In the coming months, American Airlines (NASDAQ:AAL), the largest airline in the world, will start flights to more than half a dozen cities from New York's LaGuardia Airport. As the closest airport to midtown Manhattan, LaGuardia is very popular with business travelers, and a broader network there will help it compete with market leader Delta Air Lines (NYSE:DAL).
However, as an extremely popular -- and indeed, overcrowded -- airport, LaGuardia is subject to strict slot constraints. In a deal that looks somewhat foolish in retrospect, American's merger partner, US Airways, traded away most of its LaGuardia slots a few years ago. As a result, American Airlines has had to make some trade-offs to rebuild its route network there.
New York comes back into focus for American Airlines
US Airways operated a sizable focus city operation at LaGuardia Airport until 2012. However, its aircraft fleet wasn't well suited to the airline's LaGuardia operations. Moreover, US Airways didn't have much of a presence at either of the New York-area international airports, which made it harder to win corporate contracts.
As a result, US Airways essentially gave up on the airport. In a 2012 deal with Delta Air Lines, it swapped 132 slot pairs at LaGuardia for 42 slot pairs at Washington's Reagan Airport and cash. This gave Delta a formidable presence at LaGuardia. Combined with its international gateway across town at JFK Airport, this has allowed Delta to gain market share in New York.
If US Airways had known at the time that it would soon merge with American Airlines, it never would have agreed to the swap. Pre-merger American Airlines had a sizable presence at both LaGuardia and JFK. Adding US Airways' LaGuardia slot portfolio would have given it a big advantage in New York (even if it had been forced to divest a significant number of slots during the merger process).
Even with US Airways having a much smaller presence in New York by the time of the merger, company executives talked up the benefits of combining the US Airways Shuttle service from LaGuardia to Boston and Washington with American Airlines' international flights at JFK. Both services are very important to lucrative corporate customers.
American growing its presence again at LaGuardia
In the past few months, American Airlines has announced seven new routes from LaGuardia Airport. It will fly once daily to Akron and twice daily to Memphis beginning in November. In December, it will begin a daily flight to Orlando and two daily flights to Jacksonville, Fla..
In January, it will expand its LaGuardia network further with three weekday flights each to Cincinnati, Ind., and Minneapolis. Between these seven new routes, American is adding 15 peak day flights to its schedule.
However, with its slot portfolio fixed -- and smaller than that of its main rival, Delta -- American Airlines had to cut a flight for each one it is adding. Let's take a look at how it managed that task.
Where are these flights coming from?
A handful of slots for American Airlines' new flights at LaGuardia are coming from an obvious source: short-haul flights to Philadelphia.
It's about 95 miles as the crow flies from LaGuardia Airport to Philadelphia International Airport. Nobody flies to travel between New York and Philadelphia; taking the train or even driving would be much faster. However, US Airways has for many years operated a large hub (and its main international gateway) in Philadelphia. The Philadelphia-LaGuardia flights allowed it to connect customers from New York to Europe and the West Coast.
But American Airlines has direct flights from JFK to most of the top US Airways destinations from Philadelphia, making these connecting flights much less important. As a result, American Airlines is cutting its Philadelphia-LaGuardia schedule from 10 daily flights to just four.
American Airlines is also cutting back on routes with severe overcapacity in favor of the undersupplied markets where it is adding flights. Pricing has collapsed on the New York-Dallas route since Southwest Airlines and Virgin America began serving it last year. American Airlines is trimming its schedule from 14 daily flights to 12 daily flights in response.
Chicago is another market that has been routinely oversupplied this year. On the LaGuardia-O'Hare route, American is cutting back to "only" 13 roundtrips a day, compared to 16 daily roundtrips today. Other cities losing flights include Pittsburgh (down from eight to seven daily roundtrips) and Miami (down from 12 to 11 daily roundtrips).
These capacity reallocations make sense
Cutting flights in oversupplied markets -- and markets like LaGuardia-Philadelphia that no longer serve a clear strategic purpose -- should improve American Airlines' profitability. The planes used for these flights can be reallocated to more profitable routes, while the capacity cuts should help restore a supply demand balance more quickly. Importantly, American still offers plenty of schedule options on the routes where it is cutting service.
Meanwhile, these cuts are allowing American to significantly broaden its LaGuardia route network to more than 30 destinations. That will improve the company's ability to compete with Delta for corporate travel contracts in New York, a critical (and potentially lucrative) market.
Adam Levine-Weinberg owns shares of -- and The Motley Fool recommends -- Virgin America. He is also long November 2015 $40 calls on American Airlines Group and long January 2017 $40 calls on Delta Air Lines, 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.