MIAMI — The strategic implications of American’s recently announced Los Angeles – Hong Kong route will not be overlooked by its two largest competitors at LAX: Delta and United. The world’s largest carrier has now added or plans to add four new transpacific routes from its LAX hub within the past 3 months to Sydney, Tokyo Haneda, Auckland and now Hong Kong. By Fall 2016, American’s LAX roster have grown from offering three intercontinental routes (London Heathrow, Tokyo Narita and Sao Paulo) year-over-year to a total of seven once Hong Kong comes online on September 7, 2016. Auckland will go-live on June 23, 2016. Sydney commenced on December 17, 2015 and Tokyo Haneda began on February 16, 2016.
Notably, of all of these seven routes, five are currently served by American’s existing OneWorld partner carriers – representing a major commercial shift from its pre-bankruptcy days when its cost-structure prohibited such growth and the carrier relied on its OneWorld partnerships to access off-line markets. Even more significant is that, with the exception of Hong Kong, American participates in JV partnerships with fellow One World carriers – British Airways to Heathrow, Qantas to Sydney and Auckland, LATAM to Sao Paulo and Japan Airlines to Tokyo Narita and Haneda – on these LAX routes, thereby strengthening its market position against competing alliances.
American is the Leading Carrier at LAX and Wants the World to take Notice
The route additions also send a very convincing message to its domestic US competitors that American wants everything in LA short of “owning” the market. Since 2013, American has invested heavily in its LAX hub, owing to freedoms gained from its bankruptcy restructuring that facilitated the acquisition of cost-efficient narrowbody aircraft to grow its domestic feed from LAX. These include the Embraer E-175 series and Airbus A320 NEO family that will permit feed from mid-continent markets such as Kansas City, Minneapolis, New Orleans and Omaha. It has also bolstered its regional feed from short-haul markets west of the Rocky Mountains and along the Pacific Coast, and is banking on liberalized bilateral agreements between the U.S. and Mexico to grow its short-haul feeder operations from south of the U.S. border.
Furthermore, American’s LAX additions, from an international perspective, come at a critical point of transformation for LAX airport in general, particularly in context of the facility upgrades at Los Angeles International designed to make it a more appealing connect point for travelers. Long criticized by travelers as a sub-optimal transit hub for domestic to international itineraries, LAX has suffered competitively to the nearby San Francisco airport, which vies heavily for transpacific gateway traffic, and recently, although to a lesser extent, Seattle-Tacoma International. SFO is a hub for United Airlines, and Seattle is a hub for Alaska Airlines as well as Delta Air Lines.
While Los Angeles is served by numerous foreign flag carriers, owing to the robust origin-and-destination traffic headed to the LA basin (much of it due to yield-rich premium demand and strong ethnic ties representing multiple nationalities), US flag carriers have maintained a token presence at LAX in terms of building long-haul trunk routes to foreign markets. Up until the late 2000s, international routes on US carriers from LAX were limited to alpha-tier citieplaces such as Tokyo Narita, London Heathrow and Sydney. The rest was left to foreign carriers, and U.S. airlines, namely the “big three” being American, Delta and United, benefited from their respective airline partnerships, alliances and codeshare agreements to connect domestic traffic onto foreign flag carriers from the Pacific, Asia, Latin America, Europe and the Middle East.
But that has slowly changed. As airlines have evolved and shifted their focus away from alliances, and onto more strategically valuable agreements such as joint ventures and equity stakes, the relationships have evolved. Delta was perhaps the first crusader in seeing an opportunity to gain a foothold into the highly-lucrative, massively underserved and monopolized U.S. – Australia market in 2009, upon which it struck a Joint Venture deal with Virgin Blue (now Virgin Australia) and commenced service from LAX to Sydney. Not only did this give Delta an online presence in Oceania, it also was feasible from LAX, which was a major focus city for Delta at the time. Delta has not inherited a true, functional transpacific gateway hub from its 2008 merger with Northwest Airlines, and LA proved to be a viable alternative.
However, Delta’s long-haul success in Los Angeles has seen mixed results, at best. It briefly attempted a Los Angeles to Sao Paulo route in 2009 that failed, and even more embarassing for SkyTeam, its own alliance partner, Korean Air, has managed to successfully operate the route thrice weekly since then. This was also during a period in which the Brazilian economy was much stronger, although arguably Delta also encountered challenges with limited bilateral agreements between the US and Brazil at the time (the market has since liberalized).
Delta also briefly operated a flight from Los Angeles to London Heathrow after implementing a major joint venture with Virgin Atlantic Airways, but again, this service was culled after a short period of time. The only other major international routes that Delta offers from LAX, on its own metal, are to Tokyo Haneda, Tokyo Narita, Sydney and Shanghai. The latter was added in 2015, but also competes alongside American, United and China Eastern.
United has more or less ceded the long-haul market to American. The Chicago-based carrier offers nonstop flights from LAX to Sydney, Shanghai, Melbourne, Tokyo Narita and London Heathrow, but of these, only Melbourne has been added within the past five years. In the past decade, United has cancelled flights from LAX to Hong Kong, Frankfurt and New York JFK, although the latter was replaced by Newark as the recipient of its P.S. service.
American is Sending a Message to Delta, Who is Throwing Down the Gauntlet in Asia
One thing is for certain: American will likely not be able to replicate United’s hub out of San Francisco anytime soon. But that doesn’t preclude the carrier for taking the next alternative: out-competing rival carrier Delta Air Lines, who has been notoriously vocal about its challenges in the transpacific market and has tried to build up a gateway hub in Seattle.
Delta has not announced additional transpacific service from its Seattle hub since 2013, although the carrier has sensibly waited for its massive capacity growth in Sea-Tac to mature before making further push. However, Delta has also ruffled feathers in Asia, claiming that its competitive position in the transpacific market is at a disadvantage relative to American and United given its lack of a Joint Venture partner in the region. Delta has criticized the landing slot allocation procedures at Tokyo Haneda, for instance, resorting to extreme measures to argue that it merits, “its way or the highway” to receive a portfolio of landing slots to shift its operations from the distant Narita airport to the more convenient Haneda. Long-haul growth at SeaTac is also a challenge for Delta given that the airport is pretty maxed-out facilities-wise.
Furthermore, Delta has encountered its own challenges in sustaining consistent service to Hong Kong. It reduced its Seattle – Hong Kong route from daily service to twice weekly during the IATA Northern Winter period and reinstated a 5-weekly flight from Tokyo Narita (which was axed several years back in order to support its Seattle hub). Even more challenging for Delta is that the carrier has to balance the emphasis on its Seattle hub as a transpacific gateway against its own intentions at Los Angeles, having added Shanghai in 2015 and already offering service to Tokyo Narita and Haneda.
Above all, the addition of LAX-Hong Kong already places American ahead of Delta at Seattle, and well ahead of both United and Delta at Los Angeles.
American should Attempt to Secure Rights to Fly LAX-Beijing. Seoul and Ho Chi Minh City are also Possible Contenders. Secondary China still a few Years away.
Although American’s LAX-Hong Kong route was widely rumored, Beijing remains a key opportunity for the carrier given that it is not currently served by any other US carriers, nor any competing global carriers, for that matter. Star Alliance’s Air China holds a monopoly in the Los Angeles – Beijing, running an average of 18 weekly flights to the Chinese capital. Securing landing slots at Peking airport would be a different story altogether, especially ones that are timed appropriately for American to optimize its schedules to appeal to premium traffic. Fortunately, however, this was an issue American was able to circumvent in 2014 when it secured flights to fly between Dallas/Ft. Worth and Beijing, after learning a fateful lesson when it launched its Chicago O’Hare – Beijing route in 2010.
Facilitating the international growth at LAX is American’s newest widebody fleet deliveries, with its premium 777-300ERs deployed to routes such as London, Sydney and now Hong Kong while the 787 can fulfill missions to Auckland, Sao Paulo, Shanghai and Tokyo Haneda. The 787 would be optimal for a hypothetical Beijing route, as it would complement the aircraft rotations that American uses out of its Dallas/Ft. Worth and Chicago O’Hare hubs to Peking airport.
This will also provide American with a cost advantage compared to rival United on its transpacific routes, given that United deploys its 747-400s and 777-200ERs to Tokyo, Hong Kong, Seoul, Beijing and Shanghai, although United will be retiring its 747s in a few years as well as receiving new 777-300ERs in the near future. United has a separate advantage over American in that it has deployed its 787 to uncontested routes in interior China, such as Chengdu, Xi’an and now possibly Hangzhou from its San Francisco hub, whereas American will likely not be moving into this space anytime soon. Rather, it can likely justify a 777-200ER service to Seoul, South Korea and possibly explore a nonstop service to Ho Chi Minh City, Vietnam. A direct flight from the U.S. to Vietnam is nonexistent today, and with a nearly 400 passengers-per-day, each way (PDEW) market with likely stimulation for additional growth, American may be able to find a potential goldmine in Southeast Asia, contrary to popular belief.
American has Grown from Market Laggard to Contender in Asia. Partnerships will still Play a Major Role
American will be celebrating the tenth anniversary of serving mainland China in April 2016 – and by year end, it will boast an entirely different route profile in Asia than it did ten years ago. Although partnerships will continue to play an important role in its expansion beyond Japan, South Korea, mainland China and Hong Kong, the carrier has shown that it will waste no time in compensating for years of neglect in a highly important region.