HAMBURG — There came a point in the late 2000s when Fort Worth based American Airlines was in very critical condition. From 2001-2011, the carrier lost a combined $9.47 billion, an average of $860.6 million each year. 2011 was a particularly abysmal year from a financial perspective; American had fallen behind its legacy carrier peers who had all used Chapter 11 bankruptcy protection to lower their costs, and lost $1.97 billion over the course of the year. On November 29th of that year, they filed for Chapter 11 bankruptcy protection, a move that had been utilized by almost all of its legacy competitors (both Delta and Northwest pre-merger, as well as pre-merger United Airlines and US Airways) to restructure debt, and tackle growing costs by re-drawing labor contracts and getting rid of costly defined benefit contribution pension plans. Filing for bankruptcy was certainly not a desirable step, especially for an airline with as proud of a history as American Airlines. But the low point for American wasn’t in fact that bankruptcy filing, but a few months earlier in July, right before American announced their massive new order – the order that marked the start of the transition into “The New American.”
On July 20th, 2011 American announced an order for 460 new narrow-body aircraft with 465 additional purchase options, the single largest aircraft purchase order by number of frames or value in commercial aviation history. The order consisted of 200 firm orders for the Boeing 737 family, split evenly between the 737-800 which American already operated more than 100 of, and what would become the 737 MAX (though it was called the 737RE at the time as Boeing had not yet launched the MAX). The order also came with 40 purchase options for the 737-800 and 60 more options for the 737 MAX. On the Airbus side, American ordered 130 current generation members of the Airbus A320 family, and 130 Airbus A320neo (new engine option) family aircraft. The order came with a staggering 365 purchase options, 85 for the A320ceo family(as the current generation A320 family has become known – ceo stands for current engine option) and 280(!) for the A320neo family. The 130 orders for A320 ceo family aircraft were eventually split evenly as 65 A319s and 65 A321s.
It was yet another landmark milestone for an airline that had been on the cutting edge of the industry for decades. Ever since American Airways was formed back in 1930 as the conglomeration of 82 smaller airlines, American had been an industry leader. Under the leadership of C.R Smith, it was the first airline to fly the venerable Douglas DC-3 and the first airline to earn a profit solely from passenger traffic (without a government mail contract backing it up). American was integral in the construction of New York’s La Guardia Airport, and even launched the world’s first airline lounge at La Guardia, as the invitation-only Admirals Club. After World War II, American created a subsidiary, Líneas Aéreas Americanas de Mexico S.A. to fly to Mexico and helped build several airports there that are still in service today. Until the United-Capital merger in 1961, American was the world’s second largest airline (behind Aeroflot) and the largest in the United States.
In 1959, American was the first carrier to introduce trans-Continental jet service with the Boeing 707. In 1961, it launched the world’s first electronic booking system, Sabre, in joint venture with IBM. This helped spark the computer revolution in the airline industry that has evolved into modern day aviation computing systems; Sabre is still in use today. In 1968, American introduced the iconic AA eagle logo that was in use constantly until 2013. In 1973, American became the first major US airline to employ a female pilot when it hired Bonnie Tiburzi to fly Boeing 727s. Throughout the 1970s and 1980s American continued to drive change in the US airline industry. It launched the first frequent flyer loyalty program as AAdvantage in 1981, and later introduced a 2-tier wage scale to deal with rising costs.
After de-regulation in 1978, American wreaked even more havoc on the industry status quo. In 1981, American opened the world’s first true airline hub (though there is some debate as to whether Delta and Eastern operated quasi-hubs within the parameters of regulation at Atlanta) utilizing the hub-and-spoke distribution model to reschedule flights nearly overnight at recently opened Dallas Fort Worth International Airport to maximize connections through a banked schedule. Chicago O’Hare was added as a hub in short order, as were San Jose, Raleigh Durham, and Nashville to complement their historical strength in origin and destination (O&D) markets in the Northeast. The 1980s also marked the beginnings of Sabre as a true yield-management platform which brought American’s revenue generation to the top of the industry. Near the end of the decade, American also beefed up its operation in San Juan, Puerto Rico to serve as a true hub connecting passengers between the US mainland and the Caribbean, as well as within the Caribbean. This hub was strengthened by the introduction of the wide-body Airbus A300 in 1988, American’s first aircraft purchase from the (then) upstart European manufacturer. The medium-range A300-600 was primarily used on services to, from, and within the Caribbean, as well as on trans-Atlantic flights.
In 1991, American set up a massive Latin American operation in Miami virtually overnight after the demise of Eastern Airlines (helped by the demise of Pan Am a year earlier, which also had a strong Miami presence). Throughout the 1990s, American focused on growing its international and domestic business through smart strategic moves such as gaining coveted access to London Heathrow Airport (one of only 2 US carriers allowed such access until the Bermuda II Treaty was retired as a condition of the open skies agreement between the European Union and the United States in 2008). Much of this success was achieved under the reign of CEO Bob Crandall, a visionary who many consider to be one of the greatest airline executives in the history of commercial aviation. But this history and culture of innovation largely subsided in the 2000s after Crandall’s retirement. After the dot-com bubble burst in 2000, American receded into heavy losses, lagging behind its legacy and low cost carrier (LCC) peers, and closing once profitable hubs like San Jose and San Juan (which died a slow [so-called] death by a thousand cuts). Perhaps most surprisingly, American became largely a reactive carrier; no longer an industry leader.
But the new leadership that entered into place as a restructuring team at the start of the second decade of the millennium, including CEO Tom Horton and CFO Beverly Goulet, has taken the steps to bring American back to the forefront of the industry. There is once again a palpable excitement surrounding American Airlines, and its actions over the past two years have once again brought the airline to the cutting edge of the industry. It started with the massive order (and other incremental fleet changes in the time since), and really gathered steam after bankruptcy was filed. Despite the negative connotation of the word bankruptcy, the best way to think of Chapter 11 in the context of the airline industry is like a forest fire; burning away the rotten vegetation so that the land can be re-populated afresh. Chapter 11 is the forest fire that allows legacy US airlines to burn away the high labor costs and poorly structured debt to bring their costs in line with market reality.
After that highly positive step, American continued with a strong pace of aggressive new route expansion, and on January 17th, 2013, American revealed a new brand image and logo on a Boeing 737-800 aircraft. The new branding was seamlessly rolled out across all of American’s online platforms that day, and has been rapidly expanded across the American Airlines route network. The new livery features a striped tail modeled after the American flag, as well as a new logo that features a heavily modified version of the iconic AA eagle logo. Outside of the Airbus A300s, which were painted in a light grey livery due to their composite body, it marked the first time in more than 40 years that an American jet did not feature the bare metal livery that American made famous (while other carriers like Aeromexico had used the all metal livery, none had stuck with it as long as American). The livery has generated a large amount of buzz surrounding the American Airlines brand and product. And less than a month later, on February 14th, 2013, American and US Airways finally consummated their long-rumored merger, creating the world’s largest airline by many metrics.
Which brings us back to the fleet. Part of the reason why American lost so much money in the decade between 2001 and 2011 was its fleet. The domestic fleet, composed of a mix of aging McDonnell Douglas MD-80s, Boeing 757s, and 767-200s, are clearly in their waining days. This fleet is highly fuel inefficient, and suffered from ever rising maintenance costs. The domestic fleet also limited American’s expansion potential in major hubs (especially Chicago O’Hare and Miami), because it didn’t have the right sub-130 seat mainline aircraft to serve many new and existing routes after the retirement of the Fokker F100 fleet in 2004. On the international side; the 767-300ER fleet was also aging, while the 777-200ER wasn’t large enough to cope with increased demand in core markets like London Heathrow and Sao Paulo. And in the regional fleet, a restrictive scope clause prevented American from utilizing the larger 70+ seat regional jets like the Embraer E175 and Bombardier CRJ-900 which American’s legacy competitors had all used to provide increased comfort to passengers on longer and thinner flights; usually featuring a full-fledged first class cabin.
In the last three years, American has addressed all of the facets of this issue. On the international side, it firmed up an order for 42 Boeing 787-9s (plus 58 purchase options) to secure the long term future of the fleet, while adding interim lift through a slow building order for the Boeing 777-300ER, which began with an order for 2 frames in January of 2011, and has since grown to 20 (with 8 frames already delivered and 2 more to be delivered in the third and fourth quarters), with American adding new orders in increments of 2 or 3. Interestingly, that order actually followed the historical norm for how American ordered aircraft. It has never really been the carrier (before 2011) to place the massive, headline-grabbing order for aircraft. Rather, American preferred to add frames incrementally; no more than 8-10 wide-bodies at a time and no more than 30-35 narrow-bodies at a time. On the regional side, Chapter 11 bankruptcy allowed American to re-write its scope clause, and in January of this year, American announced that regional provider Republic Airways had been selected to fly 47 new American E175 regional jets, the first 15 of which will arrive on property in the second half of 2013.
But it is the massive new domestic order for mainline jets that is really paying dividends. Already, American has taken delivery of 59 737-800s in the time since the order was placed (at the time of the order, American had 51 outstanding orders for the 737-800) including 18 in the first half of the year. The fleet now numbers 215 frames. Concurrently, American has begun to retire its fuel-inefficient fleet of McDonnell Douglas MD-80s (60 frames have been retired since the order was placed and the fleet is down to 160 frames – and 23 more are scheduled to leave service in the second half of 2013 as 13 more 737-800s and 15 A319s will be delivered), Boeing 757s (fleet down to 84 frames with 6 more scheduled to leave in the second half), and Boeing 767-200ERs (the fleet now numbers 12 frames and 3 more will leave the fleet in the fourth quarter as 5 Airbus A321s in the 4-class trans-continental configuration are delivered to replace them). Commensurately, American reported a 3.2% decline in fuel costs year over year for the second quarter of 2013, despite a 1.1% increase in capacity and a flat fuel price per gallon. This result certainly helped contribute to American’s $220 million (GAAP adjusted) net profit in Q2, its highest Q2 profit in the history of the company excluding special items.
The new A319 will also help contribute to this trend. According to ultra-low cost carrier (ULCC) Allegiant Air, who recently began replacing its fleet of MD-80s with used A319s, the A319 presents significant cost advantages over the MD-80 including a 25% improvement in block fuel burn per block hour and a 40% improvement in maintenance costs per block hour. American for its part has said that it expects the A319 to have at least a 35% advantage in block fuel burn per seat-mile and a significant maintenance cost advantage. The A319 is part of a 3 pronged strategy for the mainline fleet that is designed to maximize efficiency for each demand segment; sub 130 seats, 150-160 seats, and 180+ seats. Essentially, American has chosen the most efficient aircraft for each segment whether that aircraft is a Boeing or an Airbus; the A319 is more efficient than the Boeing 737-700, the 737-800 is more efficient than the A320, and the A321 is more efficient than the 737-900ER. And while the 737MAX family and A320neo family orders haven’t been defined yet, it appears likely that American will follow the same practice with the A319 and A321neos as well as the 737 MAX 8.
The split order was significant as well, because it meant that American once again had become an Airbus customer, 4 years after the last Airbus A300 was retired and 20 years after the last A300 delivery in 1993. While American Airlines had been an exclusively Boeing customer since the merger of Boeing and McDonnell Douglas in 1998, it emerged that Boeing would be unable to deliver all 260 narrow-bodies in the time-frame American wanted (2013-2016) due to production constraints; another factor in American adding an Airbus order to the mix. Older readers will remember that in the early 1990s, American had actually signed an exclusivity contract with Boeing (this was after the last of the MD-80 orders was placed) saying that they would only purchase Boeing aircraft. The “exclusivity” portion contractually was eliminated back in 1998 as a condition of allowing Boeing and McDonnell Douglas to merge from the European Commission.
Finally, although Boeing questions whether the company’s “exclusive” agreements with its U.S. customers should be the subject of demands by the European Commission, to secure merger approval Boeing further agreed not to enforce the exclusivity provisions in its existing agreements with American Airlines, Delta Airlines and Continental Airlines. The agreements remain otherwise unaffected.
What persisted was a so-called “Gentleman’s Agreement between American (as well as Delta and Continental) and Boeing — Boeing discounted its aircraft in return for exclusivity from those 3 carriers. But the Gentleman’s Agreement has now been broken, at least by American, though the new Delta and United haven’t purchased new Airbus narrow-bodies beyond their pre-merger fleets.
Interestingly, American returned to Airbus after suing the manufacturer in the wake of the deadly crash of American Airlines Flight 587, operated by an Airbus 300-600 back in 2001. The issue in question was a flaw with the A300’s rudder design. But the split order from American is part of a growing trend amongst airline across the world (like Turkish Airlines and Lion Air) who are opting for split fleets to best match aircraft type to mission and maximize fleet turnover. This flies counter to the conventional wisdom that having commonality in an airline’s fleet is the optimal practice, because it saves money on duplicitous maintenance facilities and training for crew and pilots. While this still holds true in the fleet of smaller airlines (such as LOT Polish Airlines), once a sub-fleet grows above 60 frames, the commonality aspect largely disappears. In a world of high (for the moment) fuel prices and increasing backlogs, airlines are increasingly opting to purchase the right, available, aircraft for the mission, regardless of commonality.
The A319 also holds importance as it marks the beginning of American’s re-vamped strategy to refresh its in-flight product and drive premium revenue growth. By and large, American has retained the revenue generation advantage it had over US airline competitors; a common refrain when American was in the doldrums a few years ago was that American didn’t have a revenue problem, just a cost one. And with the fleet overhaul, American has taken the steps necessary to consolidate that advantage by creating what we believe is the one of the best in-flight products in the sky amongst US carriers; competitive with those of Virgin America and the 737s that Delta/United have configured with DirectTV, wi-fi, and premium economy cabins.
The A319 is the first new American short-haul aircraft to feature the leather seats, 110 volt universal AC power outlets and USB jacks at every seat, Wi-Fi, and in-seat in-flight entertainment throughout the aircraft that will become standard across American’s narrow-body fleet.
“Everything about the new A319 aircraft has been designed with the customer at the center,” said Virasb Vahid, Chief Commercial Officer American Airlines.
The A319 is configured in a 3-class configuration, with 128 seats (8 First Class, 18 Main Cabin Extra, and 102 Economy Class). Customers onboard the A319 will have access to seat-to-seat chat, weather updates, 3-D moving maps, airport maps, connecting gate information, and more. For First Class passengers, the new seat will feature a complimentary in-flight entertainment selection of up to 75 movies, more than 150 TV programs, more than 350 audio selections and up to 15 games on a 12.1-inch HD-capable touch-screen monitor in each seat-back. Economy class passengers will also have access to an assortment of movies, TV programs, games and audio selections on in-seat 8.9-inch HD-capable touch-screen monitors.
After the A319 is delivered with the new cabin, it will be followed by Boeing 737-800s in Oct. 2013 and A321s In late 2013/early 2014.
The A319 is all set to play an extraordinary role in American’s route network. As a smaller aircraft, the A319 is perfect for so-called long and thin routes with lower demand, as well as services into so-called hot and high airports; airfields with hot temperatures at a high altitude that are pre-dominant in Latin America where American is the largest US carrier. Thus, the A319 will be useful for American on several fronts. The initial pilot base will be at Dallas Fort Worth, but one can easily envision large A319 sub-fleets opening new routes from Miami and Chicago O’hare as well.
The first base will of course be Dallas Fort Worth, and by the end of the year, American will be operating more than 20 A319 flights per day out of DFW as follows:
A map of the routes is shown below, representing 15 destinations with an average stage length of 866.5 miles.
Of the destinations displayed above, the most interesting ones are Vail(EGE), Gunnison (GUC), Jackson (Hole), San Salvador(SAL), and Bogota(BOG). The former three are all high-altitude destinations while the latter two are hot and high destinations in Latin America. The schedules for the new Bogota flights are as follow:
AA1123 – Departs: DFW 18:35 –> Arrives: BOG 01:05+1 –> A319 Daily
AA1122 – Departs: BOG 02:05 –> Arrives: DFW 07:15 –> A319 Daily
American will be taking delivery of 15 A319s through the end of November, with the Manufacturer Serial Numbers (MSNs) assigned as seen below. The first few aircraft also possess registrations.
MSN 5678 (N8001N) July
MSN 5698 (N9002U) August
MSN 5704 (N93003) August
MSN 5745 (N9004F) September
MSN 5753 (N4005X) September
MSN 5761 September
MSN 5781 October
MSN 5786 October
MSN 5788 October
MSN 5789 October
MSN 5798 October
MSN 5810 October
MSN 5827 November
MSN 5842 November
MSN 5327 (N9015D) November
It remains unclear what the fate of the new American fleet will be as the merger with US Airways progresses (it is currently scheduled to close by the end of the third quarter of 2013). At the time of the merger, American will become the world’s largest operator of Airbus A320 family aircraft (the title currently belongs to merger partner US Airways). American will also be (temporarily) the world’s first airline to have its A320 fleet delivered entirely with sharklets.