American Airlines' alliances strategy could reap higher benefits - Swelbar

Swelbar was writing about whether recent questions that Flight Plan 2020, or cornerstone strategy, is too timid in the face of the Delta/Northwest merger and the proposed United/Continental merger. The question was prompted by JP Morgan Analyst Jamie Baker during the company's first quarter conference call. Baker expressed deep impatience with American management.

But Swelbar analysed its strategy noting that American is in a position of strength at four of the five markets it has targeted in its cornerstone strategy - Los Angeles, Chicago, Dallas and Miami. It also enjoys strength, through oneworld, in Tokyo and Hong Kong. However, he criticised the strategy as well. "The AA/oneworld strategy clearly targets the Star Alliance with United and Continental and its focus on the largest population centers in the US, but pays less heed to the SkyTeam network with more small cities in its route portfolio," he said.

But Swelbar thinks American is definitely on the right track. "If one of the tenets of Flight Plan 2020 is to strengthen and defend its network, then AA is beginning to address its relative weakness in New York with the JetBlue relationship," he said. "American's strength in the domestic markets will translate into added benefits if, as expected, anti-trust exemptions are approved to allow joint ventures with British Airways/Iberia/Finnair/Royal Jordanian and JAL. Significant new benefits will accrue to American as a result of being able to coordinate schedules and prices as well as jointly market the combined services - a benefit the other two global alliances already enjoy. So alliance competition is about to take off as we transition to a three carrier contest for travelers rather than the global market that today favors Star and SkyTeam."

While saying he is not a fan of American's emphasis on its cost disadvantages against an industry that has been through bankruptcy, Swelbar said the real point is its cost cutting efforts. Over the past five years, American has led the industry in lowering costs.

"In fact, non-labour costs at American should only keep coming down as the company takes a new aircraft every ten days to replace the outdated and inefficient MD80 fleet," he said. "American should be touting this other side of its cost equation - the fact that its success in trimming non-labor costs mitigate some of its labor cost disadvantage - rather than bank on the hope that labor cost convergence at the other carriers will ease some of its labor pain."

While Swelbar noted that some see bankruptcy as American's only option for lowering labor costs and strengthening its balance sheet, Swelbar said there is no dramatic catalyst such as 9/11 to allow it to achieve what bankruptcy did for its competitors.

He also expects both American and US Airways to benefit from consolidation. "I've read many stories that attempt to write American Airlines' obituary," he said, pointing to predictions that the two legacies will die a slow and painful death. He concluding a merger between the two is not a foregone conclusion. "But the rumors of the airline's demise have been greatly exaggerated. In theory, the unmerged US Airways and American and other carriers should benefit, albeit indirectly, from industry consolidation. Moreover, most of these stories missed the fact that consolidation is taking place at the bottom of a recovery cycle, not at the top. Assuming that the health of the US airline industry is inextricably tied to the health of the US macro-economy, then a rising tide should benefit the entire industry. Sometimes slow and steady wins the race."

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Swelbar pointed to the dismal results of American's previous acquisitions, adding that resolving its labour issues would do far more for it than consolidation. Coupled with that should be its steady focus on integrating its ATI networks once approval is granted.

"There is enough work to be done in the interim to coordinate schedules with its immunized alliance partners," he said. "There is enough work to be done to get the tentative agreements ratified and complete negotiations with its pilots and flight attendants. And there is enough work to be done to improve the operational integrity of the system - a renewed fleet will help but it is not the complete answer. I am willing to believe that bankruptcy may be an answer for American only if its employees push it there...and they may be the ones hurt most by the experience."