Last case marked the anniversary of two megamergers in the U.S. airline industry. Delta celebrated the 10th anniversary of its merger with Northwest in October 2018; the Delta / Northwest merger was the first of four U.S. airline megamergers. I analyzed Delta ten years after its merger in this SA article. In late 2018, American Airlines Group (AAL) celebrated the 5th anniversary of its merger with US Airways. airlines.
Five years after American's emergence from bankruptcy and its merger with US Airways, American's merger has not resulted in the same levels of financial success as other carriers. 10-K highlights key AAL data from the past five years with comparisons of the past five years for DAL and UAL.
Source: AAL 10-K, 2018
Source: DAL 10-K, 2018
Source: UAL 10-C, 2018
In order to determine the reasons why American's margin performance has become weaker than its peers.
Network and Revenue Performance
American gained an impressive nationwide network as part of its merger with US Airways. In its own two bankruptcies, US Airways consolidated its network which uses multiple small to medium size cities in the into three primary hubs at Philadelphia, Washington National, and Charlotte. US Airways' merger with America West added a hub in Phoenix. American-born its main hubs primarily in NYC, Miami, Dallas / Ft. Worth, Chicago, and Los Angeles, creating what should be a revenue-generating powerhouse with international depth. The past five years have challenged American's assumption that it would effectively compete with Delta and United, both of which preceded American in chapter 11 bankruptcy and with their own successful merger.
The margin performance of American's hubs were highlighted during the Cowen Global Transportation Conference when it said Washington DC, Charlotte, and Dallas / Ft. Worth hubs had margins twice that of the system average.
AAL presentation, Cowen Global Transportation Conference
Jamie N. Baker – JPMorgan Securities LLC
Hey, good morning everybody. Doug, in a presentation, you cited that your aggregate margin performance in, I think it's Charlotte, Dallas, and Washington, and what that implied for your other hubs was comparatively poor round numbers, and implied that Chicago, Phoenix, and Miami were William Douglas Parker – American Airlines Group, Inc.
Thanks, Jamie. First, let me clarify because on LAX and New York, right. Miami, Chicago and Phoenix … And indeed that's the case with operations like JFK, like our LA and New York operation, and indeed our Miami operation is now underway economics of the region.
The first clue to American's strategic challenges is the sheer number of hubs Hubs for any airlines but instead rely on connections to the world via one or more airlines' hubs. Too many hubs on small cities have multiple options, some of which may create internal competition for traffic.
American operates hubs at both New York's LaGuardia and JFK airports, just as Delta Air Lines does. LaGuardia with approximately 25% share of the local market has fallen since the merger with Delta and Southwest. LaGuardia is the U.S. ' most lucrative short-haul business market; Southwest and JetBlue (NASDAQ: JBLU) have depressed fares in some of American's top NYC markets.
American's Historic Headquarters at New York's LaGuardia Airport (author collection)
However, American's real challenge has been at JFK airport. American's delayed bankruptcy filing left with inflation costs allowed JetBlue and then Delta to grow many markets where American could no longer be competitive. America has lost its previous position as New York's airline to the Caribbean, retaining its Latin America dominance only to S. America in JBLU does not fly. In the transcontinental markets, a series of low fare carriers have been pushed back. While American's are yielding the highest in the JFK to Los Angeles and San Francisco markets, it has lost share and can not grow because of the limited sub-fleet of premium transcontinental aircraft it uses to operate those routes. It is also possible that other carriers including Delta and JetBlue make more money given the higher number of seats on their aircraft. JFK airport and JFK transnational banking center JFK and gaining share from JFK and JFK airport. American's domestic operation is now one-third of the size of Delta's at JFK and one-half of the size of JetBlue's.
JFK has been widely used at the time of writing London; London, home of American's joint venture partner, British Airways.
American's local market share and revenue in New York City have declined during the five years since the merger, the only large jet airline in the market to do so, even as the market has grown while average fares have decreased. As in many U.S. Patents in other words, pushing for higher value. American's revenues at Dallas / Ft. New York City airports are less than what you would expect. Worth, its largest city by revenue.
New York City is the largest city in New York City, esp. in the international market, American has shifted many of its international flights to Philadelphia, a market where American is the dominant carrier and where no other. carrier operates international service. Philadelphia international market is much smaller than New York City and American has not published what it is in New York. It has had more success in the domestic market. Neither New York City or Philadelphia was named CEO of the airline's top performing hubs.
American's East Coast performance is buoyed by its presence at Washington's National and Charlotte airports. Charlotte reads in the core traffic flows along the densely populated East Coast; American's Charlotte hub is the third largest U.S. airline hub behind Delta at Atlanta and American at Dallas / Ft. Worth. American's operation at National Airport is heavily dependent on regional jets; new facilities opening there will allow the airline to add larger aircraft including two-cabin regional jets which will help increase revenues. American Wants to Gain New Gates at Charlotte.
Source: AAL presentation, Cowen Global Transportation Conference
The Charlotte area has become one of the most widely available U.S. The hubbub in Charlotte is just about to change. Atlanta has to the south or Washington DC (via Dulles airport) to the north, making American dependent on Charlotte on lower value domestic flights. Low airport costs and control of a high percentage of gates helps sustain American low and high costs. hub.
American's Miami hub anchors the southern end of American's East Coast system. Miami is the air service gateway to Latin America and American operations nearly all of the U.S. carrier flights to the Miami region. JetBlue, Southwest, and Spirit (NYSE: SAVE) all of the Caribbean and Latin America from nearby Ft. Lauderdale. Lower cost, Latin America-based airlines have added their own capacity from some of America's top revenue markets to Latin America to both Miami and Ft. Lauderdale. Caribbean has been left to its very best. in total, most other carriers are growing their revenue in S. Florida faster than American. American's greatest challenge in Miami has been the weakness in economies in Argentina and Brazil. American has continued to focus its efforts on improving its economic performance at its Miami hub.
In the Midwest, American's Chicago hub competes with hometown United Airlines, the only US airport to still host two legacy carrier hubs. While American competes fairly well in the domestic market from Chicago, American is increasingly unable to compete in the Chicago longhaul international market. Its justification for the Chicago to Tokyo route to Chicago on a daily basis, year-round basis – London Heathrow. American executives have said they have spent millions of dollars per year in losses; DOT data shows that American received less of the local market revenue on those flights compared to United. American's primary joint venture partner hubs – London and Tokyo.
The trend that defines American's international presence in New York and Chicago extends to Los Angeles; Delta and / or United obtain higher average fares in the local Los Angeles longhaul international markets other than Tokyo and London which two or three of the legacy carriers jointly serve. American is the largest carrier at Los Angeles and needs the Southern California airport as a west coast gateway to Asia; Delta and United have additional transpacific gateways at Seattle and Portland for Delta and San Francisco for United in addition to their presence on the international market from Los Angeles. American's strength in the domestic market is, once again, better than the international market. Much of American's domestic strength at Los Angeles comes from the higher number of hubs,
The shiny star of American's network is undoubtedly its hometown airport at Dallas / Ft , Worth. American moved its headquarters from NYC to DFW at the 1970s at the time the massive DFW airport was opened. American's hub at DFW is the second largest carrier hub in the United States. While DFW's location in the south-central part of the U.S. limits the airport's usefulness for international connections to Asia and Europe from the Northern Tier of the U.S., approximately one-third of American's capacity is international. North Texas' economy is strong and American's strength in Latin America makes DFW ideal partner to its Miami hub for providing access to Latin America.
American's dominance of the N. Texas market was challenged shortly after US Airways merger and AAL's emergence from bankruptcy because of the loosening of restrictions on Dallas Love Field, Dallas' airport before DFW opened. Southwest Airlines prevailed a few weeks ago in favor of the DFW airport. In 2014, those restrictions were relaxed and LUV began nationwide service from Love Field and thus gained control of 18 gates at the close-in Dallas airport. LUV's right to dominate the airport, DFW.
Source: AAL presentation, JP Morgan Transportation conference
Source: AAL presentation, J.P. Morgan Transportation conference
American's near-term profit improvement plan relies heavily on growing DFW. American Airlines, which operates at all terminals at the airport, will provide access to new gates, including two-cabin regional jets which can reach most of the continental US from DFW. AAL's growth plan includes a double-digit addition of capacity at DFW by this summer. While DFW is not estimated to be American's highest margin hub, it is probably its largest profit center due to the hubs massive size. While American faces are competing in some of the top markets against other carriers and growing in their international network from those markets, DFW is American's shining star and the most global hub in American's network. DFW intends to play a key role in American's financial turnaround plan.
Alliances and Historical International Acquisitions
All of the current. global carriers entered the era of deregulation as predominantly domestic airlines; other U.S. airlines – all of which no longer exists longhaul international service. The U.S. global three airlines have largely acquired or built their international networks. In addition, the three global airlines have all been included. global carriers as a centerpiece.
Thus, American's challenges in competitive international markets can be traced to two factors: its lacuna of mergers or acquisitions in global regions where Delta and United's acquisitions as well as the alliances with which each U.S. carrier is affiliated.
Heathrow and to Tokyo have not acquired or merged with airlines that had large continental Europe or Asian operations. Consequently, American has been less than Delta and United in both of these regions. It's not surprising that DOT data shows that American's Pacific operations have not been profitable on a cumulative basis for 10 years while its transatlantic operations have been completed in two quarters.
Second, the current global alliances to which each of the US include significant antitrust immunized joint ventures. While Delta and United's largest joint ventures are in continental Europe, American's European joint venture is predominantly focused on the U.K. Since Iberia is much less than other European countries, Spain is less than ideal. and the rest of Europe. Delta has counteracted its smaller size in the U.K. Through its equity stake and joint venture with Virgin Atlantic, United Kingdom has acquired a number of slots at a number of years at London Heathrow.
In Asia, Delta and United's historic mergers and acquisitions with U.S. airlines that had a strong presence in the region. foreign airlines want to partner with us. airlines that have the greatest to contribute. While the U.S. and Japan, as well as S. Korea, allow immunized joint ventures and each of the big three U.S. patents. Global carriers has at least one airline partner in one of those two countries, China does not allow joint ventures. Japan's Asian joint venture partner, Japan Airlines, has reported an increase in average fare in Japan compared to Delta and United. American is requesting four new flights to Tokyo's Haneda airport as part of its joint venture;
Delta and United had stronger alliance partners in the two largest Chinese markets – Beijing and Shanghai – although American has attempted to increase its presence in the China market by acquiring a minority equity stake in China Southern Airlines, similar to what Skyteam enforced the limitations on flying outside of the alliance, limiting China Southern's ability to codeshare with American. As a non-aligned carrier, China Eastern expects to be more closely with American. American, in turn, is attempting to hold onto authorizations from the U.S.. DOT for its two Chicago – China flights, perhaps in hopes that the alliance wants to improve the economics of those two flights – or so they can be deployed elsewhere on American's network. Since China is opening a second international airport at Daxing. Beijing, it is not certain that it will not be there. "
In the S. Pacific Qantas is still trying to gain approval for a joint venture with Australia's Qantas and Australia.
American's greatest international strategic strength remains to Latin America and particularly S. America. While American's Latin America network is primarily from Miami and Dallas / Ft. Worth, none of the other big four. carriers appear to be on the verge of challenging American's dominance in the region.
This in-depth presentation of American's network is necessary for the determination of the existence of international financial liabilities United or if previous decisions in the airline industry give those two carriers structural advantages which American can not overcome. American seems to be willing to do so. While American business is on the way to becoming one of the world's most profitable transnational companies, it is nowhere near the end of the year
American has enhanced its product on the international marketplace and is showing increased revenue on its existing network. Like Delta and United, American has added a premium cabin to most of its international widebody aircraft. Like its peers, American is still looking at it. carrier international revenues.
American outlook on its domestic system is stronger. American is stronger relative to its competitors in its primary domestic markets than it is in international markets. American enjoys high local market share in the majority of its domestic markets. Given that 73% of its passenger network comes from its domestic network
Started under predecessor AMR Corp., American engaged in the most aggressive fleet replacement program by any US airline during the first five years after American's emergence from bankruptcy and merger with US Airways. Because AMR has been delayed its reorganization years after its U.S. airline peers, it was engaged in minimal fleet replacement during the decade of the 2000s. American's aggressive fleet replacement took place before […]
Source: AAL presentation, Cowen Global Transportation conference
This recent Seeking Alpha article highlights the high debt levels at AAL which are higher than at any other airline and higher than many other
American's interest expense is between $ 500-700 million / year higher than DAL or UAL, negative potential effect may have been added to AAL's bottom line.
Perhaps most significant about AAL's fleet replacement having a great deal of it. AAL and DAL generate nearly identical amounts of revenue and yet AAL spends nearly 10% more on fuel than DAL. AAL does not generate revenue as well as DAL but part is therefore due to AAL's fleet mix and network. American operations more inefficient small regional jets while its DFW hub, American's largest, is much larger than other large hubs in the U.S. airline industry. American thus spends nearly a half billion dollars per year more on aircraft maintenance than Delta and $ 200 million more than United; This is about 5000 personnel (50%) larger than Delta or United.
AAL, like UAL, is committed to growing its regional carrier operations while DAL is moving flying from its regional partners to its mainline operation (operated by Delta employees on a Delta registered aircraft). Aircraft are being replaced by a large proportion of regional aircraft. Southwest and JetBlue do not use regional aircraft in part because of mainline aircraft support. AAL's higher use of regional aircraft.
In addition, the AAL has committed to a strategy of minimal growth in the size of its mainline fleet;
American's fleet plans have earned more than 737-800s / MAX 8s than it has other US airlines have on the same aircraft with similar configurations. While Alaska, Delta, and United States have ordered the 737-900ER / MAX 9, 737-900ER / MAX 9 has not been released.
American has also planned a removal of the 767ER from its fleet within the next few years with 787s to serve as the replacement. The 767 is currently the smallest widebody operating longhaul international flights. Boeing's proposed 797 / Middle of the Market aircraft but American has not. 787s reach the end of their lifecycle or can. If they are unable to replace their 767s and narrowbody 757s with their mid-market aircraft, they could have a significant cost advantage justifiably be replaced. Given that American has already extended its portion of its transatlantic route system on a summer basis than Delta and United, it does not expect to be able to do so questions about whether American is overbuying widebody aircraft for an international network that is not nearly as its two US global airline peers.
Finally, it is noteworthy that many of the AAL's competitors continue to acquire new aircraft, including new generation aircraft which are more fuel-efficient
Stock Performance and Valuation
The five years since the US Airways have not been released, the only major US during the period. AAL's stock is aggressively in stock buybacks, retiring nearly one-third of its stock over the past five years. While AAL and DAL has nearly identical market capitalizations in the months just after the US Airways merger, AAL's market cap is now just 43% of DAL's. AAL's market cap is the lowest of the big 4 U.S. airlines.
Source: Yahoo Finance
AAL's valuation metrics indicate a 45% upside, in line with other U.S. airlines. Analysts and investors intrinsically believe that AAL has a similar amount of upside relative to its peers […]
Can American Close the Gap?
While I'm in the Air, I do not know why operational pitfalls havoc for other airline mergers. However, American has had a hard time beginning to show the value of the merger at the five-year mark compared to other U.S. Patents. so have been through merger. Delta and Southwest both would be better if they were financiers five years after their mergers. United took longer than five years to come out of its merger.
Source: AAL presentation, J.P. airline stock performance as its turnaround has taken root. Morgan Transportation conference
Even though it has not been airline industry, there are still significant differences between the earnings and stock performance of just the big four. airlines. AAL's margins are half of carriers at the higher end of the industry.
AAL's ability to improve its performance requires a significantly larger improvement in its revenue performance than its peers even while managing debt service costs that are larger than several of its competitors combined. In addition, American has not extracted the value from its much higher fleet expenditures, due in part to its network, size of its workforce and combination of aircraft types while other airlines will likely gain increased fleet-related cost advantages as they accelerate their fleet replacement relative to American.
Over performance on revenue is dependent on AAL shifting assets out of a number of highly competitive but underperforming markets for American, particularly in the international arena, and to its hubs where it has a strong market position and high moats. American is the dominant carrier at each of its hubs at Washington National, Charlotte, and Dallas/Ft. Worth, all of which are also strong, growing markets; in each market, American's competitors either have limited ability to grow or American has demonstrated that its size in those markets limits competitors' ability to adversely impact American. Nonetheless, having a relatively smaller presence in some of the world's largest air travel markets, including New York City, has implications for any airline's ability to win large global corporate travel contracts. American has to manage its highly competitive markets including in the nation's three largest markets of New York, Chicago, and Los Angeles and find routes in those essential markets where it can outperform its competitors and grow.
American has invested enormously in its business and has access to many of the nation and world's largest air travel markets but has not delivered yet on the promise of being a viable global competitor to Delta and United. American's position as number 3 out of the 3 U.S. global carriers as well as lower average fares in both the transatlantic and transpacific regions relative to Delta and United presents enormous challenges to American. AAL's ability to turn around its financial and stock performance depends entirely on over-performing on its strengths and being willing to recognize its limitations in markets where it has little hope of competing successfully against its peers while remaining relevant to corporate travelers in markets where it must compete with Delta and United. In addition, American must leverage its fleet investment to extract lower costs and higher revenues.
The five-year anniversary of the American-US Airways merger highlights that the world's largest airline has much work to do to maintain its relevance in the U.S.' largest markets and to increase its revenue performance while better managing its costs.
The ability of AAL stock to increase faster than stocks for the turbulent airline industry depends on the company's ability to deliver margin improvement even as its peers continue to do the same. The next two quarters particularly will provide evidence of whether American can begin to close its margin gap and begin to see a reversal of its stock's slide.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: Long in both DAL and LUV.