Cranky Flier, who himself worked at America West and historically has been quite sympathetic to current American Airlines management (“Why I Want US Airways to Buy American“) has turned on them saying that Delta’s deal to take away their LATAM partnership means American needs to “face its demons,” that change is needed but “who will make it happen?”
Brett recognizes that this management has simply doubled down on its strategy rather than recognizing that things aren’t working – investors, employees, and customers are all unhappy – and the airline is getting strategically outplayed by competitors.
The New Latin Strategy American Appears May Be Working On
Brett has likely heard the same things that I have, as he hints at American taking a stake in Gol now that Delta has to walk away from that partnership.
While JPMorgan Chase’s Jamie Baker told investors last week that “We do not believe American will pursue a consolation partnership with GOL” because “GOL is overwhelmingly a Brazilian domestic operator, which lacks the fleet characteristics best-suited for long-haul US operations” American has a strong presence in Brazil, with flights from multiple hubs and service to four destinations, and Gol’s domestic feed and additional Brazilian destinations would be more valuable to American than it was to Delta with the latter’s limited service to the country.
And so while Baker “believe[s] American would come to a similar realization [as Delta] and would resist any thesis that GOL could simply fall back into the partnership arms of American, once its relationship with Delta is terminated” word on the street is that American is seriously looking at Gol now that it won’t partner with LATAM.
Cranky notes that American could also work on “convincing Copa to join forces instead of being in third position with United behind Azul and Avianca.” This is something at least some at American are now talking about.
Will This Management Get the Chance to Try Again?
American has high debt loads, from spending on new aircraft to a new corporate campus while using its free cash flow for share repurchases – largely at a higher price than its stock stands today. American’s debt is a question that comes up nearly every time they speak to investors.
Delta’s Purchase of LATAM Shares Values the South American Airline Nearly as Highly as American Itself
They have invested in a new domestic interior configuration that customers hate. Whether or not it was the right move to squeeze in more seats than competitors on Boeing 737-800s, reducing the amount of space that premium Main Cabin Extra and first class customers have even, while eliminating seat back entertainment, it seems as though nobody actually sat in the first class seats before buying and installing them — and the airline now has to go back through making additional capital investment to replace them.
The airline has been chased out of competing in New York, which has implications beyond the ability of the ostensible world’s largest airline to operate well in the country’s most important aviation market – it has reduced its relevance to the wallets of New Yorkers, reducing their appetite for the airline’s co-brand products which is what drives the airline’s profits.
There hasn’t been sufficient progress with a mechanics contract after years – there has never been a joint US Airways-American mechanics contract six years into the merger – and that’s caused operational problems. Negotiations with flight attendants and pilots will be coming soon enough.
Brett asks now that American is losing its LATAM partnership, “maybe this time the board will be listening.” I’m hearing that they may be. They see Delta encroaching on American’s turf in Miami – with Delta leadership visiting with airport leadership this week. And it may be one step too far that makes all of the other concerns relevant.
He says, “this should be the event that causes patience to run out entirely” and that he would “would be very surprised if we don’t see management changes at or near the top soon thanks to this turn of events. I never thought I’d see the day where Brett called for “big changes” at American and that “they need to happen very soon.”
Don’t Expect Much From Management Changes
The good news for American Airlines investors, employees, and customers is that – outside of the potential for United to introduce functional inflight internet – American has more potential to improve than any other U.S. airline. And there are clear steps that would make it better.
Unlike One Mile at a Time I never called for a management change. While it seems silly to think that current management would change course without some massive external event (although I thought that Scott Kirby’s departure for United might make American better, it didn’t) my working assumption has been that a change like Doug Parker leaving and promoting Robert Isom – remember, American’s board decided they wanted to retain Isom and that led to Kirby’s departure – wouldn’t lead to any kind of real change. It’s Isom who promises everything the airline is doing will finally work once they achieve D0.
And the first priority of any new CEO will be gaining the confidence of Wall Street, reducing the airline’s debt burden, and probably cutting costs. They’ll need to make inroads with employees and that will be expensive, and there will be some symbolic efforts aimed at consumers (like United introducing stroopwafels and Illy coffee upon the arrival of Oscar Munoz) but reduced capital expenditures will come mostly out of passenger experience and they’ll need to do more to monetize each trip – but mostly the AAdvantage program, because that’s where the money is.
So while American has great potential, I’ve held out hope that it would be current leadership that would see it as unlikely as that seems. Would a new management be better? Another approach would be hiring a Chief Commerical Officer (the airline hasn’t had one since Virasb Vahibi under the last regime), a Chief Operating Officer to relieve airline President Robert Isom from focusing solely on D0, and to spend time with the board plotting out a strategy to grow profits and articulate a vision that employees can get behind.
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