American Airlines Offsets Higher Regional Costs With More Connections, Higher Fares

Photo credit:  Flickr / risingthermals

American Airlines Chief Commercial Officer Vasu Raja made clear Tuesday how the carrier plans to make its new industry-leading regional pilot pay rates work: higher passenger yields or, in other words, fares.

“The value we’re able to go and create, especially [with] the regional network, has less to do with the expense profile of a regional jet and really everything to do with the yield profile of being able to go and serve a ton of these really unique markets,” Raja said at a Raymond James investor conference.

By American’s own count, it offers travelers roughly 30 percent more unique connection pairs — for example, Charlottesville, Va., to Tucson — across its U.S. network than its main competitors, Delta Air Lines and United Airlines. And, in any market where one company has limited competition, the airline is able to generate higher passenger yields, particularly in smaller destinations, than its competitors.

That is certainly what investors want to hear from American. In June, the airline agreed to historic pay increases for pilots at its three wholly-owned regional affiliates — Envoy, Piedmont Airlines, and PSA Airlines — that brought rates, at least for the next two years, in line with entry-level rates for pilots flying at American mainline. The move, according to American executives, was needed to address the pilot shortage faced by many U.S. regional airlines. But higher cockpit crew member pay also means higher expenses.

Compared to 2019, American forecasts a 12-14 percent jump in unit costs excluding fuel and special items, which includes pilot pay, in the third quarter. However, to Raja’s comments about higher yields, the airline anticipates a 20-24 percent increase in total unit revenues during the same period — an increase that would more than offset the higher costs.

Those higher yields will come in handy when American adds a new regional affiliate next year. On August 22, it unveiled a new agreement with Air Wisconsin to operate up to 60 Bombarder CRJ200s under the American Eagle brand. Air Wisconsin, which currently flies for United under a contract that expires in February, will ramp up flying with 40 CRJ200s from March through October. Another 20 aircraft could be added to the agreement if the regional airline meets “certain minimum block hour utilization thresholds.”

The addition of so many additional 50-seat regional jets at American comes as most U.S. airlines are focused on phasing out the aging and inefficient aircraft. A United spokesperson, when asked about the end of the Air Wisconsin agreement, pointed to the airline’s order for 270 new narrowbody aircraft last year and said the carrier plans to “fly more larger narrowbody aircraft within our domestic network” — and fewer small regional ones.

A spokesperson for American, when asked if the Air Wisconsin aircraft would replace any existing regional feed — currently flown by higher-cost Envoy, Piedmont, or PSA, for example — said the additional CRJ200s would “supplement,” and not replace, existing regional flying. The new aircraft will primarily be based at American’s Chicago O’Hare hub.

Still, in a world where fuel prices are likely to remain relatively high and other costs are only going up, it is difficult to see American maintaining a regional fleet of more than 150 50-seat jets for long. Envoy and Piedmont flew 107 Embraer ERJ-145s at the end of last year, according to American’s latest fleet plan. The Air Wisconsin deal could be a harbinger of further changes at American’s affiliates.

In the meantime, American will continue to push more U.S. domestic connectivity over its hubs — particularly Charlotte and Dallas-Fort Worth — relative to its competitors, Raja said. This, in his view, will support the airline’s aim to continue to grow unit revenues, or RASM.

“We have competitors who can fly to islands off the coast of Africa and, presumably, they do great at it,” he said in a nod to United’s seasonal service to Tenerife in the Canary Islands this summer. “It’s not a thing that American Airlines historically made money doing. But we have the biggest and best domestic short-haul network, and we’ll always preserve that.”