Issue No. 905

American Plays Catchup

Can the Largest U.S. Airline Ever Be as Profitable as Delta and United?

Pushing Back: Inside the Issue

Welcome to the second quarter of 2023. The first quarter is now in the books, with the stronger spring and summer seasons approaching in most major geographies. First quarter earnings season will begin next week, with Delta kicking things off on Thursday, April 13.

One airline to watch this earnings season is American, which for years has lagged Delta and United in terms of profitability. As this week’s feature story discusses, American has several key areas of weakness in its flight network, which it’s attempting to address with strategies ranging from partnerships with other airlines to operating with a simpler fleet. Importantly, American is doubling down on places where it’s strong (i.e., Dallas-Fort Worth and Charlotte) while shrinking drastically in places where it’s weak (i.e., Chicago, Los Angeles, and Philadelphia). Will these efforts bear fruit?

Efforts by Avianca to buy Viva Air (which is no longer flying) are alive again. That’s as Colombia faces a shakeup in its airline sector, with the startup Ultra Air now joining Viva on the ground and Copa angling to enter the fray with Wingo. JetSmart displayed an interest in the market by nearly buying Ultra Air. And don’t forget about Latam, whose aggressive expansion has helped make Colombia one of the fastest growing airline markets in the world since the days before Covid.

Speaking of fast growing markets, Istanbul is attracting more low-cost carriers. Smallish U.S. cities like Erie, Pennsylvania, however, are not; United is now exiting the market. Charleston is a market that’s both growing rapidly and shrinking rapidly — it just depends on which Charleston you’re talking about. The one in South Carolina is booming, not least thanks to Boeing’s big factory there. But it’s the troubled city in West Virginia where Breeze Airways will undertake an expansion. And yes, one of its new routes is Charleston to Charleston.   

Airline Weekly Lounge Podcast

Lufthansa is closer than ever to a deal for Italy’s state-owned carrier, Alita…, err, ITA Airways. But can Lufthansa turn loss-making ITA into a gem? That remains to be seen. Plus, the Istanbul Airport’s impressive growth. Listen to this week’s episode, and find a full archive of the Lounge here.

Weekly Skies

Southwest Airlines will do everything from acquiring more deicing trucks in Chicago and Denver, to upgrading its internal technology and communications systems by this winter to avoid a repeat of its massive holiday flight meltdown.

In a report last week by the Dallas-based carrier’s board and independent advisor Oliver Wyman, Southwest outlined three broad areas where it is making improvements to avoid a repeat of last Christmas and New Year’s fiasco. Investments are focused in three areas: Winter operational readiness, technology, and internal collaboration. Of 13 specific actions, the airline has only completed three with the balance set to be done before the end of the year.

“With this plan in motion, we can move forward and focus on continuing to deliver the reliable operation, high-quality customer service, and legendary hospitality that Southwest is famously known for,” CEO Bob Jordan said in an email to loyalty plan members.

The report is the latest on what occurred when the airline cancelled more than 17,000 flights between Christmas and New Years and disrupted the trips of tens-of-thousands of travelers. The situation generated outrage among the public and officials alike, with even President Biden tweeting that the airline would be held “accountable” for the situation.

In the report, Southwest said it had refunded, reimbursed, and returned lost luggage to more than 99 percent of travelers affected by the holiday meltdown.

A timeline of Southwest’s holidays 2022 meltdown and recovery. (Southwest Airlines)

The cancellations, during one of the busiest travel periods of the calendar in the U.S., cost Southwest $850 million in the fourth-quarter alone and pushed it to a loss for the quarter — a period when most other airlines made money. It will likely accrue additional costs related to the event throughout the year, with analysts warning that some travelers could book away from the carrier in the first and second quarters.

At a U.S. Senate Commerce, Science, and Transportation Committee hearing in February, Southwest Chief Commercial Officer Andrew Watterson acknowledged that the airline had “messed up.” He described the carrier’s winter-weather preparedness as “insufficient” ahead of Winter Storm Elliott that affected a large swath of the U.S. in the days before Christmas, and precipitated Southwest’s meltdown.

The report affirms Watterson’s statements with most of its action items centered on improved winter weather operations. Southwest will acquire more deicing trucks, increase its stocks of deicing fluid, and secure more deicing “pads” — airport parking spots away from the terminal where planes can be deiced — in preparation for future storms. Investments will be focused at the Chicago Midway, Dallas Love Field, Denver, and Nashville airports. The airports are four of the eight busiest by departures in Southwest’s system; Denver is its busiest with up to 270 daily departures, according to Diio by Cirium schedules.

Whether the action items outlined are enough to avoid future meltdowns is unclear. Elliott, which stretched across the entire continental U.S. in the days before Christmas, affected operations at every U.S. airline but only Southwest was unable to recover. More winter weather preparedness will undoubtedly help the carrier, but the preventing operational distress takes more than just equipment, and the support of the entire airline. One only has to look to Delta Air Lines to see a carrier that has made operational reliability a company-wide ethos.

“This began with chronic ground support personnel shortages and excessive reliance on mandatory overtime, then cascaded into the flight and crew scheduling operations,”said Bob Mann, an adviser at R.W. Mann & Company and former airline executive. Southwest should have already known the answers in the report, he added, calling the engagement of Oliver Wyman a “virtue-signaling exercise.”

“Will it be enough? Time will tell … Planning is important, but ultimately, execution matters,” Mann said.

Somewhat surprisingly, technology investments are not the largest action item for Southwest in its report about the meltdown. The role of the airline’s crew assignment system, known as SkySolver, was an initial focus as a potential cause of the situation. The system, which did play a role among numerous other factors, was upgraded in February. Southwest lists two remaining technology-related action items: enhancing crew notifications and system recovery functions.

Southwest will make $1.3 billion in technology-related investments in 2023. The number, while up from roughly $1 billion in 2019, is unchanged from the beginning of the year.

Other areas where the carrier will make improvements this year include pulling down team silos, and enabling more coordination and communication. This should allow Southwest to better coordinate and respond to future operational crises.

“We will not allow a week in December to define us; but we will continue to learn from what happened and be better because of it,” the airline said in the report.

Edward Russell

Lufthansa Seeks Discount on Loss-Making ITA

Italy’s state-owned ITA Airways unveiled a massive net loss for 2022, amounting to nearly half a billion U.S. dollars. The company blamed heavy losses early in the year when Covid was still holding back travel demand, but also cited a worsening U.S. dollar-euro exchange rate, rising fuel costs, and the outbreak of the Russia-Ukraine conflict.

The losses are hardly a surprise. Prior to creating ITA in 2021, Italy’s government searched in vain for decades for a solution to the problems that plagued ITA predecessor Alitalia. Year after year, the state-owned airline lost extraordinary sums of money, burdened by high costs, labor strife, political interference, and relentless low-fare competition. During the global financial crisis of 2008, Rome privatized Alitalia, with a quarter of the airline winding up in the hands of Air France-KLM. Faced with bankruptcy a few years later, Etihad Airways stepped in with a large investment. This too ended in tears — Alitalia would file bankruptcy for a second time in 2017. Not long after the start of the Covid crisis in 2020, Alitalia was back under full government control. Officials subsequently shut the carrier down while passing some of its assets and employees to a new entity called ITA Airways.

According to Reuters, Alitalia — during the 11 years through 2020 — cost the Italian government nearly $11 billion to sustain. With ITA, the plan from the beginning was to privatize it as soon as possible. Despite the ugly legacy of Alitalia, several parties expressed interest, enticed by the prospect of capturing Italy’s lucrative longhaul traffic to markets like North America. For all of Alitalia’s many problems, one area of the company that typically performed well was its network of routes to the U.S., operated for many years as a joint venture with Air France-KLM and Delta. Air France-KLM and Delta, sure enough, were among those interested in acquiring a stake in the new ITA.

It was Lufthansa, however, that submitted a formal offer. In January, the German-headquartered airline said it would initially buy a minority ownership stake in ITA, along with options to purchase the remaining shares at a later date. But the offer was subject to negotiations about price and other matters. Those negotiations are ongoing. At an Airlines for Europe (A4E) industry event in Brussels last week, Lufthansa CEO Carsten Spohr expressed hope that a deal could be done before a deadline at the end of this month.

In the meantime, ITA will operate a spring schedule that features about 30 international destinations, including the U.S. cities of Boston, Los Angeles, Miami, New York, and Washington Dulles, all from Rome, according to Diio by Cirium schedule data. It offers New York nonstops from Milan as well, along with longhaul Rome service to Tokyo, Delhi, Sao Paulo, and Buenos Aires. ITA remains Italy’s second largest airline by scheduled seats this quarter, Diio shows. But it’s far smaller than Ryanair, which counts Italy as its largest country market overall. Ryanair serves just shorthaul markets within Italy and greater Europe.

As for ITA’s fleet, it currently flies 66 Airbus planes, according to Cirium Fleets Analyzer. Most are A320-family narrowbodies but for longhaul flying, it has seven A330-200s and six A350-900s. It has another 65 planes on firm order, including A320neos, A321neos, and A330neos. Its order book also includes A220s.

Naturally, Lufthansa is seeking a bargain price for ITA, whose net loss margin last year works out to a ghastly negative 31 percent. Spohr told Flightglobal that the losses need “to be reflected in the valuation.” The Italian carrier itself says revenues will show “further substantial growth” this year, separate from any takeover to which it might be subject. Management also promises “a significant improvement in the expected operating result.”

Lufthansa is not paying much attention to that. It surely understands ITA’s shortcomings and hardly sees it as a potential profit generator in its own right. The idea instead is that these shortcomings would be outweighed by contributions ITA could make to the overall Lufthansa Group network, feeding longhaul traffic through Frankfurt, Munich, Vienna, and Zurich, for example. It would also gain access to ITA’s loyalty plan and aircraft order book. Lufthansa currently owns a smaller Italian airline called Air Dolomiti, which could potentially be merged with ITA, thus further amplifying Lufthansa’s Italian clout. The German airline has said repeatedly that Italy is its second most important market after the U.S., excluding its home markets Germany, Switzerland, and Austria.

Jay Shabat

Avianca Unsure of Colombian Conditions on Viva Merger

Colombian authorities have tentatively approved Avianca’s proposed merger with bankrupt Viva Air under strict conditions following alleged antitrust violations by the legacy carrier.

Aerocivil, Colombia’s civil aviation regulator, approved the deal earlier in March with a number of conditions. They include resurrecting Viva, which shut down on February 27, as its own standalone discount brand; refunding tickets for all passengers affected by the shutdown; and giving up slots at the congested Bogotá airport to competitors. Most of these are the standard fare when it comes to mitigating the impact of airline mergers that concentrate capacity in the hands of one carrier or group.

But Avianca, after months of arguing its case to merge with Viva — and even offering some concessions in exchange for approval — is not simply accepting the approval and getting on with things. “We will analyze in detail the feasibility of conditioning in light of what is Viva today. That company no longer has the same capabilities in terms of route network, aircraft, and workers,” Avianca CEO Adrian Neuhauser said in a LinkedIn post following Aerocivil’s decision.

The key difference appears to be the fact that Viva is not a going entity anymore. Maintaining the brand would require restarting the airline and that would likely require more capital than Avianca budgeted for— capital that Avianca may not have following its emergence from U.S. Chapter 11 bankruptcy restructuring in late 2021.

But the harsh conditions come into a new light given the recent revelations that Avianca may have violated Colombian antitrust law in its takeover of Viva. Numerous local media outlets have reported that, following Avianca’s purchase of Viva early last year, it installed a board loyal to its own interests at the ultra low-cost carrier despite repeated assurances that it had no say over commercial matters at the airline. What’s more, reports suggest that Viva had several options to avoid the bankruptcy and shutdown that occurred earlier this year but the Avianca-backed board pursued a strategy that it believed would force Aerocivil to approve the merger.

Aerocivil made no mention of Avianca’s plan to merge with Brazil’s Gol under the new Abra Group holding company, or a South American equivalent to IAG in Europe. The creation of Abra would allow its airlines to better compete with the region’s largest carrier, Latam Airlines. Gol executives said earlier in March that Abra would officially be established in April, while the consolidation of both airlines’ economic interests in the group would take more time and antitrust approvals. In addition to Avianca, Gol, and Viva, Abra could also eventually include Chilean discounter Sky Airline.

All of these deals, plus an American Airlines investment in JetSmart and Delta Air Lines’ stake in and partnership with Latam, have made Latin America one of the most dynamic aviation markets in the world. United Airlines has a stake in Avianca following the airline’s bankruptcy.

Colombia is of particular interest to airlines because of its sheer size. The country is Latin America’s third largest aviation market behind Brazil and Mexico, according to data from regional trade group ALTA. In 2022, Colombian domestic passenger numbers were up 20 percent from 2019 levels to 47.9 million.

Aerocivil’s movement on the Avianca-Viva merger comes amid other changes in the Colombian market. Chilean discounter JetSmart, which is backed by U.S. private equity firm Indigo Partners, plans to launch domestic flights in Colombia following the receipt of a local air operators certificate earlier in March. JetSmart, which had expressed interest in acquiring Viva, dropped plans to buy Colombian discounter Ultra Air on March 23 citing “various factors.” Ultra Air suspended operations on March 30.

Ultra Air was Colombia’s third largest airline — fourth if including bankrupt Viva — by seats, according to Diio by Cirium schedules for March. Avianca is the country’s largest airline followed by Latam.

JetSmart’s launch in Colombia — it currently serves Bogotá, Cali, and Medellin from Chile — would add low-cost competition from a new competitor. That could help make up for the potential loss of Viva and Ultra if the latter faces continued difficulties. JetSmart would also stand to benefit from any slot divestiture by Avianca and Viva at Bogotá’s El Dorado airport.

Latam also continues to grow in Colombia. Earlier in March, it notified Aerocivil of plans to launch daily service between Bogotá and Riohacha, and Medellin and Miami with Airbus A320-family aircraft later this year. The airline, whose investors include Delta and Qatar Airways, plans to operate nearly 24 percent more capacity that touches Colombia in the second quarter than it did last year, Diio schedules show. Latam’s Colombia capacity in the period will be up nearly 40 percent compared to 2019.

Avianca, for its part, has said it can appeal Aerocivil’s decision on the proposed Viva merger. Until it either accepts the conditions or appeals them and receives a subsequent decision, Avianca said it is “not authorized to intervene in the operational or financial situation of Viva.”

Edward Russell

In Other News

  • The European Union’s Director General of Mobility and Transport, Henrik Holelei, stepped down on March 31 after an uproar over his acceptance of free flights from Qatar while the bloc was negotiating an open-skies treaty with the Gulf country. The free flights, which were uncovered by Politico, comes amid the larger “Qatargate” scandal in Brussels where there are allegations that Qatar bribed European Parliament lawmakers.
  • ALTA, the trade group for Latin American airlines, raised concerns about the situation in Colombia last week. The group highlighted high taxes, as well as the devaluation of the Colombian peso against the U.S. dollar and high fuel prices, for a 1 percent year-over-year decline in domestic passenger numbers in January. ALTA called on the Colombian government to significantly reduce value added tax (VAT) on airline ticket sales to help boost passenger numbers. The group did not draw a connection between the drop in passenger traffic and the subsequent closures of Viva Air in February and, now, Ultra Air. Viva and Ultra operated 22 percent of domestic Colombia seats, and almost all of the ultra low-cost carrier seats last year, per Diio.
  • Speaking of political fueled changes, Southern Airways Express‘ foray into the Northern Mariana Islands, Marianas Southern Airways, with Tecnam P2012 Travellers appears over after less than a year. The airline will end flights on April 1 after the governor of the Northern Mariana Islands, Arnold Palacios, cancelled its $8 million contract with the airline in February saying there was “just no money” for the deal. The contract had been signed by the administration of former governor Ralph Torres whose term ended in January.
  • On the labor front, United and the International Association of Machinists & Aerospace Workers (IAM) last week reached an agreement in principal for a new contract covering more than 30,000 staff at the airline. The two-year agreement, if ratified, includes wage increases, as well as bringing outsourced ground staff positions in Atlanta, Colorado Springs, Miami, Raleigh-Durham, and Salt Lake City in house. And two pilots union announced strike authorization votes last week: the Allied Pilots Association (APA) at American, and the Air Line Pilots Association (ALPA) at WestJet. Both votes will be held in April.

Edward Russell

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Routes and Networks

  • Copa Airlines did something unusual the other week. It notified Colombia’s regulator Aerocivil that it its budget subsidiary, Wingo, plans to begin four domestic routes in the country. A Copa-owned carrier flying domestically in Colombia? What is it 2010, you may ask? Copa Colombia, neé AeroRepública — and today Wingo — previously flew domestic routes in the country but the network was dismantled in favor of additional flights feeding Copa’s Panama City hub in the first half of the 2010s. The routes in question are: Bogotá to Barranquilla, Bucaramanga, Cúcuta, and Pereira all of which would be flown daily with a Boeing 737-800, per the Aerocivil filing. Copa’s move may be a response to the shut down of Viva Air on February 27, and Ultra Air on March 30; the discounter flew all four routes prior to closing its doors. The closure is the only major market change since Copa CEO Pedro Heilbron said on February 16 that the Colombian market was “very competitive” and faced “overcapacity.”
  • Frontier Airlines last week unveiled five new seasonal routes this summer. The ULCC will connect Chicago Midway to Raleigh-Durham and San Francisco; Orlando to San Francisco; and Phoenix to Houston Bush and Tampa with flights beginning in May or June and operating through at least August.
  • Breeze Airways named its latest new destination last week: Charleston, W.V. Flights to the West Virginia capital will launch on May 31, initially with nonstops to Charleston, S.C., and Orlando, under a new “partnership” between the airline and state. That partnership, which includes revenue guarantees for the airline, covers at least three more yet-to-be-announced Breeze routes from Charleston, W.V., including to New York. Spirit Airlines previously flew the Charleston, W.V.-Orlando route under a past partnership with the state.
  • Route tidbits: American is suspending its Philadelphia-Madrid nonstop in May and June because of more Boeing 787 delivery delays, The Wall Street Journal reported. The airline pulled a number of international markets last year, including exiting Hong Kong, due to previous delays receiving new 787s. United will end service to Erie, Pa., and Springfield, Ill., on June 2 due to the pilot shortage. The cuts bring the total number of markets exited by either American, Delta, or United since April 2020 to 71, per Ailevon Pacific Aviation Consulting. Avelo Airlines is adding two more routes from Wilmington, N.C., to Florida: Tampa and West Palm Beach nonstops begin June 22.

Edward Russell

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Landing Strip

Wizz Air’s inaugural flight to Istanbul Airport, Europe’s busiest for three years running, arrived to wet and gray weather last week. Not the preferred welcome for a new airline at an airport that is eager for growth.

But the Hungarian discounter, along with many of its peers, has a very different forecast for its new Istanbul service: Bright and sunny with room for growth. Wizz complemented its maiden sortie from London’s Luton airport with a flight from nearby Gatwick later on March 28. Budapest flights began March 28, and Iasi, Romania, flights on April 6, according to Diio by Cirium schedules. AirBaltic joins Wizz in adding Istanbul to its map on April 2, and EasyJet lands in June. A nice haul of new airlines for one (major) airport in such a short period.

At least 15 airlines have added Istanbul’s main airport, on the European side of the Bosphorous (there’s another airport called Sabiha Gökçen on the Asian side), to their maps since the beginning of 2023, Diio data show. That includes Arkia Airlines and El Al from Israel, and Flyadeal from Saudi Arabia. Combined, seat capacity at the Istanbul airport will be up more than 19 percent in the second quarter compared to the same period in 2019.

Much of that growth is, of course, driven by Turkish Airlines, which operates a large hub at the Istanbul Airport. The carrier is scheduled to fly nearly 20 percent more seats in the second quarter — equal to 81 percent of the airport’s total seats — than it did four years earlier, according to Diio. Turkish has outlined plans to add at least 25 destinations, including Denver, Iasi — watch out Wizz — Osaka Kansai, Rio de Janeiro, and Sydney, to its map this year and in the future.

But Turkish’s primary focus is on expanding its already robust connecting hub in Istanbul, which rivals Gulf hubs in Doha and Dubai for connectivity. That has left the Istanbul Airport “under-served” when it comes to point-to-point and budget airlines that bring travelers to Istanbul itself, airport CEO Kadri Samsunlu has said.

“With the entry of Wizz Air, EasyJet, Flyadeal and AirBaltic, among others, we expect to stimulate our market within [point-to-point] potential and increase awareness around Istanbul as a city break destination,” Samsunlu said.

Both EasyJet and Wizz in separate statements on their new routes to Istanbul highlighted its cultural attractions, as well as connectivity to the city.

The opening of the Istanbul Airport in April 2019 also appears key in landing the new airlines. The facility replaced the former Ataturk airport, which was capacity constrained and offered limited opportunities for budget carriers to add flights. And the Covid crisis, which began less than a year after the Istanbul Airport opened, likely delayed any planned launches.

An AirBaltic spokesperson cited “slot availability,” as well as other factors, in driving the Riga-based airline’s decision to add Istanbul to its map. The carrier plans to operate its largest-ever network this summer.

Asked what air service incentives the Istanbul Airport offers, Samsunlu said none but that it does focus on keeping base fees low in order to attract new airlines. The airport does offer new carriers support for local sales and marketing campaigns to promote their brands in Istanbul, he added.

Airport and local financial incentives for new air service are increasingly common to attract new airlines. For example, the Denver Airport offers up to $8 million in annual financial support to new airlines that open unserved longhaul international routes from the Colorado capital. The incentives are significantly lower for new domestic routes, or flights to markets that are already served by another carrier.

Istanbul Airport hopes to continue its haul of new airlines. Samsunlu said the airport is targeting several segments of the market for new flights, including carriers from East Asia, the U.S., and Star Alliance members. Turkish is a member of Star, but only another seven of the confab’s 26 members serve the airport; this includes Aegean Airlines, Lufthansa, and Singapore Airlines.

“You will continue to see a very proactive Istanbul Airport,” Samsunlu said. “We believe that our current strategy and approach will lead us towards reaching 100 million passengers within the next 4-5 years.”

Istanbul Airport handled 64.3 million passengers last year, according to data from the Airports Council International (ACI) Europe. The next busiest European airport was London Heathrow with 61.6 million passengers. Samsunlu has previously said that he anticipates the airport nearing 70 million travelers this year.

Edward Russell

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Feature Story

Once again last year, American came in last place. In the battle for profitability with peers Delta and United, American’s operating margin (excluding special items) was just 4 percent. This was half what Delta earned and two points worse than what United earned; 2022 was the fifth straight year that American finished in the basement, behind its two main rivals. Will it ever climb to the top?

Not that long ago, it was on top, if just briefly. This is from the Airline Weekly archives in the fall of 2015: “American enjoyed one of the greatest quarters in airline industry history, en route to what will surely be an incredibly strong year.” 2015 would indeed be an incredibly strong year for American. United and Delta both looked up at their enemy in Texas, which flew to an 18 percent annual operating margin. Unfortunately, such good times wouldn’t last long.

American’s brief tenure on the earnings throne came largely thanks to one fateful decision. Unlike Delta and United, it refrained from hedging fuel, pocketing all the gains when fuel prices plummeted mid-decade. Call it skilled risk management. Call it dumb luck. Whatever you call it, American’s fuel cost bonanza did little to position it for future success. During the second half of the 2010s, the airline would go on to encounter a long list of setbacks, including — this was critical — the meltdown of many of its most lucrative South American markets. Almost overnight, Venezuela went from a profit machine to essentially un-servable. Brazil and Argentina soured as well, tainting American’s outsized Latin American network. Conversely, its limited presence in Asia meant it missed out on a region generally performing well in the late 2010s. All the while, low-cost carriers staged ongoing attacks, including Frontier’s assault on American’s Philadelphia hub.

In 2019, American was slammed by the grounding of Boeing’s 737 Max, spilling business to United (which had significantly fewer Maxes at the time) and Delta (which didn’t have any). American would lose access to its Boeing 787s for a long time as well. It faced labor unrest from its mechanics. It was failing to earn adequate returns in New York, Los Angeles, and Chicago, the three largest cities in the U.S. Latam, its chief partner in South America, ditched American for Delta. Then came the pandemic when Delta and United had larger Asian cargo profits to buffer losses. As United has said, international flying is currently producing higher margins than domestic, which if true across the industry, isn’t good for American — it’s the least internationally exposed of the Big Three. American’s management, meanwhile, said during the pandemic that United and Delta were earning superior profits from their credit card agreements. As recently as this past summer (the third quarter of 2022), American’s shortcomings were on display again. It managed just a 7 percent operating margin, compared to 11 percent for both United and Delta.

American did, however, show some margin convergence in the fourth quarter. It was still worst among the Big Three but only by fractions: Delta earned 11.6 percent, United 11.2 percent, and American 10.5 percent. Is this an early sign of success stemming from some of the changes it’s making?

One thing that’s changing a lot about American is its network. Perhaps most importantly, it’s allocating more and more of its capacity to its highest-margin hubs, led by Dallas-Fort Worth and Charlotte. DFW is arguably the U.S. airline industry’s greatest piece of hub real estate outside of Atlanta, never mind Southwest’s large presence at neighboring Love Field. The DFW Metroplex is one of the hottest economies in the country, with a fast-growing population that’s on pace to overtake Chicago as America’s third largest city. While American’s systemwide seat capacity is still down 4 percent from the second quarter of 2019, according to Diio, its seats from DFW are up 3 percent. Versus the second quarter of 2017, American’s DFW seats are up 17 percent. From Charlotte, another booming Sun Belt city (albeit smaller and more dependent on connecting traffic), American’s seats are also up 3 percent from 2019 (and up 7 percent from 2017). Charlotte has many of the strengths, if on a smaller scale, that make Atlanta such a powerful hub (notably its geography).

Both DFW and Charlotte airports have added new infrastructure to handle more flights. The same is true at Washington’s Reagan National airport, where American has likewise responded with more capacity. Other growth markets since the start of the pandemic include Austin, perhaps the hottest economy in the country, and Miami, also booming not just with new residents but also inbound tourists. American in fact has heavy exposure to leisure markets in Florida and the Caribbean more broadly — markets that performed relatively well during the pandemic and extremely well since. The same is true for Phoenix, another American hub with heavy leisure demand. Phoenix has not been a recent growth market for the carrier though, which removed lots of flights from California (Frontier, most importantly, has waged war on the Phoenix-California market, launching new flights to San Francisco, Oakland, San Diego, and Orange County).

As American amplified its exposure to DFW and Charlotte — hubs where it makes a lot of money — it addressed its Mega-City problem by retreating. This refers to New York, Los Angeles, and Chicago, places where American has for years struggled to make money. To relieve its New York troubles — and its northeastern troubles more generally — American forged an unusually close alliance with JetBlue, so close in fact that the U.S. Justice Department (DOJ) sued to stop the arrangement. As it awaits the outcome of DOJ’s action — and any potential impact on the alliance from JetBlue’s planned merger with Spirit — American is revamping its New York schedules. It’s added new JFK flying to Athens, Delhi, Doha, and Tel Aviv, for example. But that’s after spending much of the late 2010’s downscaling its JFK presence, exiting markets like Dublin, Rio de Janeiro, and Zurich.  

In Los Angeles and Chicago, American’s cuts have been far more drastic — its seat capacity at LAX and O’Hare is roughly 70 percent of what it was pre-pandemic. Chicago was once American’s top transatlantic gateway, with a few Asian routes mixed in as well. Much of that has gone away over the years — it once flew from O’Hare to Beijing, Delhi, Frankfurt, Shanghai… now Chicago is United’s to rule. To be clear, American will still operate six European routes to Chicago this summer. And it’s added some regional flying with smaller Bombardier CRJs. At LAX, meanwhile, and the west coast more generally, American is relying on Alaska Airlines for help.

There’s one more big hub where American has greatly downsized. In Philadelphia too, its seat counts are roughly 70 percent of what they were four years ago. That’s partly because its northeastern focus is now around optimizing New York and Boston with JetBlue. It’s also a reaction to competitive pressures, including Frontier’s Philadelphia expansion and United’s overlapping transatlantic expansion from nearby Newark. Philadelphia’s transatlantic network — still formidable with 11 routes operating this summer — was considerably larger before American abandoned its Airbus A330s and Boeing 767s during the Covid crisis. Mass regional downsizing, furthermore, left Philadelphia without enough traffic feed to support as many international routes.

Of course, retreating from foreign gateway mega-cities like New York, Chicago, Los Angeles, and Philadelphia — its capacity is down in Boston as well — means American will grow even more dependent on domestic traffic. Chief commercial officer Vasu Raja acknowledged as much at the Skift Global Forum last fall, stating that, “Increasingly, where we choose to go and fly our flights, will realistically be probably a lot more heavily in the domestic system.” To be sure, Latin America and the Caribbean will continue to shape American’s fortunes as well. Also remaining critical will be American’s overseas joint ventures and alliances, most importantly with IAG (led by British Airways and Iberia) but also Japan Airlines, Qantas, Qatar Airways, Gol, and Finnair.

As for American’s fleet strategy, 737 Maxes and 787s have served it well — when they’re actually in service. Delivery delays remain a headache, most recently forcing the suspension of some Philadelphia transatlantic flying for the upcoming summer. The carrier also has a large fleet of Airbus A320-family narrowbodies and Boeing 777 widebodies, and that’s it for mainline operations — since the pandemic it retired all of its A330s, 767s, and Boeing 757s, not to mention Embraer E190s. It still has 176 planes on firm order, according to Cirium Fleets Analyzer. That’s mostly more 737-8s and 787-9s but also A321XLRs, the latter presenting new international opportunities. Importantly, these 176 orders present much less of a future capital spending burden than the 676 planes United currently has on order, or the 312 planes in Delta’s order book.  

This lighter capex burden will serve American well as it tries to resuscitate a heavily-indebted balance sheet. Debt peaked in the second quarter of 2021, falling by roughly $8 billion since then. Still, it ended last year with more than $32 billion in longterm debt, and management hopes to shrink that by another $7 billion from now through 2025.

Will it generate enough free cash flow to make all those debt repayments? This year, it expects free cash flow from operations to reach nearly $3 billion. But American’s future operating costs are in question, not only because of the obvious uncertainty of fuel prices but also because of a looming pilot contract, one that’s going to be very expensive.  

To offset some of that pressure, American is now slashing its corporate sales staff and taking bold steps to force corporate customers to book directly through its systems. Importantly, AAdvantage, its loyalty plan, remains a powerful weapon, albeit one the carrier would like to monetize further with more favorable credit card deals (it partners with both Citi and Barclays). The airline continues to invest in premium products and services. Its operations have improved, and management insists it’s ready to handle the expected surge in demand this summer. Are all such efforts enough to get American out of the basement?

Jay Shabat

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