The merger of American Airlines Group (NASDAQ:AAL) and US Airways created a third giant U.S. airline capable of matching Delta Air Lines and United Continental. While American Airlines' global route network is broadly competitive with those of Delta and United, it does have one weak point: Asia.
American Airlines has a much smaller footprint in Asia than its two key competitors. Given the size and growth rate of Asia's developing economies, building a stronger network there is crucial.
American Airlines now appears to have a strategy for competing in Asia. It plans to build Dallas-Fort Worth International Airport -- its largest hub -- into a major Asian gateway airport.
Competing from behind
Whereas American Airlines has a leading position in the domestic market and for flights to Latin America and Europe, it is a distant third place for flights to Asia.
For example, in Q2, American Airlines' transpacific capacity was less than one-quarter of its European or Latin American capacity. As a result, it generated just $255 million of transpacific revenue, compared to $1.19 billion at United and $819 million at Delta.
This summer, American Airlines began two new routes to Asia, flying from its Dallas hub to Shanghai and Hong Kong. This expanded American's number of nonstop Asian routes to nine. That still leaves it far behind United and Delta, though.
Another Asian flight in Dallas
Last week, American Airlines announced plans to launch yet another flight to Asia from its Dallas hub. It is looking to fly nonstop to Beijing starting next summer, complementing its existing route from Chicago to Beijing.
After adding service to Beijing, American would fly nonstop from Dallas to all of the five key business markets in East Asia: Tokyo, Seoul, Beijing, Shanghai, and Hong Kong. This would mark a major milestone in the company's Asian strategy. Delta has similarly added flights from Seattle to each of those five cities as part of its attempt to make Seattle a major Asian gateway.
American Airlines Chief Marketing Officer Andrew Nocella emphasized the importance of this new route. He stated, "The pending addition of Beijing and recent additions of Shanghai and Hong Kong elevate Dallas/Fort Worth to one of the primary connecting hubs between Asia and destinations within the U.S. as well as Mexico, Central and South America."
The geography problem remains
Adding new routes to Asia is the easy part of American's strategy to boost its appeal to business customers. Now it must make those routes profitable -- and it needs to convince corporate customers that Dallas is a good connecting point to get to Asia. That's a more challenging task.
From a geographical perspective, American still operates at a disadvantage compared to United and Delta, which have their main Asian gateways in San Francisco and Seattle, respectively. Both of those cities are more than 1,000 miles closer to Asia than Dallas.
This means American Airlines' flights to Asia are significantly more expensive to operate. Additionally, for travelers originating in the Northeast, Midwest, or Western U.S., flying to Asia through Dallas would involve significant backtracking, increasing travel times.
On the other hand, American Airlines has a strong position in the South and Southeast U.S., with large hubs in Dallas, Charlotte, and Miami. United and Delta only have one hub each in those regions (Houston and Atlanta, respectively). For customers in the South and Southeast regions, Dallas isn't very far out of the way for trips to Asia. Flying to Asia from Dallas could thus be seen as a way for American to leverage its existing strengths.
American still needs a second Asian gateway
American Airlines is progressing toward its goal of building Dallas-Fort Worth International Airport into a major Asian gateway. While the airport is not ideally located for flights to Asia, American is leveraging its large route network in Dallas (where it operates more than 750 daily departures) and its leading position in the South and Southeast to gather connecting traffic for its new flights.
That said, American Airlines will need a second major Asian gateway if it wants to become a serious competitor to United and Delta in Asia. For many of the largest U.S. population centers -- including six of American's nine "cornerstone" markets -- Dallas is too far from the shortest route to Asia to be a reasonable connecting point.
Today, American Airlines operates some flights to Asia from its Chicago and Los Angeles hubs. In the future, the company should consider adding more flights to Asia from one or both of those hubs in order to provide better options for traveling between the U.S. and Asia.
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.