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?