American Airlines wants to win the recovery from the coronavirus. 55% of national seating capacity is being restored in July, much more than United’s 30% or Delta’s 21%, adjusted for blocked center seats.
It’s rare for a U.S. airline to part with its peers with such optimism, especially a U.S. whose narrow seats and restrooms gain passenger disdain, while investors place American’s strategy a distant third after Delta’s top margins. and United’s restructuring plan.
However, Americans may be showing that it has a unique recovery advantage.
“Big centers win,” said US CEO Doug Parker. “We are absolutely benefited by the fact that two of the three largest centers on earth are ours, which are Dallas / Fort Worth and Charlotte.”
They are leading the recovery of the Americans. About two-thirds of American seats in July leave or arrive in Dallas or Charlotte, according to OAG Schedules. Only 36% of American’s capacity will not touch either of its two largest hubs, which American previously said are the most profitable.
American Airlines domestic seats in July 2020 at its 15 largest airports compared to a year ago
“It’s a vacuum cleaner strategy,” said travel analyst Henry Harteveldt of the Atmosphere Research Group. “They just want to absorb all the traffic out there.”
American’s plan needs scale.
“The bigger their centers are, the more successful they will be,” Parker said at the Bernstein Strategic Decisions conference in May.
Each additional flight at a hub creates more connection opportunities at only incremental costs, driving margin growth. The hubs, calculated on connecting traffic, differ from a simple count of which US airports have the most passengers.
American is recovering capacity faster in the central cores. Dallas and Charlotte will have 66% of seats restored in July compared to the US average of 56%, according to OAG Schedules. American’s smallest center in Phoenix will have only 50% of capacity and Chicago 47%.
“It is very risky, but there is a reward,” said Harteveldt. “Of the big four, American says we’re going to try. They are being creative. I am respectful “.
United rejects the American strategy.
“Some of our competitors are flying on a larger July schedule than we are, selling extremely low-priced tickets and wasting money,” United told employees.
United’s pessimism sparks speculation if CEO Scott Kirby, after being expelled from the United States, wants a claim: better safe and conservative than great and sorry.
Kirby could be hearing the saying that if an airline can’t guarantee fares, it can control capacity. While American is still discounting, Cowen analyst Helane Becker said in a research note that United flies less but “works to maintain prices.”
Americans could be flying out of necessity. It has a higher daily cash burn of $ 70 million in the second quarter compared to Delta’s $ 50 million and United’s $ 40-45 million, estimates JP Morgan.
If American is going to lose money by keeping a plane on the ground, it could offer the flight, hoping the revenue will more than offset the additional costs like fuel and airport fees.
“Will it be a profitable strategy? It may not necessarily be profitable, but it reduces cash burn, ”said Harteveldt. Aiding the equation, the government pays the airlines’ labor costs through September 30.
Other explanations for American optimism are based on culture and politics. American’s largest centers are in Republican states, and Republicans are more willing to travel, according to a Skift survey.
But United also has a Texas center in Houston. And American centers are in cities with large Democratic populations. The centers, by definition, bring travelers from beyond.
Does health lead to a correlation? United and Delta have larger coastal and urban centers that initially experienced large outbreaks of the virus, decreasing demand. Texas is now an access point.
Large centers are temporarily the exclusive domain of Americans. Delta has its Atlanta power center, but the flight economy is weaker as Delta is blocking intermediate seats, as is Southwest Airlines. American is not.
United’s network is less concentrated, extending capacity to more centers, so many that investors ask if United will close some (so far, no).
It’s not just that Americans take advantage of missed opportunities. JetBlue this summer will bring its premium “Mint” seat on flights to Los Angeles and San Francisco from Newark, a United hub.
Another United center, Denver, is seeing American restore 59% of its capacity, slightly above the American average. That fits Cowen’s expectation that travelers look for destinations with outdoor activities, where the spread of the virus is believed to be less.
American is also restoring capacity faster in Tampa (59%), but its biggest pickup is in Miami with 72% of seats newly available. In addition to being an outdoor destination, Miami is American’s hub for Latin America and the Caribbean, and domestic connections are needed to fill international flights.
Discussions about internal capacity are too limited, worries Jamie Baker, an analyst at JPMorgan. Investors were excited about the internal upgrade for American, which shipped American stocks earlier this month.
But they overlooked a sour international outlook and rising fuel prices. “This suggests that agreed earnings and liquidity forecasts may actually be overly ambitious,” Baker wrote in a research note.
Whatever the level of summer optimism on each airline, it may not indicate a continued recovery. Delta said its additional 1,000 flights in August could be the latest increase in a while.
Summer is for leisure travel, which is easy to stimulate. Subsequently, the focus shifts to corporate traffic, which is difficult to stimulate and will be affected by the company’s travel bans and budget cuts. Analysts fear a harsh market reaction if airlines cut flights.
Unless unions manage to win more government payroll subsidies, airlines will be responsible for labor costs on October 1.
As Baker wrote: “The autumn of discontent is gradually approaching.”