American’s “cornerstone” world view
American Airlines continues to work its way through bankruptcy. Its historically rocky labor/management relations continue to complicate the landscape as the carrier moves through the process and its employees appear to have a greater affinity for US Airways’ Doug Parker. Losses have not yet been stemmed but the financials may be looking a tad better.
But a more important phenomenon, moving in the background, is the ongoing network restructuring that is profoundly changing the carrier’s presence in domestic markets.
A new approach - two years ago
In September 2009, American announced its cornerstone strategy, designed to “reallocate flying within American’s domestic network from unprofitable routes to the airline's primary markets in a push to provide more connections to and from the major U.S. business markets and international gateways – New York, Chicago, Los Angeles, Dallas/Fort Worth and Miami. These cities represent five out of 10 of the largest metropolitan areas in the country and form what the company calls the cornerstones of its network. In addition to encompassing some of the largest populations, the cities are key business centers and critical international gateways that allow American to provide better international connections to its oneworld and other partners, further enhancing the airline’s global reach.”
Not only does the approach solidify American’s position in these chosen metropolitan markets, but it also has eliminated American from a great many city pairs that used to be a part of its network. This strategy has cut competition, and even service, between some city pairs and increases AA’s head-to-head competition with its peer rivals as well as some low cost operators, given the importance of the 5 key markets chosen.
Cornerstones or corner perches?
Interestingly, the airline lacks hub dominance at three of its chosen airports. With an 87% seat share at DFW and a 70% share at MIA, American’s influence is unchallenged. However, at JFK, Delta and JetBlue both have a greater share than American’s 17%. At ORD, United dominates with 47% and AA trails at 37%. Finally, at LAX where no one rules the roost, United and American are tied with a meager 17% each and an aggressive Southwest holds a 14% share.
The carrier’s strategy statement makes clear note of the fact that at these gateways, there is intersection with oneworld partners, giving AA, through its alliance, a global reach. But at LAX, even with its oneworld partners, the group has only a 22% share; a position that makes use of the word “cornerstone” seem a bit inflated.
Delta, too, wants to be #1 in New York
In New York, clearly the prime US metro area, Delta has made no mystery of its desire to be the New York airline and has strengthened its position by doing things like entering the already-crowded LaGuardia-O’Hare market in order to be a player between all major city pairs.
More importantly, the slot swap with US Airways in which Delta gains LGA slots in exchange for DCA slots ceded to US, gives Delta a far greater presence at New York’s premier domestic airport and recent announcements indicate that Delta is investing heavily at LGA in order to gain supreamacy. All of this shuffling does nothing to squeeze New York’s top seat supplier, United, though that strength is almost all focused at Newark.
What about the rest of the nation?
The effect of this policy is especially evident in one of the nation’s other large metro areas, number 7--the San Francisco Bay area. American has had a long presence in the region, and early in the 21st century was the only legacy carrier with non-stop service from all three Bay Area airports (SFO,OAK, SJC) to New York and Boston.
Like its peers, the fuel and economic problems of 2007-08 saw AA drawing down its presence at both OAK and SJC and consolidating at SFO. But following the adoption of the cornerstone concept, the pull-down has continued.
The chart compares service in summer 2006 and summer 2011—a five year span—and looks at the ways in which the AA presence in the market has diminished.
American Airlines Non-stop service from the SFO Bay Area
21 X M80
14 X 757
49 X M80
14 X M80
35 X 738
14 X 738
7 X 757
69 X M80
48 X M80
21 X M80
35 X 738
5 X M80
14 X 767
7 X 757
14 X 757
7 X 767
53 X M80
54 X RJ
42 X 738
28 X RJ
21 X 757
21 X 757
35 X 767
35 X 767
60 X RJ
14 x 757
7 x m80
47 X RJ
Source: OAG and website *discontinued in fall 2011
Some sense to the change
Some of the changes are fully understandable. Southwest dominates the lift between northern and southern California and most carriers have drawn down their presence there, with the exception of United in the SFO/LAX market. As the only nonstop to Miami and very marginally challenged to Dallas, the airline will certainly garner the lion’s share, though Spirit has of late become a challenger at DFW—albeit with a very different product.
Others harder to see
But other reductions are more problematic. Service between SJC and Austin was begun some years ago and was dubbed the “nerd bird” as it connected two high tech centers. American dropped the route, which had grown from 7 to 21 weekly flights, and Alaska immediately pounced on the opportunity and replaced AA.
Boston-San Francisco, again linking two high tech communities, once an AA duopoly with United and a bit of JetBlue, has now been ceded to United with JetBlue and Virgin America adding to the available seats. For decades TWA operated as many as 7 daily flights between St. Louis and SFO/SJC. That route came to American when it purchased TW and it had a nonstop monopoly. Again, United—and to a lesser extent—Southwest now get the traffic with a complete AA withdrawal.
Connections from abroad?
At the recent opening of T2 at SFO, where American is one of two tenants, the carrier cited its ability to connect incoming international passengers to US points. But the claim seems a bit hollow. Qantas no longer serves SFO, leaving BA, CX and JL. British flies to all the cities AA serves from SFO so there is no connecting traffic there. Cathay flies to Chicago, Los Angeles and New York, limiting demand for connections, and JAL serves the same three US points, with American serving Tokyo from DFW, leaving Miami as the sole possible connection.
A tough sandbox to play in
Finally, to New York, where American has traditionally been a strong player, the new United offers 6 daily departures to JFK offering its 3-class Premium Service as well as an additional 9 flights to Newark. And again, JetBlue and Virgin America add to the mix. According to information previously published, AA may lose as much as $54 million on the route, a high price to pay for the New York presence.
One of the lessons that the remaining legacy carriers have learned is that no carrier can be everywhere or serve everyone. All the US carriers have reduced flying and network size in ways that were unthinkable just some years ago. But American’s strategy seems especially risky, playing for high stakes in very competitive markets.
Two years on, the financial payoff has not appeared and the time for the strategy to succeed is getting shorter. One hopes that this does not become a tombstone strategy instead.