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October 12, 2012

An interview with AMR CEO Horton, Part III (the Oneworld edition)

In part III, AMR chief executive Tom Horton discussed how its Oneworld alliance and joint business agreements across the Atlantic and the Pacific have helped American Airlines grow its revenues.

ST: I know you like to talk about your unit revenue growth compared to the rest of the industry...But you started off at a lower starting point than the rest of the industry if you look at your actual unit revenue.

Horton: But Andrea look, this I think is pretty interesting. [has a couple of PowerPoint slides comparing unit revenue growth] This shows how…this is the first quarter after bankruptcy, and I also have it for the second quarter and it shows ours and the other guys, and what you typically see is that the carrier that has just filed bankruptcy. What you typically see is they underperform the industry. This is the carrier. This is the industry. So United. Huge underperformance. US Airways. Huge underperformance. Delta. Same. Northwest, a little better but they cut a ton of capacity. Look at American. Outperformed the industry in the first quarter. Not by a little but by a good bit. Second quarter. We crushed the industry. And again, customarily that’s not what happens so I think this is a pretty interesting story. And I think it’s worthy of making note of. But I’ll leave that to you, you’re the reporters…And I think it’s not a coincidence guys so maybe a little bit of color on why that is. You know we did do a pretty big configuration of the network focusing on our biggest markets. So we’ve really got all of our network assets dedicated to the five big hubs. It didn’t used to be that way. You know we had something like 8 or 9 percent of our capacity was scattered about. That’s taken some time to take root. But it’s been, it has produced the desired result. We now have the joint business up and running with BA/Iberia across the Atlantic. That is having the desired result and we’re winning corporate accounts with that piece of the business built into it. We’ve got the same thing now up and running across the Pacific with Japan Airlines. Latin America has been a huge success story for our company. We’re growing that part of the business, we’re adding five new destinations this year. And Latin America is just really, really going strong. And you know we do that with our own flying but we also have a great partner down there in LAN. And I would say watch the alliance situation there closely. The biggest alliance…

ST: Have they officially changed their name now?

Horton: LATAM.

ST: They haven’t made a decision yet on which alliance to join, have they?

Horton: Right. You remember LAN was in Oneworld, TAM was in Star. They’re now merged so calling the alliance question. That in my view is the biggest alliance event of the decade so watch that closely.

ST: So when do you think they’re going to make their decision by?

Horton: Soon.

ST: Are you going to go back up to New York for another Oneworld announcement (Horton was there earlier in the week to announce that Qatar Airways was joining Oneworld.)

Horton: (laughs). Well you’ll be the first to know if I do. But I tell you what. That’s a big decision and because of our presence in Latin America which I would argue is one of the, if not the best airline franchise in the world. Because of that, in concert with a great partner in LAN and potentially bigger that ends up, that’s in my view a 20 year strategic advantage.

ST: But when you talk to industry analysts, they say that Oneworld is the weakest of the three airline alliances because it does not have a partner in China. I know you have Cathay Pacific, but Hong Kong, in the analysts’ view, is not as important as Shanghai and Beijing. What is Oneworld doing to try to get into that growing China market? Even in India, your Kingfisher partnership is not looking so great right now.

Horton: Yeah, but nobody’s looking great in India. Tell me the great looking carrier in India. Tell me Star’s good partner. Tell me SkyTeam’s. There isn’t one. Look, everybody has their points of strength. Tell me about Star in Latin America.

ST: But China is bigger.

Horton: Yeah. Latin America. China is a big market. Latin America is a big market where you can make money and bring it home and you can really capitalize on it. China is different. But look, we’ve been growing in China. We now have three flights a day, a few years ago we had no flights a day. So we have Chicago to Beijing and Shanghai. We added LA-Shanghai. So we’re growing our own flying and we have great partners in that part of the world. We don’t have a mainland Chinese partner yet and that’s something we’re obviously focused on on the Oneworld level. I think you should consider that a medium term objective of Oneworld but I think you should also consider that Oneworld was just the first alliance to grab a Middle East carrier.

ST: Speaking of the Qatar Airways announcement…Why did Oneworld choose to go with Qatar as opposed to Emirates Airlines which now flies nonstop from DFW to Dubai and has a long-term alliance partnership with Oneworld member Qantas?

Horton: It’s very simple. And as you know I’m also chairman of Oneworld. So we had a long, long debate at the Oneworld governing board on what to do about the Middle East carriers. And as you know, the European guys and the Asian guys, they’re all scratching their head because the Middle East carriers are taking a lot of their business, transiting over the Middle East hub. So, the debate went something like this. Well they’re costing us revenue – these other guys, not so much American – do you want them in the alliance with you or do you want them flying against you because they’re not going away. And my view, and [British Airways chief executive] Willie’s [Walsh] view was, better to have them with you than against you. That took a long time to cross that bridge. And I tell you what, I don’t think they’ve crossed that bridge at Star alliance because they have very strong views, I’m sure you’ve read the views out of that group. And I don’t know where SkyTeam is on it. We crossed the bridge. It was a long and rigorous debate. Once we crossed that bridge the question was okay, which one. There are three of them. Emirates is the biggest. Qatar is next and Eithad is third. And it’s about like this. Emirates is twice as big as Qatar. Qatar is twice as big as Eithad. So, then you look at size, fit, who would be the best for the alliance. Well Emirates has said they don’t wish to join an alliance. They’ve been very emphatic about that. So that leaves you with two. And Qatar was keen to join an alliance and they were very keen on Oneworld because they understand the quality of the carriers in Oneworld. And so they wanted to do it and they were the next largest with a great fit and a great product. A great product. So we thought it would be a good fit from a quality standpoint. A good fit from a network standpoint. I think they’ll be a good partner. Now, your question, I think is a really good one which is okay, but what about Emirates and its partnership with Qantas. That was a discussion I was also in the middle of with BA and with Alan Joyce at Qantas. Qantas has a very unique challenge and that is traffic between Australia and Europe and beyond. And they were losing a lot of money in the long haul business and that’s a well-known fact. So they concluded it was in their best interest to solve that problem via a partnership with Emirates. That was their decision and what is unique about Oneworld is that we allow for bilateral partnerships that are not part of the Oneworld alliance if they make sense for the airline like you know, for example, Japan Airlines does some business with AirFrance and you know we had a partnership with Eithad for example and still do. So it allows for that sort of thing, our partnership with jetBlue is another example. And I think that’s good because it gives each airline the ability to do what is in its commercial best interest. The core of course is the Oneworld alliance and that implies certain benefits for customers across the globe on the carriers that are part of the Oneworld alliance but it doesn’t prevent individual airlines from doing what’s best for them and that’s what Qantas chose to do with Emirates and you know as it stands now we have Qatar as an incoming member to Oneworld but we also have a partnership with Eithad. And I see no reason why we can’t have both of those. And indeed if Emirates wanted to do a deal with American, the more the merrier.

ST: Did you say that South America is more profitable than China?

Horton: It is for us. It is for American. We have a big hub.

ST: But you’re not in China but you are in South America so it’s going to be.

Horton: Well we are in China, we’re just a lot smaller.

ST: You said China is a big market Latin America is a big market where you can make money and bring it home.

Horton: And you can grow, Mike, because a lot of those markets are now Open Skies, so if we want to grow, if we want to add new destinations, which we’ve been doing, we added our seventh destination to Brazil, this summer, Manaus, you can grow. You can capitalize on that. In China, as you know, it’s still very restrictive. So you know I might want to add, you know we’ve got all these new airplanes coming, we’ve got all these 777-300s, 787s on the way. I might want to add five new destinations in China, well you’ve got to get the authority to do that and as you know, that takes a lot of time. That’s a complicated process. So it will take time. It will take time to grow our China business further. Latin America, we are growing fast.

ST: Personally, I think what you’re saying is you’d rather be in Latin America than China. If you had to pick.

Horton: I’ll put it to you this way. I would rather have our Latin franchise than the China franchise of either of our two big competitors. It’s bigger. It’s better and it’s ours.

-Andrea Ahles

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aaway

"In China, as you know, it’s still very restrictive. So you know I might want to add, you know we’ve got all these new airplanes coming, we’ve got all these 777-300s, 787s on the way. I might want to add five new destinations in China, well you’ve got to get the authority to do that and as you know, that takes a lot of time..."

Interesting. According to the U.S.- China Air Transport Agreement
http://www.state.gov/e/eb/rls/othr/ata/c/ch/114749.htm
and based on schedules presently flown by U.S. carriers, there are a number of unused weekly frequencies that AA could apply for.

The stark reality is that the Latin America - U.S. air transport market remains highly fragmented. Many of the Latin carriers are marginal in size. Also - with some exceptions - there is little government 'intervention' - be it through direct shareholding / nationalization, or protectionist taxation schemes.

With China, there are four well developed, large international carriers. Three of the four (Air China, China Eastern and China Southern) remain partially nationalized. Additionally, the Chinese government policy permits frequent recapitalization schemes and fuel taxation offsets. Also, the Chinese carriers tend to be fare setters, vis-a-vis U.S. carriers, in competitive markets. I wonder why?

In other words, the competitive landscape is decidedly tilted. U.S. (and European) carriers will be disadvantaged in China for years to come. Hard to compete in such an environment.

Alex in TX

It's really interesting that South America is more profitable than China for American. I guess not terribly surprising, given the number of flights to each.

What really caught me off guard with this part of the interview is how adamantly the Star Alliance has been opposing having a Middle East carrier join. I think that's a huge strategic mistake for them.

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