The latest American Airlines “Tell Me Why” podcast for employees explains how they choose aircraft for routes, where to fly to, and why they’ve scaled back so many destinations from New York.
Vasu Raja, American’s Vice President for Planning, answered several employee questions and this is available on Soundcloud and iTunes even though it’s meant as a way to explain the airline’s decision-making to employees (employees can watch it as video on their intranet Jetnet).
He explained by they fly old Boeing 767s instead of 787s on many transatlantic routes, and he explained that while the 787 is cheaper to operate it has a higher ownership cost. So overall it may not be the cheapest plane, especially when fuel is ‘cheap’ so the 787’s advantages in fuel efficiency aren’t as great. So it’s “hard to go into Budapest or Prague with an expensive plane to own.”
In the abstract the 767 may be a cheaper plane, but the followup questions I’d have would be:
- Does the customer experience matter? You’ll see the 767 on routes where presumably American thinks it doesn’t matter. Business class seats are narrow. Some of American’s 767s lack wifi. And the only standard seat power in coach can be found at Main Cabin Extra seats, not the rest of the economy cabin. (Update: should read which has DC power.)
- How does reliability factor into the analysis? American’s 767s are far more likely to go mechanical and that’s costly as well.
American Boeing 767 Business Class
The next question was “why not fly to more northeast markets from DFW” like Buffalo? And the answer is that longer flights take more aircraft time, so trade off with multiple frequencies to closer destinations. You need to be able to earn more revenue off of a longer distance flight to not only cover its higher cost, but to cover the opportunity cost of what else you could do with that aircraft.
Finally he was asked why American has backed off from so many New York markets such as Caribbean flying and some destinations in Europe?
- He emphasized that for most flights they need connecting traffic to make money, but their operation in New York is split between two airports (LaGuardia and JFK) and is 70% point-to-point rather than driving connections.
- For what are referred to as “O&D” markets where passengers are starting or ending their journey in New York and not connecting they make money in significant business markets, so they’ve been getting out of markets without local business demand.
- There are significant constraints on how much flying they can do from New York so they have to choose their markets carefully.
American Airlines Terminal New York JFK
There’s something of a death spiral though that he doesn’t touch on. They’ve given up the fight to be the airline for New Yorkers, and even New York business travelers, by not flying to all the places they want to go. They’re looking at the profitability of individual flights but the accounting here isn’t always as simple as that because dropping flights can lose customers for your other flights.
The flights you think are profitable may actually be dependent on the ones you think are not (so really an economic model should be attributing more revenue to those ‘laggard’ flights), mis-specifying the model can lead you to believe some flights are more profitable than they are and other flights less so. And as a result you cut down to the profitable flights and find they don’t make as much money.
That said we’re necessarily going to get short answers — that while basic are still illuminating — in an 8 minute podcast dealing with several questions of course. The theme across all three questions Vasu Raja answered was opportunity cost though this wasn’t stated explicitly. I’m not sure I agree with all of the framing, and as a result always the ultimate decision the airline makes, but it’s always crucial to understand the tradeoffs than any decision entails.