Will the Loss of LATAM Bring All the Other Problems at American Airlines to a Head?

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.

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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  1. The structure of the domestic airline industry simply leaves very little choice to consumers and thus all are largely playing a commodity service strategy. It would be really nice if Toronto could be positioned as a hub and we could go cross country on Air Canada…..

  2. I think this fascination with seat back entertainment is nuts. DL and B7 are the only two all in with seatback entertainment (30% of domestic flying). AA and UA have International and Trans-con with IFE. The free TV and streaming hi-speed WIFI on AA is heads and shoulders above DL’s crappy GOGO and seat back screens, especially the updated planes with device holders and power.

    The AA 321 NEOs and CEO refits have fewer seats then what DL is planning and are a huge upgrade to the current fleet. I do agree that the 737 need to go back to 160 or at least 166 (same as UA) and find a new restroom design in the back of the plane.

    DL and LATAM will move DL from number 3 to number 2, but nothing more. I think it’s a bad deal for DL in the long term and AA will continue to lead in SA. I think DL just lite a fire under the AA management and board.

  3. AA needs to revamp its Aadvantage program and make it usable because unless flying to the Far East it’s pretty pathetic as far as domestic and European flights. This makes miles for a lot of people useless. Lots of decades long faithful customers and road warriors are looking elsewhere with AA’s seeming contempt for its customers and that starts at the top. I hope there is a good housecleaning in the management.

  4. It’s clear that AA’s current leadership has no vision how to grow an airline. They’ve already thrown money at unhappy employees, that rarely improves morale. They didn’t strategically look at LATAM, DL stepped in and stole them. AA’s board should be more than frustrated at this point…and AA isn’t even today in a position to do much about it.

  5. Can you clarify this sentence? “They’ll need to make inroads with employees and that will be expensive, and there will be some symbolic efforts aimed at consumers… 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.”

    Is it the “symbolic efforts aimed at consumers”, the “reduced capital expenditures”, or “more to monetize each trip” that will mostly involved the Aadvantage program? All of the above?

  6. American has already crossed the point of no return from a downward spiral. They no longer have the ability to undo all the wrong decisions that started, and is accelerating the spiral. Product (yield discounts to DL are widening, but don’t have the capital to fix it), labor (contracts have no you-perform-or-you’re-out clauses, and they’re so rich they can’t negotiate it in) and network (it’s expensive to re-enter markets that corporate customers care about, such as NYC).

    And because all of this, no sane person will want to become the CEO (it’s like being offered to be the captain of the Titanic after it hits the icebergs). They need to fire Parker, and the board will definitely fire him (so they can blame someone else but them), but it’s too late to get real talent. Isom or some other floating deadwood will be the only option.

    It’s going to get uglier.

  7. American needs a new board of directors. The fact that the current board has sat on their hands while American has nosedived in almost every way under Parker (and Kirby) shows their ineptitude and lack of oversight, and oversight is kind of the definition of what a board of directors is supposed to do. Since they’ve failed so dramatically in this department, it’s obvious that the place to start is with a new board. Then the new – and hopefully capable – board can hopefully find some capable top officers for the airline.

  8. @Christian hit the nail squarely on the head: the Board isn’t doing its job. Poor governance has contributed immensely to the debacle at AA. That duty of a board of directors is to provide governance. Alas, there is no indication the AA board will change anytime soon. Expect more of the same.

  9. @ sunviking82 — seat back screens are not everything, but they are one of the more important reasons I choose Delta. If I feel like relaxing, I can watch a movie or TV show. If I want to get work done on my laptop, I can have the map displayed (AA doesn’t even offer a real time map when steaming). And no, I don’t travel with a tablet; it’s just too much too pack. Plus the streaming entertainment rarely works correctly.

    Reasons I avoid AA now:
    -inconsistent product (prime example: 772’s have either great business class seats or the terrible rockers; and AA is too cheap to replace the zodiac rockers)
    -lack of seat back screens
    -planes that feel more like Spirit than Delta
    -staff that feels under appreciated, so they don’t go the extra mile anymore
    -pre-departure beverage is hit or miss
    -priority luggage almost never makes it out first
    -price: AA almost always seems to be the same price as Delta, if not more expensive, so why choose AA when I get less when compared to Delta’s product

    Doug and the board need to go. I want my favorite AAirline back.

  10. AAdvantage would be useful if you could actually get a saver ticket without multiple stops. If you have to make 2 stops to go from hub to hub, you know they are doing everything to make their miles worthless. This would be an easy fix if only they wanted to do something to make the program attractive again.

  11. Well you better watch out because United has now committed to installing Viasat WiFi across its domestic fleet and installations are in progress – first A319 has it and a few 757s also have it.

  12. An analyst described American “The ugliest house on the block and it’s a long term fixer-upper”. Parker needs be fired!

  13. I think a partnership with COPA would be great and solidify central/south america. But convincing COPA may be difficult.

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