US/AA merger settlement imminent!

[MAH4546]

AA is starting service in December to align with it's schedule change. AA only starts new routes on select dates, and those are schedule change dates. This year those are 21-Nov-2013, 16-Dec-2013, 31-Jan-2014, 01-Apr-2014 and 13-Jun-2014.
 
I wouldn't fault Delta for waiting a few weeks like AA is, to align the introduction with a schedule change or to begin at peak travel. But the fact remains that peak U.S.-Brazil travel is mid-December through mid-February, yet Delta isn't even going to serve the market at that time despite it's complete ability to do so! That's pathetic, but it also shows us how Sao Paulo isn't this all-amazing market it's supposed to be.
 
It is very impressive how AA has been able to maintain a complete dominance in the U.S.-Latin America market despite it being freely open to competition. Delta has not been able to do the same as Asia - particularly Japan - has been liberalized. 

 

[WorldTraveler]

MAH,
DL has the capacity to launch services whenever it wants.

What you seem to miss in all of this (I have posted it before) that slot times at GRU change in March. I don't know the specifics of what is happening but DL is starting the new GRU flight with a 12.25 a.m. departure but it is moving 2 hours earlier less a month later. US' slot times for its new GRU flight also change.

GRU is building a new terminal and there are a lot of new things happening. What DL doesn't do is start flights if there isn't the possibility of making money. DL made the decision they would not start ATL-GRU any sooner than they had to meet the requirements of the DOT route award but also not fly a schedule which has low profit potential.

AA might have decided to launch CWB and POA with $600 RT fares and LAX-GRU with a schedule that is 4-6 hours later than what was originally proposed just to get into the market, but DL doesn't do those kinds of things. It probably also explains why AA's RASM in Latin America was down by 9% while its capacity was up by 9% (+/-). What that means is that AA is adding new capacity faster at yields that are lower than what they generate today.

You can crow all day long about AA's strength in Latin America and they do have it. I have never doubted that. But when they throw capacity into the market faster than the market can sustain their current yields, they are not generating the highest revenues they could.

AA is doing the same thing to Asia which is exactly why I have highlighted it over and over again.

The difference is that AA makes money in Latin America and has the ability to throw capacity into the market and still be profitable. But companies that are secure about their market leadership don't discount fares in order to build market share. Companies that are new entrants to a market discount in order to build a new customer base but companies in established markets do not reduce their yields in the market in order to grow. That is exactly what AA is doing in Latin America in order to get as much mass as possible so that it becomes harder for any competitors to establish a foothold.

As for DL at Japan, your statement is completely without any basis in reality. DL said on their earnings conference call that the NRT hub in June 2013 was their highest margin hub. DL is absolutely making money at NRT. Furthermore, despite DL having the largest US-Japan exposure of any carrier, DL reported an operating profit to Asia in the first quarter of 2013. In the same quarter, AA's profit margin was -26%. So the notion that DL can't compete in Asia or Japan is completely without merit.

 

[FWAAA]

AA might have decided to launch CWB and POA with $600 RT fares and LAX-GRU with a schedule that is 4-6 hours later than what was originally proposed just to get into the market, but DL doesn't do those kinds of things. It probably also explains why AA's RASM in Latin America was down by 9% while its capacity was up by 9% (+/-). What that means is that AA is adding new capacity faster at yields that are lower than what they generate today.

In what period did AA's Latin American PRASM decline by 9%?   Not in the third quarter and not in the first three quarters of 2013:
 
http://hub.aa.com/en/nr/pressrelease/amr-corporation-reports-third-quarter-net-profit-of-530-million-excluding-reorganization-and-special-items
 
In the third quarter, PRASM was up slightly on 11% more capacity.   Yield was up 3.1%.    

 

[WorldTraveler]

I stand corrected... it was a 3% decline in RASM for Latin America on 9.2% more capacity for the 2nd quarter.

For Asia, it was 7% lower RASM on 8% more capacity.

For the first 9 months of 2013, AA's RASM has decreased to both Asia and Latin America meaning that they are generating less revenue per seat mile than they were a year ago.

AA is throwing capacity into Latin America and Asia faster than the market can sustain current yields.

http://www.sec.gov/Archives/edgar/data/4515/000000620113000086/amraaer2013q38k.htm

 

[robbedagain]

Yet they cant make asia work like dl can I realize dl inherited the nrt hub w nwa but it still does not make any sense that dl can make asia work n no other airline can secondly how is it aa n ua lose money on asia runs but not dl third us does real well to brazil but how about aa ua and dl and last I do apologize for takin this one off course..

 

[FWAAA]

I stand corrected... it was a 3% decline in RASM for Latin America on 9.2% more capacity for the 2nd quarter.

For Asia, it was 7% lower RASM on 8% more capacity.

For the first 9 months of 2013, AA's RASM has decreased to both Asia and Latin America meaning that they are generating less revenue per seat mile than they were a year ago.

AA is throwing capacity into Latin America and Asia faster than the market can sustain current yields.

http://www.sec.gov/Archives/edgar/data/4515/000000620113000086/amraaer2013q38k.htm

True,  AA's Latin America PRASM was down by 8/10 of one percent for the first nine months on 8.2% more capacity;  yield was up 6/10 of one percent.   Even with all the added capacity,  AA has collected a yield of 17.5 cents to Latin America, almost 50% higher than AA's Asia yield over the first three quarters.    Might as well collect as much high revenue as possible in the one place AA succeeds.
 
Looks to me like AA added a lot of capacity in the one region of the world where AA prints money, so in my book, that was a good thing.   Something has to subsidize those money-losing flights to Asia.    And by adding capacity now,  perhaps AA firms up its dominant position, better enabling AA to hold its own in the future when DL and UA attempt to add capacity there. 

 

[WorldTraveler]

You about nailed it there, FWAAA.

AA is using their Latin operation to subsidize the rest of their network. I've said that for years. However, it is not just their Asian network that gets subsidized. In the first quarter, AA lost money in every region except for Latin America; in the 2nd quarter it was only Asia that was losing money. AA knows full well how important Latin America is to AA's profits which is why they will do all they can to remain as large as they can to prevent competitors from challenging them.
But it also doesn't change that AA has such a disproportionately large presence in Latin America compared to what any other carrier has in any other region and AA also has a US carrier monopoly from the largest gateway in the US to that region. Other carriers know that. Other carriers know that they haven't been able to challenge AA's mass in Latin America because of the lack of Open Skies agreements. Even if you or others want to argue that they have fallen within the past couple years, other carriers are waiting for the right opportunity to grow their presence to Latin America, including from MIA.

AA will be facing a convergence of 4 major competitive events within a 1-2 year period kicking off with the divestiture of the slots at DCA and LGA, although the Congressional letters indicate that the divestitures might not go exactly the way the settlement agreement states or with just a disproportionate amount of slots going to WN or B6 to use to large cities. The fall of the WA comes next. Competitors will be adding capacity in other key markets including on the east coast and in the western US. Add in WN's growth in Latin America and B6's continued addition of flights from FLL to Latin America. By next summer, DL and VS will be coordinating schedules to LHR under their JV. As AA is looking for fire extinguishers to try to manage all of these competitive incursions, it might be about time for competitors to start adding some new MIA-Latin America flights.

BTW, I believe B6 just added a round of new flights to Latin America from FLL. While NK didn't really succeed and had little effect on AA at MIA, B6 has the potential to be very different. B6 is perceived as a higher quality airline and also has the marketing power. Their new flight to LIM is reaching deep into AA's core S. America network. B6 has been very successful at taking share from AA in key markets throughout L. America and the Caribbean.

There will be multiple carriers looking for a bigger piece of Latin America over the next few years. On top of everything else that AA is having to do to pull off this merger, battling to protect their cash cow will take an enormous amount of energy and it is doubtful they can succeed at all they will try to do when 75% of the rest of the industry will be looking to stop the benefits AA/US is trying to gain from the merger and to extract major pieces of AA's hide.

robbed,
you can echo MAH's words if you want but the simple fact is that DL's Asian network is profitable and was the only US carrier network to Asia that was profitable even in the dead of winter 2013. The difference between DL and other carriers is that DL doesn't expect any region to subsidize any others on a sustained basis. DL has redeployed capacity out of Japan and may continue to do so and use lower cost aircraft like the new 333s to help match costs with revenues but DL is not giving up on NRT and they also have redeployed whatever capacity they are pulling out of Japan to other parts of Asia where they are doing very well.

UA loses money to Asia in the offpeak seasons because their costs are too high across their system. UA also lost money in every other region in the 1st quarter 2013 which is why they know they have to cut costs or end up back in BK. There are plenty of skeptics who aren't sure they can do it, esp. given that other carriers are targeting UA's bread and butter including VX' transcon flights, DL's SEA hub which challenges UA's west coast to Asia strength, and AA and DL's buildup of LAX.

Also, US has done well with CLT-GIG but they are losing a lot of money on their CLT-GRU flight because of poor slot timings. AA has plenty of good slot times so it won't take too long before AA/US either has to get good slot times or AA has to give up one of its GRU slot times. US' current schedule at GRU is not sustainable financially.

http://airlineroute.net/2013/11/16/us-gru-s14/

remember also that US' costs throughout its network will go up as part of the merger. US' profitability will be questioned and it is also very unclear how AA wants to use CLT in a region that siphons traffic off of MIA at costs that are well below what AA charges. It is well known that US' flights from the US to Brazil are some of the cheapest alternatives.

 

[robbedagain]

Do u expect ua to do better once they utilize the right arcft such as the 787 for asia? Also do u think post merger the new aa will get a better time slot on the clt gru route

 

[LD3]

I think that UA and the new AA should park all their aircraft and shutter their operations.... Reading some of these posts, those two airlines can't do anything right....

 

[robbedagain]

LD3  you pretty much summed it up   no matter what any other air carrier does  its DL  the king of all airlines  thats just by readin wt posts    as much as i am against the merger... i do think us/aa merger will fair much better than ua/co   that merger was a disaster...   i read somewhere on the internet that investors were pulling out of the ua/co bec they have never gotten their synergies  

 

[WorldTraveler]

Do u expect ua to do better once they utilize the right arcft such as the 787 for asia? Also do u think post merger the new aa will get a better time slot on the clt gru route

Robbed,
The responses seem to indicate how you and LD3 think I am going to reply but UA is facing enormous strategic challenges:
1. They are the highest cost competitor in the US.
2. They are facing significant competitive attacks in their key markets including EWR and on the west coast. CO was given freedom to build a huge hub at EWR because AA and DL basically were sitting on the sidelines until about 2005 and UA had already pulled down much of its relatively small JFK presence. DL’s buildup at JFK and LGA is challenging UA’s dominance of the NYC corporate travel market. WN and VX have both added significant low fare service in key UA markets. As the highest cost airline, UA is the most vulnerable to DL’s buildup from SEA-Asia and as AA, DL, and AS shoot it out in the west. It isn’t beyond the realm of possibility that DL wanted to pull AA into the shootout to put even more pressure on AS and UA. UA at IAH likely will be significantly impacted by WN’s buildup to Latin America.
3. Labor integration is not complete and is moving along difficulty.
4. Alliance changes will be impacting UA esp. in Latin America where UA will be losing a major partner in TAM (Brazil).
5. UA mgmt has significantly underestimated the importance of valuing their most premium customers.
The first three are fairly common with AA and AA/US with the exception of 2nd highest instead of highest.
AA will benefit from the alliance changes in Brazil but there are a number of current US routes to Europe that won’t work to anywhere they have now when US is in oneworld.

AA has long understood the value of premium passengers but it is far from clear if Parker will do the same; that has been well-expressed here. Even if he does nothing to alienate AA’s premium passengers in key AA hubs, he has to build that experience into legacy US’ operations if the value of the merger is to be unlocked. It will be very, very hard to rebuild a culture of high quality service at the merged AA.

LD3 you pretty much summed it up no matter what any other air carrier does its DL the king of all airlines thats just by readin wt posts as much as i am against the merger... i do think us/aa merger will fair much better than ua/co that merger was a disaster... i read somewhere on the internet that investors were pulling out of the ua/co bec they have never gotten their synergies

I happen to think AA will do better than UA as well but remember that AA’s strategy ten years ago was to expect someone else to fail so that AA didn’t have to make the deep cuts they should have.
Pinning your success on someone else’s failure or being just a little better than someone else but not as good as the best is never a position of strength. AA will still be a high cost, more indebted airline than a number of its peers.

History shows that AA and UA have had this back and forth relationship between themselves for years but other carriers including DL have been very successful at taking more from both than either have gained long term from each other.

New AA has to fix the strategic problems that landed it in BK and forced a merger or it will continue to be highly vulnerable. But so is UA. The question is who will turn themselves around first and stop the revenue that has leaked from both AA and UA.

Either could just shut their doors but the better option would be to just fix the problems.

 

[robbedagain]

if i were a bettin man  id say the new aa would actually fix the problems  

 

[Thomas Paine]

2. They are facing significant competitive attacks in their key markets including EWR and on the west coast. CO was given freedom to build a huge hub at EWR because AA and DL basically were sitting on the sidelines until about 2005 and UA had already pulled down much of its relatively small JFK presence. DL’s buildup at JFK and LGA is challenging UA’s dominance of the NYC corporate travel market.

EWR is quicker to get to from downtown Manhattan and offers more reliable on time departures than LGA, plus EWR has room to grow. So your theory is off, EWR is UA/CO territory with almost no pressure from DL or AA there. AA has not announced any plans on increasing their presence in EWR in fact they gave up real estate there. So UA/CO can sit back and let AA and DL duke it out over at the other two airports but lower Manhattan and Jersey City are going to head to EWR when they want to fly and when they do most will be on UA/CO.

New AA has to fix the strategic problems that landed it in BK
AA’s strategy ten years ago was to expect someone else to fail so that AA didn’t have to make the deep cuts they should have.

The only thing that landed AA in BK was greed, they wanted to screw over their workers. what did AA cut other than pay to their workers and what did it add up to?

 

[WorldTraveler]

Thomas,
on-time at EWR has frequently been worse than at LGA/JFK over the past several years, in part because of UA's own operational problems. Over the past couple months, EWR on-time has been slightly better than LGA and JFK but it is at best a percentage point or so, hardly enough to send anyone running for another NYC airport.

There are indeed DOT statistics that show both that UA's average fare in key markets has fallen because of competition at EWR and that UA has lost market share in the combined LGA/JFK/EWR market to DL as DL has added new flights at LGA. There is no hard and fast rule about which people go to which airport. NYers went to LGA and JFK for decades before there was a hub at EWR and they can and are just as easily switching back to LGA and JFK now that there are more alternatives. People from Jersey won't fly from LGA and JFK and people from Queens and LI won't fly from EWR but there are a whole lot of people that can to either airport - and the DOT stats show that there is a movement of passengers back to LGA and JFK with DL's buildup just as happened when B6 built JFK.

CO succeeded at EWR for as long as it did because they offered more flights and an alternative that didn't exist at LGA and JFK. Now that DL has added millions of new seats to LGA and will continue to upgauge its existing flights, there will be more and more movement in passengers from EWR back to LGA and JFK. Port Authority statistics show that LGA traffic is growing far fster than at LGA and JFK.

EWR is slot-controlled just like LGA and JFK so the only growth possible is by upgrading flights.

You have confirmed that AA hasn't fixed its fundamental strategic problems but instead has focused on cutting employee cuts in BK. AA has cut some non-employee costs in BK but the merger and the buying spree of new aircraft will undo most of those benefits.

Further, no one seems to want to acknowledge that a big reason for the huge buying sprees of airplanes by AA and UA is to reduce the size of the maintenance workforce.

 

[nycbusdriver]

EWR is quicker to get to from downtown Manhattan ...  than LGA, 

 
Total urban myth.