The bankruptcy of American Airlines and parent AMR(AMR_) could mean fewer flights and fewer seats for passengers, even on some prestigious routes, as well as a turning point for airline investors. Competitors' shares rose, with the three remaining legacy carriers registering double-digit gains last week. Passengers in a variety of markets could be impacted. American's principal hubs in Dallas, Miami and Chicago should escape the bulk of the capacity trimming, and American may also be hesitant to reduce flying between the U.S. and the U.K., Ticonderoga analyst James Higgins says. But flight cuts should be steeper in markets outside the three major hubs, he says, and various analyst agree they see impending cuts in Los Angeles and New York -- which despite being keys to American's cornerstone strategy are not places where it dominates.
In May, in a controversial report, Avondale Partners airline analyst Bob McAdoo wrote that American loses $1 billion annually by flying too much in losing markets.
"More important than its costs are AMR's capacity decisions, its market selection and its unwillingness to halt or reduce flying in markets that are losers," McAdoo said. Those losers, he said, include many of the carrier's highest-visibility, most prestigious routes: New York to London; New York to California; Chicago to Delhi, Beijing and Shanghai; and Miami to Buenos Aires. The 10 worst markets lose $450 million a year, he said.
Similarly, American operates 10 daily flights in the New York-Los Angeles market, losing $70 million annually, and five daily flights in the New York-San Francisco market, losing $54 million annually, McAdoo wrote.
In its first week in bankruptcy, American has signaled modest capacity cuts via interviews with executives and in its filing, which shows 24 planes already retired to desert storage facilities and more aircraft lease rejections coming.
In a report issued Monday morning, Higgin wrote "We expect all U.S. airlines to benefit from AMR's surprise Chapter 11 filing, largely because we believe AMR will meaningfully reduce capacity," probably in the 10% to 15% range. |
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