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American Airlines Partners With Another Budget Airline

By Adam Levine-Weinberg – Sep 30, 2021 at 9:30AM

Key Points

  • Like its major peers, American Airlines has used partnerships with foreign flag carriers to expand its international network over the past 25 years or so.
  • In recent months, the company has announced codeshare deals with ultra-low-cost carriers JetSMART and IndiGo.
  • Partnering with budget airlines may help American Airlines maximize its global reach, but the airline risks further weakening its reputation.

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Teaming up with ultra-low-cost carriers will help American Airlines expand its international route map, but it could come at the cost of further brand damage.

Over the past quarter-century, U.S. airlines have increasingly relied on close partnerships with foreign airlines to enhance their international service. Many have formed joint ventures with other countries' flag carriers, providing full-service offerings throughout a customer's journey, regardless of which airline operates any given flight segment.

American Airlines (AAL -3.12%) has formed several such joint ventures over the past two decades. However, the company has become less selective when looking for international partners recently. In fact, it has signed partnership deals with two ultra-low-cost carriers in the past few months. Let's take a look at what this means for American Airlines going forward.

A long history of seeking international partnerships

In 1996, American Airlines made its first attempt to form a transatlantic joint venture with British Airways. However, antitrust concerns related to the alliance's potential dominance of flights between the U.S. and London's Heathrow Airport repeatedly stymied the plan. In 1999, the two carriers began cooperating on a smaller scale (along with other airlines including Cathay Pacific and Qantas) through the oneworld global airline alliance.

Ultimately, American Airlines formed its first joint venture in 2002, teaming up with Finnair, Finland's flag carrier. It finally received approval for a joint venture with British Airways and Spanish flag carrier Iberia in 2010. American added a transpacific joint venture with Japan Airlines in early 2011. Just before the pandemic hit, it launched a joint venture with Australian flag carrier Qantas. And most recently, Aer Lingus joined American Airlines' existing transatlantic joint venture.

An overhead view of airplanes on the ground at JFK Airport's American Airlines terminal.

Image source: American Airlines.

Thus, American Airlines has a robust set of joint ventures spanning much of the globe, all with storied national flag carriers. It also maintains lesser partnerships with more than a dozen other airlines, either through the oneworld alliance or bilateral partnerships.

Breaking the mold

More recently, American Airlines has expanded its horizons in looking for international partners. After Chile blocked its plan to form a joint venture with South American airline giant Latam Airlines in 2019, Latam chose to team up with Delta Air Lines instead.

That forced American to get more creative. Last year, it signed a codeshare agreement with Brazilian low-cost carrier Gol Linhas Aereas. Two weeks ago, American said it would make a $200 million investment in Gol and expand this partnership. However, whereas Latam's operations span much of South America, Gol mainly operates within Brazil.

As a result, American Airlines announced in late July that it planned to buy a minority stake in Chile-based budget airline JetSMART and form a codeshare agreement with the carrier. JetSMART started operations just a few years ago, but it already has a broad route network, mainly in Chile and Argentina.

On Tuesday, American Airlines announced a codeshare agreement with another ultra-low-cost carrier. This time, it is partnering with IndiGo, India's largest airline. American plans to launch nonstop service from New York to Delhi and from Seattle to Bangalore over the next few months. By placing its code on 29 IndiGo routes within India, American can offer connecting options for travelers on its new flights to India.

An American Airlines plane in flight, with mountains in the background.

Image source: American Airlines.

A risky move

American Airlines has good reasons for teaming up with budget airlines. After being blocked from forming a joint venture with Latam, it didn't have any better options in southern South America. And ultra-low-cost carriers dominate the Indian air travel market. IndiGo alone has captured more than half of the market, making it the best potential partner among all of India's budget airlines.

On the flip side, the JetSMART and IndiGo codeshare agreements will have American Airlines marketing ultra-low-cost carriers' flights under its own brand. That could create confusion about service standards among customers. After all, JetSMART and IndiGo are no-frills airlines, whereas American Airlines still presents itself as a full-service airline (especially on long-haul routes).

In short, American's partnerships with ultra-low-cost carriers have clear tangible benefits in the form of additional connecting options for customers, offset by potential intangible harm -- i.e., brand damage.

In theory, American Airlines might be able to collaborate with its new partners to offer an upgraded experience to customers connecting to and from long-haul flights. That said, American Airlines has earned a poor reputation for customer service and operational performance in recent years, so I am skeptical that it will implement a good solution to this challenge. As a result, partnering with ultra-low-cost carriers could drive further erosion of American Airlines' brand over the next few years.

Adam Levine-Weinberg owns shares of Delta Air Lines. The Motley Fool recommends Delta Air Lines. The Motley Fool has a disclosure policy.

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