What went wrong with American Airlines? – Shift

Change Senior Aviation Business Editor Brian Sumers writes this column with a critical look at the important global issues affecting the airline industry, from the middle seat of the latest economy-class series to the boardrooms of the world's largest carriers.

As insiders gathered between 2012 and 2016, many asked a simple question: What's wrong with United Airlines? They saw a company with so much potential, including hubs in the largest US markets and an unbeatable Asian franchise, which repeatedly disappointed investors and customers.

But under new leadership United has its mojo back. So the insides have moved on, whispered (or texted me) to ask about another US airline. What, they ask, is the American problem? Why is it worse than peers and disappointing the best customers with late flights and often demanding service? When will Dallas / Fort Worth executives understand that they are dealing with a crisis?

This was the conventional wisdom before Thursday, when Delta Air Lines captured a 20 percent stake in America's most important Latin American partner. The American downplayed the move, saying its connection with Latam Airlines produces only $ 20 million in annual revenue. But the US had bigger plans for its relationship with Latam ̵[ads1]1; the two airlines were seeking antitrust immunity in some markets – and it is notable that South America's top global airline will entrust Americans with Delta's leadership. Spun aside, this is bad news for Americans, who rely on South American routes for a significant portion of their earnings.

Perhaps if Delta had done this in a vacuum, others would have given the American the benefit of the doubt. But it does play into a story that the US has not been able to match Delta and United on a number of commercial initiatives related to passenger experience, operations and foreign partnerships.

Here is the essence of the argument: As Delta and United improve, US management seems to be working from an old ledger, where flights are a commodity, costs must remain low, and US carriers stay away from overseas entanglements, such as investments in not-so-profitable, yet strategically important global airlines, like Latam, or in United's case, Avianca.

It's easy to guess why Americans are bucking trends. Before he went bankrupt in late 2013, CEO Doug Parker and President Robert Isom teamed up with Scott Kirby, who now works at United, US Airways from one of the world's worst-run airlines to one of the best. They had little need to upgrade the product or invest in remote carriers; they were just trying to keep the airline flying.

When they picked up American, they promised to change their ways. In some aspects they have, investing billions in the passenger experience and strengthening the relationship with some foreign partners, including Qantas. They even made a small investment in China Southern Airlines.

But they have been slow to respond to other new trends. And investors have noticed something is not right, pushing US stock prices down by about 50 percent since January 2016. Although the American remains solidly profitable, there are whispers some investors may be pushing to change US leadership.

It's an airline that is currently going through major problems, says Jay Shabat, senior analyst at Shift Airline Weekly. "I definitely think there's a chance Parker will lose his job and a new leadership team come in."

A mindset

Maybe Delta's connection with Latam will make huge profits, or maybe it won't. Regardless, it's a big bargain for Delta, as long as there are races in Latin America as well. With its more than $ 1.9 billion total investment, Delta should get large scale in an important region while it wounds one of its biggest competitors.

That's another indication Delta is willing to rewrite the rules of the game. You name the topic and Delta leads the industry. "They are just a strategic cut above everyone else," Shabat said. "Delta is just in a league of its own."

The list is long. Delta has invested in the passenger experience and retains relatively comfortable seats while adding personal TVs on most aircraft. It is growing in the most robust US economies, including Seattle, Boston, Austin, Texas, Raleigh and Durham, North Carolina, as it spends a fortune on operations. And there are unnecessary flight alliances for equity investments in major airlines, such as Virgin Atlantic, Air France-KLM, Korean Air and Aeromexico.

United have made some similar moves, albeit slower. However, the American remains much more cautious.

Due to passenger experience, the American gets as many seats as it can in many of its aircraft, and uses what some detractors say are unusually cheap seats with limited padding. Also, American removes personal TVs on short-haul flights that have it, saying they will become obsolete in a few years.

In addition, unlike Delta, which goes where the money is, American is not interested in opening new hubs or focusing cities, instead flying where it is already strong. Reinforcing the best hubs makes sense, but American is probably losing customers in places that were once part of the sphere of influence, including Boston, Austin and Raleigh. And don't forget New York, a long-time American stronghold where the airline has withdrawn.

Then there are the connections with foreign airlines. The American still has antitrust immunity against Qantas and British Airways, two iconic carriers. But for the past two years, American has lost two important partners in America, first WestJet in Canada, and now Latam. At the end of 2017, Canadian airline WestJet dropped the agreement with US in favor of Delta.

In public forums, American leaders repeatedly apologize for their problems. Asked last week at the Shift Global Forum when American wants to get his swagger back, CFO Derek Kerr said the airline will improve as soon as it comes to a contract with its mechanics union, which the airline has accused of delaying or canceling flights because of a labor dispute , and continues to fly the Boeing 737 Max aircraft.

"I don't think it's a sustainable issue in the long run, because we're going to have a mechanics deal done, and the Maxes will go back in the air," Kerr said. "I think in the end everything is going to be where it needs to be."

It is not clear this will solve American problems. Some say the US may need fresh leadership, with a new CEO making rapid changes. It's also possible Americans can try to fill some top jobs with outsiders, maybe add a chief who is operations manager or commercial boss. Today does not have American.

"I don't think American management understands how frustrating it is for their own employees when executives come out and say they have only two problems," said Holly Hegeman, a longtime US janitor who writes PlaneBusiness, an industry newsletter. "It bothers me to see the airline that stands there and says, these are the two big problems, as if these are taken care of, everything will be fine."

Given the remarkable history and breadth and scope of operations – it is by many estimates the world's largest airline – American has the tools it needs to shake off its decline. But it would be nice to look a little more urgent from the management.

Photo Credit: American Airlines executives have blamed the founding of the Boeing 737 Max for some of their problems. Pictured are American Max jets on the ground in Tulsa, Oklahoma. Patrick T. Fallon / Bloomberg

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