Just half a year into the merger of American Airlines (NASDAQ:AAL) and US Airways, the combined carrier is doing as well as even the most ardent bulls had hoped. If the new American has any flaws, it's the company's weak presence in Asia.
Indeed, Delta Air Lines (NYSE:DAL) and United Continental (NYSE:UAL) both have small international hubs in Tokyo. United also has a big transpacific hub in San Francisco, and Delta is rapidly building a competing West Coast gateway in Seattle. By comparison, American has a fairly small Asian route network -- and doesn't fly to Australia at all.
American Airlines wants to narrow the gap with Delta and United in Asia. This week, it starts daily service from Dallas/Fort Worth International Airport (its biggest hub) to Shanghai and Hong Kong. If successful, this service could pave the way to American maintaining a more competitive Asian footprint.
American Airlines' Asian dilemma
American Airlines has been the dominant carrier for travel to Latin America for the past two decades thanks to its hub in Miami. The acquisition of US Airways has also made it very competitive in the transatlantic market. However, for flights to Asia, American has poor hub locations compared to United Continental and Delta Air Lines.
American Airlines has hubs in Chicago, Dallas, Los Angeles, Miami, and New York. The New York and Los Angeles hubs are both undersized and cannot provide much connecting traffic, and Miami is located in the opposite corner of the U.S. from Asia. Chicago and Dallas aren't ideally located, either.
The US Airways merger didn't help. US Airways never operated transpacific flights to Asia, although it had planned to fly from Philadelphia to Beijing prior to the Great Recession. Of the three US Airways hubs, all but Phoenix are on the East Coast. Unfortunately, Phoenix has a "hot and high" climate that makes it very challenging to operate long-haul international flights.
Up until last year, American's main transpacific hub has been Chicago, from which it flies to Tokyo, Beijing and Shanghai. American also flies from Los Angeles to Tokyo and Shanghai. However, American now seems interested in building up Dallas/Fort Worth as an alternative hub for transpacific flights.
American's new Asian gateway: Dallas?
American Airlines has been flying from Dallas to Tokyo since the 1980s, but it is now trying to better exploit its largest hub (with more than 750 peak-day departures) as a gateway to Asia. Last May, American began nonstop flights between Dallas/Fort Worth and Seoul. In October, it announced plans for the new Hong Kong and Shanghai flights that will begin this week.
This will make Dallas/Fort Worth the biggest Asian gateway for American Airlines. However, the key question is whether American can successfully compete with United and Delta for flights to Asia with Dallas as its largest transpacific hub.
On the plus side, American has unrivaled scale in Dallas. With 750 daily flights, American can provide a host of connection options. By contrast, United operates about 300 daily departures at its main transpacific hub in San Francisco. Delta's new gateway in Seattle is even smaller, with fewer than 100 daily departures (although it is growing rapidly there).
However, geography is a big negative. From most major cities in East Asia, Dallas is more than 1,000 miles further than San Francisco, and more than 1,500 miles further than Seattle. This means that American's flights from DFW to Asia will be more expensive to operate than competing service from United and Delta. It will also require longer-range aircraft, which tend to be more expensive.
In large part, the success or failure of American's flights from DFW to Asia will depend on local market demand. If American can fill a large proportion of seats with travelers originating or ending in Dallas, then it should be able to fill the rest of the plane with passengers connecting to other cities in the South. However, for most of the U.S., connecting in a West Coast hub like San Francisco or Seattle (or a Midwest hub like Chicago) usually makes more sense.
Looking for a good Asian gateway
Dallas/Fort Worth may be a viable gateway for flights to the top few business centers in East Asia, but it is still no match for San Francisco or even Seattle. Longer-term, American may look to build its presence in the Los Angeles market to make that its primary transpacific gateway.
American Airlines recently reached an agreement with United Continental to sublease four gates at Los Angeles International Airport. This will replace the two gates it was forced to give up as part of its merger with US Airways, while also providing room for growth.
Los Angeles is a highly fragmented market today: United and American each have about 20% market share at LAX. However, Los Angeles has a large local market, and it is a more convenient connection point for travelers in the western U.S. By taking over a few gates from United, American will gain a small lead. This may be enough to support expanded transpacific service, complementing the new routes from Dallas/Fort Worth.
Foolish bottom line
American Airlines is still searching for the magic formula to compete better with United and Delta on routes to Asia. Adding transpacific flights from its largest hub -- Dallas/Fort Worth -- could be one part of the solution. However, in the long run, American probably needs a real hub on the West Coast. Growing in Los Angeles may be its best bet.
OPEC is absolutely terrified of this game-changer
Imagine a company that rents a very specific and valuable piece of machinery for $41,000 per hour (That's almost as much as the average American makes in a year!). And Warren Buffett is so confident in this company's can't-live-without-it business model, he just loaded up on 8.8 million shares. An exclusive, brand-new Motley Fool report reveals the company we're calling OPEC's worst nightmare. Just click HERE to uncover the name of this industry-leading stock... and join Buffett in his quest for a veritable landslide of profits!
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.