Perry Flint talks to American Airlines Chairman and CEO Doug Parker about the US industry’s transformation and the need to keep unnecessary regulations at bay
A merican Airlines has proposed a joint venture with Qantas as it looks to take advantage of international opportunities. Domestically, despite a strong market, increasing regulation and the lack of ATM modernization threaten to curtail efficiencies, as Chairman and CEO Doug Parker explains how the company plans to address this.
Are you happy with the airline’s performance so far in 2018?
The year is off to a good start. We seem to be firing on all cylinders. One of the good things about being profitable is the amount of investment you can make in your product and in the team and we continue to do that.
Since the merger [between American Airlines and US Airways], the average American Airlines team member’s pay is up 43%. We’ve added 15,000 net new jobs. I attended a flight attendant graduation recently and it was great to see the energy and enthusiasm about the future. My job is to try to ensure they still have a healthy airline 30 or 40 years from now, even better than the one we have now.
Some $20 billion has been invested in 496 new aircraft, and we have retired 469 since the merger.
We will operate the youngest fleet by far of any large US network carrier. And we have put a lot of money into our product. There are a lot of things that US customers are not used to seeing, such as our Flagship [airport] Lounges serving meals for international customers much like you see in other parts of the world and satellite Wi-Fi for all mainline aircraft by 2019 so that everybody can stream at the same time.
At the same time, we’re also taking care of our shareholders. Even while those investments were being made, we’ve been able to return $11 billion to our shareholders through dividends and share repurchases.
Getting partner approval
In February, American Airlines and Qantas filed a new application with the US Department of Transportation (USDOT) seeking approval to form a joint business to better serve customers flying between North America and Australia and New Zealand.
According to both airlines, the proposed joint business will significantly improve service, stimulate demand and unlock more than $USD 300 million annually in consumer benefits that are not achievable through any other form of cooperation.
That figure includes up to $221 million in value from expanding codesharing between the two—opening more connections to more destinations— and up to $89 million in value by offering a wider range of fare classes across each other’s networks, including lower fares and discounts.
An expanded relationship will encourage significant improvements in the overall customer experience, with these benefits expected to stimulate significant demand for new travel – generating up to 180,000 new trips between the US and Australia and New Zealand every year.
Without USDOT approval, American and Qantas will have no choice but to further reduce codesharing on their networks, which the airlines say will jeopardize the number of services and routes each carrier flies between the US and Australia and New Zealand.
What is your strategy for the next few years, domestically and internationally?
Domestically, the market has matured and is finally allowing the airline to make a profit. Clearly, as the US economy expands, there will be increasing demand for domestic travel. But we expect growth to be in line with the economy, so 2%-3% per year.
Internationally, growth should be a little more than that. There are bigger opportunities. We have announced new services to Prague and Budapest from Philadelphia and there is a new service to Reykjavik from Dallas Fort Worth.
Both domestically and internationally, we expect to be growing for years to come.
Will the proposed joint venture with Qantas make a difference to your business?
We feel very good about the application we have put forward [to the US Department of Transportation]. Both airlines have worked hard to ensure the benefits are laid out clearly.
It is a very compelling case. Our ability to work together will enable us to improve service and stimulate demand. We estimate $300 million in customer benefits compared to if we didn’t have this cooperation. There will be additional frequencies to Australia and New Zealand and new city pairs. It’s a good thing for the airlines but, most importantly, for the consumer.
Do you have concerns about the increasing regulation of airlines in the United States?
If the airline business isn’t the most regulated industry in the United States, it has got be close to the top. We work well with regulators in a number of areas, such as safety.
But we don’t need regulations in areas where an airline should be taking care of itself, such as customer service. Unnecessary regulation can have unintended consequences. Look at the proposal [in Congress] for so-called fair fees, which includes changing tickets. When a customer buys a ticket, that gives an airline a degree of certainty. If an airline can’t charge when a customer has a change of mind, then the reality is the fare will have to be different initially.
Airlines should be allowed to deliver a product that attracts the customers they want to attract. An airline cares as much about taking care of its customers as any business and if you look at the investments being made in recent years, then, if we give it time, I am sure we will see quality products that cover all aspects of customer service.
We’re hopeful that as these quality products come online, it will be recognized that there is no need for legislation.
Aviation was deregulated 40 years ago but some still view airlines as a public utility. It is obvious that those airlines that aren’t serving their customers well will pay for it in the marketplace.
It looks as if the restructuring of the Air Traffic Control (ATC) system in the United States is off the table for now. What are the implications for American and the airline industry?
It’s concerning. This was all about modernizing air traffic control. Our view was that this was not going to be able to happen under the existing governance structure and therefore we should move ATC into a not-for-profit corporate structure that can do things the government can’t do—or doesn’t do well—such as raising a lot of money well in advance of the benefits, and getting bond financing. It could also provide certainty in leadership rather than major board changes every couple of years that forces a different strategic direction.
Now Congress has told us, “We don’t want to do that.” Fair enough. But that means we now have to work within that existing governance structure to figure out how to modernize ATC. Because let’s be clear: nobody in this process has ever said the current ATC system is okay. So, we’ve got to figure out how to modernize it under the current structure, because the status quo isn’t acceptable. There is a $7 billion surplus in the aviation trust fund, so maybe that would be a start.
Proponents of raising the Passenger Facility Charge claim there is an airport funding crisis. Do you agree?
There is no airport funding crisis.
American Airlines has over $30 billion of airport capital improvement projects in our hub cities that are approved, funded, and underway.
And that’s just American’s hubs. Everyone knows there are some airports that need capital improvements. One of the great things about having profitable airlines is now we can do that work.
Airports must work with the airlines to agree on projects that make sense. And we agree all the time. There is about $100 billion in airport projects going on right now in the United States. There has never been this much activity.
What necessary airport projects haven’t been approved or haven’t received funding? That list doesn’t seem to exist!
Do you have any thoughts on turning airports into for profit companies?
In general, I get worried about turning airports into money-making organizations. It could be a not-for-profit privatization, of course. But if you get monopolies determined to maximize profits, you’re in trouble. We’re certainly not in favor of that.
Has the industry finally moved beyond the boom-and-bust cycle?
Traditionally, the airline industry has made a little money then lost a little money and the investors never saw a return on their money.
That basic up and down won’t change. Aviation is absolutely a cyclical business, and earnings will peak and dip. But the point is that the absolute earnings of the US carriers now is at such a level that when the dips come, earnings won’t fall below zero. We have made more in the four years since the merger with US Airways than both airlines made in the 35 years before that. The industry has changed.
It would be doing our customers, our employees and our shareholders a disservice if we didn’t acknowledge that fact and make investments in our product rather than sitting on cash waiting for something bad to happen.
How important is new distribution capability?
We are pleased with the progress so far. We are working with our global distribution system partners to ensure we can provide rich NDC content to our customers. American has introduced an innovative program where travel agents get paid $2 for every booking they put through the American application interface. A lot of agencies are looking to integrate with us following the announcement.
Is there anything that keeps you up at night?
I don’t worry about too much as we’re in a good place. But the cultural transformation since the merger is still ongoing. There is a lot of history to overcome and there is some mistrust. That trust must be restored. We are making great progress, but we continue to put pressure on ourselves to do the right things to keep moving forward. You can never think you’ve arrived at the right spot.