American Airlines announced last month that they’re ending their Chicago – Beijing flight in October. The fares on this flight are so low it’s hurting the performance of domestic connecting flights to Chicago as well.
American Boeing 787-8 in Chicago
Often when airlines look at a route they don’t really know how profitable it is. It may appear to lose money, but if it’s the linchpin for a profitable corporate contract it makes a lot of money for the airline — because revenue they’re attributing to other flights really should belong to that linchpin flight. Drop the linchpin, lose the contracts.
Similarly, a British Airways executive once told me that Club Europe (intra-Europe business class) is a money loser for them, but they need to offer a business class service or else they’ll lose lucrative business class connecting passengers. Right then I suspected the airline was attributing too much of that business class revenue to the long haul flight, and not enough to the short haul connection that was a requirement to earn the total fare.
Chicago – Beijing, though, sounds like a clear enough loser — costing the airline tens of millions of dollars a year. American’s CEO says the airline will never lose money again so they cannot abide money losing flights without a path to profitability.
American’s Vice President – Planning Vasu Raja told employees in Chicago last week at a question and answer session that Chicago flights to Asia are mostly connecting traffic, that they rely on connections from cities with low fares and often their own non-stop flights to the same destinations, and that higher fuel costs make it even harder to sustain flights than before.
It turns out, according to Raja, that American is “challenged in Chicago – Tokyo and Chicago to Shanghai in much the same way” as Chicago – Beijing. He said he’d “love to tell [American’s employees] that Chicago – Beijing was the worst of our Chicago – Asia markets but it’s not the only one.”
American Airlines Chicago O’Hare
While “there’s nothing imminent about those markets” whether other Chicago – Asia flights continue is “something that we look at.”
He re-assured that “should we do anything with any of the other Chicago to Asia markets that has nothing to do with our commitment to Chicago.”
However he says it’s hard to see how they’ll make any money flying Chicago – Asia at all.
Chicago – Asia is indeed challenged. It’s something that we’re looking at. We want to make sure all of our flights are on a path to profitability. In all candor it’s hard to see how they are but we’ll keep looking at it.
Here’s Vasa Raja’s full discussion of American Airlines flights to Asia, why they dropped Chicago – Beijing, and where Chicago – Asia flying fits in going forward.
Historically we were at what I’d call phase one of Asia expansion. Going back 10 or 20 years we were a small carrier to Asia. We didn’t have a lot of the network or even the regulatory rights our competitors had to go and serve Asia.
So for the last 20 years we just bet on everything. Any time we could add Tokyo, China, Seoul, you name it we would fly it. And we flew it for the most part at a loss. We’ve made no secret of the fact that we’ve lost money on Asia since we’ve been in it.
Some of our routes are profitable and have increased their profitability, on balance it’s been unprofitable for us. Over the last 10 or 20 years it hasn’t been as big of an issue because the difference between the least profitable flight and the most profitable flight in the international system wasn’t that big. That’s changed very meaningfully right now. The difference between Chicago to Beijing and Chicago to London isn’t 15 margin points it’s 60 margin points because Chicago to London is doing so well, the other one is doing so not well.
A lot of that growth in Asia was to go and establish a foothold there not just with out network but to build partnerships which we’ve done, not just with JAL or our growing partnership with Qantas but even with China Southern in China which has been so so crucial for us to be relevant to the Chinese customer and even to Chinese regulators.
So now we have it. We have partnerships in place. We have the kind of regulatory rights that our competitors have had. We have a network that we can lay legitimate claim to be able to connect all the major cities in the U.S. to Asia.
Now we’re in phase two to Asia which is we need to get a lot more focused because we can’t run any part of our system with the kind of losses we’ve sustained. The only way we can run around and say I never envision a time where we can go and lose money is if we don’t do things that lose money. Therefore we need to get a lot more focused about Asia.
..Chicago to Asia is a uniquely challenging part of our route structure. The delta between Chicago to Asia and Chicago to Europe is quite massive and growing all the time. As we look at Europe we see a time where we want to fly our four Heathrow trips on 787-9s with 290 seats not 787-8s with 220 seats. We want to go and upguage it. BA is bringing the A380 to Chicago Heathrow. That’s not a coincidence. We want to fly Barcelona, Venice, extend seasons and do things like that. We want to fly to Hawaii with widebodies.
..Asia has not been nearly as profitable. In the case of Beijing, Chicago is impaired versus our other hubs because in LA you have a gigantic non-stop market of people who want to go from LA to China and since LA is restricted and China is restricted we can tend to do really well there. Dallas though it’s a much much smaller non-stop market to Asia is the most efficient connecting point in the world to get people from Asia to Latin America. And indeed Dallas – Beijing and Dallas – Shanghai even Dallas – Tokyo benefits because we connect a ton of people in the Mexico and South America and indeed it’s the best connecting proposition that exists in the world.
In Chicago we really depend on connections like Boston or St. Louis. We it’s different than it was at one point in time. Boston has non-stop service to virtually every major city in Asia today and indeed the fares there are extremely low.
..The non-stop walkup fares.. Boston or St. Louis to Beijing you may be paying between $200 and $500. When you walk up to the counter and fly Boston or St. Louis to Honolulu you may pay twice that. When you walk up to the counter and buy one of those cities to London you will pay seven times that.
What that means is that when we go fly Chicago to Beijing it’s not just that we lose money on Chicago to Beijing, it’s not just that we can go do something else with the airplane that can make money, when we have a route like that that is so unprofitable it degrades the profitability of Chicago to St. Louis and Chicago to Boston as well because any time we sell a customer St. Louis to Beijing we are selling at a really really cheap fare. You all see the flights St. Louis to Chicago is full pretty much all the year round. Boston to Chicago is full pretty much all the year round. If we’re sending someone to China that’s someone we’re not sending to Europe, that makes it harder to go and develop annual services to Europe, it incentivizes you to fly smaller jets so you get those fares off of your planes.
And that’s a really destructive thing to go and do to your hub. Chicago to Beijing was a uniquely negative market. For full clarity here when I say uniquely negative it wasn’t like it was 10% negative and we’re a bunch of accountants trying to chase everything nickel here. Chicago – Beijing would need a $50 million annual improvement to be a passable international market. It would need an $80 million annual improvement to be anything even remotely close to what Chicago – Heathrow or Chicago – Barcelona are.
That was at $1.90 fuel not at $2.20 fuel. And I’d love to tell you that Chicago – Beijing was the worst of our Chicago – Asia markets but it’s not the only one. We are challenged in Chicago – Tokyo and Chicago to Shanghai in much the same way. Unlike Dallas you can’t draw on Latin America flow.. unlike Los Angeles there isn’t the non-stop business market.
Now there’s nothing imminent about those markets but it’s something that we look at. And when we look at that, let me go all the way with this too, when we go and cancel a market like Chicago to Beijing or when we go and should we do anything with any of the other Chicago to Asia markets that has nothing to do with our commitment to Chicago. In fact it’s because we take unprofitable markets out that we are committed to Chicago. When we do that those jets can go get repurposed and even though that may be not flying a really attractive trip like Beijing and it’s flying a trip like Cancun that is a gigantic profit and loss difference to Chicago. The more of that we do the more Chicago is upgauging, the more Chicago is growing. As strange as it may sound we need to take out unprofitable flights to make the profitable ones more profitable.
That’s why Chicago – Beijing is out. Chicago – Asia is indeed challenged. It’s something that we’re looking at. We want to make sure all of our flights are on a path to profitability. In all candor it’s hard to see how they are but we’ll keep looking at it.