It’s been a quiet week around here, so a lot of my recent posts have been around the airline industry itself. Today is no different.
Can American Be Profitable Forever?
Yesterday, American Airlines held its first investor day in I don’t know how many years. And while there were a lot of tidbits for Wall Street to play with, there was one in particular that stood out: CEO Doug Parker claimed that the airline would never lose money again. That’s a heck of a statement from an airline that, in the 25 years after deregulation, struggled to break even (and filed a bankruptcy).
But this isn’t the American Airlines that you remember from when you were young (unless you are really young). In 2013, US Airways bought American Airlines, and this is the management team that was in charge of US Airways at the time. But they weren’t the US Airways that you remember, either, but rather, the America West team that had bought US Airways. And on and on. I have no doubt that, at some time, Doug Parker was the Dread Pirate Roberts.
Say what you will about the business and its ability to innovate, but Mr. Parker has been at the forefront of it. In 2002, he made perhaps the gutsiest move in industry history by completely revamping his fare structure. Gone were the days of Saturday night stays, one-way tickets that cost more than round-trips and $2,000 walk-up fares. Instead, he reduced fares across the board and allowed passengers to buy a one-way at half the price of a round-trip ticket. It was considered heresy in an industry that had always relied on the huge spread between last-minute fares and those purchased much earlier, but it forced the other airlines to do the same.*
America West was an airline that shouldn’t have existed. It had weak hubs in Las Vegas, Phoenix and Columbus and significant overlap with Southwest. But instead of going away, the airline ended up buying its much larger competitor, US Airways, out of bankruptcy.
US Airways was an airline that shouldn’t have existed. It had weak hubs, weak international business and a heavy presence on the price-sensitive east coast, particularly from north to south. Multiple competitors tried to buy it on multiple occasions, but America West caught them at the right time. US Airways cut costs, thrived and made an ill-fated effort to buy Delta. Instead of buying Delta, it bought American Airlines out of bankruptcy. Say what you will about the management, but they are clearly bargain hunters.
The Bottom Line
Five years ago, the thought of an airline saying that it was never going to lose money again would have been ludicrous. But we’re not dealing with an ordinary CEO here, and Mr. Parker may be able to pull it off. With four airlines controlling over 80% of the domestic industry, pricing should remain firm, even in downturns. If. American continues to keeps its costs down, it may pull off the (almost) impossible.
*While it’s true that Southwest Airlines was doing this long before any of the other carriers, Southwest had been born that way, so to speak. America West had to ditch its entire business model and start again. There’s a reason that Southwest always makes money.
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