American’s CEO is Paying Attention to the Wrong Things

United’s Jeff Smisek, Delta’s Richard Anderson, and American’s Doug Parker started crowing a little over a year ago about having to compete against Emirates, Etihad, and Qatar – that it was unfair these Gulf carriers got subsidies and they didn’t.


Jeff Smisek, Doug Parker, and Richard Anderson

Since then Jeff Smisek was fired when it turned out he was the cronyist, seeking government favors and even offering kickbacks to get them it seemed.

Delta’s Richard Anderson is being retired.

And American, which seemed the most reluctant in making the case, continued to solidify and grow its partnership with Etihad (which also controls oneworld member airberlin). It continued to build on its joint venture with British Airways and Iberia whose largest single owner is Qatar. And it apparently even seriously considered a flight to Abu Dhabi.


Etihad Airbus A380 First Apartment

While it became clear that the case made against the Gulf carriers was itself a fraud (which isn’t to say there haven’t been subsidies), that the US airlines have themselves been massively subsidized, and that it was a case of selective outrage (not complaining about other state-subsidized partners, including ones part-owned by US airlines), the cry over the Big 3 Gulf carriers somewhat subsided.

Except, oddly, from Doug Parker..

Back in November he penned a cynical and misleading op-ed in the Wall Street Journal suggesting that the Gulf carriers were a threat to US jobs.

Parker and his major airline CEOs of course aren’t in this ‘for American jobs’ when major US airlines outsource maintenance work and buy foreign-made aircraft. There’s nothing wrong with that, of course, maintenance work is supervised and inspected and meets the highest standards of safety.

US airline employment is at a seven year high even as the Gulf carriers expand their presence in US markets. Alaska and JetBlue are growing as a result of their partnerships with Emirates. And the growth of Gulf carriers has meant more jobs in travel and tourism, and in aircraft manufacturing, as well as trade.


Emirates Airbus A380 Shower Spa

Yesterday Parker re-raised the issue while speaking at a conference, calling the Gulf carriers ‘the biggest threat’ to US commercial aviation.

“This is the biggest threat I’ve ever seen to commercial aviation in the United States,” Parker said during a speech at an aviation maintenance conference in Dallas on Wednesday. “I’m sure that sounds like hyperbole, but it’s not. What’s happening is those two countries are subsidizing those three airlines to a point where they don’t need to be profitable.”

It sounds like hyperbole because it is. He’s not worried about global warming, terrorism, or risk of war in the Middle East. And in any case clearly the future cost of jet fuel and negotiations with their own labor unions are greater threats to each airline than where Emirates, Etihad, and Qatar fly or what their operating margins are.

It’s also clearly false that Emirates, Etihad, and Qatar do as they wish without regard to profit — especially at a time of declining energy prices. Emirates is profitable, Etihad is arguably marginally profitable. And if financial performance wasn’t a driver of strategy you wouldn’t see Emirates:

  • Introducing the densest configuration Airbus A380 in the world, the passenger jet squeezing in the most passengers.
  • Introducing a new business class seat that’s competitive only with United’s decade-old legacy Boeing 777 seats.
  • Downgauging poor-performing routes like Houston – Dubai from an A380 to a Boeing 777 (a function of declines in the energy business.
  • And Emirates’ home base of Dubai is even introducing new airport fees which hit the home carrier hardest.

Parker complains,

[S]ome of the routes being flown by the three Middle Eastern carriers cannot possibly be profitable, pointing specifically to Emirates’ flight from New York’s JFK International Airport to Milan.

Of course those Middle East airlines might point to some of Parker’s Pacific expansion, including a return to Tokyo Haneda and buildup of flying to China at a time where China’s economy is slumping. Parker’s own team complains of losses from their continued flying to South America.

American Airlines earned a $7.6 billion profit in 2016. That made American the most profitable airline in the world. And they’re asking the government for special protection from competition. (Delta’s CEO was explicit on this point that the goal was fewer flights and higher fares.)

Of course American’s profit was goosed in the fourth quarter by “a $3 billion special credit stemming from a change in its tax valuation allowance.” Though obligations are shed in bankruptcy, tax loss carry forwards are not.

A nickel’s worth of free advice for Mr. Parker: your limited time is far better spent, from a business standpoint, focusing on completing the merger between American and US Airways — getting a joint seniority list for pilots — and on providing customers with a consistent inflight product (most of the legacy US Airways fleet still doesn’t have an extra legroom seating product even as you’re looking to start selling international premium economy), than contemplating the 37 cities in India you aren’t really going to serve anyway if only you could keep US passengers all to yourself.

About Gary Leff

Gary Leff is one of the foremost experts in the field of miles, points, and frequent business travel - a topic he has covered since 2002. Co-founder of frequent flyer community InsideFlyer.com, emcee of the Freddie Awards, and named one of the "World's Top Travel Experts" by Conde' Nast Traveler (2010-Present) Gary has been a guest on most major news media, profiled in several top print publications, and published broadly on the topic of consumer loyalty. More About Gary »

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Comments

  1. United, American and Delta received the best subsidies in the world:
    * Bankruptcy – eliminate some debt
    * Mergers – eliminate some competition
    It doesn’t get any better than that. The big 3 need to stop whining.

  2. I’m not a fan of Discount Doug, but I’ll at least give him credit for not being a dweeb and intentionally wearing god-awful socks with company colors at the National Press Club….

  3. United hasn’t really had International 1st class for a long time. Their differentiated “forward cabin” offered little above business class and was sometimes staffed by even less motivated attendants.

  4. Gary, the statement that Richard Anderson “is being retired” makes it seem like his retirement is involuntary. However, everything that I have read — including your prior post on the topic — indicates that it was entirely his own decision. Perhaps it would be better and more accurate to write that “Delta’s Richard Anderson is retiring” (also saves a syllable over “. . . is being retired”).

  5. Dear Mr Parker,

    The best way to fight the Middle Eastern airlines is to make your airline one customers would want to fly on.

  6. Playalaguna- United 1st is just business class with soup. I just flew SIN – ORD first, and was amazed at how poorly the service matched up to other carriers’ premium class…

  7. Totally agree with the larger point that Parker should maybe focus on his airline and customers experience – even with equal subsidies/”apples to apples” comparison his product would be inferior for a long long time into the future. However to state that one of these ME airlines is “profitable” without documentation is not accurate either. I highly doubt that there are any financial statements vetted by/to Western standards that show any of these ME airlines to be profitable on a standalone basis. They are only managing them tighter because oil money is drying up. But make no mistake, Parker is 100% correct when he says they aren’t profitable and don’t have to be. Any other conclusion is misguided, biased or naive. Now, does that constitute a big threat? I doubt it as I doubt the Feds would allow that to happen. Too important a part of our national infrastructure to be controlled by foreigners. But there is no question the ME airlines float as well as fly – on oil.

  8. Screw this. There is corruption everywhere. Show us how to cheat on our taxes.

    Screw 1%, politicians and fake hypocritical patriots.

  9. Once again, great to see your insightful comments highlighting this issue, Gary. The oligopoly that comprises the Big Three US airlines have been so coddled by protectionism that they don’t know how to compete internationally without complaining.

    I know that, in the supposed interest of protecting a crucial part of our transportation infrastructure, our government resists the one step that might actually introduce real competition to our domestic markets – letting foreign competitors control the majority interest in new or existing airlines here. But what would be so horrible about legislation (or is it simply a matter of regulations?) allowing foreign ownership of up to, say 25 or 35 percent of the US airline industry, and/or allowing the government to seize temporary control of such airlines in the case of war or other carefully defined national emergencies?

  10. Gary, I am a regular reader of this blog but this post is ridiculous.

    I was at that conference and I was at his talk when the question was asked. He didn’t bring it up at any time during his talk, which focused on how the airline industry has fundamentally changed for the better over the last ten years, and how AA will not lose in product or service to UA or DL. He talked about next steps in the integration and how he’s set a goal for management to have all employees genually feel that AA is a great company and a great place to work.

    The ME topic came up when someone from the audience asked in Q&A to have Doug weigh in on the existing debate. Doug did say it was a big problem and if you were there you’d understand the context as to why.

    One particular chart used in several AA sessions showed how the airline industry went from -$19B in losses in 2005 to $28B in profit in 2015 despite similar key economic variables: fuel at about $55 per barrel, economy growth at about 2-3%, and about the same capacity in ASMs.

    Doug’s point that the key difference between 2005 and 2015 is better focus as to where and how those ASMs are deployed. Certainly the mergers helped drive that focus.

    Doug is not suggesting that Emirate’s JFK-MXP flight alone is a terrible disaster, but that Emirate’s potential capability to disrupt focused deployment of ASMs is! In a focused, disciplined model, no one in their right mind would put an A380 on JFK-MXP, but Emirates can put A380s anywhere and disrupt the focus that drove profitability.

    Say what we want about or frequent flyer programs, but I think we all agree we all want a healthy airline industry. The AA of 10 years ago couldn’t afford 77Ws with 50+ all isle access business class seats.

  11. Part of his team seems to be focused on some of the right things. I got a call yesterday from AA asking why my flying with them has declined in the last 2 months. I told them that the changes to their frequent flyer program and premium partner awards meant that it was no longer worth it to me to go out of my way to subject myself to their inferior onboard product and reliability. The lady told me that they were calling all Exec Platinums with notable dropoffs in travel and that my comments were actually common themes, and that this feedback would be fed up to senior management. She ended the call by encouraging me to be patient and that “lots of good things were coming”.

  12. It’s obvious that you’ll never overcome your irrational support of the MEGA-subsidized Middle East carriers, but there is probably a reason why Doug Parker has built the largest and most profitable airline in the world from almost nothing (essentially-bankrupt America West) in 15 years and you haven’t. Dare I say that Parker might know more about airline profitability — and subsidy — than you do? Of course, you don’t need to have Parker’s level of knowledge and experience to understand this situation. Believing that the Middle East airlines aren’t subsidized is like believing North Korea has a thriving economy. It’s just plain silly. It doesn’t jive with anything observable in the real world. The routes these Middle East airlines are currently flying to the USA are so bizarre from a financial standpoint that they alone prove the subsidization.

  13. @iahphx the first rule of offering an effective comment is to read the piece you’re commenting on. You criticize me for something I do not do (“Believing that the Middle East airlines aren’t subsidized is like believing North Korea has a thriving economy. It’s just plain silly.” when I explicitly write that none of this means the Gulf carriers do not receive subsidies).

    Instead you have an axe to grind at every mention of the major Gulf carriers, engaging with neither the arguments nor the facts offered each time.

    But while we’re talking about Parker and subsidies, google America West and air transportation stabilization board.

  14. @M I think I was clear that this came up in Q&A. And while I have no beef with the airline’s right to have merged (I said consistently throughout that while it wasn’t my preference there wasn’t a good argument against it), American of ‘ten years ago’ with today’s fuel prices absolutely could afford 77Ws.

  15. @steve just as no one seriously argues that qatar makes money, no one seriously argues that emirates loses money. (and certainly not nearly as much as american airlines lost over the last decade!)

  16. @Gary — There is no dispute that, after the horrific attack on the USA and its airline industry by the 9/11 hijackers, Doug Parker needed a loan from the ATSB to keep America West out of bankruptcy. The capital markets were closed to USA airlines due to the attack. By a 2 to 1 vote, the gov’t lent AWA money at a usurious interest rate: 30% of the equity in the company for a $400 million loan. This turned out to be one of the best investments our gov’t ever made, as they cashed out a couple years later with more than 30% profit.

    Comparing this transaction to what is going on in the Middle East today is as absurd as the rest of your argument. Parker would have no problem whatsoever with the Gulf States loaning their airlines money on real commercial terms. But that’s obviously not what’s happening. The Middle East airlines basically get unlimited billions from their gov’t to build unprofitable mega airlines to enhance the glory of their petro-kingdoms — with no obligation to ever pay a penny back. While geography and culture obviously the damage this can inflict on the US airlines, it is certainly harmful to them (as Parker noted, the US-Indian market is hopeless at the moment), and Parker would be a complete fool to ignore this blatantly unfair competition.

  17. Alaska and Jet Blue are growing ” as a result of their partnerships with Emirates”? They’re growing because, compared to the Big 3, they provide a better product and, in point of fact, have inconsequential interline traffic with Emirates.

  18. @Chris.

    Thank you for sharing that information. We can only hope senior management is listening.

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