Thomas C. Lawton is a visiting professor at Dartmouth's Tuck School of Business.
What has been happening recently at American Airlines? Its management has gone rather quiet since entering Chapter 11 bankruptcy last year. Inevitably, questions will arise: About progress on restructuring, when it will emerge from Chapter 11, and how it will successfully relaunch on a profit trajectory.
So far, the answers look promising. The company bullishly predicts exiting from Chapter 11 in late 2012. Revenue has improved across all regions of the business. Domestic unit revenue was up almost 10 percent and Latin American revenue has increased by close to 11 percent in the first quarter of 2012 compared to the same period the prior year. American Airlines is performing better than other airlines that have filed for protection and has done so without slashing capacity. In short, American is doing the right things to return to business efficiency and customer effectiveness.
To be more specific, its emphasis is now on operational flexibility, international growth through alliance and selective network expansion, and domestic partnerships to reduce operational and balance sheet risks. American's market differentiation is based on emphasizing and meeting the needs and expectations of high value customers (particularly large global corporates) and better alignment with the oneworld airline network and value proposition. Also, being the lead carrier between not only the United States and Latin America but, increasingly, the world and Latin America—connecting through Dallas, Los Angeles, or Miami. This strategy makes sense; if they can get all labor work groups on board, they should be able to make it happen. That is still the main challenge, as is competitor contestation, particularly from larger traditional rivals like Delta and United.
Interestingly, American is not planning on scaling up to compete with their primary U.S.-based challengers. According to Chuck Schubert, American's vice president for network planning, "from a network perspective, bigger is not always better." Instead, the carrier is focusing on being the best and it aims to do so mainly through targeting high value corporate customers.
Its primacy at New York JFK airport gives it a head start. JFK-London Heathrow is the number-one premium market in the world, by a long way. American Airlines, together with its partner British Airways, serves this route 13 times a day. No one else comes close. American's key city hubs underpin this differentiated customer proposition: New York, Los Angeles, Chicago, and Dallas have the four largest U.S. metropolitan populations and Miami is the eighth largest. Also, New York boasts 73 Fortune 500 companies, while there are 27 headquartered in L.A., 20 in Chicago, 20 in Dallas, and five in Miami. Moreover, oneworld hubs are located in the largest premium markets. London Heathrow, British Airways's home base, is the largest by far, with 4,200 international premium passengers per day each way. Cathay Pacific dominates the second, Hong Kong, where there are 2,300 daily passengers. Tokyo Narita, where Japan Airlines is based, is fourth, with 1,900 passengers and American's JFK hub is sixth with 1,600 per day.
American Airlines's new network strategy is designed to improve profitability by offering the routes and schedules that attract and retain not only their own high value customers but also those of alliance partners, an important source of revenue through codeshare agreements and closely aligned loyalty programs. Therefore, linked to the premium passenger focus, American's Chuck Schubert notes that building the international customer base is important. In doing so, he comments that the network is the core product that works in concert with lie-flat seats, onboard amenities, and customer service. Latin America is a prominent focus, due in part to American Airlines's strong presence in key hubs to Latin America such as Dallas and Miami. This is where the profits are. Passenger growth forecasts for Latin America for 2012-17 are 6 percent for Latin America North (Central America and the northern rim of South America) and 8 percent for Latin America South (southern cone countries such as Brazil and Argentina). This compares with 3.6 percent for Europe and 4.4 percent for Asia.
To follow the growth markets, American Airlines is changing its portfolio mix to focus more on international rather than domestic routes. This is a gradual process, moving from 38 percent international and 62 percent domestic capacity in 2012 towards a 44/56 percent balance by 2017. As American refocuses more of its flying towards international opportunities, it is likely to look towards increased codesharing with domestic carriers like Alaska Airlines, jetBlue, and others to further enhance its network in places like Los Angeles and New York City. This is likely to have initial teething problems, due to terminal colocation and product disparity issues. For instance, the business passengers that American is pursuing may be disgruntled by jetBlue's more restrictive carry-on baggage policies or by extra time and added security checks if they are required to change terminals.
American Airlines also plans to diversify its domestic feed by increasing the number of regional carriers with which it does business to reduce operational and balance sheet risk. Today, American primarily gets a feed from its wholly-owned subsidiary, American Eagle, which has higher costs than some other regional carriers. American Eagle is going through its own restructuring to lower its costs, and it may ultimately be spun off.
Growing American Airlines's international market will be an uphill battle. Although the network is the basis for market differentiation, U.S. airlines are not viewed favorably abroad. When home passengers are excluded, domestic airlines consistently score poorly in international customer satisfaction and airline quality surveys. American seems determined to challenge this perception. In addition to route configuration, reach and frequency, they plan a nose to tail overhaul and refit of their long-haul Boeing 777-200ER fleet. Business class will be 100 percent all aisle access, lie flat beds. On-demand video entertainment will include a few hundred hours of television, audio and video programs and game options. When complete, it will lead the industry. The new 777-300ER series will arrive later this year, serving to further bolster American's state-of-the-art, premium offering.
But to overturn preconceptions about quality and service will require not only a refurbished fleet and a reconfigured network. American Airlines also needs more flexibility and innovation in workload models and staff training. A lot of attention has focused on the $2.1 billion cost-reduction initiative but less notice is paid to redesigned collective bargaining agreements reached with unions. So far, five out of seven Transport Workers Union work groups have signed up to new, more flexible work practices. There have been notable improvements already in operational performance (reduced delays, improved baggage handling, and so on). However, behind-the-scenes staff are going to have to continue to improve the efficiency and consistency of what they do, particularly when it impacts on the customer experience or the company's bottom line. Customer-facing staff need to raise their service game, especially in the cabin. In doing so, American's senior management acknowledge that they can learn a lot from alliance partners such as British Airways and Japanese Airlines.
International rivals such as Emirates Airlines and Singapore Airlines consistently score highest in international customer satisfaction surveys, particularly among business passengers. American Airlines is nowhere to be seen. Much of this is due to innovations such as Singapore Airlines's holistic approach to staff training, where both profit consciousness and their role in delivering the customer experience is ingrained in every employee. Singapore Airlines has been highly profitable and highly regarded for several decades. American has a long way to go but is off to a good start and now has a clear sense of where it is heading.