Why Is Asia American Airlines' Achilles Heel?

American Airlines Group is off to a strong start following its merger with US Airways. But will its weak position in Asia drag it down?

Jan 29, 2014 at 7:31PM

New American Livery

American Airlines reported strong Q4 results this week (Photo: American Airlines).

On Tuesday, American Airlines Group (NASDAQ:AAL) reported strong fourth-quarter earnings in which adjusted earnings per share of $0.59 beat the average analyst estimate of $0.55. Not surprisingly, American Airlines bulls are very excited about these results, as they show that the company is performing well as it enters the merger integration process with US Airways.

However, the company still has one big disadvantage in competing with Delta Air Lines (NYSE:DAL) and United Continental (NYSE:UAL) for airline industry dominance: Asia. United and Delta have both historically had larger presences on the continent.

Most people expect Asia to be one of the biggest growth engines of the global economy in the coming decades. As a result, it is critical for American Airlines to have a strong Asian route network in order to compete for corporate travel contracts. American is introducing new flights to Asia to narrow the gap with United and Delta, but its hub positioning is far from ideal. As a result, growth in Asia could weigh on American's unit revenue for quite some time.

American's Asia dilemma
In 2013, airlines that were heavily exposed to Asia flew into significant headwinds. The devaluation of the Japanese yen, rapid capacity growth in China, and slowing GDP growth led to lower unit revenue.

Images

United Airlines has the strongest position of any U.S. carrier in Asia.

In the fourth quarter, United Airlines, the top carrier to Asia, stated that PRASM -- a common measure of unit revenue -- fell 5% on its trans-Pacific routes. That underperformance partially offset solid gains elsewhere, leading to a system-wide PRASM increase of 3.2%. A similar story played out at American, as trans-Pacific unit revenue fell 6%. However, since American has a much lower exposure to Asia, its system-wide PRASM grew 5%.

Given the ongoing unit revenue weakness in Asia, it's not a great time to add more capacity to the continent. On the other hand, American is in a dogfight with United and Delta for corporate traffic. United is taking every opportunity available to promote its position as the top carrier to Asia (and especially to China). Meanwhile, Delta is building a big international gateway in Seattle, from which it will serve the top five Asian business markets by mid-2014.

Dilutive growth
Recognizing the long-term importance of Asia, American Airlines will up its capacity to that end point later this year. Starting this summer, it plans to offer nonstop flights from Dallas-Fort Worth (its largest hub) to Shanghai and Hong Kong. This is part of a broader 9% increase in American's international capacity this year.

Growing in Asia is probably the right choice for American from a long-term perspective, but investors should recognize that these flights will probably be money losers initially. In many cases, it can take two to three years for new airline routes to reach profitability.

Additionally, American faces a longer-term disadvantage in Asia compared to United and Delta. In terms of geography and cultural ties to Asia, San Francisco and Seattle are the best-located gateways for trans-Pacific flights. However, United has solidified a dominant position in San Francisco and Delta is rapidly ensconcing itself in Seattle as the dominant international carrier.

None of American's hubs are nearly as good for connecting traffic to Asia. Dallas-Fort Worth is one of the largest airline hubs in the world, but it is about 1,500 miles further from Asia than San Francisco and Seattle (roughly three hours of flying time). It is also an inconvenient transfer point for most U.S.-origin cities.

American's Chicago and Los Angeles hubs are slightly better positioned geographically, but the airline has fewer flights to those airports and it faces strong competition in both cities, particularly from United.

Foolish takeaway
American Airlines has gotten off to a great start following its merger with US Airways, but the company is going to need to invest a lot of money in the next decade to build up its route network in Asia. Doing so is critical for grabbing corporate travel share from United and Delta (particularly the former, which has the biggest presence in Asia today).

However, even as American grows in Asia, it is likely to remain in third place there for the foreseeable future. United and Delta have already seized the two best trans-Pacific gateways in the U.S. None of American's hubs are as well positioned for serving Asia, and that will make it less profitable on the continent in the long run.

While American is the laggard in Asia among the top three U.S. airlines, it is by far the top airline to Latin America, which is another long-term growth market. American's strength there could make up for its weaker position in Asia. Only time will tell.

Protect your portfolio with dividend stocks
Dividend stocks as a group handily outperform their non-dividend paying brethren. The reasons for this are too numerous to list here, but you can rest assured that it's true. However, knowing this is only half the battle. The other half is identifying which dividend stocks in particular are the best. With this in mind, our top analysts put together a free list of nine high-yielding stocks that should be in every income investor's portfolio. To learn the identity of these stocks instantly and for free, just click here now!

Adam Levine-Weinberg is short shares of United Continental Holdings. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of fool.com.

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to www.fool.com/beginners, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at www.fool.com/podcasts.

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.


Compare Brokers