Late last year, American Airlines (NASDAQ:AAL) became the first of the three big legacy carriers to return to unit revenue growth.
American maintained its advantage last quarter, posting solid increases in passenger revenue per available seat mile (PRASM) and total revenue per available seat mile (TRASM). Meanwhile, Delta Air Lines (NYSE:DAL) and United Continental (NYSE:UAL) both reported that unit revenue was roughly flat year over year.
However, direct comparisons between the three legacy carriers can be misleading because of differences in how they deploy their capacity by region. Let's take a closer look at how American Airlines is outperforming its peers in terms of unit revenue growth.
The three legacy carriers have different strengths
All three legacy carriers get the majority of their revenue from the domestic market. Yet even here, there are meaningful differences. Last quarter, American Airlines generated 74% of its revenue in the domestic region. Delta Air Lines was close behind, with 72% of its revenue coming from domestic routes. By contrast, United Continental has much more of a global focus, generating only 61% of its revenue in the domestic market.
Looking outside the U.S., there are even greater discrepancies in how the legacy carriers allocate capacity. American Airlines has historically been strong in Latin America. Despite a recent push to diversify, Latin America still accounts for more than half of American's international revenue.
Delta is more focused on the transatlantic market, which accounts for 41% of its international revenue. Lastly, United has the most balanced allocation of capacity, with the transatlantic and transpacific markets both driving a little more than a third of its international revenue, compared to 28% for Latin America.
American Airlines is the winner domestically
Within the domestic market, American Airlines is outperforming its competitors right now. Last quarter, its domestic PRASM rose 2.3%, compared to declines of 0.1% and 1.4% at United and Delta, respectively.
Clearly, American Airlines is benefiting from having its largest hub at Dallas-Fort Worth International Airport. The Dallas-Fort Worth metro area has seen sustained high population growth in recent years. Additionally, the regional economy is growing more than twice as fast as the national average, powered by a steady stream of corporate relocations.
American Airlines is also probably seeing a rebound in passengers connecting from Latin America to domestic flights in Miami. This connecting traffic had fallen off dramatically a couple of years ago, primarily due to economic weakness in Brazil.
That said, American Airlines isn't just profiting from its position in growing regional markets. It has also retooled its schedules in the past few years to enable more flight connections. This strategy seems to be having the intended effect of boosting unit revenue.
The international market is a mixed bag
In international markets, American Airlines' performance is more mixed. In Latin America, it posted strong, industry-leading PRASM growth of 7.7% last quarter. However, this likely reflects its disproportionate exposure to Brazil, where demand is bouncing back after collapsing beginning in 2014. (American Airlines has about twice as much market share in Brazil as Delta Air Lines and United Continental combined.)
American Airlines also outperformed in the Pacific region, with a 0.4% PRASM increase, compared to declines of about 4% at Delta and United. However, it was starting from a very low base. United -- the leader in the transpacific market -- produced PRASM that was 18% higher than American's in the region. The good news is that American Airlines still has plenty of room for improvement in Asia, which could drive future unit revenue gains.
By contrast, American Airlines was a distinct laggard in the transatlantic market, where its PRASM fell 5.9%. Delta's transatlantic PRASM was down 0.5%, and United actually posted a 2.1% increase in the region. Here, American Airlines may have been held back by its higher exposure to the U.K., where revenue has been negatively affected by Brexit.
The bottom line is that American modestly outperformed its competitors in the international market, but mainly because most of its international capacity is in Latin America. As year-over-year comparisons in Latin America get tougher later this year, American's international unit revenue growth may slow.
Can American Airlines maintain its lead?
For the second quarter, American Airlines has again forecast solid unit revenue growth that will outpace what Delta and United can achieve. However, by the second half of this year, American Airlines will start to face noticeably tougher year-over-year comparisons than its peers. This could whittle away its advantage.
That said, American Airlines does seem to have some genuine unit revenue momentum in the domestic market. The ongoing rollout of its new basic economy fares could drive further gains. Meanwhile, in the international market, it is officially launching its promising premium economy option later this week.
Thus, American Airlines has some tools to maintain its strong unit revenue growth later this year and into 2018. Nevertheless, American will clearly face more of an uphill climb going forward.