The end of Wright

[MetalMover]

http://www.fool.com/investing/general/2014/02/06/american-airlines-group-inc-is-finally-getting-com.aspx
 
The way this article is written, maybe AA should throw up the white  flag now.

 

[jimntx]

Oh, I wouldn't go shopping for a funeral spray just yet.

 

[eolesen]

Good piece in Cranky Flier about it today as well.

http://crankyflier.com/2014/02/06/southwests-announcement-of-15-new-destinations-from-dallas-leaves-so-many-questions-unanswered/

There are a few more shoes left to drop, mainly which cities will be losing service to support their expansion, something I've been saying for the last couple years.

The rest of the conversation I'll save for the WN forum.

 

[MetalMover]

Good piece in Cranky Flier about it today as well.

http://crankyflier.com/2014/02/06/southwests-announcement-of-15-new-destinations-from-dallas-leaves-so-many-questions-unanswered/

There are a few more shoes left to drop, mainly which cities will be losing service to support their expansion, something I've been saying for the last couple years.

The rest of the conversation I'll save for the WN forum.

Good point. AA is also in a much different position then they were when WA was enacted.

 

[WorldTraveler]

Good point. AA is also in a much different position then they were when WA was enacted.

no, Jim, it isn't time to buy funeral sprays but, mover, let's also not forget that US' highest margin hub will become a low fare carrier mecca - and there is no way of denying that DCA will have the highest concentration of low fare activity of any large airport.

At the same time, AA will face more competition than they have ever seen in the Metroplex.... DL's hub at DFW in comparison provided next to now real challenge to AA compared to what WN will do.

The other piece which hasn't fully played out is complete Open Skies in Latin America against a backdrop of slowing growth in emerging markets and a strengthening dollar.

And finally, AA continues to have to subsidize its operations in the Pacific and is seeing its relative position on the west coast challenged by the growth of other carriers while AA has very little ability to grow in key markets. Its presence in NYC continues to slip and they don't intend to challenge DL and UA's strength in a number of top domestic and int'l markets.

And then AA has to merge two airlines where so-called labor leaders want to take the company to the mat over stuff as relatively inconsequential as the type of boarding priority.

AA has a very full plate, strategically and operationally.

 

[eolesen]

At the same time, AA will face more competition than they have ever seen in the Metroplex.... DL's hub at DFW in comparison provided next to now real challenge to AA compared to what WN will do.

So, DL's operating 250+ flights was less competition than WN with 160 flights?

Without going to the past-date schedules library, I do suspect DL was operating in all the same markets that WN is now proposing to operate, plus more because they also had the ASA operation overlaying the closer-in cities.

So, what does that really say about DL's ability to compete?...

Or are you now going to apply the lens of "that was a really long time ago"???

 

[UPNAWAY]

SW is no longer a low far carrier and are pretty much no longer low cost either.

 

[WorldTraveler]

DL was carrying less than 20% local traffic on its hub... it was almost entirely connecting traffic. DL was not an effective competitor to AA's DFW hub.

By the same token that it was more effective for AA to close its BNA and RDU hubs in order to build up Latin America, it was equally effective for DL to not try to compete in the flow markets over DFW that DL carried but instead for DL to move capacity to ATL and JFK where DL built up its presence such that it was much smaller than competitors.

As has been noted before, DL retained its #2 position of the DFW local market relative to AA despite the pulldown of the hub. DL lost the connections but still competes fairly effectively in the local market.

WN may not have a CASM as low as it once did but it has the financial strength to lower prices to generate the market it needs to survive.

Anyone can argue about how WN will have to raise prices eventually and that is true but that doesn't mean they can't lower fares low enough to hurt AA in the short-term; WN will still end up with a sizable portion of the local market. You need only look at the cities which WN can serve from DAL today to see that there is probably not one that AA serves from DFW in which it has the majority of the market when the combined DFW/DAL market is considered.

 

[RJcasualty]

WN has a $15b deep pocket. DAL is home turf. Could be a protracted war of attrition concluding with both sides limping away from the trenches--- agreeing to an armistice. 

 

[WorldTraveler]

WN's version of armistice is likely to be "when we get to at least half of the market and can't fit anything else on the 500 seat 777-300s (Japanese style) that we run from DAL, then we'll say we've tapped out the market."

 

[AirwAr]

My biggest worry is US Air management.  They're overwhelmed and their mentality seems to be completely operational...something like, "if our plane flies from A to B...we will win just cause we're bigger".

 

[eolesen]

As has been noted before, DL retained its #2 position of the DFW local market relative to AA despite the pulldown of the hub. DL lost the connections but still competes fairly effectively in the local market.

WN may not have a CASM as low as it once did but it has the financial strength to lower prices to generate the market it needs to survive.

Anyone can argue about how WN will have to raise prices eventually and that is true but that doesn't mean they can't lower fares low enough to hurt AA in the short-term; WN will still end up with a sizable portion of the local market. You need only look at the cities which WN can serve from DAL today to see that there is probably not one that AA serves from DFW in which it has the majority of the market when the combined DFW/DAL market is considered.

 
Hmmm. Seems to me that if DL is a distant #2 in the market, they're going to be a more distant #3 after WN starts up their new services.

 

DAL is home turf.

It may be home turf, but don't confuse that as being a top revenue generator.

 

[swamt]

Let's not forget that the new AA has well over 10 billion on hand in cash.  AA can and is ready to do battle for the North Texas market.  With W/A going away, yes it will put a dent in AA's market.  But AA has had time (8 years) to better fit itself for this coming in 2014.  AA will do just fine over at DFW.  Some folks will remain very loyal to AA for several different reasons,  frequent flyer miles, assigned seating, first class seating etc...  Now AA may have to pull back some flights as SW market share will increase and AA will probably feel it the most, but AA will still exist and focus on other flights and international flights.  I am certain that the W/A going away was a part of their reorganization processes.  However, AA better be more focused on getting this merger integrated and completed and ready to compete with Delta, United, and Southwest. 

 

[WorldTraveler]

The amount of cash that AA has on hand means very little since the amount of its debts far exceeds cash on hand. The cash is all borrowed.
Not only is the cash borrowed but debt will go up over the next few years as AA's fleet restructuring accelerates to the tune of $2.5B per year. The last time US airlines spent money at that clip on new aircraft was in the late 90s which was followed by the dot.com crash and 9/11 which was nearly the end of some of the legacy airlines.

Considering that two of the 3 legacy airlines are taking that same financial tack but one is not, similar to what WN and AS did in the last go around, the results will be very different when the bottom falls out of the industry - and it almost certainly will. The US airline industry is enjoying one of the longer runs of profitability it has known in decades due in large part to a stable global economy, even if it isn't rosy. It is naive to think that the airline industry has overcome the enormous shocks that have significantly hurt the airline industry in the past

Further, AA is trying to merge two airlines at the same time the Wright Amendment subjects AA to more competition at its largest hub than it has seen since BN, DCA - which is sandwiched between CLT and PHL - is becoming one of the most heavily low cost carrier dominated major airports in the nation if not the world, and Latin America is becoming truly Open Skies in every major market within the next couple years. Add in the growth of other carriers that will force major competitive changes in the industry in the west and in NYC.

No other single airline has faced as many revenue challenges at the same time.

Yes, AA knows this has all been coming but to think they will just waltz thru it as if nothing has happened is a little much for even the most optimistic AA loyalist to believe.

 

[FWAAA]

Let's not forget that the new AA has well over 10 billion on hand in cash.  AA can and is ready to do battle for the North Texas market.  With W/A going away, yes it will put a dent in AA's market.  But AA has had time (8 years) to better fit itself for this coming in 2014.  AA will do just fine over at DFW.  Some folks will remain very loyal to AA for several different reasons,  frequent flyer miles, assigned seating, first class seating etc...  Now AA may have to pull back some flights as SW market share will increase and AA will probably feel it the most, but AA will still exist and focus on other flights and international flights.  I am certain that the W/A going away was a part of their reorganization processes.  However, AA better be more focused on getting this merger integrated and completed and ready to compete with Delta, United, and Southwest. 

Of that "well over 10 billion,"  one billion dollars is "restricted cash," which isn't available for general corporate purposes (it's primarily taxes and workers' comp obligations).    Another $700 million is locked up in Venezuela in Bolivars and it's unclear whether the government there will stick to its word to allow AA and others to withdraw it at the old favorable exchange rates or whether the devalued rates will apply.  Probably the latter.   I read the other day that AA and others have stopped selling tickets in Venezuela for Bolivars, but is still selling tickets there if you have Dollars.   
 
Subtracting the $1.7 billion above from the $10.3 billion of cash mentioned in the earnings release leaves a rather impressive-sounding $8.6 billion in unrestricted cash, but as WT points out - it's all borrowed.  More favorable rates than if you or I took cash advances against all the plastic in our wallets, but still borrowed.   And for a $40 billion enterprise, it's not all that large.     
 
On top of that, the $8.6 billion is a lot less than the combined unrestricted cash of pre-merger AA and pre-merger US as of 9/30/13.  Primary reason for that is that when AA exited Ch 11, it had a lot of bills that had been accruing but had not been paid, like interest,  lawyers, accountants, bankers, advisors and other various sundry parasites.   When the 10-K is filed in a couple of weeks we'll get more detail about those cash outflows in the fourth quarter.