It seems like the continuous “good-news, bad-news” cycle repeats itself for US legacy carrier American Airlines this week as the airline had mixed reports in the media on its overall health as it restructures in Chapter 11 bankruptcy protection.
Let’s start with the positive components. Revenue performance, per usual, continues to output commensurate results with American’s legacy peers. Although during Q1 AA recorded a loss of USD $1.7 billion and USD $248 million excluding restructuring and other special items, revenues increased 9.1% year-over-year to $6 billion when compared to Q1 2011. Latin America continues to be American’s strongest bright spot as unit revenues grew 10.8% in Q1 coupled with a 5% rise in capacity.
Yesterday, American unveiled its plans to overhaul its long-haul in-flight product offered on board its existing fleet of Boeing 777-200ER and Boeing 767-300ER aircraft. The Boeing 777-200ERs will be redesigned from a three-class cabin configuration to a two-class layout, thereby eliminating the first class section altogether. The carrier will install 45 new fully lie-flat Business Class seats with “up to two times more living space” than on American’s current 777-200ER Business Class seats. Each will have direct aisle access, as well as the traditional hardware such as a 15.4-inch in-seat entertainment high-definition touch screen, a universal AC power outlet, USB ports, and access to a fully-stocked bar at the front of the aircraft.
In the main cabin, American will add 45 Main Cabin Extra seats, with 4-6 additional inches of legroom, and along with 170 regular coach seats, each will offer passengers in-seat entertainment on a 9-inch HD touchscreen, universal AC power outlets, and a USB jack.
Extra: See what’s going on at American with its, ‘Fly Better, Feel Better’ campaign.
American will retrofit half of its Boeing 767-300ER planes to include 28 fully lie-flat Business Class seats, again each with aisle access. The carrier will NOT install in-seat touchscreens, but rather offer Samsung Galaxy Tab 10.1 devices to offer movies, TV and audio selections for premium passengers. Fourteen Main Cabin Extra seats will be added to coach, but these, alongside the remaining 167 economy class seats, will continue to utilize overhead monitors instead of personal tv screens.
These changes are expected to be implemented in early 2014. However, even as they are phased in, the ten Boeing 777-300ER series aircraft deliveries, which are slated to arrive later in 2012, will continue to offer First Class.
The changes to the 777-200ER series reflect the shift in global appeal for International First Class, which, given economic realities, no longer provides a sustainable advantage given that few passengers actually pay the full-fare for first class seats. It is no secret that American’s current 777 layout, which features 16 First Class seats (with a lie-flat bed), 37 business class seats (with an angled lie-flat bed) and 190 main cabin seats, is too premium-seat heavy, with a large portion of the First class seats being filled with mileage-burners, upgraded elite fliers, or non-revenue passengers, which obviously do not adequately cover the costs of the services.
With the revamped cabin configurations, American will enjoy greater flexibility with its 777 fleet, potentially paving way to upgrade certain international routes served on the older 767-300ER planes. Routes such as Dallas/Ft. Worth to Paris/Madrid/Frankfurt, Miami to Madrid/Rio de Janeiro, Chicago-Rome, or New York to Paris, all seem like ripe candidates for the new 2-class 777, given the higher-density seating capacity to help optimize revenue. Or, quite possibly, the new 777s can be used to open up untapped routes such as DFW-Seoul or New York-Tel Aviv, or re-attempt previously discontinued routes such as Chicago to Moscow.
Meanwhile, the top-tier business markets in American’s long-haul network that still merit the demand for International First, such as Tokyo, London and São Paulo, Brazil, will continue to see that need met once the 777-300ER frames arrive, as they will continue to offer International Flagship First.
American has also broadly stated a few business plan updates on its restructuring plans. One of the measures it intends to take is to grow international capacity, up from a 38/62 percentile ratio (Int’l to Domestic) to 44/56%. Domestic capacity growth will remain flat until 2014. Among the target regions for growth include Latin America and Asia, although arguably Latin America continues to provide the most promising market performance relative to AA’s other international regions. American has scaled back its capacity to Europe by 5%, which made room for 6.5% revenue growth. In Asia, the carrier cancelled its nonstop Chicago to Delhi flight back in March, and has only announced three new Asian routes over the past 5 years, including Los Angeles to Shanghai, Chicago to Beijing and New York to Tokyo Haneda airport, of which the latter two encountered a certain degree of “start-up difficulties” at the time of their respective launch dates, but have since been smoothed over.
However, even with growth plans in place for international flights, American’s cost disadvantage remains a real, formidable challenge. At the time of earnings announcements, American was only slightly outpaced by rival carriers Delta Air Lines and United Airlines, which each posted USD $8.6 billion and $7.2 billion in revenue, respectively. Delta achieved 10% YoY revenue growth, while United actually only achieved 4.9% growth, thereby falling behind American.
The key difference is that these carriers continue to turn profits while AA records substantial losses due to its high cost base. Arguably, United will also continue to see an uptick in revenue performance as it shakes the bug of merger integration issues that arose during Q1 from its new passenger services system cutover with Continental which occurred back in March.
On the periphery, American is taking the right steps by upgrading its cabin interiors and re-allocating capacity in the right markets to grow its revenue streams. Nevertheless, American appears to “beat the same old drum” when it comes to explaining its inability to compete in markets which have become saturated with low-cost carrier competition. American claims that of its 50 top markets, 49 face LCC competition. Trends indicate that when American fails to match lower fares, it loses out on traffic, yet when it does match rival fares, it lowers yields and profitability.
Yet, to me that explanation seems to dodge a veritable fact: all of AA’s rival legacy competitors, even including industry darling Southwest Airlines, are facing increasing LCC competition in their top markets. Yet, each of these carriers are able to turn profits. Again, this brings cost-base issue into the spotlight. Many of these competitors, with the exception of Southwest, have managed to lower their cost bases through bankruptcy protection. Southwest, of course, has always maintained a low-cost business model since its inception.
As such, key to the turnaround for American will be reconciling its labor woes. At the very helm of AA’s problems, its employees seem to be urging the board of directors to consider a merger with US Airways now instead of waiting to emerge from bankruptcy.
It’s never a good sign when the management of an airline and its three largest unions appear to be looking at different sides of the coin. In essence, the unions feel that the ‘standalone’ business plane AMR management has outlined as part of the Chapter 11 restructuring are ‘unsustainable’ and a merger plan with US Airways represents, ‘a better path for the airlines’ future.’
Again, it goes back to the cyclical motions: as American’s leaders continue to make sweeping changes to the brand, the other half simply looks in the opposite direction.
At the end of the day, it’s all about AA playing catch-up: United and Delta have 5+ years of a leg-up over American in terms of turnaround efforts. Certain moves like installing a premium economy cabin, pushing for growth overseas, renegotiating expensive labor contracts through the courts, and focusing on capacity growth in promising markets, while reducing loss-making concentrations in other ones, each represent key visionary moves to achieve profitability.
American can afford to have “slightly missed the boat” on some of those items, but arguably the real error of judgment came from ignoring its cost base, and allowing labor relations to continue to rot on the side. Unfortunately, the pressure is mounting from its unions to do something about that fast, and even more cumbersome, the proposed strategy involves a tie-up with another airline.
That, my friends, is a far larger challenge for AMR management to contend with than simple cabin refurbishments and route cancellations. Despite promising, exciting milestones ahead for American, the unions do not seem to wish that the current leadership team see through those delivery dates.
Whether or not the AMR management sees a merger with US Airways as necessary for the future viability of the carrier remains an unanswered question. Regardless, the immediate need at hand is to reconcile the differences in vision between the two parties, before it is too late.
AMR Press Release: American Airlines To Refresh Its International Widebody Fleet
SkyTalk/Fort Worth Star Telegram: American updates employees on its restructuring plan
Chicago Tribune: American Airlines unions ask board to consider merger now