Good to see the conversation developing about DL’s future, esp. with respect to AA and a potential DL bid during AA’s BK.
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First, I agree that the assets that AA has cannot be underestimated and there is no way that DL could duplicate at LHR or in Latin America or at DFW or ORD w/o having what AA has. Even if DL cannot obtain any of AA’s NYC assets other than the LHR slots, AA is still a very valuable franchise.
DL will likely make the decision within the next 6 months if they will attempt to make a bid for AA depending on how AA’s C11 case progresses, but if DL doesn’t bid on AA, it is almost certain that DL will begin the process of starting its own MIA-Latin America service. The equity positions in AeroMexico and Gol and the partnership with Aerolineas Arg… as week as it may be… still provide DL with the partnerships necessary to launch a small scale hub in MIA – and it only needs to be large enough to obtain the corporate business and provide the overall network advantage of being able to serve all major market regions from all of the major gateways. MIA has long been an enigma in that AA has been the only longhaul US carrier for years; DL’s success at starting MIA-LHR up against AA-BA had to be a trial balloon to see if DL really could compete not only against AA but also against an AA partner on a key hub route. So far, G3 has no intentions of flying long haul international but does have the ability to pump a lot of feed onto DL flights – which it does. AR’s international service is weak enough that DL would probably be the carrier of preference for most passengers in that partnership – all they need to do is distribute traffic in S. America. MEX is strategically very important as a hub – and for now, DL has the only major partnership between a US and Mexican carrier. Throw in markets like Colombia, Costa Rica, Guatemala, and Peru where DL has a decent position via ATL and then factor in that DL has so many US hubs that they can feed anything in MIA (including now both LGA and JFK to MIA) and it really is possible to build a DL hub in MIA.
As for London, it is doubtful there are enough slots for DL to meaningfully compete with either AA or UA… but DL is doing very well in LHR w/ what it does have. It needs several more key slots (an earlier ATL, LAX, and perhaps one more JFK minimum) but those slots could be bought ; right now all of DL’s slots are either from AF-KL or obtained from AA/BA as part of their joint venture (if DL acquired AA those slots would be given up and it would validate even further how small DL’s position at LHR is relative to other carriers). Also, Virgin Atlantic still hasn’t decided what it will do other than invest in its product and realizing that 4 holers aren’t necessary over the Atlantic and do provide a huge fuel penalty. If VS doesn’t sell equity or develop a strong partnership with DL, then it argues all the more that DL needs to buy its way into LHR – unless the size it has is sufficient.
Internationally, LHR and Latin America still demonstrate that AA – for far longer than a decade – has not been able to compete very well in markets that have Open Skies and are in areas where it has not been naturally strong. AA’s presence in continental Europe has long been weak and the number of markets where they have failed is long. Indeed, DL has not done much with Bucharest for years – but it still has a partner there and in PRG, even though many eastern European markets just aren’t large enough to work. DL left BUD when AA and MA decided to start service together and now AA’s service and MA are gone. AA tried unsuccessfully to fly to Russia and is now dropping India. AA has a token presence in Germany at best - and AB won’t help AA develop its long-haul presence because AB’s model is so different from AA’s.
After operating JFK-NRT for years without DL, AA quickly fell to #3 in the NYC-NRT market after DL restarted service using the PMNW hub despite AA having a partnership with JL… and is now ending the market. UA competes directly against every transpac route AA flies except for DFW-NRT and UA gets a significant revenue premium on every one of those routes. It is highly unlikely that AA will succeed in growing its presence to a significant degree in Asia against DL and UA and their partners who are much stronger. AA is also being trumped by UA out of ORD to Europe in addition to the difficulties they have in growing their international presence at JFK to Europe against DL. Once again, AA is not strong in JFK markets other than to their partner hubs.
Do you realize, Tom, that DL has gained a JFK-LHR local market share comparable to what AA has on its own metal at fares comparable to what AA has? DL’s 3 flights/day are enough to pick up the best local revenue and the same trend holds true on DL’s BOS and MIA to LHR… AA continues to pump a lot of connections onto its flights to LHR and have a presence in other markets that DL cannot gain…. AA also connects a lot of traffic beyond LHR or as stopovers that DL can currently route through continental Europe hubs.
And, Tom, DL still is the largest local market carrier in the NYC-Europe market. CO carriers more passengers in total from NYC to Europe but carries alot more connections. AF-KL combined only push DL's lead further forward.
Domestically, you cannot underestimate how significant AA’s loss of market share in NYC has been and will continue to be. AA has long had an advantage in corporate contracts because of its balanced presence at NYC, ORD, and LAX. UA now can put a strong position at all 3 cities on the table while DL has taken away any advantage any other carrier has at NYC by flying from LGA and JFK to every domestic major and most of the largest international markets. The fact that CO’s LGA-IAH market is larger than EWR-IAH highlights that LGA and JFK, not EWR, are the preferred airports for NYC and that is impossible for UA to have an advantage at EWR if the same hub exists at LGA and JFK.
UA has an advantage with ORD and a larger presence at LAX – part of why DL has to act. AS would give DL the size in LAX and they could add flights in a few more key ORD markets but AS doesn’t solve DL’s need for more presence in ethnic (not tourist) Latin America and at LHR. The bigger factor with AS is for AA to consider how its ability to compete will look if DL buys AS instead of AA. AA will be weakened to a #3 position in LAX which is where it is NYC and in most non-AA hub cities now – which is part of why corporate revenues are moving to DL and UA – and AA’s RASM growth is trailing the industry.
One can argue as long as you want about how strong AA will be coming out of BK – but their 8 years of waiting for labor peace and hoping someone else would fail have not worked – and AA will not be able to regain the competitive advantage it has lost… they will increasingly be relegated to a 2nd tier carrier with respect to AA just as US is. Add in the fall of the Wright Amendment and it will be very hard to argue that AA can increase its revenues and that AA can compete on the same level of revenue as other carriers. And low fare carriers continue to expand into AA markets. AA employees and creditors are very unlikely to believe that a 2nd tier, trailing revenue growth position with increased competition across AA’s network is in the best interest of the company or their futures.
As for fleet, arguments about DL’s mixed fleet seem meaningless in light of AA’s decision to buy duplicate models from both A and B – just as they did with the 763 and A300. If DL had to make a duplicate new generation fleet work because of not being able to get out of contracts, they would, but I agree they will make every effort to cancel one order or another.
It is also very true that DL simply does not believe the economics of buying new generation aircraft outweigh the fuel savings they would gain over current generation models. Far too few people understand how expensive airplanes are and how much debt it takes to service the debt necessary to buy those aircraft. Given that as the industry contracts, the ability to price the product in order to cover costs increases, it becomes less and less necessary to buy a bunch of new aircraft as a basis for being able to cover costs. DL has no intentions now to get rid of the M80 because it flies 2-3 hour flights on the east coast where DL has strong pricing power and where it can easily cover the increased fuel costs. In addition to the M90 which has fuel efficiency comparable to if not better than current aircraft at a fraction of the ownership cost, it is still very possible that DL could end up with FL’s 717 fleet which are very well suited for point to point markets like LGA, BOS, and perhaps eventually ORD or LAX – and again at a fraction of the cost of 319s or 73Gs.
But once again, the notion that AA will have a cost advantage relative to its peers because of its new fleet has to be viewed in light of the reality that other carriers are replacing their older aircraft as well and are not spending tens of billions of dollars to do so…. Part of AA’s expensive refleeting reflects its delay in starting the replacement process sooner – and some of it quite frankly is not necessary if AA combines with another carrier.
When you also consider that DL gained about a 15 cent per gallon fuel hedge advantage over its peers in the most recent quarter (about 5%) – which they apparently repeated in January – then the advantage gained from a new fleet is even smaller. From AA’s first quarterly report in BK (Covering 4Q2011), AA has about 20% of its fuel hedged, down from 35% a year earlier. The new fleet is still a year or more away… if AA and US each have a disadvantage to the industry in fuel costs, then it is even harder to argue how they can together or separately compete against carriers who have either newer fleets now or better fuel hedges.
Combining AA with US doesn’t solve any of the problems. Despite having some of the lowest paid employees in the industry, US still has higher costs. US can’t generate revenue premiums from its own network and yet expects to be able to gain revenue premiums from a carrier that will increasingly find it difficult to grow revenues on the scale of DL and UA. US doesn’t have anywhere close to the financial strength of even niche carriers like AS or B6, let alone DL or UA with whom it might have to compete with in bids for AA.
Even if US succeeds at acquiring AA, the integration will be long and painful and competitors will continue to take every opportunity to weaken the two combined carriers – who somehow are supposed to become much stronger overnight even though both carriers are much weaker now than their competitors.
Without AA, US’ future is increasingly uncertain as competitors continue to grow their presence in key US markets.
B6 could help AA grow its presence at JFK to a large size – but they could run into the same ATI issues that other carriers would have. While AA plus B6 at LGA and DCA wouldn’t be a problem, AA plus B6 at JFK would likely still require slot divestitures. Plus, JFK is not near as well positioned as LGA or EWR for US business markets from NYC and there simply aren’t enough slots between AA and B6 to compete effectively at LGA with DL or with UA at EWR.
Like US, a B6 or even AS merger would merely incrementally help AA while leaving them far short strategically in a number of areas. No solution increases AA’s presence in Asia. While US has a larger share in continental Europe than AA, it is largely tied to Star… if US moved to oneworld, it is doubtful they could retain their position in continental Europe.
AA waited while the DL and UA consolidated and there are no solutions that will allow AA to effectively compete long term against DL and UA which are both larger as individual airlines but also have larger alliances.
And I agree that DL would probably be willing to sacrifice its ATI relationships in order to gain AA… knowing that US would likely buy US and be forced to do the same thing. Alliances and joint ventures help move revenue but they cannot serve as valid substitutes to a much larger market position operated by one carrier.
The implications for maintenance are significant no matter what happens with AA, US, or with further consolidation in the industry. DL’s fleet likely will become younger even if it is also more complex with the addition of new fleet types. A flood of new AA outsourcing work could help DL gain more business for Tech Ops. Even if AA becomes an MRO force, it will take years for AA to stabilize and ramp up. Of course if DL gains new fleet types and perhaps even maintenance capabilities/capacity elsewhere in the industry, then DL will increase its ability to grow its MRO business. It is a lot harder to make the case for AA to retain its own maintenance capabilities if it is investing in a much newer fleet. OTOH, DL is gaining one dollar in revenue from insourcing for every 4 dollars it spends to maintain its own fleet… thus, DL’s older fleet increases its ability to make money from others because DL has the capabilities that others need. DL has said that Tech Ops generates 10% plus margins which means that DL directly is offsetting its own maintenance costs by at least 3-5%.
So, dawg, the industry is still in transition. DL’s position in the industry is not fully defined yet. The next few years will likely define the point of stability the US industry has been seeking for almost 35 years since deregulation. DL is making decisions now to position itself to benefit from the next round of consolidation – and that could have implications for DL employee compensation and benefits, including the fact that DL will find it increasingly difficult to not include WN in its pay and benefit comparisons given that DL, UA, and WN will be3 of the dominant airlines in the industry. Whether there are others in addition to those 3 remains to be seen.
