AA to Asia: a new option

[WorldTraveler]

With AA’s recent expansion to Asia faltering and its desire to serve more of the country unmet, here’s another possibility that might get them more access to China.

Basic assumptions/facts:

• AA still wants more access to Asia; AA still has lots of cash
• NW is the best option because of their current position in BK
• AA doesn’t want all of NW; it would be politically disastrous to try to shut down major portions of NW
• AA and NW now have little overlap on US-NRT routes due to AA and NW’s recent Japan pullbacks.
• NW’s creditors will demand that they get the best return and that can only happen if all of the company is acquired.
• Enter US and Doug Parker who also wants to expand

Here’s the proposal:

• AA acquires NW’s Pacific routes, nearly all rights, its 744 fleet, and its 787 orders.
• US acquires NW’s DTW and MSP hubs, its 320/19 and 330 fleets
• MEM????? Either a US or DL focus city.
• NW Cargo????
• DL acquires the best of NW’s PW 757s
• NW’s debt and personnel would be assumed proportionally by the carriers that acquire its assets or more likely the assets revenue generating capability – which would shift proportionately more debt to AA.

AA could acquire one of NW’s two Midwest hubs since they probably don’t want to see a new competitor become larger in the Midwest region. Take your pick as to whether AA acquires DTW or MSP. I’ll bet DTW.

AA can easily pay $2B in cash plus assume several billion dollars in debt.

The 744s are not ideal but AA can make them work for several years when 777-300ERs would probably be the best replacement option.

AA would gain beyond NRT service as soon as the deal closes, the ability to deploy some 777s to beyond Japan destinations quickly, and enough 787s to significantly increase AA’s presence in Asia.

US would gain a fleet of A330s to use to expand PHL international and from DTW or MSP (whichever hub(S) they acquire) to Europe. US’ standing in Star would improve if it can shove more traffic onto the Star network. US would be a more viable competitor to Europe.

DL would gain 757s to backfill the 767s being removed from its domestic fleet which would also allow DL to grow further to Europe which they would have to do if US becomes a larger player to Europe.

The loss of NW feed to KL at AMS would provide opportunities for DL and CO to backfill some of that traffic or to shift it to CDG.

Competitive reaction: Limited. DL could make the case to acquire used 757s now but probably not do much more. DL and CO would be weak in the Midwest but they both can continue with their plans to grow Asia. Any linkup between CO or DL and UA can’t happen because UA’s costs and debt are still too high and can only be resolved in BK. Translation: This is a very good time for AA to expand into Asia since there isn’t much any one else can do to.

Drawbacks:
• AA still doesn’t have a viable west coast gateway. LAX would be the best option but AA is gate constrained there now.
• AA will have to present NW with a proposal around the time NW presents its Plan of Reorg to its creditors. If NW is willing to pursue a breakup proposal, then US would have to get involved. Negotiations between all 3 airlines would be time consuming and messy. NW would probably not emerge from BK for another 6 months (fall of 2007).
• DOJ would have concerns because of the loss of a domestic competitor ; the question is whether NW management and creditors can argue that NW is not viable long-term and must be carved up.


DISCUSSION???

 

[Fly]

Where is the part where you write......then DELTA CONQUERS THE WORLD?

 

[s80dude]

When Henry Joyner, the VP for Planning and Capacity spoke with our employee group, he said AA has no interest in the 5th Freedom Rights to Japan. With the advent of airplanes that can overfly Japan direct to their destinations, airlines are seeing a drop in demand and passenger volumes. He claims that is one of the reasons Osaka failed the second time, because the connecting traffic they had hoped would utilize the same terminal connections at KIX simply was not there.

 

[TechBoy]

This is a plausible scenario. While a 3 party (NW, AA, US) transaction would be difficult to put together, stranger things have been pulled off before.

For US to take on NW's domestic and Euro routes would be a huge transformation, but Parker has done a surprisingly good job of cobbling US and HP together so perhaps he could pull this off as well. The plan would clearly have to shut down MEM and probably shrink MSP as well. DTW would be an excellent midwest hub for US, playing the role that PIT used to but from a better geographic position and a larger O&D market. The DC9s and 10s would be parked. The 319/320 would continue and I suspect that US would need the 757s to maintain enough lift unless MSP were dramatically downsized. The 330s could be used to open new Euro and SA routes instead of tons of AMS connections. If all the labor issues could be worked out (with low US wages as the benchmark), this kind of transaction could leave US larger and stronger.

For AA, getting the Asia routes is a no-brainer as long as the price is right. 744s are not the albatross that you imply they are. They are the right equipment for higher density routes to Asia and they would give AA the flexibility to use some 744 on dense Euro or SA routes when needed. And AA would finally be able to compete with UA on equal footing for corporate accounts with significant Asian needs. Win-win-win.

I don't see what any of this has to do with DL. If there are leftover 757s from NW, there is a fairly strong market for used 757s and the paper holders will place them with the highest bidders (which could be DL, but I question whether DL really needs the additional lift beyond the 10 that they are already getting). I suppose the loss of the Asian routes from Skyteam hurts DL a bit, but that is only a minor issue. Ditto for CO.

As for UA, it would be a very mixed blessing. On one hand, US would be a stronger *A partner and could feed a lot of UA international routes, plus UA would get a shot at taking a lot of the NW FFers on the Asian routes. On the other hand, AA would be a much stronger competitor in Asia than NW ever was and UA could be consigned to permanent Avis status to AA's Hertz.

 

[WorldTraveler]

NW’s 10s are gone as it is. Shrinking any of their domestic operations would be enough to park the 9s. DTW would be a nice fit for the new US. As I’ve said, though, I don’t think the US-HP merger can be considered a success since the financials are only being kept up by shrinking capacity and the labor groups are still not integrated.

DL’s part is only to take the 757s…. there is a market but NW does have a decent sized fleet of 757s. You can’t place 50 757s without having some fairly large transactions… DL is probably one of the few airlines in the world that would be interested in a large amount of 757s. They are worth too much to NW to write off. DL has pulled or will pull 30 767s out of its domestic fleet for int’l conversion. They need some backfill. But DL’s part in this transaction is relatively minor.

I agree the 744 is not a dog… it’s just being quickly overshadowed by new models, which Asian carriers are the first to order. AA should have no problem keeping the 744s in the fleet for at least five years and could indeed use them to Europe or S. America but they also could work well to get AA into beyond Japan Asian routes.

While I agree that the 5th freedom authority is not the biggest part of the transaction, AA could have it now and use it to build a presence on its own beyond NRT. The 787s and AA’s existing 777s are what help accomplish that.

The bottom line is that AA is still sitting on a boatload of cash and is still missing the one part of their network which they must have long-term.

 

[flyhigh]

Can the cities NW flies to via NRT be flown non-stop from the US? For NW, it might be an aircraft availability issue, but it seems that merged with someone else, there would be enough lift to use some of those 747's to fly non-stop.

As for US-HP...that's the reason you merge...to shrink the fleet yet provide the same utility...so, it seems to be working quite well. The union issues seem to be going rather smooth compared to most other mergers. Might surpass DL-WA as the smoothest and most successful merger ever.

I'm not sure you get rid of MSP over DTW. MSP is a goldmine for NW...little to no competition whereas WN is adding (albeit one flight to BWI) in DTW...both could be kept much like NW has run them. Who knows...AA might benefit from MEM. As could CO. It's a nice STL size focus city. Lots of RJ's to the region with mainline to major cities (LAX, NYC, DFW, ORD, DCA)...

 

[RowUnderDCA]

This three way has been speculated upon here for months. I think it's plausible.

But, JAL would almost assuredly would have to bolt from the oneworld alliance that they just joined, filling in for SkyTeam's NWA loss.

I agree with S80 and flyguy, that AA might be looking at taking even less of NW's asia routes. Does it really need to replace JAL at Tokyo, when what it really wants is China freqs?

 

[MAH4546]

Can the cities NW flies to via NRT be flown non-stop from the US? For NW, it might be an aircraft availability issue, but it seems that merged with someone else, there would be enough lift to use some of those 747's to fly non-stop.

For NW it is not an aircraft availability issue. They fly those Tokyo flights because they are extremely profitable and most could not be sustained year-round from the US from their gateways. Outside of flights to the US/Hawaii/Guam, they fly to Singapore, Hong Kong, Manila, Seoul, Busan, Shanghai, Beijing, Guangzhou, and Nagoya (no local traffic) from Tokyo, as well as Osaka-Taipei and Nagoya-Manila.

I'm not sure you get rid of MSP over DTW. MSP is a goldmine for NW...little to no competition whereas WN is adding (albeit one flight to BWI) in DTW...both could be kept much like NW has run them. Who knows...AA might benefit from MEM. As could CO. It's a nice STL size focus city. Lots of RJ's to the region with mainline to major cities (LAX, NYC, DFW, ORD, DCA)...

MEM is a dead hub already. If any airline takes over/merges with Northwest, the Memphis hub is as good as gone. Same with Contiental and Cleveland.

 

[Fly]

On the other hand, AA would be a much stronger competitor in Asia than NW ever was and UA could be consigned to permanent Avis status to AA's Hertz.

Don't know if the actual customers would agree with you on that one. United has a very nice Asian experience. Take a look at this trip report.

UA F vs AA F to Asia

 

[TechBoy]

Don't know if the actual customers would agree with you on that one. United has a very nice Asian experience. Take a look at this trip report.

UA F vs AA F to Asia

I wasn't talking about service quality. (My personal experience is that the only real differences between AA and UA are E+ and Ch. 9. But everyone has an opinion on this topic. )

I was talking about the preference of corporate managers to sign contracts with carriers. Right now, AA can't really cover Asia as well as UA. If AA solves that problem, then they offer more flights with better coverage to more regions than UA. And that leaves UA in the position of "trying harder."

 

[WorldTraveler]

NW cannot really fly to its Asian points nonstop because it doesn't have a west coast hub that would be the most likely place to originate flights if it were to serve destinations nonstop. It makes more sense for NW to hub in DTW where it can serve all of the US to all of those cities than to fly a few routes nonstop and cut off alot of the US. AA has a greater capability of serving all of the US with nonstops or single connect flights but not even UA with all its flights is willing to get rid of the NRT hub. There will always be a market for the intra-Asia flights and they can be profitable even if they are flown only with narrowbody aircraft. The beyond NRT rights are extremely valuable to the US and if AA doesn't want them, someone else will and will make money.

And some destinations will probably not be nonstop such as to SIN and BKK... while planes are now capable of doing it, that doesn't mean there is a market for all of those nonstops.

NH and UA are both Star carriers and they both hub at NRT. There's no reason AA and JL couldn't be in the same alliance if AA had beyond NRT flights, although JL might have made a different decision if they knew AA would be setting up its own hub.

There are a number of possibilities as to how the industry will consolidate. Until something actually happens, we'll probably keep talking about it. I'm also willing to bet that something different than what we predict will actually occur, however, based on the overwhelming belief that DL's acquisition of UA is ridiculous, that's exactly why I'm betting on it.

 

[NewHampshire Black Bears]

World Traveler,

Your timing is IMPECABLE

I sat STARING into my PC screen, the other night, and came up with 90% of what you've outlined.

But you've OVERLOOKED the following;

UA/CO.....I don't care how much in debt YOU say UA is in, or will be. Tilton was brought in to "marry" UA with someone, and the only logical "someone" is CO.

You left out WN, who I think would LEAP at the chance to serve MSP(minus NW), to all those places like N/S Dakota, and to its other money maker places, like MDW/BWI/MCO/BNA etc, etc, etc

Because I have a personal (family) stake in this, I hope NW stays as is !!!!!

Having said that, after EVIL DOUGGIE gets through "pruning" NW, to look mighty attractive to buyers, I definitely can see the NW BOD's looking to pull this off !!


NH/BB's

Ps,

WT, you need to be VERY careful around FLY.
She will "#### SLAP" you, just like those Penguins(on her avatar) do to each other.

Soooooooo, "mind your "P's" and "Q's", before you end up in the "MUD" , face down

 

[WorldTraveler]

Fly masquerades as tough but she's as scared as anyone at how this industry will shake out. She should be taking her anger out on her management and BOD, not me.

I'm glad we're on the same wavelength. You can read my postings on the UA forum regarding a UA/CO marriage but the bottom line is that UA had the worst operating profit margin in the industry for the last quarter and CO was just ahead of them. UA reduced very little non-pension debt in BK while CO will be the most leveraged airline in the industry when DL and NW emerge and all airlines are in the same position. Further, UA had the highest costs in the industry while CO had the fastest growing costs. Even one of those would be enough to scare investors away.... combine all three and investors are not going to be very interested in helping UA and CO combine. Remember investors will be asked to help bring DL and NW out of bankruptcy and both have much stronger financial fundamentals than does either UA or CO.

ALthough AA has been rather lethargic of late, they are maintaining industry average profitability. Combine that with their cash position and their unique position of never having been in BK and AA will have real advantages when the industry consolidates.

I know you are talking about Steenland but Doug Parker at US can talk about mergers all he wants but he has yet to integrate US and HP and is now facing industry unrest - which is exactly what you expect when the coming is leading the industry in profitability while US' employees are the lowest paid in the industry.

See my post on the DL thread but I still believe DL and AA will be in the driver's seat when the industry consolidates.

 

[NewHampshire Black Bears]

WT,
Like everything else in this "LUNATIC" Industry, that we all (seem) to be addicted to, TIME WILL TELL !!!!

As for FLY,

You better BEWARE, that you don't get on her BAD side.
She will "knock the *hit out of you, in a NY Minute".

Why do you think she has that AVATAR, with those Penquins ?

She's sending you a subliminal message.

WT, "you have been WARNED" :unsure: h34r: :blink:

NH/BB's

ps,
"IF" your right about DL, I'm STILL trying to figure out, how DL gets into Asia ??

(ATL/NRT exempted)

 

[WorldTraveler]

DL will be starting alot more service to Asia in just the next couple years.

That will be just a prelude to the ex-UA 744s flying from ORD-HKG and SFO-TPE as sample routes.