American Airlines updated their communication to employees about the upcoming loss of South American carrier LATAM as a partner at the end of the business day on Friday. Their message is two-fold:
- The LATAM partnership was no big deal
- They’re still strong in Latin America
Make no mistake, though. Losing the largest South American airline as a codeshare and potential joint venture partner means the loss of access to its customers, and the loss of connecting opportunities beyond American’s own service to more major cities in the region.
Copyright: artzzz / 123RF Stock Photo
American Incredibly Says They Were Only Earning $20 Million a Year From the LATAM Partnership
Delta says their collaboration with LATAM will earn $1 billion over five years. If American is really earning just $20 million a year, they’re clearly doing it wrong.
From a financial standpoint, the loss of LATAM is not significant. Our partnership provided less than $20 million incremental revenue, and the proposed joint business without Chile would have provided limited upside.
The $20 million figure, of course, has to be a stretch. American earns money when,
- LATAM brings passengers to the US who connect onto American flights
- LATAM brings passengers to and from the destinations American serves in South America
- LATAM customers choose to fly American, both between South America and the U.S. and domestically when they’re here, because of the frequent flyer relationship
LATAM is the largest airline in South America. Without their customers and their connectivity that’s a significant loss. So how does American come up with just a figure of $20 million? They assume they still get most of the business anyway, which is a stretch.
If you see claims that that dollar amount is higher, that’s because in all codeshare agreements, the incremental revenue generated by the codeshare is far less than the amount of revenue that is sold between the codeshare partners. For example, in a codeshare relationship a passenger flying from Orlando to Sao Paulo may fly Orlando to Miami on American, and then Miami to Sao Paulo on LATAM. The revenue from that passenger is generated by the codeshare, but it isn’t necessarily incremental because American could have carried that passenger on the entire journey. On the whole, the relationship did provide $20 million of value that we are unable to recapture without commercial changes. However, we do expect to make commercial changes to recapture as much of this $20 million as possible and expect to add more service to South America to further bolster our leading position.
It’s possible that, as partners, a LATAM customer might have chosen to fly American without the codeshare. There’s little reason to expect that to happen when LATAM and American no longer partner, and ignores the opportunities the customer will have with Delta.
But American is Growing in Latin America!
American practices a bit of sleight of hand here. They point out that they “operate almost 250 flights to 90 cities across the Mexico, Caribbean and Latin America (MCLA) — more than any other carrier.”
American’s Mexico and Caribbean service is largely beside the point, and while it can benefit from LATAM’s customer base that’s not nearly as central as its South America flying. LATAM is a major player in Brazil, Argentina, Ecuador, Peru, and Chile.
So when they highlight growth in Mexico, Honduras and Costa Rica it’s largely beside the point.
So far this year, we have added the following year-round service to our Latin America network:
CLT–GDL (Guadalajara, Mexico)
DFW–TGU (Tegucigalpa, Honduras)
DFW–DGO (Durango, Mexico)
DFW–ACA (Acapulco, Mexico)
DFW–HUX (Huatulco, Mexico)
DFW–SAP (San Pedro Sula, Honduras)
JFK–GEO (Georgetown, Guyana)
JFK–SJO (San Jose, Costa Rica)
JFK–LIR (Liberia, Costa Rica)
MIA–COR (Cordoba, Argentina)
PHX–CUU (Chihuahua, Mexico)
Meanwhile the amount of flying American does between the U.S. and Latin America is certainly affected by its ability to attract connecting customers from cities they don’t serve, and to attract customers with a local preference for another airline. With fewer of those passengers, we’ll have to see it play out to know which services need to be downgauged and which ones can’t be sustained on their own.
No Risk to the Miami Hub
American serves Latin America aggressively from both Dallas and Miami, and especially Miami given the local traffic. With LATAM’s major presence at Miami we can expect Delta to grow there once the partnership is fully realized. However American has most of the real estate and will certainly remain the largest carrier in the market. That doesn’t mean they won’t lose passengers and revenue, and see the performance of some of their flights affected.
And to our nearly 13,500 team members who call MIA home, where we account for nearly 70% of air traffic (with about 45% international flights), we’ll continue to be the preferred airline for our customers. This year marks our 30th anniversary as a hub, and we intend to remain the No. 1 airline and leading gateway to Latin America.
American will no doubt continue to be the “preferred airline for [their] customers” but what about for LATAM’s customers?
Makes you wonder if AA’s CEO Parker has negatives on his Board to keep them in line. At what point does the Board finally react and declare that “the emperor (Parker) wears no clothes?” AA continues to lose its footprint at JFK, ORD-Orient, and now Latin/South America. Where are the institutional stockholders who usually don’t succumb to manure as excuses for operational/financial failures?
Of course, hard not to think that Parker and his Board have actually invested in Delta and await the big payoff as AA eventually collapses under the weight of its perpetual failures.
Ed Bastin unequivocally said that Delta will begin to build up Miami. I don’t think this will happen until after it gets its JBA approved with LATAN, but this totally opens the door for a 125-175 daily flight operation from Miami, similar to its Boston and Seattle operations. Will AA remain the biggest? Of course! But this is going to hurt them in a major way.
The problem with airline accounting is that whole high fixed cost low variable cost thing, and then add on the fact that tickets are priced based on market demand and not service cost.
Point being, most hard numbers reported about anything in aviation are either wrong or cherry picked.
Actually, American is no longer the “preferred airline of their customers”…or at least not this one. The poor domestic hard product, mediocre international premium soft product, and worse customer service — driven, as far as I can tell, more by corporate policies than by individual employees — have pushed this once loyal executive platinum into the arms of Delta and JetBlue, even when flying to South America.
Example: though my wife and I live in Florida, on a recent trip to Chile, we flew Delta, rather than have to deal with AA (due to a combination of my feelings about American, and my wife’s feelings about MIA, about which she said, “Do we have to go through Miami? Something always goes wrong there. I like Atlanta a lot better.” She’s not an avgeek, and doesn’t relate the problems of a hub airport to its primary airline, but I do.)
We have plans to go to the Peruvian rainforest, and this latest news makes us both hope that LATAM’s transition will be complete by the time we go.
American’s management seems to think they are running a money generating company for their shareholders, and doesn’t seem to relate the money they make with the quality of the product they provide. In short, they don’t really think of themselves as an airline accountable to their customers. Delta generally seems to be able to focus on both constituencies, and as far as I can tell, they are more successful in all areas because of that.
@Gary – I do have one question: does Delta already have some assurance that their joint venture will be approved by the authorities that turned down American’s?
There is this thing, in America right now, which I will call “denial of reality”. It is obviously becoming very common….
There’s no reason to think Delta’s deal would be rejected. American got regulatory approvals, but was finally rejected in Chile by Chile’s Supreme Court. The issue was route overlap, LATAM/American were the only two airlines serving Santiago-Miami. There’s really not that sort of situation with LATAM and Delta, and Delta has a much smaller presence in South America generally.
While no guarantee per se, the issues that led to problems with final approval of American’s JV with LATAM don’t really exist for Delta.
@Dan yes, your conclusion is largely accurate..
Losing LATAM need not be a devastating blow for AA. AA’s stupidity will make it one though.
Perhaps AA should cease service to Chile to increase the anti-competitive effects of a Delta/LATAM joint venture.
Surely AA’s institutional investors must be sick of this er, stuff by now.
Gary,
You and all the hAAters must be salivating waiting for American to totally fail and collapse.
I don’t understand the court issue with AA and LATAM. Why is the joint venture not ok for aa but it’s ok for delta to make this investment? Maybe I’ve misunderstood the case.
So here’s the big problem for LATAM and Delta. Delta is paying almost $2 billion for a 20% share in a company that doesn’t really make any money. Together, I think we can safely say they still won’t make any money in the current South American business environment. AA has, by far, a superior Latin network, and they’re not making much money in that network right now. If economic conditions improve, I am certain that AAL will expand its operations to take advantage of these improved conditions. That expansion will undoubtedly occur in MIA, but might also occur at LAX, DFW and (gasp) JFK. There’s been no history of any US carrier ever making money in Latin America without a huge MIA hub. I don’t think that history is likely to change just because DAL is spending a lot of money to buy into a not-very-financially-successful airline.
@Nun — There is a legitimate argument that AA and LATAM joint venture would raise fares due to a near monopoly on nonstop flights between the USA and SCL. On the other hand, DL and LATAM would be a competitor to AA, so there could be more competition. In the real world, of course, what we’re likely to see is a duopoly with similar fares to those that LATAM and AA would have charged had their combination been approved. I suspect almost no customer will notice a difference, but it certainly “looks better” to have a theoretical competitor. The market would need a true low fare entrant to actually increase competition.
I too wonder if Delta will ever make a cent on this joint venture. Let´s face it. Latin America is not the money making place for anyone…
I am wondering how DL plans to grow in MIA where they have limited gates? Is MIA such a big O&D market for most of LATAM’s flights? Or is their big presence there exactly because of their AA partnership which provides them with lots of connecting possibilities? With DL now a sizeable investor, wouldn’t it makes more sense if LATAM move the majority of their flights to ATL and let DL use its current gates/slots in MIA to run a more frequent ATL-MIA flights? I mean, ATL-MIA is a relatively short hop. For example, LATAM can drop one of its 2 current nonstops between MIA-GRU and change it to ATL-GRU instead and DL can add a new ATL-MIA flight.
MIA is a common use airport. Delta does not lease/own gates, nor does any airline, including AA. DL will have access to all the gates it needs to expand. Only limited by actual physical constraints.
Love all the people coming to the defense of AA and calling people “hAAters”. While no one wants the airline to go bust long term, you’re damn right that they should be called out and castigated in the short term on the idiocy they are putting out there day after day. The shine on Doug Parker has long rubbed off.
This is exactly where United was 2013-2015 – they paid the price for a number of years, changed leadership, and now are in a better place.
@Ron- for most of LATAM’s flights to and from Miami, over half to 80% ( depending on flight/ destination in South America) is o/d Miami. Miami is a HUGE destination for people in Latin America. Latam will need to keep most of not all their flights in Miami, as that’s where people want to go. Very simple.
@Simon
Understand that airlines don’t own/lease gates at MIA, but I’d imagine that this being a hub airport (and a sizeable one at that) for AA, they would have most of the physical gates assigned to them / their Oneworld partners already. I just don’t see how DL is going to be able to execute their plans to grow materially at MIA given the gate constraints.
@Jason
Thanks for the enlightenment.
Well, I think what you writes here is true to some extend like “domination” but not truly when we see how AA has growing in different markets as you point there, with you loosing some other markets. I would say that the major lose for AA is the Latam Pass customers who used AA to US and other destinations in US/Canada….but who cares for few hundreds of miles in domestic markets when you can have the big chunk on long haul destinations? I don’t at the end Chileans, Colombians,, Argentinians, Brazilians Peruvians love international travels more than domestic using the low cost carriers such as SKY in Chile or Norwegian in Argentina. But each market has the own players and main destinations but it has been market for every player…. UA, AC and DL has kept their daily flights to Chile where there isn’t (wasn’t for DL) a partner…DL had one in Argentina (not so great partner for DL since they are in the lowest earnings of SkyMiles ) and one in Brazil with 10% of GOL. In Colombia AA reduced the capacity to BOG but increased their routes about a year ago flying to the main destinations in Colombia from MIA and some from DFW: BOG, CLO, MDE, CTG, BQA and PEI. Ecuador covers the two main cities with daily flights from MIA and DFW: UIO and GYE. Peru only LIM and lose their connections to other cities in the country, in Brazil it’s a different story where AA is now flying to the main cities and destinations there: GRU (Served from MIA, DFW, JFK and LAX) GIG, MAO, BSB but it lose big markets from this joint venture such as POA, SSA and CWB. Argentina is well covered by from DFW, JFK, LAX and MIA to EZE and MIA to COR. Chile where LAN started before LATAM but SKY still operating there and it could do some agreements with AA. DL selling 10% of GOL it can open possibilities for AA in Brazil market. Ecuador could so something with TAME, Colombia now all players are full and it would be hard to do agreements with other airlines because the alliance… but at the end they could do something with AV as IB did some codeshares… I think the big losers are the European airlines such as LH that have had agreements with LA. IB is has a big chunk in Latin America since they fly to most of the countries in South America… IN few words, I believe the lose it would not be that big if AA play well with other cards… actually it could win even more based on their cards of great customer service, history of operations in the region to capitalize their time and money invested thru these years
UA-NYC
They got what they wanted with Doug Parker and company. The unions and all forced out all of legacy AA management.No one wanted any of them, including some of the bloggers.
For the record I am not or ever was a Parker fan.
They got what they wished for so deal with it. At least in terms of the product if legacy AA was around you would have had seat back screens on board and padded seats and an overall more premium product and more fight back with NY as it was a cornerstone gateway but I guess back then all legacyAA management was condemned in entirety.
Thank you Mr. Leff. Being a member of the company, I cannot tell you how ridiculous the policies and procedures are in that sucking vortex. People don’t get their money back when American screws up because the procedure to obtain those funds back are so convoluted, most give up trying. Isom banks on it! I spend most of my day explaining the “how to’s” to people. It only requires someone to try to use a ticket to get another flight when they original ticket is higher in value after the $200 change charge is assessed out of it, and the new ticket value. The “voucher”issued via email DOESN’T COME WITH THE FOUR DIGIT PIN, WHICH US REQUIRED TO USE IT AT ANOTHER TIME. The only way to rectify that situation is send an email to a nameless customer service representative that might..
. MIGHT be able to get one issued correctly. GOOD LUCK WITH THAT! I keep waiting for the class action lawsuits any day now……