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Posts Tagged ‘american airlines’

Estimated reading time for this article: 2 minutes or less

American Airlines is having problems with the new Department of Transportation disclosure rules that came into effect yesterday. A warning on its website says that the airline is having technical difficulties and the initial fares don’t include taxes and fees.

Given the DOT’s recent streak of fining airlines for violations, I’d guess that a fine will be American’s fate too. Whether they will ever pay it is a different question – bankruptcy protection will make it very hard for the DOT to collect any fine…

Estimated reading time for this article: 4 – 5 minutes

In case you haven’t heard yet, the Wall Street Journal has reported that Delta is considering the option of acquiring American Airlines. American, while in bankruptcy, is a major acquisition target, since it can be bought very cheaply compared to the value of its assets, such as aircraft, slots, hubs, route authorities, and terminal buildings.

I have to say, this acquisition is rather unlikely. Delta and American are the second and fourth largest airlines in the country respectively by domestic market share. If put together, they would control over 1/3 of the US market, including regional partners. That is a lot compared to the Delta of today, which controls less than 20% of the market. This massive increase in size would undoubtedly raise flags with government regulators. While sheer size isn’t an issue per se, combining the airlines would create areas of high market concentration, like New York. Both Delta and American have large operations and JFK and La Guardia Airports in New York. Delta would be forced to divest a significant amount of slots in these areas to new entrants and low fare carriers in order to get the acquisition approved. Since Delta and American are both very big and have significant overlap, the combined airline would probably have to give up so much during a merger that it just wouldn’t be worth it.

The second reason that this acquisition is highly unlikely is alliances. Delta is a member of SkyTeam Alliance, while American is a member of oneworld. Since American is the only North American partner of oneworld, it is extremely important. Without American, oneworld would likely dissolve, since it wouldn’t have coverage in the largest aviation market in the world. For this reason, American’s oneworld partners like British Airways and LAN would fight a Delta acquisition very hard. They would likely attempt to get the acquisition rejected by regulators, and they might even team up with a private equity firm to buy out American. No matter what happens, oneworld and its carriers will fight the move of American to any other alliance with all the power that they have.

Since it’s so unlikely that acquisition will ever occur, you might be wondering why Delta is even considering it. There is no doubt that Delta wants this acquisition to happen. Some reasons why:

• American has hubs in major cities with large amounts of high yielding business traffic.
• American also is the largest American carrier at London Heathrow airport, a major business airport with very high yields.
• American has a very large frequent flyer base that Delta would love to get its hands on.
• American has a lot of profitable corporate contracts that Delta would like to take.
• American has a large Latin American network that would be a valuable addition to any other airline in the US.
• American has a fortress hub in Dallas. Fortress hubs are hubs in which one airline controls a massive amount of the capacity. These hubs are incredibly profitable since airlines enjoy the effect of a monopoly, allowing them to increase prices.

With all these reasons and more, it makes perfect sense that Delta would want to acquire American. Perhaps Delta feels that even with the hurdles that regulators will subject them to, the acquisition will be valuable enough in the end to be worth it. However, I don’t think this is likely.

What is more likely is that Delta is using these rumors to try to force the hands of US Airways and TPG Capital, the other 2 companies interested in purchasing American. Delta wants to find out the intentions of the other two groups, and also increase the prices that they will have to pay if they decide to bid. The latter is a big risk. Increasing the price of American significantly would mean that Delta would have a weaker competitor in the future. However, if they bid too high and the other companies walk away, they will be stuck with an overpriced American Airlines for themselves, a disastrous outcome. This is exactly what happened when AirTran was interested in buying Midwest Airlines back in 2007. TPG Capital, along with Northwest Airlines, tried to inflate the price that AirTran would pay. However, AirTran decided to just walk away from the deal, and TPG ended up with the airline. 2 years after TPG bought Midwest, they sold it to Republic Airlines at a $400 million loss.

Another extremely unlikely possibility is that US Airways and Delta could team up to buy American, and then split up the airline. Each airline could take the parts of American that they need, and they can avoid many of the regulatory issues by allocating parts of the airline based on market concentration. Both US Airways and Delta would face less financial risk by each paying for only part of American Airlines. Delta and US Airways have worked together before on the DCA/LGA slot swap which finally is taking place this year after the US Department of Justice approved it.

Whatever happens to American, it is many months away. However, it is important not to discount any possibility – strange things have happened in aviation before.

Estimated reading time for this article: 2 – 3 minutes

Yesterday, American Airlines, in an email to employees, announced that it will be cancelling it’s longest route from Chicago to Delhi.

Today, January 9, American Airlines announced two schedule adjustments and previously announced operational changes.

1. We will cancel the Chicago-New Delhi service effective March 1, 2012
2. We will also stop flying between DFW and Burbank, Calif., effective Feb. 9
3. Some operational and business changes that occurred prior to the company filing for reorganization will result in a reduction of approximately 150 airport-related (Airport Services workgroup) employees

ORD-DEL
The historical financial performance of the route and its future outlook given the global economic climate and high oil prices has resulted in a decision by American to cancel its New Delhi (DEL) – Chicago (ORD) service.

The last flight to leave for India from Chicago will be on February 28, 2012, while the last return flight from India to Chicago will operate on March 1, 2012.

AA will continue to offer travel choices between the US and India in conjunction with oneworld partners British Airways, Kingfisher Airlines and Finnair, via either London Heathrow or Helsinki (summer only), and through its codeshare partner Jet Airways via Brussels.

I’m not really surprised about this decision at all. Chicago to Delhi is an ultra-longhaul route, which means that it is very expensive to operate. As a flight gets longer, it not only needs to pay for the fuel to go that extra distance, but also has to pay for additional fuel to be able to carry the additional weight of the fuel already added! That means that flight costs go exponentially up as flight distances get longer. In addition, American Airlines can use the 777 equipment that they fly to India for 2 daily flights to Europe, which would generate much more revenue than the one ultra-longhaul flight. In addition, American Airlines has high labor costs, and a relatively inefficient aircraft type in the 777.

Ultra-longhaul flights can work if the airline manages to generate sufficiently high yields to cover the additional costs. Unfortunately for AA, India is a relatively low yield market. A lot of the traffic is VFR (Visiting Friends And Relatives) and leisure travel, which involves passengers that tend to be relatively price conscious. In order to fill up its planes instead of letting its passengers go to the likes of Emirates, Air India, and Lufthansa, American is forced to sell the route rather cheaply. This means that their revenue doesn’t cover the costs of operating this route.

I think that American would be better off operation to Delhi through a European tag flight to India, similar to what Delta used to do (not sure if they still do). For example, they could fly Chicago-London-Delhi-London-Chicago, which would allow or better aircraft utilization and would allow them to carry more cargo (since they wouldn’t have to sacrifice payload for fuel). Also, operating costs would be lower, allowing them to better compete in the marketplace.

Overall, it’s sad that American now no longer serves South Asia, but it was a route that was losing money and needed to be cut. Now, in bankruptcy, is the best time to do it, so they can emerge a stronger airline in the end.

Estimated reading time for this article: 3 – 5 minutes

Almost a year and a half after Chile’s LAN Airlines and Brazil’s TAM Airlines announced that they planned to merge, they have finally been approved by the aviation regulators in Brazil and Chile. Shareholders of LAN have also agreed to the merger.

LAN oneworld Livery; Source: Jeffrey S.

LAN is a member of oneworld Alliance, as it has been for over a decade. It has strong ties with many oneworld airlines, especially American Airlines and Iberia. Many of its traffic flows are optimized for oneworld connections. There is no doubt that oneworld is an important part of LAN’s strategy. Luckily for LAN, oneworld’s strategy for South America depends on LAN. Without LAN, oneworld would be pitifully weak in South America. This means that oneworld will likely sweeten the deal quite a bit to try to retain LATAM (the planned name after merger).

In contrast, TAM is a recently joined member of Star Alliance. It joined mere months before the merger was announced. It would not surprise me if joining Star Alliance was just a way to attract LAN for the merger. Its ties with Star Alliance members have not had the time to mature, so it is not as dependent on alliance traffic as LAN is. While TAM doesn’t really need Star Alliance that badly, Star Alliance still wants LATAM. The combined airline is focused to have over 60% of market share in South America, and every alliance wants that kind of coverage. That said, losing LATAM wouldn’t be as devastating for Star Alliance as it would be for oneworld. Avianca Airlines, TACA Airlines, and Copa Airlines all are in the process of joining Star Alliance, and all of them have reasonable connectivity in South America. In addition, Star Alliance has TAP Portugal as a member. TAP serves numerous destinations is Brazil, keeping some semblance of connectivity for Europeans and Asians to Brazil.

TAM Star Alliance Livery; Source: Bruce Drum

A major factor in the alliance decision is the restrictions that regulators put on the combined airline. Chile’s anti-trust regulator, the TLDC, approved the merger in September 2011. It placed 11 conditions on the merger. The majority, such as divesture of slots and restrictions on service to Santiago, have no bearing at all on the alliance decision. The TLDC declared that LATAM must be in a single alliance – it cannot be split between oneworld and Star Alliance. In addition, it declared that LATAM cannot join an alliance that Avianca-TACA is a member, or in the process of joining. The decision also decided that LATAM cannot have any codeshares with airlines outside the alliance, but that condition is being appealed.

There is no doubt that this decision heavily favors oneworld over Star Alliance. For one, the decision mandates that LATAM cannot join Star Alliance as long as Avianca-TACA plan to join the alliance. It would be ludicrous for Star Alliance to rescind their invitation from Avianca-TACA just so that they might be chosen by LATAM. And that might is extremely unlikely, considering LAN’s close ties with oneworld airlines.

LAN and TAM Airlines; Source: LATAM

Brazil’s anti-trust regulator, the CADE, imposed a completely different set of conditions. The only one which affects alliances is that it mandated that LATAM join an alliance which is is already part of. This means that SkyTeam has no chance to pick up LATAM.

TAM’s switch from Star Alliance to oneworld would change alliance dynamics in South America drastically. oneworld will control the majority of long-haul traffic to and from South America. Star Alliance will only have Avianca-TACA and Copa to cover South America, while SkyTeam will be in worse shape with only extremely poorly managed Aerolineas Argentinas to cover South America. oneworld is in an excellent position to take over South American market share. Of course, it is important to never say never when it comes to the aviation industry. There is always a chance that LATAM will join Star Alliance or the merger will fall through. But it seems pretty certain that oneworld will be the final destination for LATAM in the end.