Merger network synergies to focus on improving yields, not capacity growth
American Airlines is sparing no time in rationalizing its route network following a healthy end to 2013. The American Airlines Group announced a profit of $436 million for FY2013, excluding special items, with an optimistic outlook to carry into 2014. American is eyeing Q1 EBIT margin guidance between +6-8%, in line with Delta Air Lines, which is resounding favorably among Wall Street analysts ahead of ongoing merger synergies.
The two carriers completed the final phase of their systemwide codeshare implementation on February 2, with the exception of American placing its code on US Airways’ nonstop flight from Tel Aviv, Israel.
American gradually assesses roles to be played by each hub in post-merger network
In January, American unveiled its detailed list of service cuts from Washington Reagan (DCA) and New York LaGuardia (LGA) airports slated to take place in coming months. In order to receive the green light to merge with US Airways from the US Department of Justice, American was required to relinquish 17 landing slot pairs at LGA and 52 at DCA. Included among the list of cuts from New York and Washington were services to larger metropolitan cities such as Atlanta, Cleveland, Minneapolis/St. Paul, markets where American competes against anywhere from 1 to 3 domestic carriers. Instead, American appears to be retaining links from the New York and DC metros to smaller cities within the perimeter ranges of both airports. The logic behind this is to target high-yielding O&D traffic between these regions and NYC/D.C
Elsewhere within its US network, American has announced plans to rebank schedules at its 3 largest domestic hubs, Dallas/Ft. Worth, Chicago O’Hare and Miami, which entails timing flights to arrive and depart within a narrow window in order to optimize connections. At current US Airways hub, Charlotte Douglas Int’l, American plans to add roughly 50 additional daily flights, increasing the number of departures to 700 from its current level of 650.
So far, no plans have been outlined for pre-merger US Airways hubs at Philadelphia nor Phoenix. Little has also been mentioned about Los Angeles, either, with the exception of the fact that the combination of AA and US will make the new American the largest carrier at LAX. However, AA President Scott Kirby did mention that LAX would be “nicely profitable” for American in 2014 given its grasp of the local premium market.
Premium transcontinental focus shifted to JFK with drawdown of LAX-Newark
American will pull its daily service from Los Angeles to Newark Liberty International airport on March 5, a long-standing route it has served since the late 1970’s. Current schedules display AA flights 116 and 119 to operate as a late-evening departure from Newark to LA followed by a morning departure from LA with an evening arrival into Newark:
AA119 EWR1825 – 2150LAX 738 D
AA116 LAX0835 – 1659EWR 738 D
American competes against United and Virgin America on LAX-EWR, a market whose importance has eroded over time to American. Prior to the United – Continental merger, it was a much more fragmented route, but once the merger closed, it converted into a hub-to-hub operation for the combined UA-CO entity. Virgin America entered the market with three daily flights between LAX and EWR in May 2013 following a winning bid to lease slots from American.
With a mere 8% market-share presence after Virgin America entered LAX-EWR, American likely decided the route was no longer worth pursuing given the fare pressure created by a new low-cost carrier entrant. American’s transcontinental services on its new premium cabin-retrofitted A321Ts generate far more high-yielding O&D traffic within the highly-competitive New York to Los Angeles corrdidor. With the vast majority of the Los Angeles – Newark market deflecting to United, and now having to compete against Virgin America for share, it makes little sense for American to stay present on the route. Allegedly, early returns on the new A321T product have been very good in the New York market, and with American becoming the largest carrier in LA post-merger, the elimination of the Newark route will have little impact on its overall presence in NY-LA.
International network changes begin with cancellation of Charlotte – Rio de Janeiro
American will be discontinuing service operated on US Airways from Charlotte to Rio de Janeiro, Brasil, approximately five years after it celebrates its 5th anniversary in early 2015. The route alternates between a 767-200 from late March through late October and then reverts to an Airbus A330-200 during the winter season, where demand to Rio generally spikes due to the Southern Hemisphere summer timetable and Carnaval festivities.
US Airways also flies from Charlotte to Sao Paulo on a Boeing 767-200 (soon to be up-gauged to an Airbus A330-200), a route which it launched in June 2013 (after many logistical delays). So far, no plans have been revealed to cancel the Charlotte to Sao Paulo services, despite rumors that it was also on the chopping block as well.
The Charlotte to deep South America connections make sense for US Airways on a standalone basis, but not in a post-merger scenario with American’s Latin American gateway hub in Miami. The carrier has so far not announced intentions to back-fill capacity to either Brasil from any of its other hubs once Charlotte – Rio becomes offline, despite earlier speculation that the aircraft would be sent to Miami used to create a new Miami – Rio route.
However, that scenario is unlikely given that American plans to accelerate the retirement of US’ aging 767-200s. Miami is also connected to Rio via two daily roundtrip flights on American and a daily flight on TAM, which will be joining the OneWorld global alliance in a few weeks. Furthermore, Rio de Janeiro Anton Jobim Galeao airport is not a landing-slot controlled airport, and with US-Brasil Open Skies taking place in 2015, American does not need to worry about putting the Charlotte – Rio frequency to use. Sao Paulo is a different story as it is a landing slot-restricted airport, and American is likely taking a more conservative approach to weighing its options in the Charlotte to Sao Paulo sector given that the route may prove its worth to the American network as it matures over time.
The discontinuation of Charlotte to Rio is likely one of several pre-merger US Airways routes from CLT to the Latin America and the Caribbean that may be terminated, or moved to create additional capacity at Miami.
Charlotte will also likely experience a reduction in transatlantic services as well now that combined merger will have four gateway hubs located along the Eastern seaboard as opposed to two for each carrier. US Airways has been gradually adding transatlantic capacity at Charlotte year-over-year, although it is highly seasonal and generally lasts only during short winter month periods. OAG capacity shows that capacity from Charlotte to Europe has nearly doubled in size between summer 2011 and summer 2014, with US offering up to 10 peak-day nonstop services across the Atlantic to London Heathrow, Frankfurt, Paris, Madrid, Dublin, Rome, Brussels, Barcelona, Lisbon and Manchester (UK). The latter four markets will be introduced for the first time starting in May/June of this year, and all of the above markets, with the exception of London and Frankfurt, are only served on a seasonal basis from Charlotte.
It is unlikely that American will continue with this same volume of transatlantic flights, even on a seasonal basis. In a pre-merger scenario, the routes are justified given US Airways’ low-cost structure. However, the AA merger creates major redundancies while also creating a higher cost structure, which spells the difference between a profitable/break-even route and a loss-making/marginal route.
American has been tight-lipped about further international route adjustments out of Charlotte, saying that its, “too early to tell,” particularly in reference to the new summer routes. The good news is, Charlotte has a summer to test them out and see how they perform. The bad news is, it will only be one summer on record, whereas a more storied-history of solid performance may serve the airport more favorably. Then again, that did not seem to bail out the Charlotte to Rio route.
The focus on Asia will not be overlooked
American will have its hands full as it rolls out its domestic hub strategy and grooms its Latin American and transatlantic operations as the two carriers slowly become one entity. On a combined basis, Latin America represented American and US Airways’ best performing entity during 4Q 2013, with an 8% increase in yields and a 9% increase in revenues, year-over-year. Those numbers are likely to only strengthen even more when TAM Airlines joins the OneWorld alliance in March 2014. Across the Atlantic, American posted 7% unit revenue growth and a 7% rise in yields for 4Q 2013.
However, looming in center stage is American’s very weak situation in Asia. For 4Q 2013, passenger revenue per available seat mile was down 6% and yields were down 4.5%. Although this number is an improvement from prior years, and competitors Hawaiian Airlines, Delta and United have similarly been struggling in the transpacific market, American has acknowledged there is work to be done.
There has been much buzz about upcoming growth out of DFW airport to Hong Kong and Shanghai. While the Hong Kong route is sure to be a success, as it is the base of OneWorld partner Cathay Pacific, Shanghai will be a bit more challenging. However, Executives appear to be optimistic about the long-term viability of the route, encouraged by the slot times allocated to American by the CAAC.
Bankruptcy has allowed American to shore-up its balance sheet and reduce overhead costs to enable Asia-Pacific growth. More critically, American will be reconfiguring its 777-200s from a 3-class configuration to a 2-class format with Business and Economy, which should help reduce premium capcity in line with current market demands.