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American Airlines looks to catch up to Delta and United in Asia. Capacity re-deployment from LatAm?

American Airlines, the world's largest airline, has accepted it is the smallest of the three US carriers in Asia. But American wants to move from being "a distant third player to a relevant player, and eventually a leader," American Airlines VP Asia-Pacific Erwan Perhirin tells CAPA. Over the last 18 months American has added routes to greater China it could not do so under its old cost base, employee contracts, fleet and product offering. American's focus now turns to further thickening its Asian presence, adding service to existing Asian points from other US hubs – such as Los Angeles.

American wants to narrow competitive gaps in its core Asian markets and gain a firm footing in Beijing and Shanghai before looking at new Asian points, such as the secondary Chinese cities United is exploring. Nine of American's 10 longest routes are to Asia, and American is replacing 777-200s with 787s, delivering the obvious unit cost advantages but also helping to moderate capacity while maintaining a daily service in what are still emerging markets. 77% of American's 787 ASKs are to/from Asia. Asia has been a strategic growth market, with low fuel prices (American is un-hedge) significantly helping financial performance. Asia may catch a second wind as American considers re-deploying capacity out of the weakening Latin America market. American has also increased Latin American services at Dallas to make its largest hub a connecting point between Asia and Latin America, having decided against using Miami as a connection point.

American Airlines to thicken its Asia network with services from Los Angeles

American Airlines operates nine hubs, only three of which (all legacy American) have Asian service. These are Chicago, Dallas and Los Angeles. Two Asian destinations – Shanghai Pudong and Tokyo Narita – have service from all three hubs. Beijing has service to two while Hong Kong and Seoul have service to one hub. American is unlikely to open Asian service to US hubs that do not already have Asian flights. Rather the objective is to thicken its Asian network by linking existing destinations with other US hubs, and in particular build up a trans-Pacific hub at Los Angeles.

Dallas by default has been American's Asia hub despite Dallas being so far inland. Five of American's 10 longest routes originate in Dallas. Hub construction at Los Angeles has been a defining characteristic for American and Delta Air Lines in recent years. Los Angeles is a hugely competitive market but is large, making it an attractive hub.

See related reports:

American Airlines' nine hubs and the three which have Asia-Pacific service: as of 16-Nov-2015

Latin American weakness could prompt American Airlines to redeploy capacity to Asia

The constant movement of American's network planning for Asia is experiencing a noticeable additional force: Latin America. Economic malaise in the region is impacting American, especially in Brazil, where American holds over one third of all Brazil-US seat capacity. American's unit revenues decreased 10.4% in 3Q2015 in Latin America and a staggering 25% in Brazil. Worse, American flatly said it does not expect improvement until Brazil's economy rebounds – for which there is no estimate with the Brazilian economy expected to contract.

American has cut its Brazil capacity by about 30% and may not be done. Mr Perhirin noted weakness in Latin America could prompt American to redeploy capacity to Asia.

As CAPA previously wrote:

Worsening conditions in Brazil have also dragged down American’s passenger unit revenues in Latin America, which dropped 10.4% year-on-year during 3Q2015. The airline’s passenger unit revenues in Brazil fell 25% year-on-year, and Mr Kirby stated that American does not expect any improvement in Latin America until Brazil’s economy turns around. Brazil’s GDP is forecasted to contract 1.5% versus previous estimates of 1.4% growth.

Mr Kirby stated that American has cut capacity by 30% in the Brazilian market, but “total capacity in the market is up quite a bit”. Both Azul and Delta Air Lines are expanding between the US and Brazil, and data from CAPA and OAG show that for the week of 26-Oct-2015 American remains the largest airline between the US and Brazil with a 36% seat share, followed by its oneworld partner TAM with a 28% share. United holds a 14% share and Delta has a 5% share.

Azul, which has introduced flights from Campinas Viracopos to Fort Lauderdale and Orlando, has a 5% share. Total one way seats between the US and Brazil are up 4.5% year-on-year to roughly 61,688.

American’s capacity to Latin America during 3Q2015 was down 3% in 3Q2015 and fell 5.7% for the 9M ending Sep-2015. Delta, which has been growing rapidly in Latin America despite the region’s economic weakness, slowed its expansion of supply to 1.6% in 3Q2015. That follows a year-on-year jump of 13% in 1Q2015, and a nearly 8% rise in 2Q2015. Delta’s passenger unit revenues on routes in the region fell 5.3% year-on-year during 3Q2015, mostly driven by Brazil’s declining currency valuation. As of mid-Oct-2015, the exchange rate was USD3.80 to the BRL.

See related reports:

United States of America to Brazil (seats per week, one way): 19-Sep-2011 to 1-May-2016

JAL JV and Cathay partnerships complemented with Hainan and Korean Air. Another Chinese partner sought

American's non-Beijing/Shanghai Asian routes operate under a joint venture with Japan Airlines. Some consider this JV to be less impactful than ANA and United's JV, partially due to ANA and United having a longer historical relationship and familiarity with each other. American has a large partnership with Cathay Pacific that has deepened since American launched a Dallas-Hong Kong flight in Jun-2014. Cathay has not been the easiest airline for others to partner with, but since Cathay heavily relies on American for codeshare access in the US, Cathay must ensure American has a good experience in Asia. American's single daily Hong Kong service is small compared to the upwards of 14 flights to the US Cathay operates a day. (There are also Cathay/Dragonair interlines and codeshares from American's other Asian flights.)

American has had a tactical partnership with Hainan Airlines in order to have a better footing in the mainland Chinese market. But this partnership has not significantly expanded in recent times; synergies appear limited. American, like a few other oneworld carriers, is eager for a mainland Chinese partner.

At the very least this would be for codeshares but could take on more integrated partnership options and even, many oneworld carriers hope, see a mainland Chinese airline join the oneworld alliance. Many oneworld members do not consider Cathay Pacific an adequate option; Cathay and Dragonair do not have domestic China flights, and are often sensitive to partnership access. American is a longstanding and close friend of Qantas, which has established a firm partnership with China Eastern, one other option.

“China is of great importance” Mr Perhirin says. American in recent years has expanded across Asia, re-fleeted to reduce average fleet age and improved its product. “We’re hopeful Chinese carriers will see the value of that,” Mr Perhirin says of attracting a partner.

A new Asian partner for American has been Korean Air. This is a limited partnership that sees Korean code on American's Dallas-Seoul Incheon service. This bolsters Korean's offering, which on its own metal is less than daily. There are frequent flyer benefits while American receives interline access beyond Seoul. It is also leverage for Korean Air with Delta Air Lines, a relationship that treads a line between partner and competitor. Mr Perhirin would like to see American's partnership with Korean Air expand (likewise for Cathay Pacific).

Korean Air is the largest Asian operator between Asia and North America. This might appear to conflict with American's JV partner JAL, but Mr Perhirin notes the historical relationship between Korean Air and JAL. The two may have more to gain by, at the very least, tolerating each other. They have both have larger competitors to worry about.

See related report: Korean Air Part 2: Delta Air Lines difficult but potential JV partner. Pause on US-LatAm growth

American focuses China growth on Beijing and Shanghai instead of secondary cities. United to serve Xi'an and Chengdu

As CAPA has previously mentioned, American Airlines is uninterested in serving secondary Chinese cities at this stage. American believes market fundamentals for secondary Chinese cities are still some years away (significantly lower premium demand, lower local incomes). American still sees itself cementing its position in Beijing and Shanghai, its only two online destinations in mainland China. Its China market is changing as 787s replace 777-200s, delivering lower costs, less capacity, a better balance between economy and premium cabins, and a better product in all classes.

American is the third largest US carrier in mainland China with approximately 8,000 weekly one-way seats compared to Delta's 9,000 (including 2,000 offered via Tokyo although Delta's Tokyo-Shanghai route sees some local traffic) and United's far larger 18,000. United is the largest in Beijing and Shanghai while American is second largest in Beijing, and Delta second largest in Shanghai.

US carrier seat capacity from mainland USA and Japan to mainland China: 16-Nov-2015 to 22-Nov-2015

Delta also only serves Beijing and Shanghai, but has partnerships with two local carriers – China Eastern and China Southern, both members of SkyTeam – to access other cities. American in comparison has a tactical, limited partnership with Hainan. There is no oneworld partner in mainland China, much to the frustration of many oneworld members.

United Airlines in Sep-2015 announced plans to operate three weekly 787 services from San Francisco to Xi'an on a seasonal basis from 08-May-2016 to 27-Oct-2016. This is not only the first trans-Pacific service for Xi'an but its second intercontinental route (its first, Finnair from Helsinki, is also seasonal).

Xi'an is United's second secondary Chinese city route after Chengdu. Chengdu is also served from United's Asia gateway at San Francisco, but is year round (three weekly, also 787).

United's Chengdu service was the first trans-Pacific flight for Chengdu but far from its first intercontinental service. To Chengdu, United has generally achieved load factors above 75%, with large increases over the summer travelling period, as expected. However, this does not give yield or overall profitability indications.

United Airlines Load Factor from San Francisco International Airport (SFO) to Chengdu Airport (CTU): 2014-2015

787 deployment is helping to reduce costs, moderate capacity and improve product offering

The 787 is an important part of American’s improvements in Asia. The aircraft brings a number of benefits. Its fuel efficiency (and resulting unit cost reductions) is most commonly cited, and is certainly appreciated at American; nine of American’s 10 longest routes based on distance in Nov-2015 are to/from Asia. 77% of American's ASKs/ASMs on the 787 are on routes to/from Asia (17% is to Latin America and 6% domestic).

American Airlines 10 longest routes ranked on distance: 16-Nov-2015 to 22-Nov-2015

Rank Distance (km) Route Region
1 13,049 Dallas-Hong Kong Asia
2 11,805 Dallas-Shanghai Asia
3 11,330 Chicago-Shanghai Asia
4 11,191 Dallas-Beijing Asia
5 10,982 Dallas-Seoul Asia
6 10,559 Chicago-Beijing Asia
7 10,412 Los Angeles-Shanghai Asia
8 10,319 Dallas-Tokyo Asia
9 10,071 Chicago-Tokyo Asia
10 9,910 Los Angeles-Sao Paulo Latin America

American Airlines 787 ASK/ASM share by route region: 16-Nov-2015 to 22-Nov-2015

The 787 configuration has also been important. IFE and seats are significantly improved, including all business seats having direct aisle access lie-flat (the old 777-200ER business seats were angled in a 2-3-2 configuration). An overall lower seat count has helped to reduce capacity in markets that in the past may have had too much capacity but American had no smaller aircraft that could fly to Asia. Class mix is also important: American’s old 777-200ERs had 16 first class seats – far above industry norms.

The retrofitted 777-200ERs and 787-8s have no first class. The two also have a lower share of seats allocated to premium (first/business) cabins. China routes typically see large leisure passenger volumes but limited premium demand.

American Airlines 777-200ER and 787-8 configuration: 20-Nov-2015

Aircraft First Business Main Cabin Extra Economy Total Premium Total Premium Share
777-200ER old 16 37 0 194 247 53 21%
777-200ER retrofit 0 45 45 170 260 45 17%
787-8 0 28 57 141 226 28 12%

American has swapped the 777-200ER with the 787-8 on four of its 10 Asian routes (its 11th Asian route, Dallas-Hong Kong operates with the 777-300ER). Three of the swaps have been to Beijing and Shanghai with one to Tokyo Narita.

Prior to the swap from 777 to 787 on Chicago-Tokyo, American had been operating five weekly flights despite historically offering a daily service. Once the 787 took over the route, daily service was restored with some small reductions during off-peak periods (see graph below). Five weekly 777-200ER flights offered 1,235 one-way seats compared to a daily 787-8's 1,582 seats. A daily service on the non-retrofitted 777-200ER would have offered 1,729 seats (and on the retrofitted aircraft, 1,820). This demonstrates the 787’s capability to reduce capacity while still offering a daily service.

American Airlines Chicago-Tokyo Narita weekly frequencies: 2012-2015

Reducing frequency on China flights (such as Shanghai-Chicago, which has had low off-peak load factor performance, see graph below) could have been commercially viable. But it would have been risky as Beijing and Shanghai are full at the peak hours American flies, and American has had long fought battles to secure those slots.

Offering five weekly flights would have been below IATA’s industry standard for slot usage. Other airlines that have reduced frequencies to China have been unable to gain the slots back.

American Airlines Load Factor from Shanghai Pudong Airport (PVG) to Chicago O'Hare International Airport (ORD): 2013-2015

Equipment history on American’s Asian flights (* denotes mainland Chinese destination): as of 19-Nov-2015

US hub

Asian destination

Equipment change

Effective

Chicago

Beijing*

n/a

remains 777-200ER

n/a

Chicago

Shanghai*

n/a

remains 777-200ER

n/a

Chicago

Tokyo Narita

777-200ER to 787-8

Aug-2015

Dallas

Beijing*

777-200ER to 787-8

Jun-2015

Dallas

Hong Kong

n/a

remains 777-300ER

n/a

Dallas

Seoul

n/a

remains 777-200ER

n/a

Dallas

Shanghai*

777-200ER to 787-8

Jun-2015

Dallas

Tokyo Narita

n/a

remains 777-200ER

n/a

Los Angeles

Shanghai*

777-200ER t0 787-8

Oct-2015

Los Angeles

Tokyo Haneda

n/a

launches as 777-200ER

n/a

Los Angeles

Tokyo Narita

n/a

remains 777-200ER

n/a

American retaining double daily Dallas-Tokyo flights. JAL enters Dallas Nov-2015

American will also retain its double daily Dallas-Tokyo Narita flights even after JAL resumes Dallas-Tokyo Narita service on 30-Nov-2015, initially three weekly and possibly increasing in 2016. The lower frequency and low density configuration on its 787-8 will see JAL hold about 16% of seat capacity between Dallas and Tokyo.

JAL's re-entry to Dallas comes as Japanese companies expand their business across Dallas and the American Southeast. JAL also would have felt a competitive need to respond to ANA's launch of service from Tokyo to Houston, the hub of partner United. JAL's Dallas resumption gives much of the same strategic positioning as ANA's Houston service. ANA is one of a few Asia-Pacific carriers to have entered Houston recently.

See related reports:

Dallas/Fort Worth International Airport to Tokyo Narita Airport (seats per week, one way): 19-Sep-2011 to 1-May-2016

American's Asian service from Miami has been deferred in favour of Dallas hub

Some years ago American Airlines had thought about a medium/long term goal of launching flights to Asia from Miami, its third largest system hub (second largest is Charlotte, which was inherited through the US Airways merger).

There was an opportunity to link Miami non-stop with Asia, and also facilitate extensive transfers to Latin America. 

American Airlines top 10 hubs/bases/stations/focus cities ranked on available system seat capacity: 16-Nov-2015 to 22-Nov-2015

In terms of seat capacity to Latin America, Miami has been and remains American's largest hub by far, twice that of its second largest hub for Latin America, Dallas.

Linking this large Latin America hub with a comparatively small Asian network seemed logical at the time, especially as American was considering new opportunities with next generation aircraft.

American Airlines largest 10 hubs/bases/stations/focus cities ranked on available seat capacity to Latin America: 16-Nov-2015 to 22-Nov-2015

But as American's strategy evolved, the focus shifted from linking Miami with Latin America to instead linking Dallas with Latin America. While Miami may be larger than Dallas for Latin American services, half of the flights are to the Caribbean, which have minimal connections to Asia. Miami retains a lead over Dallas for Central America and South America, where there are traffic flows to Asia (notably from Brazil, Mexico and Peru).

The strengthening Dallas economy has supported point-to-point growth to Asia, and Dallas' local demand to Asia is significantly higher than from Miami. For transfer markets, Dallas is better positioned than Miami to connect with the southeast US and other parts of the country. From Miami, there is too much backtracking. Mexico is increasingly a destination for Asian manufacturing, and the country is better accessed over Dallas than Miami.

Operationally, Miami-Asia pushes the limits of aircraft. Even a Miami-Tokyo service would be long; further into Asia would be challenging to impossible to achieve with commercially sustainable payloads. From a strictly Latin America perspective, Miami is the best hub to link with Asia. But in terms of American's entire network, Miami is easily overshadowed by Dallas. Dallas achieves a balance with both Asia and Latin American destinations whereas Miami would have been tilted towards Latin America and had the challenges of weaker local demand and aircraft operational constraints. Further, Asia-Latin America traffic tends to be low yielding and competitive. This is not a niche worth pursuing at high cost.

“We’ve achieved our goal but done it differently,” Mr Perhirin says of American's Asia-Latin America goal. American has invested heavily at its Dallas hub, improving the international arrival experience with passport kiosks and onwards luggage transfer. Dallas airport is hopeful of being able to facilitate transit without visa, which was suspended after the 9/11 terrorist attacks.

Needing a visa to transit holds the US back from being a competitive transfer point between Asia and Latin America, where passengers can save a few hours compared to transiting through Europe or the Gulf. Japan's addition to the US Global Entry programme from 2016 will further improve international connections for the Japanese market.

There are significant volumes of Japanese nationals travelling to Latin America.

American Airlines Latin American destinations from Dallas and Miami: 2015

American serves key Latin American destinations from its Dallas hub. Its seven South American destinations are not the 23 that Miami has but cover the key Asia-Latin America traffic flows. Dallas has more Central America (namely Mexico) destinations than Miami, but most destinations see limited Asian traffic.

American Airlines Latin American frequency from Dallas and Miami: 2015

American's ramp up of Asian services from Dallas has coincided with growth in Latin American markets, including the key South American market. American added two South American points from Dallas in 2013 for a total of seven.

American Airlines Latin American destinations from Dallas: 2011-2015

Part Two: American's Los Angeles hub versus Delta's Seattle hub

Part Two of this report looks at American's hub construction in Los Angeles and its development as an Asia-Pacific gateway compared to Delta's similar aspiration in Seattle.

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