Matt Molnar
2008-04-30, 07:44 PM
Fortune has a nice profile of AA with an interview with CEO Gerard Arpey and an analysis of the industry's problems.
:arrow: American Airlines loses $3.3 million a day: How CEO Gerard Arpey runs a carrier that's losing money like airplanes burn fuel (http://money.cnn.com/2008/04/28/magazines/fortune/gimbel_american.fortune/index.htm)
Since January, nearly every flight the airline has flown has lost money - analysts estimate it is losing $3.3 million a day
So what's an airline executive to do? As in any industry that's in trouble, some think consolidation is the answer. Take the proposed merger of Delta Air Lines (DAL, Fortune 500) and Northwest Airlines (NWA, Fortune 500). Richard Anderson, Delta's chief, says the new carrier can better withstand high fuel costs by exploiting the combination of two complementary route networks. Northwest has a large Asian presence, and Delta has a large European one.
But many in the industry say that's exactly the wrong strategy, and that the value in such mergers lies in acquiring a competitor with similar routes and shutting some flights down. The terms Delta's executives propose will leave capacity largely unchanged and will increase their costs - they've agreed to give their pilots a raise - with limited potential to substantially increase revenue. "The appeal of consolidation is redundancy - the network overlap - that can be eliminated," J.P. Morgan analyst Jamie Baker wrote in a recent report. "The value creation comes in the form of shedding duplication."
American Airlines (AMR, Fortune 500) is only now beginning to find solutions to the problem. The company is rolling out software to identify flights for which passengers will pay extra. "We call it the passenger choice model," says Scott Nason, American's vice president for revenue management. "And it's easily worth a few percentage points. On an individual flight that was going to take in, say, $10,000, if we got 3% more, that's $300. But across our system, over the course of the year, 3% of $20 billion is $600 million."
:arrow: American Airlines loses $3.3 million a day: How CEO Gerard Arpey runs a carrier that's losing money like airplanes burn fuel (http://money.cnn.com/2008/04/28/magazines/fortune/gimbel_american.fortune/index.htm)
Since January, nearly every flight the airline has flown has lost money - analysts estimate it is losing $3.3 million a day
So what's an airline executive to do? As in any industry that's in trouble, some think consolidation is the answer. Take the proposed merger of Delta Air Lines (DAL, Fortune 500) and Northwest Airlines (NWA, Fortune 500). Richard Anderson, Delta's chief, says the new carrier can better withstand high fuel costs by exploiting the combination of two complementary route networks. Northwest has a large Asian presence, and Delta has a large European one.
But many in the industry say that's exactly the wrong strategy, and that the value in such mergers lies in acquiring a competitor with similar routes and shutting some flights down. The terms Delta's executives propose will leave capacity largely unchanged and will increase their costs - they've agreed to give their pilots a raise - with limited potential to substantially increase revenue. "The appeal of consolidation is redundancy - the network overlap - that can be eliminated," J.P. Morgan analyst Jamie Baker wrote in a recent report. "The value creation comes in the form of shedding duplication."
American Airlines (AMR, Fortune 500) is only now beginning to find solutions to the problem. The company is rolling out software to identify flights for which passengers will pay extra. "We call it the passenger choice model," says Scott Nason, American's vice president for revenue management. "And it's easily worth a few percentage points. On an individual flight that was going to take in, say, $10,000, if we got 3% more, that's $300. But across our system, over the course of the year, 3% of $20 billion is $600 million."