American expands its world
Flights abroad a faster route to profit than battling discounters
11:42 AM CDT on Saturday, July 24, 2004
By ERIC TORBENSON / The Dallas Morning News
With low-cost carriers handing them their hats, the big traditional airlines are boosting their international routes.
Fort Worth-based American Airlines Inc. has expanded its international capacity nearly 19 percent during the first six months of the year, compared with the same period in 2003.
That's six times the rate that American added seats to its domestic schedule.
"I think our desire would be to continue to look for ways to grow our international presence," said Henry Joyner, senior vice president of planning at American.
"We're not going to grow it at the expense of our domestic operations, but our domestic flying is going to grow a lot slower," he said.
International revenue was the star of American's second-quarter earnings last week, as parent AMR Corp. turned a profit of $6 million.
Each global region showed big gains over last year in average fares, while domestic fares fell slightly. Full-fare passenger traffic rose 129 percent for American's Tokyo routes over the same time last year.
Currently, nearly 69 percent of American's schedule is for domestic flights, and 31 percent is international. (The carrier includes Canada as part of its U.S. schedule.)
American, like most traditional network carriers, faces low-fare competition on eight of every 10 domestic routes it flies.
With higher costs than discounters such as Southwest Airlines Co., American often loses money when it matches a low fare – in many cases taking only $299 for a one-way ticket that once went for more than $1,000.
The situation may get worse for traditional carriers, executives at Delta Air Lines Inc. and Continental Airlines Inc. warned last week when they reported quarterly results.
One reason is that discount airlines are growing faster and ordering new planes. Southwest, JetBlue Airways Corp., AirTran Airways Inc. and their low-cost cohorts are expected to double their fleets within four to five years.
That's good news for passengers, but not so good for the traditional carriers.
An opportunity
So far at least, U.S. discounters have treaded lightly on international routes. Dallas-based Southwest has no plans to expand beyond the continental United States.
Traditional airlines such as American see an opportunity. Although they haven't been able to raise domestic fares in an improving economy, they have had more success doing so on international routes. Industrywide, international revenue rose 9.5 percent in May over the same month last year across seat miles flown. A seat mile is equivalent to one seat flown one mile.
In contrast, domestic revenue per seat flown fell 2.1 percent in the same month.
The international figure presents an easier comparison because many overseas trips were canceled last year over the Iraq war and fears of severe acute respiratory syndrome.
Some wonder whether American will follow the model of its alliance partner, British Airways, in becoming a primarily international carrier.
"The network carriers have far fewer places to hide," said Robert Gordon, an economics professor at Northwestern University, at an April airline conference.
British Airways made a handsome profit of nearly $1 billion in the last 12 months despite stiff low-fare competition from carriers such as Ryanair that sell some tickets for less than $10.
By emphasizing international flights and keeping enough domestic traffic to feed those flights at hubs, financially strapped big carriers could improve their margins, Mr. Gordon said.
Struggling giant airlines such as American might want to think about changing their flight mix to avoid all-out brawls with low-cost carriers on transcontinental routes, said Ray Neidl, an analyst at Blaylock & Partners.
"I've always wondered why they don't do more of that and perhaps try to set up alliances with some of the low-cost guys," he said. "It doesn't make sense for them to keep throwing more capacity at low-cost carriers."
The revenue strength of international flights may help offset the weak domestic market for traditional carriers, Mr. Neidl said.
But American officials say it's unlikely the world's largest carrier will try to look like British Airways.
"I don't think you're going to get to see American transition into a carrier that is predominantly international," Mr. Joyner said.
About 70 percent of American's $14 billion in revenue comes from domestic routes, which the airline relies on to feed into its more lucrative international service.
Emphasis on Asia
The airline has been particularly focused on Asia, if only because the fast-growing region is the smallest part of its global network. American was unexpectedly shut out in the last round of air rights applications to China. The carrier will apply for rights to fly to Shanghai in 2005, and many analysts expect the effort will pay off this time.
"Given its growth in trade and its prospects for the future, China is an area we'll look at aggressively growing our own flying," Mr. Joyner said.
If granted, American's Shanghai service may fly from Dallas/Fort Worth International Airport, Mr. Joyner said.
Chicago's O'Hare International Airport was thought to be American's first choice for flights to Shanghai. But rival United Airlines, which already serves China, is planning Chicago-Shanghai service.
"I think D/FW has a chance," said Joe Lopano, executive vice president of marketing and revenue management at the airport. Shanghai "would be a jewel for us."
American added a second daily flight to Tokyo's Narita International Airport, which shows D/FW has the strength to support Asian routes, Mr. Lopano said. Plus, local traffic through the airport has already exceeded levels before 9-11, he said.
The airline already serves 33 foreign destinations – including cities in Canada – from D/FW and could increase that easily with its gate space in Terminal D, which will open next year.
American should hear from U.S. Department of Transportation officials later this year on whether it can fly to China.
"We think we'll be the best choice," Mr. Joyner said.
The carrier has also added flights to Latin America that have been dropped by competitors, Mr. Joyner said. Its new Buenos Aires service, launched last fall, is "off to a terrific start," he said.
As American and others scout the globe for international routes, they're also spending money on the in-flight service for business- and first-class passengers.
This month, American upgraded amenity kits with spa products. United Airlines made a similar move a week later. American may also invest in new seats to appeal to high-dollar international travelers.
All this contrasts sharply with the airline industry's approach to domestic service, where the free meals that passengers long took for granted have practically disappeared.
"We feel fairly comfortable with our in-flight offerings going forward," Mr. Joyner said of American's international service. "It's an extremely competitive market."
E-mail etorbenson@dallasnews.com
