It is an odd day when the chief executive of one carrier makes the case for its competitor's strategy.
That happened during American Airlines' fourth-quarter 2017 earnings call on 25 January, when chief executive Doug Parker – despite saying he would not take the bait – bit in response to an analyst's question and laid out precisely why it makes sense to add connecting capacity over hubs, both for American and competitor United Airlines.
"We're creating better connecting markets," he said on the Oneworld Alliance carrier's growth strategy. "We're taking existing aircraft, increasing the utilisation and redeploying aircraft from markets that maybe aren't doing quite as well to places where we know we can do well where we have real strategic advantage."
United is doing the same thing, essentially, just on a larger scale. While American plans to increase system capacity about 2.5% in 2018, the Star Alliance carrier plans to grow by 4-6% year-on-year, with much of that focused on boosting hub connections.
That elevated growth rate engendered a mini revolt, with analysts fearing a return to the "same-old-airline bear case that profitable times in the sector lead to overexpansion and hyper-competition", as Kevin Crissey at Citi put it in a report, and investors sending United's stock down 11.4% from close on 23 January to close the next day.
But Parker, long an advocate for the idea of a rationalised US airline industry following the consolidation that occurred from 2008 to 2013, does not see it that way and is not hesitant to say so.
EFFICIENT GROWTH
American will increase domestic capacity by about 3% in 2018, with about two percentage points from increased aircraft utilisation and half a point from increased gauge.
That growth includes a large number of route additions, many of which connect existing destinations to new hubs. To date, American has announced only three new domestic cities in 2018: Missoula, Montana; Panama City, Florida; and South Bend, Indiana.
American will operate 58 new domestic routes in the first half of 2018 compared with the same period in 2017, FlightGlobal schedules show. The bulk of this – 52 of the 58 new routes – connect destinations in the airline's network not previously linked with a nonstop flight.
American will fly 58 new routes in the first half of 2018
FlightGlobal schedules
"We think it's smart, efficient growth where we have a competitive advantage," says Parker on connecting existing destinations with additional hubs in the airline's network. "It doesn't result in yield decline [and] doesn’t result in fare wars."
He cites Oklahoma City, long a stronghold for American, as an example. The city will gain twice-daily nonstop service to the carrier's Philadelphia hub in June, creating new connecting opportunities to the northeast and Europe that the airline cannot offer passengers with its existing service to Charlotte, Chicago O'Hare, Dallas/Fort Worth and Los Angeles.
RATIONAL MARKET?
Parker sees the analyst and investor responses to United's capacity growth plans, which includes 4-6% growth annually up to 2020, as an example of outmoded thinking.
"It's indicative of the kind of things we all used to see in the old days," he says. "I think again we're still a victim of our past when people just hear growth they think, well here they go again."
What would be worrisome, says Parker, is if American decided to add significant capacity in its competitors' hubs, like Minneapolis/St Paul or San Francisco. That would result in the kind of hyper-competition and fare wars of the pre-consolidation industry.
"In today's world all major network carriers are attempting to strengthen their hubs by driving connecting traffic and opening unique connecting opportunities for customers," says Helane Becker, an analyst at Cowen, in a report. "United is attempting to do this as best they can… That doesn't mean American won't compete for the connecting traffic, but it is significantly different from historical capacity actions that ruined the perception of the industry for many investors."
Airline capacity in the USA is scheduled to increase 5.2% year-on-year in this year's first half, 1.6 percentage points faster than during the same period in 2017, schedules show.
However, much of the growth planned by American and United are to smaller cities where capacity has fallen for more than a decade. Seat capacity to Rochester, Minnesota and South Bend, Indiana – two cities that the airlines have added since last June – fell 45% and 31%, respectively, from the year ending in June 2005 to 2017, the data shows.
Seats are scheduled to increase 54% at Rochester and 3% at South Bend – American begins flights on 7 June – from the year ending in June 2017 to 2018, according to schedules. While not back to their previous highs, the cities' past service levels suggest that there is room for growth.
In addition, US economic growth is also expected to accelerate to 2.8% in 2018 from 2.3% last year, the International Monetary Fund (IMF) forecasts.
FUEL QUESTION
Much of the growth planned by American, as well as United, will be on small regional jets. American will bring 28 Embraer ERJ-140s with 44 seats back from storage to replace 33 Bombardier CRJ200s that will be removed in 2018.
Small regional jets are known as inefficient with a higher fuel costs per passenger than larger aircraft. This drove the US industry's broad upgauging programme which has seen hundreds of Bombardier CRJ900s and Embraer 175s join the feeder fleets of Alaska Airlines, American, Delta Air Lines and United since 2012.
The ERJ-140 additions come as oil prices are climbing. Brent crude stood at $70.42 per barrel at the end of day on 26 January, up more than 25% from $55.89 per barrel the same day a year ago, Bloomberg and US Energy Information Administration (EIA) data shows.
American anticipates an at least 19% increase in average fuel expenses to $2.06-2.11 per gallon in 2018 from an average of $1.73 per gallon in 2017.
"Fares are too low for oil prices this high, and over time you'll see that adjust, but it takes time," Parker says of the fuel price environment.
He adds that American will not adjust its capacity plans – including its strategy to boost connectivity – due to rising oil prices, in response to analyst questions.
As for small regional jets, while American does not plan to remove any up to 2020, it plans to add only 76-seat E175s over the period.
Source: Cirium Dashboard
