Is American seeking the right gauge or the right gouge? You decide.
On February 22 Mr Virasb Vahidi, the Chief Commercial Officer of American Airlines, was interviewed by Terry Maxon of the Dallas Morning News as a follow on to a letter Vahidi had sent to AA employees. In that letter Mr Vahidi, attempts to make the case that American’s current pilot contract restricts AA’s commercial ability by almost two-thirds of $1billion per year and referred to American management’s desire to “right gauge” AMR’s operations using a variety of larger regional jets and other outsourced partners’ flights.
Mr Maxon is a well respected, long time aviation industry reporter for the DMN. In Maxon’s article Mr Vahidi stated that: “American is at a very significant competitive disadvantage.”
Interestingly, for reference, Mr Vahidi cited the route between DFW and Chicago O’Hare (ORD) as an example.....“You see, they [United Airlines] can effectively flex supply with demand. That obviously creates a better revenue answer...”
Mr Vahidi was presumably lamenting that as UAL has the right to operate a seventy seat jet between DFW and O’Hare and AA may not, that this is somehow the missing “piece” of AA’s new business plan puzzle. Let’s investigate that claim and analyze the reality of Mr Vahidi’s “right gauge” reasoning.
The day before the story was reported was a Tuesday (Feb 21). As many travel blog specialists remind customers, Tuesday (especially a Tuesday in February!) is typically the most lightly traveled day. As recently as March 17 Tom Parsons’ of bestfares.com. mentions Tuesday (and Wednesday) as the travel day(s) usually offering the cheapest fares.
On Tuesday Feb 21 AA had fourteen scheduled flights between DFW and Chicago O’Hare (ORD). Both airports are cornerstone hubs for AA. Flights were scheduled approximately sixty minutes apart. Each of these AA flights were on full-sized 140 seat MD-80 aircraft, configured for 16 first-class seats and 124 seats in coach.
American’s first flight - AA2320 - departed at 5.45 am (ughh!). As Mr Vahidi noted, United does indeed use an outsourced (not using a United airplane or United flight crew personnel) seventy seat regional jet for its first flight of the day between UAL-spoke DFW and UAL-hub Chicago O’Hare (ORD).
A “hub” is a major airport where there is a very large concentration for one particular carrier and in several Cities such as Chicago, New York and Los Angeles etc, at least two or more carriers. For example, Delta has a massive hub presence in Atlanta (ATL) as well as the NYC airports (JFK and LGA). United has a large hub presence at several airports including Chicago O’Hare (ORD), Denver (DEN) Houston (IAH) to name but a few. American has recently identified the five cornerstone hubs - DFW, ORD, NYC, Los Angeles (LAX) and Miami (MIA) - where it will concentrate its flight connections.
Hubs were created post deregulation as a means to allow airlines to provide a far greater number of city-pair destinations for sale to their customers. These routes typically involve some kind of connection (or transfer) from the inbound flight/jet to the outbound flight/jet at, or “through”, a carrier’s hub. Hubs are thereby used to “feed” the carrier’s jets with these connecting passengers, as well as attracting local passengers (known as O & D) whose journey may begin or end in these hub-citys by offering a multitude of destinations from that hub.
A “spoke” would be considered the beginning (or ending) of a route from a non-hub airport. These multiple spokes “feed” passengers from outlying airports into the hubs.
So, in the specific example highlighted by Mr Vahidi, AA is flying a route between two of its major hubs using full size jets, whereas United is “feeding” its hub in ORD with local passengers picked up (from what United considers a spoke) in DFW.
From its DFW hub American flies full size, silver jets to 117 cities. United (UAL) has a far lower presence at DFW and so UAL would regard DFW as a spoke of its network. United currently offers seven destinations from DFW with its spoke passengers feeding into United’s hubs in NYC, Chicago, Denver, Houston, Los Angeles, San Francisco and Washington (Dulles).
As a reminder, Mr Vahidi complains that United (UAL) has an “advantage” because UAL can currently schedule and fly a seventy seat jet from DFW to ORD, whereas American cannot. While that may sound like an impediment to good business let’s review the passenger loads on the very day Mr Vahidi stated his desire to “right-gauge the airline”. Maybe the evidence from the day of the interview will prove this claim to be a red-herring.
As previously noted, AA2320 departed at 5.45 am. On that day (Feb 21) AA2320 left the gate with sixteen (16) first class passengers and eighty-one (81) in coach for a total of ninety-seven passengers on board. This first AA MD-80 departure was the lightest passenger load of the day. American flights 2336, 2338, 2348 and 2368 all left with a full (140 seat) passenger load. Throughout that Tuesday all sixteen first-class seats were filled on every one of those fourteen flights. The next lightest load of the day was AA 2372, the last flight from DFW to ORD at 6.55pm. It carried 111 AA passengers. In total, on Feb 21 AA offered 1960 seats for sale between DFW and ORD and of those available seats 1762 passengers were carried (including ten non-working airline staff). This represents an average load factor of around 89% on the most lightly traveled day of the week!
Although nearly 200 seats spread over fourteen flights were empty, in real terms that load factor represents an operational nightmare had one or more of the flights cancelled due to mechanical or, more likely at this time of year, weather event. As many who travel this route regularly well understand, passenger standby lists caused by flight cancellations due to inclement weather may take several days to clear.
So, we must ask ourselves what “business case” may be the motive for Mr Vahidi’s desire to “right-gauge” the airline on this route? Could it be that he would like those ninety-seven customers on the first flight to “fight for” the seventy seats on the small jet he’d like to offer as replacement to the full size airplane? Would those seventy customers pony up more cash so they could ride regardless? What would the remaining twenty-seven disappointed customers do? Where would they spill away to? What other carrier would benefit from these passengers who’d refused to be gouged? How much would it “cost” AA to get their business back?
For many years, AA has religiously applied a yield management strategy to its routes. Yield management presents a mathematical application/solution to a logistical problem. In its earliest form, yield management tracked the passenger demand on a year over year basis and attempted to “match” passenger seat supply with passenger demand. As information technology has continued to develop this data is now applied on a second by second basis, resulting in the continuous adjustment of seats for sale and the prices charged for those remaining seats.
So, not only during a more lightly traveled month like February but year round, is AMR management attempting to bleed their best customers for ever higher fares by substituting a full size jet for a seventy seat jet and gouging the seventy highest paying customers to ride at the expense of the twenty-seven unlucky passengers who will no doubt find a different way to ORD? Is that what right gauging’s about?
While the extra dollars may occasionally make sense in the very short term, AA has spilled away more passenger traffic from this yield management strategy than it has gained - and much of that traffic has converted over to Southwest Airlines, who is no doubt delighted about that!
Of course, once those former AA passengers take their business elsewhere, practically the ONLY way to get them back is to sell tickets cheaply. This creates the self fulfilling prophecy; “We can’t compete!” which leads to AA’s retreat in that market and the substitution or implementation of smaller jet service. It is an open secret that most flying customers prioritize ticket price over every other consideration when “airline shopping” on-line.
Blind allegiance by American to a smaller and smaller jet yield management mantra will thus lead to ever-reduced revenues (which is indeed AA’s REAL problem as identified by many Wall St analysts) and the downward spiral continues.
By contrast and in the exact opposite manner Southwest Airlines (SWA), arguably the most consistently successful airline, is addressing its revenue needs by taking delivery of larger and larger planes, thereby spreading the operating cost over a greater number of on-board customers. At SWA, there isn’t an RJ to be seen and their smaller Boeing 737’s are being swapped for the larger versions!
By its own admission in its recently filed 1113c AA has lost $10 billion during the last decade. Yet, AA doesn’t consider this managerial practice to be the primary reason for its stunning business failure. Being able to “right-gauge the airline” will prove that? Really? Doesn’t it just sound like more of the same [failed] plan?
Not only does Mr Vahidi want to replace the full size silver AA jet with a seventy seat jet to ‘better compete’ just for good measure he also wants those customers to ride on one of the worst regional airlines to boot! To follow AA Chief Commercial Officer Vahidi’s logic, he wants to subject an even greater number of AA’s current passengers to the worst regional airline in the business! (See, US News’ latest Airline Quality Report)
If you were the Chief Commercial Officer of a viable business would your “new, improved” business plan be founded upon exposing an ever increasing number of your best customers to your worst product? Would you then expect them to return, if a competitive alternative existed? Seriously?
Mr Vahidi’s “right gauging” appears to make little business sense. Unless one considers the last decade of AMR ramping up their regional carrier American Eagle unit “a business success”. Gained at the further expense of mainline American and it’s long suffering customers, I might add.
Incidentally, as previously mentioned, Denver (DEN) is a hub for United. Denver would be considered a “spoke” for American’s network. Would it surprise you to discover that United flies ONLY its full size jets between its DEN and Chicago O’Hare hubs.
Guess what size aircraft AA schedules for its first flight from AA’s DEN-spoke into its Chicago O’Hare hub?
You got it - a seventy seat jet, as permitted by the current AA pilots contract.
Now that you too have the gouge on this part of American’s latest business plan, you can decide whether Mr Vahidi’s “competitive disadvantage” complaint is valid or another managerial red-herring.
