American prepares to launch trans-Atlantic joint business routes
On the eve of kicking off route expansions with British Airways and Iberia as part of its trans-Atlantic joint business, American has added Los Angeles-Shanghai to the oneworld route map, while Iberia will commence LAX-Madrid and British Airways will expand with San Diego-Heathrow.
American finally explained why it seemed to have changed its benefit estimate from the trans-Atlantic, which American CEO Gerard Arpey estimated at USD500 million before the carriers obtained anti-trust immunity. During the launch of the trans-Pacific joint business with Japan Airlines, the company said the USD500 million would come from both trans-Atlantic and trans-Pacific joint businesses.
Spokesperson Cameron King acknowledged that the different estimates have been confusing and encompasses more than the two joint businesses.
“What has always been stated by AA executives is that the USD500 million value to AA includes both joint businesses (AA/BA/IB and AA/JAL), its cornerstone strategy and other business initiatives, which has not been separated out any further into a specific breakdown,” he said. “However, I can understand why there could be confusion because leading up to the AA/JAL negotiations to retain JAL in oneworld, there also was the USD500 million number used in two ways. The first referred to USD500 million in ongoing revenue that oneworld already provided to JAL annually prior to the request for ATI and the decision to create a trans-Pacific joint business.
“This USD500 million annual number over three years sums to USD1.5 billion of the USD2 billion in commitments to JAL that was announced by American and its oneworld partners in January 2010,” he continued. “The remaining USD500 million of the USD2 billion in commitments offered to JAL consisted of USD300 in incremental revenue guarantees from AA and USD200 million in financial enhancements from BA. You may recall that JAL and the Japanese government decided to handle their financial issues themselves. The bottom line is that a USD500 million figure has been used a lot but as you can see, it was for different initiatives at different times and AA hasn’t changed these numbers.”
Carriers celebrate new California service
“This marks the beginning of the full-fledged cooperation of the joint business and is why the three carriers formed with venture and focussing on California,” said Iberia US Country Manager José María Alvarado, in kicking off a joint briefing yesterday.
The three carriers, who each reported 70%+ load factors for the summer on the new routes, have tried these routes in the past but have been unable to succeed with them and are hoping that combining the power of three will be the charm. Mr Alvarado noted the market has changed significantly in the 16 years when last Iberia tried the LAX-Madrid route.
“The combination with American and British Airways is the tipping factor,” he told CAPA. “There is a great demand between Spain and California and we will be the only carrier providing the service from Los Angeles. There has also been significant improvement in yields. So there is a clear opportunity and we will be starting with three flights per week and adding a fourth in the summer. It is my goal to see both the LAX-Madrid and Miami-Barcelona markets go to daily service by this time next year.”
The three executives pointed to advanced booking load factor as an indicator of the success of the new routes.
“The load factor for the initial flights is an indication of passenger response,” said Mr Alvarado. “The combined oneworld frequent flyer earned miles jumped 32% year on year between Oct-2010 and Dec-2010 which is another indication of the success of the joint business.”
American Regional Vice President, Passenger Sales Western Division Cathy Berg reported that that Shanghai is slowly building owing to the fact that the schedule was loaded later than the other new routes owing to questions about slot availability. “But in the last couple of weeks, week over week, it has been building very strongly,” she said.
British Airways Regional Director, Western US and Western Canada Kevin Burns agreed that the market has changed, especially in California. He indicated British Airways expects San Diego, its third California market after LAX and San Francisco, will be similar to the 18-month-old Las Vegas-Heathrow service which is being upgauged from a 777 to 747.
American Eagle will be feeding the flights in the joint business at LAX as well as BA’s San Diego service, according to Ms Berg. Benefits of the joint business, she said, not only included the feeder service from top markets, but retiming of flights to give passengers more choices for flights throughout the day. Mr Burns added that the same is true of the beyond markets in Europe that will be feeding the joint business at Heathrow and Madrid.
In addition to the obvious opportunities for corporate and business travelers, all three expect visiting friends and relatives to contribute to the success especially with the large California Chinese population for the Shanghai route.
“The focus,” said Mr Burns, “is to compete against the other alliances rather than each other. “Growing the joint business will strengthen the competitiveness of oneworld to other alliances.”
Ms Berg indicated, as did the other executives they were committed to growing new markets despite the hefty fuel increases. “We’re in them for the right reason,” she told CAPA.
In response to a question on their ability to pass along fuel hikes through higher fares, Mr Burns said the real issue was being competitive in the market against the other two alliances which would drive any decisions. However, the industry has been able to raise fares in six of the seven latest attempts with the last one only a couple of days old. Consequently, for now, the ability to raise fares is still there. Mr Burns said that while fares have been successfully raised, he pointed out that the increases were not across the board, echoing others who have indicated it really depends on how competitive the market is.
As for oneworld’s position in LA, Ms Berg indicated that it has more international flying out of LAX going to 11 destinations, more than any other alliance. “Our product in Southern California is very strong and that is a key part of the oneworld alliance,” she said, adding oneworld serves six out of the 10 top world markets from the airport. The top 10 include London, New York, Miami, Narita, Hong Kong and, of course LAX. While oneworld does serve Newark, Paris, San Francisco and Singapore they are not oneworld hubs.
She was echoed by Mr Alvarado who noted that no other alliance has better service out of LAX to Heathrow and Madrid.
See related story on how oneworld compares with Star and SkyTeam in market share. Global Alliance rankings. Star grows share, oneworld loses. Lack of legacy options draw in LCCs
USD1m in secured notes
The launch of the new service in the joint business came as American announced the pricing of its private offering of USD1,000,000,000 aggregate principal amount of its 7.50% senior secured notes due 2016 to be used for general corporate purposes. The notes will be secured by route authorities, airport landing and take-off slots, and rights to use or occupy space in airport terminals. The notes will be guaranteed by AMR.
AMR ended the fourth quarter with approximately USD4.9 billion in cash and short-term investments, including a restricted balance of USD450 million, compared with a balance of USD4.9 billion in cash and short-term investments, including a restricted balance of USD460 million, at the end of the fourth quarter of 2009.
AMR’s total debt, which it defines as the aggregate of its long-term debt, capital lease obligations, the principal amount of airport facility tax-exempt bonds, and the present value of aircraft operating lease obligations, was USD16.6 billion at the end of the fourth quarter of 2010, compared with USD16.1 billion a year earlier.
AMR’s net debt, which it defines as total debt less unrestricted cash and short- term investments, was USD12.1 billion at the end of the fourth quarter, compared with USD11.7 billion at the end of the fourth quarter of 2009.