AA should launch LAX-ICN and ORD-ICN immediately

[FWAAA]

Yes, it would burn tremendous amounts of money, WT.   AA would lose, because UA and DL and KE would win.   And with just several billion in cash, no way would AA be willing to "invest" any of it in new TPAC services, especially given how AA loses its shirt every day on its flights to Japan and China and Korea.  
 
Now that the financials are out of the way, I still believe that AA should prepare to initiate service to ICN from both LAX and ORD to capitalize on the weakness of Asiana (OZ).   Turns out that Korea may suspend OZ's rights to fly ICN-SFO for a while given that its pilots negligently flew a perfectly fine 777 into the ground at SFO last summer on a perfectly sunny Saturday afternoon.   Practically,  CFIT just yards short of the runway.   
 
Here's the news about OZ's predicament:   
 
http://mengnews.joins.com/view.aspx?gCat=050&aId=2992390
 
http://english.chosun.com/site/data/html_dir/2014/08/20/2014082001707.html
 
Among my "bigoted" friends here in Los Angeles, not one of them would step foot on OZ (or for that matter, KE) to Korea.   That leaves DL and UA.   With UA's troubles, compounded by OZ's potential troubles, now is the time to pounce.   Nimble competitors sometimes win and win big.   Can't win if you don't play.  

 

[WorldTraveler]

first, if the notion that AA should start a route is predicated by Asiana's potential but unprecedented route suspension to SFO, not LAX, then the likelihood of success on the route by a new entrant has to be questioned - and that doesn't matter who is involved.

This is clearly a major issue that S. Korea has to resolve and there will be repercussions for the international market but I would highly caution any carrier from making any decisions based on what may or may not happen here.

As to your "bigoted" friends, your perspective is interesting esp. since over and over again we here that Asian airlines are the ones who are preferred to US carriers and in highly competitive markets like LA, there is some evidence to believe the Asian carriers do have an advantage.

The real advantage those Asian carriers have is cost compared to US, Australian, or Japanese carriers which is why US carriers - except for LAX-PVG - have avoided longhaul routes that compete with airlines from countries with a lower cost of living than the US has.

Finally, regardless of what Asiana does, KE is still a formidable competitor and AA is still challenging KE on two routes which KE started first - DFW-ICN and LAX-GRU - and it is far from clear how either of those competitions will play out or whether AA can sustain yet another direct challenge to another carrier's major routes. If LAX-ICN isn't KE's top route, it has got to be pretty high on the list.

as for ORD, it is once again worth noting that UA dominates the ORD-Asia local market with 3X the amount of local revenue that AA has and more than 2X the share (which shows that UA also gets a revenue premium to the market while AA has a revenue disadvantage.

Obviously neither you or I will make the final decision....

 

[eolesen]

There is a historical and proven preference to fly on Asian carriers, but that doesn't mean that it extends to every Asian carrier out there. When I was doing consulting with CZ and MU last year, I flew entirely on CX, and nobody questioned that.

Without naming names, I know of at least one company whose employees were told they couldn't fly on OZ, even though OZ is a client. Same with Garuda up until recently.

Some might call it bigoted, but others would consider it managing risk.

 

[WorldTraveler]

Not uncommon or unexpected given the accident and the pretty obvious reasons behind it that became apparent early on.

Still doesn't say that KE is not doing everything to pick up that traffic.

 

[USFlyer]

So the fact another carrier dominates means others should shy away from getting in the game?  Companies routinely take losses when entering new markets.  It's the only way to grow a business over the long haul (no pun intended).

 

[eolesen]

Some people have long memories. KE lost 5 airframes in a 30 month timeframe period back in the late 90's. That's just 15 years ago.

After their crash on Guam, they were suspended by their government for four years from serving SEL-GUM.

 

[WorldTraveler]

you really don't want to start counting accidents.

The US government doesn't happen to suspend carriers because of accidents.

 

[700UW]

Oh yes they do, Valujet was grounded.

 

[FWAAA]

Thanks, WT, as your points help to validate my opinion as to why new AA should attack ICN from both LAX and ORD.   
 
As you pointed out,  LAX-ICN may well be KE's biggest market.   If AA began LAX-ICN, it's not as though AA has to drum up demand for that route;  LAX-Korea is huge.   And for better or worse, OZ's reputation isn't stellar right now among even Koreans in Los Angeles.   Sure - perhaps everyone will simply substitute KE, but AA's new seats are pretty competitive.   And the onboard service is at least on par with DL or UA.
 
As you also pointed out,  UA does very well in the ORD-Asia local market.   AA and DL have had some success luring away revenue from UA since March, 2012, and I doubt that an expanding Asian network will drive some of them away from new AA and back to UA.   It's not as if AA would be relying on new passengers discovering ORD-ICN, as new AA could take away some of UA's passengers.   And, obviously, some of OZ's passengers.
 
Yes. the Korean government is talking about suspending OZ on SFO-ICN, and AA doesn't fly that route.   Since AA will likely never have a hub at SFO, its next best option would be LAX, which features about 90% more passengers to/from ICN than does SFO.    More than 10% of the passengers on the fatal ICN-SFO flight last year were the Chinese teenagers on their way to a Christian summer camp in my Valley neighborhood.    It's a tiny anecdotal snippet  (hardly data), but that hints that OZ is reaching for passengers to fill its ICN-SFO flights when a good number of them on that flight were flying from China to LAX, not Korea to San Francisco.   Yes, I'm well aware that Saturday flights in July often need low-fare connecting groups to fill some of the seats.   
 
Bottom line is this:   From airliners.net to Flyertalk to actual buyers of premium fares, the common theme is that old AA's Asian network was a little thin.   Bulking it up is the only way for it to get any larger, since Northwest is no longer for sale and UA never did liquidate.   
 
After Bermuda II was flushed in favor of Open Skies,  CO, DL and US began flying to Heathrow, joining the two USA-based incumbents.    Did those three fill their planes to LHR solely with passengers they used to carry to Gatwick?   I doubt it.   Did they fill their planes with people who had never flown to Heathrow before?   I doubt it.   Probably a mix of LGW passengers, those who just discovered London and a third bunch - some passengers who used to fly AA and UA.   
 
Despite UA's impressive second quarter, its revenue growth still lags everyone else, and now, its alliance member OZ is suffering a safety-related reputation problem.  If AA will ever have more than one gateway to Korea besides DFW, the only gateways would be Chicago and Los Angeles.   

AA's costs are going to rise, so no time like the present to begin flying some new international routes.   
 
Preference for Asian carriers?   Sure, but IMO, the preference is more toward SQ, CX, NH and JL and not so much toward KE or OZ or any of the mainland China carriers.   Koreans in Korea may prefer one of their two big airlines, but Americans in the USA, perhaps not so much.   

 

[WorldTraveler]

excellent response and discussion, FWAAA. Exactly what I expect from you and what I want to see on this forum.

regardless of the rationale, US carriers are always going to have to fight it out in LAX with lower cost Asian carriers who will always have an advantage over US carriers.

The same thing exists between the Euro carriers and the ME3 on routes to Asia... if you can figure out how to overcome it, don't tell us; you can make a mint telling old legacy airlines how to compete with lower cost int'l upstarts.

S. Korea's airlines have a very good thing going in terms of low costs esp. relative to the Japanese carriers and the geographic advantage that made NRT the primary hub between N. America and E. Asia. Few other countries have as good of a situation as S. Korea has. KE also carries huge amounts of traffic between the US and E. Asia, just as the ME3 do between Europe and Asia, esp. SE Asia. It is a matter of favorable geography and costs.

Deregulation started in the US and has now spread to the world.

I fully recognize that AA needs a larger Asian presence - but the fact that they need it doesn't mean they will profitable or other carriers will allow them to increase their presence.

It comes down to the issue which I don't care to reopen again with this thread; if AA can generate high enough returns on other parts of its network in order to subsidize the development of its Asian network, then they clearly can and should do so. But given that no other carrier is spending as much money to develop themselves in another part of the world, it is a weight that AA would disproportionately have to carry.

You are right that there are no alternatives to internal growth so if AA wants a presence, they have to suck it up and make it work.

As for UA, remember that they outperformed analyst expectations on RASM and although they are being conservative in their estimates, they do seem to be able to deliver what they are promising.

If AA can make more routes to Asia, specifically ICN work, then go for it but other carriers, even with a blighted carrier in their alliance do have advantages, just as AA does in Latin America where other carriers are trying to expand.

Despite what many believe, I want to see AA successful - as well as every other airline esp. in the US.

Weak, struggling airlines hurt everyone, including employees.

I want the best days for the airline industry to be ahead of us, not a distant memory from pre-deregulation days.

 

[topDawg]

Yes, it would burn tremendous amounts of money, WT.   AA would lose, because UA and DL and KE would win.   And with just several billion in cash, no way would AA be willing to "invest" any of it in new TPAC services, especially given how AA loses its shirt every day on its flights to Japan and China and Korea.  
 
Now that the financials are out of the way, I still believe that AA should prepare to initiate service to ICN from both LAX and ORD to capitalize on the weakness of Asiana (OZ).   Turns out that Korea may suspend OZ's rights to fly ICN-SFO for a while given that its pilots negligently flew a perfectly fine 777 into the ground at SFO last summer on a perfectly sunny Saturday afternoon.   Practically,  CFIT just yards short of the runway.   
 
Here's the news about OZ's predicament:   
 
http://mengnews.joins.com/view.aspx?gCat=050&aId=2992390
 
http://english.chosun.com/site/data/html_dir/2014/08/20/2014082001707.html
 
Among my "bigoted" friends here in Los Angeles, not one of them would step foot on OZ (or for that matter, KE) to Korea.   That leaves DL and UA.   With UA's troubles, compounded by OZ's potential troubles, now is the time to pounce.   Nimble competitors sometimes win and win big.   Can't win if you don't play.  

so UA can start LAX-ICN and eat AA's lunch on two more routes?  :ninja:

 

[topDawg]

excellent response and discussion, FWAAA. Exactly what I expect from you and what I want to see on this forum.

regardless of the rationale, US carriers are always going to have to fight it out in LAX with lower cost Asian carriers who will always have an advantage over US carriers.

The same thing exists between the Euro carriers and the ME3 on routes to Asia... if you can figure out how to overcome it, don't tell us; you can make a mint telling old legacy airlines how to compete with lower cost int'l upstarts.

S. Korea's airlines have a very good thing going in terms of low costs esp. relative to the Japanese carriers and the geographic advantage that made NRT the primary hub between N. America and E. Asia. Few other countries have as good of a situation as S. Korea has. KE also carries huge amounts of traffic between the US and E. Asia, just as the ME3 do between Europe and Asia, esp. SE Asia. It is a matter of favorable geography and costs.

Deregulation started in the US and has now spread to the world.

I fully recognize that AA needs a larger Asian presence - but the fact that they need it doesn't mean they will profitable or other carriers will allow them to increase their presence.

It comes down to the issue which I don't care to reopen again with this thread; if AA can generate high enough returns on other parts of its network in order to subsidize the development of its Asian network, then they clearly can and should do so. But given that no other carrier is spending as much money to develop themselves in another part of the world, it is a weight that AA would disproportionately have to carry.

You are right that there are no alternatives to internal growth so if AA wants a presence, they have to suck it up and make it work.

As for UA, remember that they outperformed analyst expectations on RASM and although they are being conservative in their estimates, they do seem to be able to deliver what they are promising.

If AA can make more routes to Asia, specifically ICN work, then go for it but other carriers, even with a blighted carrier in their alliance do have advantages, just as AA does in Latin America where other carriers are trying to expand.

Despite what many believe, I want to see AA successful - as well as every other airline esp. in the US.

Weak, struggling airlines hurt everyone, including employees.

I want the best days for the airline industry to be ahead of us, not a distant memory from pre-deregulation days.

odd coming from someone who enjoys outsourcing as much as you do. 
 
don't you mean you want the best for management and above?

 

[WorldTraveler]

where in the world did you EVER get the notion that I enjoy outsourcing?

NO ONE has been more supportive of efforts to bring flying back to mainline, of doing as much maintenance work in-house, and aggressively pursuing insourcing as I have.

As for your bolded text, remember that the high rate of maintenance outsourcing started not with the legacy airlines but with a startup LCC from BEFORE deregulation that is now one of the big 4 who has consistently had more maintenance outsourcing than any of the legacies.

Reducing the number of people on the payroll is a great way to make sure that those remain receive the highest possible salaries and profit sharing - if you like outsourcing.

Not sure what this has to do with LAX, AA, or the Pacific other than that AA, as FWAAA notes, has no choice but to grow internally in order to build a presence to Asia driven by the fact that there are no airlines that can be acquired with large Asian networks but also because AA can't do it thru alliances; other airlines have similar situations in other parts of the world so are building their presences "in-house." Internal growth is great and I support it completely. It just needs to be profitable or have a very definite plan to get there.

again, as long as AA can get to profitability on the routes it starts to Asia, including ICN, I completely support their efforts to grow their system.

Growth is good for employees and the industry and competition is good for all; it keeps companies at their best and consumers have more choices.

Despite consolidation, the industry is still highly competitive but fares are pushing up after years of consumers getting too much for too little.

There is no reason to think that the best days of the industry since deregulation are in front of us - and perhaps the best days in commercial aviation.

 

[eolesen]

As for your bolded text, remember that the high rate of maintenance outsourcing started not with the legacy airlines but with a startup LCC from BEFORE deregulation that is now one of the big 4 who has consistently had more maintenance outsourcing than any of the legacies.

Yeah, not quite, Skippy.

WN may have been one of the first large North American passenger carriers to fully embrace MRO outsourcing, it was pretty well in full swing on every other continent and they weren't the largest US airline to be engaging in it.

Two possible reasons for that:

1) those airlines had the flexibility to decide what work they decided was a core function, and what was able to be contracted out; or

2) they operated under stringent labor laws, and decided to outsource from Day 1 so that they wouldn't wind up with more employees and infrastructure than they wanted to invest in...

Either way, attempting to smear WN with the responsibility for what the legacy airlines ultimately did is specious at best.

Fedex started flying the same year as WN, and had a much larger fleet of aircraft up until the late 1980's. They outsourced essentially all of their maintenance activities, and certainly all of their MRO.

Every other airline I can think of which started since 1971 has also gone the route of outsourcing their overhaul entirely, or establishing a dedicated subsidiary (some as JV's) to do the work independent of the airline's P/L.

So... WN didn't get the ball rolling. They saw the ball rolling, and decided it was the better option.

That same phenomena also holds true with regard to ground handling. Most US post-1971 passenger startups outsourced their below-wing work, and some also outsourced gate and check-in handling with the exception of their hub cities. Again, copying from the model widely used in Asia, Europe, LatAm, and Africa.



Bringing that side-bar back into relevance to the topic...



When all you have to focus on is delivering customer service and flying the aircraft, that's where your leadership's attention is going to be focused. SQ, CX, and JL aren't getting caught up in whether or not they should be investing in a maintenance base, new ground equipment, or a baggage handling system. They're focused almost solely on their cabins. Their priorities are IFE, food, service levels, and the seats.

And that's why you see such a preference for flying on the top-shelf Asian carriers. They're focused on revenue generation, not operating costs.

 

[FWAAA]

so UA can start LAX-ICN and eat AA's lunch on two more routes?  :ninja:

Uhh,  sure.   
 
Just to be clear,  AA (and Delta) have been eating UA's lunch ever since Smisek the Moron's fateful March 3, 2012 failure (cutover to Shares).   
As an example, for the first six months of 2014,  UA reported profits of $430 million, excluding special items.   
 
How did AA do?   For the first six months of 2014,  AA reported profits of $1.9 billion, excluding special items, more than four times the measly profits at UA.   
 
I realize that UA eats AA's lunch on LAX-Asia and ORD-Asia because WT has told us so over and over and over again.   And I believe him.     And obviously,  DL eats AA's lunch everywhere except to Latin America.   And yet, AA earned slightly more than DL for the first six months of this year and 4.5 times as much as UA for the same period.   The weaker carrier between Korea and the USA is on the proverbial ropes and the Korean economy continues to thrive.   If there was ever a time to add service to one of the world's largest and fastest growing economies, that time is now.