American Airlines Eschews Deals, Focuses on Customers
December 29, 2010 10:19AM
As United Airlines and Delta Air Lines led the frenzied deal-making reshaping the global airline sector, archrival American Airlines adopted the opposite tack, a "slow and steady wins the race" strategy.
Analysts were confounded; shareholders furious. But American CEO Gerard Arpey and President Tom Horton refused to budge. The next year will start to tell whether they made the right call: that American can keep pace with the two behemoths by simply focusing on airline basics.
While megamergers vaulted United and Delta past American to the world's No. 1 and No. 2 rankings, respectively, American channeled resources into a lower-risk "virtual merger" with British Airways, reconnecting with customers and bolstering hubs like Chicago's O'Hare International Airport.
Analysts blasted American as unimaginative, and its industry-lagging results for 2010 seemed to prove them right. But market dynamics are starting to work in American's favor, said Horton, lanky and soft-spoken, who brings a marathoner's perspective to his post.
"I think that for those who don't follow the herd, there are some really interesting opportunities," Horton told the Tribune last month.
But will those opportunities materialize quickly enough to win over shareholders and analysts focused on short-term gains? Wall Street, so far, isn't convinced.
The Texas-based carrier's $2.6 billion market value is dwarfed by Delta's $9.83 billion capitalization and United's $7.65 billion value. American's labor discord, aging aircraft fleet and retiree benefit costs all weighed on its stock, analysts said.
American's financial results are beginning to nose upward, however. Ray Neidl of Maxim Group is one of several analysts who think American's stock has the greatest upside potential among its peers for 2011 since it was the most battered major airline stock this year.
Passengers already are reaping dividends as American tackles service bottlenecks, like with a program created by its O'Hare workers to speed international travelers with tight connections through immigration lines to waiting domestic flights.
On a recent Wednesday, Steve Wilson stood on a train platform outside O'Hare's international terminal, his head pounding from jetlag, worry and spending nearly nine hours in a cramped economy seat on a flight from Brussels.
With just 70 minutes to navigate serpentine immigration lines and catch his flight home to Wichita, Kan., Wilson had been surprised and relieved when an American agent directed him to a special express lane as he exited the plane.
Now 20 minutes later, Wilson about to take the short shuttle to American's domestic terminal, still clutching the florescent yellow Express Connect ticket American hands out to passengers racing for domestic flights.
"I'll feel a lot of relief if the train ever gets here," Wilson said. It did, and minutes later another American worker intercepted him as he dashed into Terminal 3, escorting him to the front of a long security line.
Since the initiative's June launch, American and alliance partners British Airways and Iberia have helped a total of 26,800 international travelers make connections they likely would have otherwise missed at O'Hare.
The program is such a hit that American has rolled it out in Miami, New York's John F. Kennedy International Airport, London Heathrow and Madrid, and plans to bring it next to Los Angeles International Airport, officials said.
The initiative is emblematic of everything Horton hopes to gain: Service that delights passengers, helps American operate on time and forges a tighter tie-up with American's Oneworld partners than United has gained with Star or Delta with SkyTeam, the other two global alliances.
"If we take what we have ... and really turn up our game for the customer alongside those joint business agreements, I think we're good," Horton said.
American is slowly upgrading its aging fleet with new Boeing 737s and, eventually, Boeing 787s. And it is retooling its domestic network to feed more flights into its hubs, an initiative that began at O'Hare earlier this year.
But a $7 billion joint venture with British Airways, launched in October, could have the farthest-reaching consequences. With Spain's Iberia, recently acquired by the U.K.-based carrier, the Oneworld partners plan to jointly schedule and share profits on 5,200 flights, netting more than $500 million annually by 2012.
American is set to begin a similar northern Pacific partnership with Japan Air Lines next year, and it is exploring closer ties with Australia's Qantas Airways Ltd. and Chile's LAN Airlines, all Oneworld partners, said Horton.
"No, we haven't participated in U.S. consolidation because we haven't seen the right opportunity for us, yet," said Horton, an architect of American's alliance strategy. "But we are merging our international operations. I think that's sort of been lost in the hype about U.S. consolidation."
With his recent promotion to the No. 2 job at the carrier, Horton is seen by analysts as the heir apparent to Arpey. Both men served as chief financial officers at American, and they also share another trait. "They're very stand-up guys," said former Continental CEO Larry Kellner.
But are the virtual mergers they are striking anything more than financial wizardry? American likely dodged a labor war by not merging with US Airways, but it also didn't gain a larger network, cash reserves or stock bounce that United and Delta saw with their deals.
"When they're talking about how this is just like a merger, um, no, it isn't," said aviation consultant Hubert Horan. "With a merger you start with a clean sheet of paper."
Oneworld is the least integrated of the three major alliances, in part because U.S. and European officials granted antitrust immunity to founding members American and British Airways after their SkyTeam and Star rivals.
The relationship between American and British Airways at times has turned prickly, but the two sides will have to resolve differences amicably as they coordinate operations, said Horan. And if the market stagnates, the carriers could fight bitterly over how to divvy up revenue and costs, problems for all of the alliances.
"Think of children in the schoolyard," said Horan, who as a Northwest Airlines executive helped construct the original Northwest-KLM trans-Atlantic alliance about 20 years ago.
The two carriers are scrambling to link their frequent-flier programs, coordinate schedules and move airport operations closer together, steps they could have undertaken without antitrust immunity, Horan noted. Starting this month, they started ramping up joint sales to corporate customers.
They'll also have to explain service variations to customers, like British Airways' practice of charging up to $90 to make a seat assignment more than 24 hours in advance.
The launch of the joint venture has been jarring for some customers.
Aaron Gellman, a transportation professor at Northwestern University, said he was frustrated when he recently attempted to book a trip to Europe on American's Web site and was bombarded with flights on British Airways.
"If I wanted to fly (British Airways) across the Atlantic, I would have done it," groused Gellman. "I think American should be American."
But Horton envisions the drawing power he'll have selling corporate travelers a network with glittering assets in nearly all of the world's largest business markets: London, New York, Los Angeles, Tokyo, Hong Kong and Chicago.
"Every hub in the American Airlines network has the ability to be a significant money-maker," said Kellner. "I look out five years and think people will be surprised to see that American has come back, provided they can get their labor costs to a point where they have parity with other airlines."
Horton knows how to strike big deals, and he engineered one of the biggest telecom takeovers, SBC's 2005 acquisition of AT&T Corp., in between stints at American.
Observers don't rule out a strategic acquisition by American as it bolsters its U.S. hubs. One possible target, analysts said, is JetBlue Airways, which would help American gain an edge in its battle with Delta for dominance of New York's John F. Kennedy International Airport.
But researcher Bill Swelbar predicts American will pursue an equity investment with one of its alliance partners over the next couple of years, especially if Delta buys a stake in Virgin Atlantic Airlines, last week's hot industry rumor.
"Foreign ownership is going to be the discussion of the next two years, and it's going to be hot," said Swelbar, an airline industry researcher at the Massachusetts Institute of Technology. "They're going to want to cement some relationships since they're already at a disadvantage."
But the merger craze could help American resolve long-festering contract talks with nearly all of its worker groups, especially if United and Continental's unions strike new joint contracts that could be emulated.
One positive sign: Capt. Dave Bates, the newly elected head of American's pilots union, has reached out to management to speed contract talks that have made little progress in four years. His predecessor, Capt. Lloyd Hill, never met with Arpey, Horton or Jeff Brundage, a senior vice president overseeing labor issues, Swelbar said.
Last week, Bates signed a negotiating protocol with the company establishing an ambitious schedule for talks in the coming year. He is optimistic, Bates said.
"American is beginning to come out of a long slumber and recognize that if they don't start moving aggressively forward, they're going to be left behind," he said.