the west will not be near as strong as the simple addition of both airlines today.

The same creditors who are on AA's cmte were on the cmtes of every other airline; the aviation finance cmte is pretty small.

They all prefer capacity restraint in the name of increased RASM. Given that Parker is paying for this merger w/ lots of labor cost increases, they have no choice but to push RASM up fairly quickly.

Wings,
the issue is that some routes in EUROPE where US flies might not work if AA/US do not have a Star hub on the other end. AA/US will simply not do as well on routes to Star hubs as they could to oneworld hubs. Given that AA/US already serve those hubs via JFK and PHL, the chances are high that there might become double dailies or larger aircraft.

There is no doubt that UA carries its int'l traffic thru EWR or IAD, not on US via PHL.

The negative impact to UA will be that they lose a presence in the SE that they have had via US.

BTW, these same trends - domestic and int'l - took place when CO left Skyteam for Star.

 

[700UW]

The only Star hub US really flies to in Europe is FRA and LHR, and BCN.

 

[WorldTraveler]

ATH, BRU, LIS, MUC, or ZRH?

 

[700UW]

The only major presence US has with more than one flight from more than one city is LHR and FRA, the others are one flight a day from PHL only, and some are seasonal.

 

[WorldTraveler]

even a single flight can be heavily dependent on alliance connections. US connects at least 10% of the passengers at each of the European Star hubs above. In some cases, a lot more than 10%.

 

[tadjr]

If there was actually demand for any of those, don't you think they'd have service already?...


This is the network you asked for --- if you're not going to leverage the connections available over existing hubs to fly to relatively tiny local markets ( 500,000 population in the catchment area), then why merge in the first place?

I find this an odd statment from someone who has been in the airline business for so long. If this were true, why do airline route maps continue to change? Routes may make money and someone else comes in and it looses, so it disappears. Other routes might make sense, but the airline doesn't have the right plane for the market or the staff/equipment for one or two flights a day or there is another market that makes MORE money, so the market isn't started. Take some places like CLT-CSG/TOL/EVV/SGF. There is very little AA feed heading East from these places or they involve a backtrack to get there. US doesn't want to set up shop for 3 flights a day because the traffic isn't there for that many flights, but now that AA has staff/equipment in place you can add one flight a day to CLT that opens up hundreds of connections in the East that you couldn't via DFW or ORD. Also, some of these places like CSG and TOL that are close to another airlines hub (within an hour and half drive) could bleed some traffic off of them since it's easier to drive 15 mins to the local airport to fly out vs driving to the big city and dealing with the hassle. I also see ORD-ERI/SCE/BGM/ELM and PHL-GRR/FWA/LAN as being some other possibilities.
I also see certain city pairs like MIA-SAV and SAV-PHL being workable now with the combined route network.Without having the numbers, we can't say for sure, but it's possible. AA might have flown MIA-SAV and might have had 2 flights a day. The morning flight MIA-SAV made money with northbound intl conx and the afternoon southbound did the same, but the southbound morning and nortbound night didn't make money and caused the route to be a loser overall. Now, with the combined route structure, they can run a northbound morning (making money) that can continue on to PHL that connects to a moneymaking bank (INTL?) and then head southbound with inbound international connections making money in the afternoon, continuing on to MIA at night to make South American connections making money. With the old route network neither route did well, but having the options of adding a flight (MIA/CLT/ORD/DCA/DFW/PHL), there are routes that might be money makers now since you have more scheduling flexability.

 

[eolesen]

Sure, go ahead and connect existing dots where it makes sense, but my point is that just adding a nonstop into another hub doesn't necessarily stimulate demand -- it tends to dilute what was flowing elsewhere over the same network.

A lot of those small communities (be they rust belt, beach resorts, whatever) aren't going to suddenly have higher demand because there's a new flight. That's why I said to focus on places where there was dependence on UA or even AC to provide cross-alliance feed.

Putting service into the Bakken Shale is going to be a lot more lucrative than flying golfers to MYR or SAV. You already have the network to carry golfers.

But you don't really serve the Dakotas, Wyoming, Calgary, etc. in a meaningful way.