Since 2014, American Airlines (AAL -0.14%) has used a specially configured fleet of Airbus A321s to ply the routes from New York's JFK Airport to Los Angeles and San Francisco. Whereas airlines typically outfit A321s with 190 to 200 seats, American's "A321T" features a premium-heavy 102-seat configuration, including 10 first-class seats and 20 business-class seats.
Now, the struggling airline is reportedly considering converting all of its A321Ts into its standard, high-density configuration. Considering that business-travel demand could remain weak for years, reconfiguring this fleet to reduce unit costs seems like a no-brainer.
The wrong plane at the wrong time
American Airlines' A321T always represented a risky bet on dominating the premium-travel market. These planes devote more than half of their floor space to their 30 flat-bed first-class and business-class seats. The airline needs to fill those seats at very high fares -- thousands of dollars round-trip -- to earn high margins.
In the best of times, that was challenging, considering the competitiveness of the airline industry. JetBlue Airways launched its "Mint" premium service on the New York-Los Angeles and New York-San Francisco routes in mid-2014. It has since become a major player in the premium transcontinental market. However, while JetBlue also uses A321s, it configures them with 16 lie-flat seats in the premium cabin and 159 seats overall. The extra seating capacity allows it to make money with significantly lower fares.
Today, the A321T is a money pit. The pandemic has decimated business travel (far more than leisure travel). As a result, American Airlines has grounded nearly the entire A321T fleet. Instead of operating high-frequency A321T service from New York to Los Angeles and San Francisco, it's flying those routes just once or twice a day, mainly using wide-body jets that have a lower proportion of business-class seats than the A321Ts.
Are longer-term changes coming?
The U.S. airline industry has had to change quickly in 2020 to adapt to the COVID-19 pandemic. Many of those changes will likely prove temporary, but some will become permanent. American Airlines' move away from the low-density A321T fleet could be one of those changes.
Indeed, the airline may be looking to convert the entire A321T fleet to its new 190-seat standard configuration for the A321. For now, reports of this strategic shift haven't been confirmed. However, it would make a lot of sense.
Mass distribution of COVID-19 vaccines could drive a rapid recovery in short-haul leisure-travel demand next year. High-density A321s would be ideal for serving this market segment. By contrast, most industry executives and analysts expect business-travel demand to remain well below 2019 levels for many more years.
The pandemic has forced companies to make better use of videoconferencing tools. That could permanently reduce business-travel demand, especially at the higher price points that American Airlines has relied on for its first-class offering on the A321T.
There are better alternatives
There's no way to know for sure what the new normal will look like for air travel, but there's a good chance that the current A321T won't fit into it. In the near term, while business travel is depressed, American could use wide-body jets on the premium transcontinental routes. After all, it probably won't need its full complement of wide-body jets for long-haul international routes until at least the summer of 2022.
Looking beyond 2022, American Airlines' best option would be to create a post-pandemic premium configuration that could be installed on A321neos. American has dozens of A321neo deliveries scheduled for the next two to three years.
The A321neo provides a bigger fuel-efficiency improvement over the prior-generation A321 on transcontinental routes than on shorter flights. Moreover, Airbus has enabled new configuration options for the A321neo and its longer-range siblings that aren't available on the A321. This could potentially allow American Airlines to fit significantly more than 102 seats, in total, while still offering 20 to 30 lie-flat business-class seats.
American Airlines is on track to be one of the last U.S. airlines to reach cash breakeven and has the most debt of any major airline. It can't afford to leave any stone unturned in its quest to return to profitability. Converting the existing A321T fleet to a 190-seat configuration better suited to leisure demand and eventually rolling out a less-ambitious premium configuration on A321neos would be steps in the right direction.