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AMERICAN CHANGES STRATEGY TO SURVIVE

The gleaming "Luxury Liner” (so the inscription reads) is in service with American Airlines (AA), the biggest American airline, whose parent company AMR Corporation has a global workforce of 112,000 employees and a fleet of some 1,100 aircraft. The huge transport undertaking, which carries almost 95 million passengers per year, serving over 300 destinations, has just announced a dramatic change of course which no doubt will be emulated in due course by many other classical network carriers throughout the world. Apart from a nine per cent capacity reduction on the previous year, in line with the expected further slowdown of the US market, qualitative change lies at the heart of the company's new strategy.

American Chairman and Chief Executive Officer, Donald Carty, commenting on his latest package of measures, announced in August, with which he hopes to achieve annual savings of $1.1 billion, described the package as "a combination of fundamental structural changes and tactical moves. We believe our future lies in continuing to operate as the world's leading network carrier – but we must get our costs down in order to compete and must focus on the products our customers want and are willing to pay for.”

With these words, he is acknowledging a far-reaching market shift that is not simply confined to the USA and has less to do with the terrorist attacks of 11 September than with a fundamental change in consumer behaviour.

Faced with today's economic uncertainty, fewer and fewer passengers, even business customers, are travelling in the luxurious, expensive booking classes, while demand in the low-cost segment is on the rise and many no-frills airlines are in fact flourishing. "Since the autumn,” says Carty, "average air fares have been at a 15-year low and are putting pressure on profits.”

The new price consciousness so much in evidence among consumers has especially taken by surprise the big, established full-service carriers which offer lounges, frequent flyer programmes and additional benefits such as allowing passengers to reschedule their bookings or to obtain a refund following cancellation of a flight, combined with a crowded air-route network that reaches from the world's metropolises through to the farthest corners of the globe. For, compared with the old days, today's passengers can make direct comparisons on the internet as to how much a competitor is charging for the same flight. Flights which used to be listed by journey duration or alliance connections are today often selected simply on the basis of the lowest price.

In the battle against specialised low-cost providers with fully utilised, homogeneous fleets and minimal administrative machinery, which concentrate on pure air transport over lucrative trunk routes, the classical network airlines have hitherto been in a difficult position. That is why an industry giant like American Airlines is now borrowing some of the features that are typical of its low-cost rivals.

To start with, the diversity of types and variants in the fleet is to be significantly reduced. By retiring 74 Fokker F-100 regional jets by the end of 2005, AA will not only save itself some major hangar overhauls that will be due before long, but also the cost of keeping on pilots and engineers for this somewhat exotic discontinued model in its workforce. This is a continuation of a fleet simplification process that has already cut fleet types fromfourteen to seven. As Carty points out, "The Fokker is a small plane with very high operating costs, complicated by the manufacturer's bankruptcy. Its economics simply no longer work for us.”

Also singled out for premature retirement by November, because of their non-standard engines, are all nine of the Boeing 767-300's inherited from TWA. The ex-TWA Boeing 717's which were only leased are also to be returned, as American prefers to use aircraft that it owns.

While American's 43 Boeing 777's will continue to act as its flagships, serving destinations in America, Asia and Europe with a full three-class cabin configuration, the interiors of 49 Boeing 767-300's are to be converted to a two-class product without First Class. First Class in the American "Flagship Suite” is a particularly luxurious showcase product. For example, every First Class seat can either swivel round to face its own personal desk or be converted to a flat bed. But fewer and fewer passengers are still paying for this privilege. Instead, frequent flyers from Business Class are often upgraded to the coveted seats at the front of the plane, in whose place more of the lucrative Business Class seats could be installed, as is now happening on the 767.

Whereas up to now AA has used a variety of cabin and seat configurations on its North Atlantic and Pacific routes, on the Boeing 767 and 777 these are now to be standardised throughout the network so as to increase operational flexibility. Moreover, the Economy Class configuration of 91cm seat pitch in every row on long-haul flights, up from 86cm, which American has promoted into an advertising hit ("More room throughout coach”, MRTC) – is to be retained. Increased utilisation with uniform configurations will have the effect just in the 777 fleet of increasing capacity by the equivalent of two aircraft, according to Carty.

Even greater savings, according to Carty, will result from a major reorganisation of the airline's hub airports: from 1 November air traffic in Dallas Fort Worth, AA's home base, is to be staggered. Thus, compared with the present situation, in which planes arrive and depart in waves, with all the transfer connections crammed together so that transit passengers have the minimum of delay before their onward connections, in the future departures will be distributed evenly over the day. This will mean that fewer aircraft need to languish by the gate, waiting for the next rush-hour. Instead, they will be able to take off again on the next flight after only a short turnaround. This will improve aircraft and airport utilisation significantly, though the corollary of this is that some passengers will have to wait longer for their transfer connections.

In Chicago O'Hare, airport code ORD, another of AA's hubs, Carty's new "de-peaking” strategy has been running successfully since April. The capacity this has saved is the equivalent of five aircraft. In Dallas (code DFW), he is expecting to fly an equivalent schedule with eleven fewer aircraft and to save an as-yet-undetermined number of gates as well.

It goes without saying that labour is another significant cost factor. Although American's parent company, AMR Corporation, which, including its regional subsidiaries American Eagle and the former TWA, has already reduced its workforce from 128,000 to 112,000 over the last year, by March 2003 another 7,000 jobs are to go, mainly in sales and ground handling at the airports. As Don Carty points out, "As the company goes through fundamental and structural change, one unpleasant reality is that we simply will need fewer people to operate the airline. We will do what we can to take care of our people who are impacted.” In addition to a new early retirement programme, this major reorganisation following planning of the winter flight schedule is to be eased as far as possible by voluntary redundancies and increased part-time working.

On the other hand the pressure to rationalise is here to stay, and even American Airlines was forced to swallow $495 million of losses in the second quarter of 2002 alone, in line with the industry generally in the USA. Nevertheless, the increasingly self-confident airline, which has never had to file for creditors' protection, has so far foregone any assistance under the US government's emergency programme to help the airlines, preferring instead to seek recovery using its own resources. The company notes with satisfaction that it still has over $2.6 billion of liquid assets and because it owns 85 to 90% of its fleet, along with other non-aircraft assets, if necessary it has sufficient security to obtain some $6 billion of credit lines.

However, to spare the company's cash balances, 35 aircraft deliveries planned for this year have been deferred. If it can, it hopes to cancel all the planes it has on order.

CEO Carty is expecting the pressure to adapt to persist in the future as well. "We view change as an ongoing process at American as we continue to evaluate every aspect of our business. Our efforts are aimed at making American fit for survival and profitable in the long-term.”

From page 24 of FLUG REVUE 10/2002