Last updated: 03:03 PM ET, Tue August 02 2016

American Airlines Cuts Growth Plans

Airlines & Airports | Josh Lew | August 02, 2016

American Airlines Cuts Growth Plans

Photo via Wikimedia Commons

Despite recording significant profits so far this year, things are not looking good for American Airlines on the international market. The world’s largest airline has been forced to cut its plans to increase capacity on overseas routes. 

American had been focusing on the transatlantic market, where it has long been in a strong position because of its alliance with British Airways, and Latin America, which it can access easily from its Miami hub. Over the past few years, AA has lagged behind the two other U.S. legacy carriers in the transpacific market, which is projected to grow exponentially over the next decade. 

Lagging behind the competition

In 2014, American dedicated 10 billion available seat miles to transpacific flights. That seems like a lot until you consider the competition. Delta had nearly 30 billion available seat miles in the region and United had 40 billion in 2014.  

Now that profits have started to flow, American is in a position to catch up with its competitors in the Pacific region. This will not happen anytime soon, however. The airline has announced that it is cutting its international growth plans for the year from 6 percent to 2 percent. 

There are several reasons for this pullback. First of all, the airline industry is uncertain about what will happen with Brexit. This is especially worrying for AA, which has a very close relationship with UK-based British Airways. American is also being challenged on the transatlantic market by an increasing number of long-haul low-cost carriers. Norwegian and WOW Air both fly to Europe from the U.S. and other carriers like Icelandair have also adopted a low cost model. 

Meanwhile, the poor economic situation in much of Latin America has hurt AA's business there. And, though the future is bright in the Pacific region, revenue has been falling in the short term, further hurting AA's already poor numbers. 

READ MORE: American Airlines CEO Promises Big Changes Ahead

Cutting back growth plans and plane orders

The growth cuts will affect the airline for several years to come. While announcing its more modest growth plans, American also said that it is delaying delivery for more than 20 long haul planes (mostly Airbus A350s).  

American has had well documented struggles since it merged with US Airways. Investors want the airline to get its house in order, so to speak, before expanding too much. An imbalance in capacity and demand on both domestic and international routes has led to poor unit revenue numbers. Expanding overseas now would lower these important figures even further. 

Could American fall further behind the competition?

American has also been struggling with quality issues and labor relations. These are things that CEO Doug Parker has committed to fixing. He has admitted, however, that it is a long-term proposition. 

The danger is that American will fall further behind its competitors on international routes. United appears to be in the best position in the Asia Pacific region, shifting its routes to underserved cities instead of cutting growth plans too much. Delta has cut routes in both the Atlantic and Pacific, but it has strengthened relationships with partner airlines on all continents. It has a stake in Virgin Atlantic, China Eastern and Aeromexico and it has focused its international services on important hub airports where demand is strong and connections are plentiful. 

Stock buyback could help American control its own future

American has taken one interesting step that could help it, perhaps, speed up the growth process. It is attempting to buy back a lot of its stock. Doing this would give shareholders less of a say in the business and would allow the airline to take more short-term losses in order to position itself for larger long term gains. United is taking a similar approach to its investors.

American has said that it will not become a private airline (with no publicly held stock), but owning more of itself could help the airline avoid having to make moves to appease investors instead of getting itself in a good position for the future.  


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