Why Philadelphia Is No Substitute For New York As An American Airlines Hub

American Airlines didn’t rebuild its Philadelphia transatlantic hub coming out of the pandemic. Europe opened later than travel returned to the U.S. market. And American found that they did better flying planes to Mexico than across the Pond. When demand for travel to Europe came roaring back, the airline didn’t have as many flights scheduled, and they didn’t have planes either – having retired their Boeing 757, Boeing 767, and Airbus A330 fleets early in the pandemic and facing delivery delays from Boeing on new 787s.

Without rebuilding transatlantic flying, they also didn’t rebuild Philadephia’s domestic route network to pre-pandemic levels. Those flights used to connect people onto international departures, but those international departures hadn’t fully returned so the domestic flights didn’t make as much sense either.

Now they’re adding 3 new transatlantic routes from Philadelphia (Copenhagen, Nice, and Naples) after announcing the transfer of their New York JFK – Doha flight to Philadelphia.

And they’re adding back Philadelphia flying, such as a new route to San Antonio, and adding back Philadelphia – New York LaGuardia. This latter,

  • squats slots in New York, because with the end of the Northeast Alliance with JetBlue American no longer has a New York strategy

  • hopes to serve some of the New York market through Philadelphia rather than non-stop.

American has eliminated its second New York – Rome flight as part of providing aircraft for its announced new transatlantic service.

Cranky Flier, in writing about the announced new route, disses on American for having previously focused on New York. But this gets it all wrong.

It is, as a side note, good to see Philadelphia getting love again. These new routes are about adding network value by putting new destinations on the map and then routing people through Philly to get there. The distraction of the now-dead Northeast Alliance had American put more airplanes into places from New York that didn’t add that same kind of network value.

“Network value” is all about connecting traffic. They compete with Delta and United for passengers who have an option to fly through Newark, Boston, Washington Dulles, New York JFK, Chicago O’Hare and Atlanta.

In contrast, American’s business in New York, with its JetBlue partnership, was largely about serving the New York market. JetBlue wasn’t so much providing connecting passengers for American (people transferring from JetBlue flights to New York JFK onto American’s international flights) as much as providing local customers for American’s flights. Non-stop means competing with a different product, that consumers will generally also pay a premium for.

  • New York is a much bigger local market than Philadelphia

  • Take its New York JFK – Doha flight. That was about 80% New York passengers heading to the Mideast and Indian Subcontinent, places like Lahore, Islamabad, Karachi and Dhaka. This was one-stop service for New Yorkers to where New Yorkers were going.

  • Instead Philadelphia is all about connections. People connect to Philadelphia, will take the flight to Doha, but almost none of those passengers are flying to Doha. They are, again, heading to Pakistan, or smaller cities in India.

  • So moving that Doha flight to Philadelphia has ‘network value’ but it is low value. It competes for double connections, which means lower yields. American still has its high costs, but they’ll earn lower fares.

And that doesn’t even begin to get into the hidden importance of competing in the New York market. Once American began partnering with JetBlue, and not walking away from New York any longer, they began signing up more customers for the AAdvantage program. In fact New York was their biggest market for new signups. And that converts people to co-brand credit card customers. And New York is the most important spend market in the country.

Selling AAdvantage miles is a multi-billion dollar business with a 52% margin while all of American including the sale of miles earns about a 10% margin. Offering a product that’s relevant to the New York market matters for New York card signups and wallet share, as American learned.

Cranky notes that American will have more year-round routes and fewer seasonal routes from Philadelphia to Europe in 2024 than they did pre-pandemic. Eventually this will become even more tilted towards year-round as American takes (delayed) delivery of Airbus A321XLR aircraft that can make a route work on fewer passengers than a Boeing 787. There’s some value in a connecting hub to Europe, but a hub with greater local traffic and far greater card spend is more valuable still.

Delta was able to grow in New York because US Airways sold them their New York hub, more or less. And that ultimately made American Airlines far less competitive. When US Airways took over at American they tried two strategies in New York:

  • Serve people from other cities wanting to travel to New York, rather than New Yorkers
  • Offer a ’boutique’ operation serving primarily partner hubs in Europe and the West Coast

But neither one worked. Offering New York flights to people for whom they work well as a one-off is a recipe for lower fares than competitors. American kept cutting routes, entering a death spiral there. They decided not to compete there prior to the pandemic.

While they described themselves as ‘too small to win, too big to give up’ American simply squatted on their resources in New York so others couldn’t take them. They actually did have to forfeit 7 slots from underuse, though.

American saw themselves losing money or breaking even, but largely because they did the accounting wrong, not looking at the most lucrative piece of their business (co-brand card). They found a partner in JetBlue that gave them the necessary scale to offer as much to New Yorkers as Delta and United from Newark. But that was struck down by a district court judge, and JetBlue decided not to appeal to focus instead of its (more anti-competitive) acquisition of Spirit Airlines.

So New Yorkers are left with less competition, one less viable competitor and an airline shifting its focus to “Filthadelphia.”

But New York wasn’t a distraction from Philadelphia, it was a better place to focus limited resources that did not work out – in part because of a change in administration, part because of whom they drew as a judge, and part because of JetBlue’s deal to buy Spirit that came after. Philadelphia on its own may even work to some degree, but ultimately Philadelphia is not New York. And whether American will admit it or not, they realize this is true – now that they have one executive in charge of all revenue from flying and from credit card issuers.

About Gary Leff

Gary Leff is one of the foremost experts in the field of miles, points, and frequent business travel - a topic he has covered since 2002. Co-founder of frequent flyer community InsideFlyer.com, emcee of the Freddie Awards, and named one of the "World's Top Travel Experts" by Conde' Nast Traveler (2010-Present) Gary has been a guest on most major news media, profiled in several top print publications, and published broadly on the topic of consumer loyalty. More About Gary »

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Comments

  1. @Nptraveler for quite a while after American bought US Air, with Dougie in charge, the mentality was decidedly US Air, but they’ve evolved quite a bit since then. I think AA management is still mediocre, but it’s no longer positively awful. Philadelphia is not NYC, nor will it ever be, but with its considerably lower costs, PHL can be an excellent hub for AA if they stop treating it like a poor stepchild and actually put some money into PHL. Finishing the the dormant lounge in terminal A would be a start, but upgrading terminals B, C and F, being willing to fund the 4th runway along the Delaware and allowing the people mover construction for getting people between terminals which they personally scrubbed would be a better start.

    As to PHL not working for New Yorkers, I have many friends who are New Yorkers and frankly, to listen to them, NYC is the only real city in the US and actually the world and nothing works for them if it isn’t in NYC. The reality is that there actually is a nation and a world outside of NYC and it has a great deal to offer.

    A correction for you. The AA fleet is substantially different that what US Air had. US Air was predominantly an Airbus airline (78.5% at takeover) with some Boeing aircraft (14.5%) and a few Embraer planes (6%). American’s fleet is currently 50.2% Boeing and of the 180 planes they have on order, 72% are Boeing aircraft. That’s a major turnaround from US Air’s fleet makeup.

  2. I-81 comment is interesting. If some politician wants to get re-elected by building an airport along I-81 to enable enginerds from FRA to fly direct nonstop Lufthansa to I-81 industry, fine. Bankers/investors/VCs still will fly LON-NYC direct nonstop, and maybe FRA-NYC nonstop. European tourists not scared away by TV crime news will still fly into NYC, while other tourists will fly into MCO or MIA. PHL is a low-ranked airport and any serious passenger would choose to fly QR and not AA out of PHL. P.S., my dying dump comments, deserved or not, ring true with fairly significant number of passengers.

  3. The fact that PHL is still the worst-recovered hub post-COVID in AA’s system speaks volumes. Even lowly LAX has recovered more of their AA traffic than PHL. It just shows what AA’s management really thinks of the hub, which isn’t a lot. So poorly has current management thought of their PHL operations that they tried to shift over to JFK through a shoddily thought out partnership with another airline. Makes me think that PHL was never all that great or lucrative of a hub for them.

    Dougie doubled down on PHL because that’s all he knew. He initially tried to shunt NYC traffic through PHL and offer them a substandard product compared to their competitors and failed miserably. DL and UA just lapped it up and increased their NYC stature. AA was left as a bit player and has stayed that way. And if they think going back to their failed strategy of shuttling NYC passengers through PHL will be a winner, they’ll just lose even more market share.

    They’re only refocusing on PHL now because this is all they have. They can’t expand at JFK on their own. BOS lacks gate space and is a congested airport in its own right, so they’re shot there. UA owns EWR…so this is what they’re stuck with and they need some semblance of an Atlantic hub. PHL is the only option, warts and all.

    Will AA be successful? Who knows. But I think past performance serves as a good indicator when it was a stagnant hub at best. PHL has a lot going against it. Shoddy facility. Terrible runway configuration, so they can’t infinitely expand like at DFW or CLT. One of the poorest cities in the country with the highest poverty rate. Long-term population decline. Lower corporate presence compared to similar sized cities (don’t compare it to NYC, which is multitudes larger – PHL looks unfavorable in every metric compared to Dallas, Boston, Houston, DC, Miami, Atlanta and other metros of roughly the same size). Only positives I can think of is that no other major airline is rushing to expand there (is that really a good thing?), so they’ll be the only game in town, and they currently have room to expand since they cut a ton of flights before and the airport isn’t as congested as it was 20 years ago. The latter would change if they get to 400 departures since PHL essentially has the same configuration as EWR.

    So, this is what AA is stuck with for the time being and things will be more of the same for AA. I’m not convinced the A321LR will be the game changer for the airport as purported. I am curious what will happen with CLT once they finish the new runway. Will AA ramp it up to be another ATL? If so, that poses more of a threat to PHL than anything else. Especially the way national demographics are trending.

  4. The margins on AAdvantage (or any frequent flyer program) are 100% accounting fiction.

    This was amply proven when Air Canada spun off Aeroplan: without the fancy misleading airline revenue allocations, the true value of the program was revealed, and it was less than US$400m, the amount Air Canada (over)paid to re-acquire the program.

    $400m is market value. $billions is pure lies.

  5. AA is the go-to airline for the low-income areas of the US, offering cheap poor service, uncomfortable planes and no TVs.

    Wealthy areas like California, New York and Boston continue to vote with their wallets on Delta and United. Adding planes to NYC won’t make wealthy customers (the ones that drive profits) switch carriers.

  6. I’ll bet some of these newly announced routes out of PHL (particularly the Europe ones) will keep getting delayed in actually getting launched and eventually scrapped (just as did with crazy plans like Seattle to Bangalore then Dallas to Tel Aviv)

  7. @Jake – that’s highly misleading, Aimia’s share price dropped over 70% overnight when Air Canada announced it would not renew its 15 year agreement for Aeroplan to serve as the exclusive loyalty program for the airline. The program became next to worthless, when it wouldn’t just lose its Air Canada partnership but face new competition from a brand new airline-launched loyalty program. Air Canada bought the program back for parts, basically for the membership list. And the cost of the acquisition wasn’t $400m, most of the cost was shouldered by Aeroplan’s bank partners.

    It wasn’t a ‘$400 million transaction’ in any case.
    CAD$450 million cash and assumption of estimated CAD$1.9 billion in outstanding liability of points.
    TD payid Air Canada CAD$622 million plus prepayment of $308 million in miles purchases.
    CIBC paid CAD$200 million to Air Canada plus prepayment of $92 million in miles purchases.

    And Aeroplan is a smaller program than US equivalents.

    The ability of American Airlines to borrow $10 billion against AAdvantage is a pretty clear market test.

  8. Oh Timmy, your carelessness for facts must be so nice. I admire your ability to say things absent data. It makes it tough to respond to you, but I admire how little you care about real data but respond nonetheless to keep passport plum in your portfolio.

  9. NSL 14 doesnt have his facts straight. US Airways (not US Air) bought American. American was in bankruptcy. Philadelphia has the potential to work. It is true Philadelphia is not NY, but it doesnt have the high cost and congested airspace that NY does. US Airways had a more extensive European Network earlier than it does now and did quite well in all the markets that they served. Time will tell.

  10. @Jeffrey

    AA’s been pushing things through PHL for years and they’ve dramatically cut flights since the US days. Even with its lower costs, PHL hasn’t worked too well and it’s been a stagnant hub at best. Why do you think they went hard for an alliance to push traffic through another airport? PHL just isn’t that great of a hub. Never has been, even in better economic conditions. Why would that change now?

    As for it being less congested, the airport has the same runway configuration as Newark. Only reason it runs OK now is because it’s handling half the flights it did 15 years ago, when it had the worst delays in the NAS. Ramp it up to EWR levels and you will have the same delays. Immediate airspace isn’t as big a problem, but the runway configuration still sucks and very prone to delays.

  11. Philly! No thank you. I learned a long time ago to never fly through PHL. Not going to change now. I’ll look for alternates.

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