MIAMI — As the wheels of the much-celebrated US Airways Flight 1939 hit the ground in Philadelphia during the morning’s early hours on October 17, a sizable shift occurred within the global airline industry. The US Airways flight famously marked the last one under the formerly Phoenix-based carrier’s own branding. Absorbing US Airways under its own wing, American Airlines won the title of the largest airline in the world.
In recent years, American Airlines has been busy expanding its global reach, as one might expect of the world’s largest carrier. Particularly, American has worked to shore up one region of historical weakness: East Asia. Previously a relative laggard in the area compared to its rivals Delta and United, American has initiated several new routes to key airports, including Seoul, Beijing, Shanghai, and Hong Kong, from its DFW hub.
Prior to 2013, American flew just one route to anywhere in East Asia from its largest hub, offering service only to Tokyo-Narita (NRT). The airline made its first stride in May of that year, adding a daily flight to Seoul-Incheon (ICN). But this represented just the beginning for American.
The airline soon ventured even further south, unveiling flights to both Hong Kong (HKG) and Shanghai-Pudong (PVG) in 2014. American deployed a Boeing 777-300 to service the Hong Kong route, one of the first assignments at the time for the newly delivered aircraft. Flying to Hong Kong took over as the airline’s longest route in its network, and the Shanghai flight bolstered the airline’s presence in mainland China.
Finally, American introduced a daily flight to Beijing-Capital (PEK) last May, bringing the count of East Asian destinations served from DFW to five. Though initially taking flight courtesy of a Boeing 777-200, the route quickly received the honor of one of the airline’s newly-minted Boeing 787 Dreamliners, matching the aircraft with the route about a month after startup (and also simultaneously upgrading the Shanghai route to a 787). Again, American eagerly utilized its newly delivered aircraft to serve East Asian flights, which suggests a certain importance of the routes to the airline.
It all signals some relatively rapid growth. It seemed somewhat curious that the airline’s DFW superhub, the third largest airport nationally and ninth largest globally, would support only one flight to the entire region, but American has apparently worked to address that weakness.
Historically, flights to East Asia have been devoid of profitability for American. CEO Doug Parker acknowledged as much in 2014 during the launch of Hong Kong and Shanghai: “Our current routes have not been, over time, profitable as of yet. We hope they will be,” he said. Parker considered the routes long-term “investments” in an “extremely important part of the globe.”
The airline’s generally poor track record in the region begs the question: why is American so aggressively expanding in East Asia? Partly, American probably wants to ensure that it doesn’t fall too far behind its legacy competitors. Delta and United already offer far more expansive service within the region. The two both serve all of the region’s landmark cities, and United especially is now pushing inland, unveiling a new route to Xi’an from San Francisco set to debut next May. With demand for air travel, both domestic and international, burgeoning within the broader area, American likely hopes to avoid being shut out as the market grows.
Secondly, the newfound financial health within the industry likely made the carrier more tolerant to short-term losses for long-term gain. Flush with record profits, American may have decided that it’s willing to bear losing money temporarily on the routes in exchange for upscaling its presence in the region to a degree that is more competitive with United and Delta. The airline stands to lose far more in the long-run should it entirely ignore East Asia, especially as the proclaimed world’s largest carrier. Nonetheless, we can be certain that the airline would have made a vastly different calculation were it still plagued by the global economic downturn of 2008.
In its recent traffic results, American Airlines has been posting promising numbers along its Pacific-bound international flights, grouped as a collective anyway. For the flights at large, year-to-date growth in revenue passenger miles (RPM’s) far outpaces the much more modest increase in available seat miles (ASM’s), suggesting that American is filling a higher proportion of seats on these flights than in the past. According to its November traffic press release, American sports a load factor 3.1 points higher across all international flights this year than in 2014.
Compared just to last November, the results look even better. American filled more seats on its planes, with RPM’s increasing by 20.6%, while capacity moved upward only 9.1% as measured in ASM’s. Load factors spiked from 73.8% to 81.6%. This is the kind of material investors love to see. Exercising some capacity discipline paired with higher passenger traffic is likely to have a positive effect on the fares American is able to charge.
While the Pacific traffic numbers encapsulate many flights to many airports, we might very easily imagine that the recent additions from DFW are primarily driving the broader changes the data display.
Growth in East Asia probably accounts for at least an important share of the airline’s broader international growth picture (year-over-year) as well, with travel to Europe and Latin American showing weakness in some places due to the strengthening dollar. American has actually slashed capacity substantially to Brazil, for instance, as a tumbling economy has challenged its routes to the country (and Brazil isn’t alone, either). More generally, the airline has publicly stated that flying across the Atlantic and to Latin America is down. Yet the numbers still show international traffic cumulatively gaining altitude, with the Pacific numbers weighing heavily.
With capacity more-or-less stagnant or even declining in many other regions globally, it leads us to believe that East Asia is significantly responsible for the aggregate international growth the airline displays. The descent of international traffic in other areas across American’s system may only further entice the airline to continue investing in East Asia, where the market looks riper.
Whether the airline is filling these seats at a price point high enough to cover the flight’s substantial costs remains an open question, but the idea that it may be selling more seats seems promising. This would also seem a logical progression as the routes move beyond their infant stages and into maturity. Ultimately, it’s hard to pinpoint exactly how each route individually is performing – by intent, of course, as that’s competitive information – but the overall picture seems to be at least on the upswing.
Furthermore, the airline has made deliberately cautious choices with its capacity in the region in the routes’ early days, even amidst growth. Too much capacity could drive down fares below break even, or even lead a high number of seats to fly empty – both of which would be undesirable outcomes. Placing the Boeing 787, an aircraft with fewer seats than the 777, on at least two of the newer routes from DFW limits capacity, while simultaneously featuring a newer, shiner aircraft that passengers are likely to enjoy.
Some question the role of DFW as the airline’s primary gateway for its East Asian flights. Both Delta and United maintain hubs positioned far more conveniently to handle connecting traffic, mainly shuttling passengers through Seattle or San Francisco, respectively. Connecting through Dallas naturally involves a high degree of networking for a number of passengers, who must then trek backwards for west-coast destinations.
Is inland DFW really the appropriate facility to handle a wave of international passengers? The answer is probably, yes.
Without particularly well-suited resources at any airport in the western United States, DFW seems like the best fit for American (alongside ORD, which handles flights to three destinations in East Asia). DFW represents the largest operational hub for American, shouldering around a whopping 900 daily flights. This allows the airline to maximize connection opportunities, easily linking passengers to virtually any destination it serves within the United States, within a flight of just a few hours. In the absence of any clear geographically advantageous facility, American rightly turns to its operational powerhouse in the Lone Star State.
Furthermore, sending passengers through DFW offers American a certain unique competitive advantage for those customers bound for Latin American destinations. While historically weak in East Asia, one of American’s richest strengths lies in Latin America. The airline routes a significant number of those flights through DFW, as one might expect, offering a highly convenient connecting point on the way down south.
Nonetheless, with American not quite in a position to venture into smaller cities as United has done anytime soon, the next phase of its East Asian expansion may very well take place from Los Angeles (LAX). DFW served as a nice springboard, but with the groundwork in place, LAX flights could make American even more competitive with its rivals. The airline already flies to Tokyo-Narita and Shanghai from LAX (with plans to begin service to Tokyo-Haneda in March), so adding more routes to the region is not hard to imagine. Expect the next wave, should there be one, to take off from Los Angeles.
American Airlines is the world’s newly-crowned largest carrier. And with its moves over the past few years, American is aggressively pursuing more of the world. As American touted in one of its past advertisements, it’s “Howdy to Ni Hao.”