When US Airways management took over American Airlines 8 years ago, they had a conundrum in New York. New York is a competitive market, and they’d generally shied away from direct competition while running US Airways. And they weren’t big enough in New York to be the biggest competitor, either.
So they came up with a strategy of not competing for New York business but instead to become the airline that brought people to New York. They timed their flights, often from smaller cities, to let people travel to New York and back in a day or at least fly up in the morning and leave after the business day.
That strategy didn’t make them money flying, so they pulled down their New York operation. They stopped serving as many destinations. They flew to hubs, they served LA (which gave them an advantage pitching corporate contracts there after United pulled out of JFK), and they served London Heathrow where joint venture partner British Airways is based. They had a few other destinations that amounted to what the airline described as a ’boutique operation’.
Then they squatted on slots with inexpensive short distance regional flights, and took advantage of slot waivers wherever they could such as reducing their flying while New York JFK did runway work.
This wasn’t a great strategy either. They weren’t poised to win New York corporate business with a smaller operation. They weren’t poised to attract New York loyalty. And perhaps worst of all, a smaller New York footprint meant ceding the credit card market in one of the most important financial centers in the world.
Finally two years ago they came out with a brand new strategy and it seemed brilliant: they would tie up with JetBlue. Together they were the number 3 and 4 carriers in the New York market and would be big enough to compete with Delta. Far from being anti-competitive,
- This would allow them to compete with the biggest players, and make the corporate market competitive
- They even agreed to give up some slots, and to give up more if they didn’t grow the number of seats offered out of New York (more supply and likely lower prices, the opposite of anti-competitive behavior).
The federal government approved the deal, and then set out to sue to overturn it, all within a matter of months and with no new information.
But all of this work to finally give American Airlines a viable New York strategy may be about to get undone. JetBlue announced a deal at a huge premium to take over Spirit Airlines. And it may not be possible for JetBlue to have both Spirit and an alliance with American.
- The Spirit acquisition is a bad deal. Paying oen-third to forty percent more than Frontier Airlines for Spirit is clearly overbidding, especially when JetBlue is buying the airline for parts (planes, pilots and gates), will drive up costs at the former Spirit Airlines, and won’t be adopting its business model which has been higher margin than JetBlue’s.
In other words, JetBlue is paying a huge premium to take Spirit’s assets and put them to work in a less profitable model, not a more profitable one. And they’re outbidding a company in Frontier that could likely earn more with those assets.
- But it gives the Justice Department new ammunition and life to their case opposing the American Airlines alliance. Certainly JetBlue+Spirit+American would never have been approved, and it leads to greater concentration in the Northeast in addition to greater concentration in South Florida. JetBlue has anti-trust problems with the Spirit merger, and even bigger anti-trust problems than before with the American Airlines Northeast alliance.
- But the Justice Department’s case against American-JetBlue was weak. A Spirit acquisition could make it stronger. But it’s still not a slam dunk. The Justice Department might say to JetBlue ‘drop the American Airlines alliance as a condition of our approval of the Spirit acquisition.’
JetBlue needs American somewhat less once they have Spirit’s planes, gates, slots, and pilots. But American Airlines is left out in the cold. This scenario would put them back to going it alone in New York, where they believe they’re too big to walk away from their assets yet too small to succeed.
Hopefully the Department of Justice wouldn’t force the choice between JetBlue buying Spirit and JetBlue partnering with American, in response to which JetBlue goes forward with their acquisition. Such a move by DOJ would run counter to their anti-trust mandate to maximize consumer welfare.
New Yorkers are clearly better off with JetBlue and American partnering against United and Delta. JetBlue and Spirit together aren’t big enough in New York to matter, and JetBlue and American separate aren’t viable competitors either as we’ve seen.
Not so sure flyers are better off. AA cancelled my lax-Bos flight when they harmonized schedules, and I had to take a connecting flight because they wouldn’t rebook on Jet Blue. So if no rebooking possible on Jet zBlue, what makes ip for the loss of AA frequency?
There’s really not a path to success for AA in the NYC region unless more slots are made available. Legacy US Airways made a huge mistake when they engaged in the LGA-DCA slot swap with Delta. This one move solidified Delta’s position as the dominant carrier in NYC and effectively made US Airways and now American and also-ran. The NEA with JetBlue solves some of the challenges with respect to flying up and down the east coast, but it does nothing to increase connectivity to secondary markets on the east coast or most markets in the midwest where JetBlue has very little presence.
There is no doubt that AA has hit the skids since US AIR (with their lackluster Management brought over from America West), took over control. I was with TWA for 30 years, and AA for 11 years. Delta is kicking their butts in NYC. Why? Delta’s motto is “Never aim low.” Obviously transparent statement.
It just shows the absolute waste at the top of US airlines. Someone who can provide a valid argument for Doug Parker earning 30mln per year at AA deserves 30mln per year. It’s a Ponzi scheme at the top for executive leadership
Isom will have AA humming like a well-oiled machine by the summer
That LGA/DCA swap allowed US/AA to have a dominant position at DCA which has proven to be very profitable, so I wouldn’t call it a mistake. The management at that time decided that they didn’t have enough mass in NYC to make a profit so they traded those slots for to create a DCA operation that does.
“The federal government approved the deal, and then set out to sue to overturn it, all within a matter of months and with no new information.”
Maybe this has something to do with the change of administration in the White House. First you had an administration that may as well have hoisted the jolly roger for their big middle finger to anything smacking of helping consumers, then an administration whose main consideration in the matter was whether consumers were getting hosed, and therefore tried to reverse the earlier decision. This makes absolute sense.
Sal,
your statement is not entirely correct. USAirways was already the largest slot holder with a majority of DCA slots before the DL-US slot deal. The deal was structured so that Delta got more than 2X as many LGA slots for each DCA slot it traded to US. Add in that DL still did not gain a majority of LGA slots while US went even further over 50%, and the DOJ required AA-US to divest roughly the number of slots equal to what US gained in the slot deal or the number of AA DCA pre-merger slots (they were about the same number). Delta essentially gained 125 LGA slot pairs for $60 million while USAirways had to divest the number of slots at DCA it gained through the slot deal.
And Gary’s point is valid. Neither AA or US could or can compete in NYC – but for different reasons. US was too small to compete against larger carriers with global route systems while AA’s unit costs were and are still too high. AA’s whole proposal to have B6 handle domestic routes was to try to use B6′ lower costs to handle the domestic flights which AA has not been able to operate.
Given that a high percentage of AA’s JFK international routes are on 777s which are the least fuel efficient aircraft in the US widebody fleet, AA’s international strategy for NYC is likely not working as intended with high fuel prices.
And B6 undoubtedly has seen enough information from the NEA to realize it can be a feeder carrier to AA or it can shoot for a merger with Spirit that will give it much more of a nationwide presence and less of a focus on the intensely competitive NE where B6′ has watched its margins fall as other carriers have grown.
While I have very low expectations that B6 will succeed with an NK merger even if it is quickly approved, I do think Gary is right in saying that AA will end up on the short end of the stick. B6 is smoking something exotic if it thinks it can have the NEA plus a merger with NK and they will clearly choose the merger over the NEA.
Given that AA has pulled back on its PHL hub and pulled back its own domestic services in a number of markets because of the NEA, AA could well be left holding the bag.
Maybe all those people that thought that Scott Laurence came to Delta to have a quick look and see and walk away w/ alot of data are finding that he actually probably started to spill the beans about how poorly B6 has done in a number of markets and what they want to do about it and DL couldn’t keep him around.
Conundrum…..
Christian,
the DOT approved the Northeast alliance while the DOJ is challenging it, saying that the DOJ alone has the right to approve mergers and that the NEA has a number of merger-like characteristics that have never been given to two domestic airlines.
We might have gotten an answer to the question of whether the DOT overstepped its boundaries if B6 didn’t launch a bid for NK. Now the merger might happen and the NEA might be discarded – which could well have been something that B6 considered a possibility that motivated it to bid on NK
No one knows the future. Nobody can know the outcome of a lawsuit. It’s even harder to know the outcome of a potential lawsuit. No one knows how a judge will rule.
AA too weak in New York City market to exist?
Wow, it’s gotten that bad. Remember when AA fled New York City for that shiny new airport promise by the criminals (politicians) in the Dallas-Fort Worth area? Yes, those were the last days of non-stop AA B707s from JFK to LAX.
Now the hatred of AA for New York City has finally circled around and hurt AA. Interesting situation.
We should have never ever merged with USAir period . Never of pulled out of NY. Bad bad business decision . This was a hostile take over of AA by US . Destroyed AA corporate culture innovation. And leadership . Yep I hope they have plan B , if Crandall would of be in charge , he would have plan C D E up his sleeve .
A better solution would include both AA and B6 independently trying to compete and win in NYC through improved service and scheduling, not crying and moaning about Delta and United. As an NYC resident I’m not impressed with the scheduling, pricing, and lack of amenities like first class and lounges I see from the combined B6/AA effort. If AA were serious about NY, they would build an Admirals Club at T5 in JFK…
This blog never hides its hatred for American Airlines and will apply a lot of hubris to get its point across.
Is AA at a disadvantage in NYC structurally? Yes. Absolutely. It doesn’t have sufficient scale because it refused to bring its costs in line with the rest of its peers in the wake of 9/11 by exploiting all that US Chapter 11 procedures have to offer. At the time, it was saddled with an older, less fuel efficient fleet, with less bling, and high costs that would not allow it to grow NY profitably.
The B6 proposed deal for NK is a joke. JetBlue has neither the finances nor the managerial and operational aptitude to swallow another airline, of any size, and then integrate it into the nice product that it has. On clear sunny days and during storms, long before the pandemic, B6 could never get it right. It still can’t. The airline is a mess, but its brand equity lies in its soft product, which has developed into a serious competitor to the run of the mill offerings across the network carriers.
The price that B6 is willing to pay for NK is way too much. It will also face huge costs taking those Airbus jets from NK and reformatting them to B6’s size. It also doesn’t have the slots to grow JFK or LGA with them (it actually relies on AA’s slots to some extent to grow at those two airports).
While DL runs circles around both B6 and AA in the NY Area, the future for B6 (and AA) is a merger of JetBlue into American. How you ask? AA has a debt load far in excess of its peers (thanks to a huge aircraft order just prior to finally declaring bankruptcy in 2011). A SPAC. An activist investor, or three, from the hedge fund world, and private equity, will help push that along. Swallowing B6, slashing its FLL operation to please regulators who would otherwise look at South Florida and say no, selling off the B6 A220s to raise cash (and getting rid of those pesky E190s at B6 that are the achilles heel of its operation and have horrible dispatch rates) will give AA what it needs in NYC. The NE Alliance is already far too entwined for the regulators and B6’s lunacy of going after NK, to undo.
Kind of a biased and inaccurate article, especially for those of us who live in NYC.
What is it preventing American from building market share in their own? How do you think Delta did? It wasn’t via Northwest.
They built it strategically and offered a level of service and reliability American never could.
Not sure why they’re portrayed as a victim in this equation when it’s poor management, unreliable operations, and lousy service that caused them to forfeit market share.
no commentary – just wanted to say thanks for a well thought out article. Great read!
@Michael “What is it preventing American from building market share in their own?”
Lack of slots. The government limits who can take off and land, when and how often.
“How do you think Delta did?”
They bought US Airways slots in a deal reached in 2009.
@Johhny – AA is one mismanaged company with no accountability of sorts- starting with the check-in personnel, bag handlers, food service in FIRST Class, and the reps who are responsible for missing baggage at the carousel. Arrived on a 5-hr non-stop from San Juan PR this mid-afternoon into DFW. I Flew FIRST CLASS!! Starting with the check-in process, at that apology for an airport in San Juan, the wait time to check-in, going thru the TSA Precheck line, uncontrolled boarding process, despicable food in First Class, the pathetic condition of the 737 aircraft, non-functioning WiFi and importantly having to go to a far off luggage claim area for my Golf Clubs bag. The new CEO ISOM will be a do-nothing like Parker and company. BTW, I am a 4-million miler and have had better days going back to Randall’s days. AA will have to play catch up for years to come.
AA spent millions on Terminal 8 in the early 2000’s. Granted it was a poor lay out, there were a lot of gates. Then with the merge, Team Tempe decided JFK was not what they wanted for international flights. A bunch of flying was shifted to PHL. Well, that may have been okay for leisure travelers making connections. Business flyers, the bread and butter, want to fly in and out of JFK. Team Tempe mentality has killed AA and I don’t see Isom making any earth shatttering changes. I give AA another 10 years and they’ll join the demise of Eastern and Pan Am. Corporate greed and egos are the downfall of any company.
Gary,
Michael is absolutely right.
American was larger in NYC than Delta in 2005 at both LGA and JFK. As many people have noted, team Tempe saw no value in serving the world’s largest travel market and traded their assets away.
The NEA came about in part because the DOT had no choice but to start stripping AA’s LGA and JFK slots for non-use or agree to the scheme which AA and B6 cooked up to swap slots.
Yes, Delta acquired slots that Doug Parker – who just stepped down from 15 years of leading US and AA – but Delta had a vision for what NYC could be. Strangely, it wasn’t just Parker that couldn’t see value at LGA and JFK; neither could Scott Kirby who now runs United but orchestrated the DL-US slot deal.
Keep in mind that American was headquartered in NYC for decades; I just taxied past their LGA hangars for yet another time.
Delta has always been headquartered in the South but saw a vision for being a nationwide and then global airline including from NYC.
And Delta has recognized that being just a little better than the competition is what it takes to succeed in highly competitive markets.
AA HAD all of the resources including slots and facilities it needed – at one time.
Life is not static.
and the biggest factor that could determine the next shakeout in NYC might be Delta’s refinery in Philadelphia which provides jet fuel to Delta’s NE operations and trades the non jet fuel products for jet fuel in other parts of the country.
There is a very high likelihood that Delta’s fuel prices in NYC and elsewhere in the NE will be significantly lower than the competition for weeks if not months and that cost advantage will translate into an ability to make routes work that others simply will not be able to sustain if this jet fuel problem persists for much longer.
Just as with the need to reduce its regional jet fleet 10 years ago, Delta also saw the need to protect its fuel supply in the NE. We are now seeing the fruit of both of those decisions for Delta and the pain from others that did not have the forethought that Delta had. And seeing risks 10 years down the road matters a whole lot in very competitive markets like NYC.
It’s funny how bloggers like Gary Leff, Ben Schlappig, Matthew Klint, etc always write these articles on how American, United, etc need this or that to compete with Delta. These bloggers almost never examine how Delta has become successful in outfighting and outcompeting other airlines (legacy, low cost, whatever) in competitive markets like New York, Boston, Los Angeles, Seattle, etc. Delta actually comes to market with good customer service, good scheduling, good planes, comforts like better lounges, and wins the heart and mind of the customer. AA can try to do that any time they want to in New York instead of gimmicks like the NEA.
AA has the worst customer service ever. Their staff at the CLT hub are very poor in comparison to other airlines. They need to get rid of the staff with poor customer service skills and replace them. I am speaking on several bad experiences and not just one. US Airways had much better service in my opinion and far less canceled flights etc.
The merger that was implemented was and is a disaster. Do not put your faith in Isom. Why he has the same vision as Doug Parker. Neither of them were prepared to run an airline as big as AA.
The merger has not been successful. Until you can get the company to run as a whole instead of this is how US Airways did this vs. how AA does things. The board of directors should have made changes a long time ago. In order for AA to be successful we need all new management with new ideas. Not nichol and diming everyone.
Crandall would have all ready had a vision and implemented successful changes.