American's Raja has Tough Words for Rivals
- In a remarkably candid interview with Plane Business Banter founder Holly Hegeman, American’s strategy chief Vasu Raja explains why American is acting so aggressively relative to its peers, in terms of its schedule restoration. He looks back on American’s difficult past, particularly the 2001-to-2010 period, when it managed to avoid bankruptcy with hyperactive cost-cutting but at the expense of surrendering important competitive advantages, precluding its ability to benefit from moments of demand strength. One example he gives is shutting down its St. Louis hub, inherited from the old TWA. That “could have been the Charlotte of the midwest.” He adds: “When St. Louis was hot, that show was bigger than Chicago today for American Airlines.”
Fast forward to today, and Raja doesn’t want to follow the natural reaction in a crisis, which is to hoard cash, cut costs as much as possible, shut down hubs, and so on. The last thing American wants to do is throw away the 112% revenue premium it commands at its major hubs, apart from New York and Los Angeles. The latter two are more difficult markets for American, but a new pre-crisis alliance with Alaska should help in L.A. A restructuring of international flying finally produced profits in New York last year.
As Raja looks at competitor schedules right now, he sees Delta and United dismantling their hubs, destroying connectivity. American by contrast rebuilt its hub structure and sees domestic load factors running 70% this month. About 40% of all passengers recorded at TSA airport checkpoints nationwide are flying American. Can it make money with these passengers? Many are in fact price-insensitive, flying for emergency regions or an important life event like a wedding. At least as importantly, when oil was $35 a barrel, the airline’s break even load factor was something like 25%. At one point, at the oil market’s nadir, the breakeven load was just 9%! (Note: oil prices have been rising of late, posing a threat this aggressive strategy).
Raja of course acknowledges the need for cost cutting but thinks it can be done without gutting the carrier’s core strengths and hopefully without any morale-sapping layoffs. He sees leverage in its contracts with Boeing and Airbus. (“Nobody is scared of these guys anymore.”) Another important avenue for improving American’s prospects and ability to avoid layoffs: relaxing pilot scope restrictions, so that regional flying won’t have to shrink in tandem with mainline downsizing.
He has some tough words for rivals. Southwest? “This is not 2008. This isn’t a fuel advantage. And nobody is scared of these guys anymore. We certainly aren’t. Look, we can use basic economy to undercut them. They don’t even have the technology to match that.” Ouch. United, which made fat margins on international flying? “They are literally built to be big in what is now the wrong places.” And Delta? “These guys, if they don’t watch it, could be the new [bankruptcy-era American].” He adds: “Delta was yesterday’s genius. Tomorrow is up for grabs.”
- Emirates Chief Operating Officer Adel Ahmad Al Redha told Reuters that the airline needs to redefine its strategy in the post-pandemic world. Increasing visitors to Dubai, when borders reopen, will remain critical to the airline’s success. But “surely,” he said, “what used to work for us in the past is not going to work for us going forward.”
One change coming is a shift to smaller widebodies. For routes where narrowbody flying is more appropriate, a further deepening of cooperation with FlyDubai will help. But Emirates is not in talks to cancel any aircraft orders, including B777-9s that were supposed to start arriving next year — it’s now not clear when Boeing will be ready to deliver them.
Al Redha did say demand is trending up, with load factors reaching 50% on some flights. But most passengers right now are travelling for emergency reasons. Not until Dubai relaxes travel restrictions in July will Emirates get a true sense of the demand recovery.
Frontier Expects to Grow in 2021
- Edward Russell of The Points Guy checks in with Frontier’s CEO Barry Biffle, who said he’s pleased with the recovery so far. The ultra-LCC, based in Denver, expects to see flights roughly 70% full this month, significantly higher than what other U.S. airlines are expecting. Biffle said sales nearly doubled when it announced mandatory mask requirements earlier this spring. And it’s still the only U.S. airline checking every traveler’s body temperature before boarding.
It went a bit too far however, when it said travelers could pay a fee to have the middle seat next to them blocked. Biffle said the policy, which was quickly scrapped after a public outcry, created confusion. But blocking middle seats for a fee was something Frontier was studying even before the pandemic and it would like to reintroduce the idea in the future. By September, the carrier plans to be running about three-quarters of its pre-crisis capacity, which will rise to as high as 90% by year end.
With nine A320 NEOs still arriving this year (down from 15), Frontier is the one U.S. airline expecting to be larger in 2021 than it was in 2019. Its Q1 financial results, as recently-released government data show, were not good. It had the worst operating margins of any U.S. airline last quarter in fact. But with lots of capacity in outdoor leisure destinations like Florida, Arizona, and the mountain states, it’s been well positioned in the current recovery. That recovery, however, is now threatened by raging Covid outbreaks across the U.S. Sun Belt. What will happen moreover, when the natural summer peak fades to the always-much-quieter fall? And will the fall see a second wave of outbreaks in northern markets like New York, Boston, Chicago, San Francisco, and Seattle?
In a separate interview with Spirit’s CEO Ted Christie, Russell writes that the Florida-based LCC will operate one of the most robust domestic schedules among U.S. carriers in July, intending to fly about 86% of what it flew last year.