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American aims to capture more business traffic with hub growth

American Airlines aims to capture additional business travellers in smaller markets as part of a larger effort to boost connectivity over its largest hubs.

By the Fort Worth, Texas-based carrier's analysis, it becomes more attractive to local travellers outside its hubs as it adds more "connect points" in smaller markets it already serves, said American president Robert Isom at the Bernstein Strategic Decisions conference on 30 May.

"When you talk about smaller cities that today we may serve out of Chicago, or out of Philadelphia, or out of Charlotte – being able to also then create another connect point really improves our standing in that local market, especially with business travellers," he says.

For example, this year American has added new service to Augusta, Georgia from Dallas/Fort Worth to complement its existing Charlotte flights and add more east-west connecting options, Cirium schedule data shows. It made a similar addition in Gainesville, Florida, which it previously served from just Charlotte and Miami.

American hopes that by attracting more lucrative business travellers in these markets it can boost overall profitability – particularly by adding flights over its most profitable hubs.

"Every time we add another point, every time we add frequencies – in our strongest hubs – it is something that we think we can build at hub averages, and has the ability to impact airline profitability overall," says Isom referring to financial returns on new services at the levels of its most profitable hubs, rather than at its lower system average.

American is adding more than 100 flights to its Dallas/Fort Worth hub this summer, plans a comparable increase at Charlotte next year and will shift to larger -gauge aircraft at Washington National in 2021 as part of this push to boost profitability.

And while the new flights benefit travellers by adding utility in smaller markets, the carrier's motives run directly to its bottom line with, Isom emphasising the goal is to "improve profitability overall".

American's financial performance, while still healthy, lagged network competitors Delta Air Lines and United Airlines in 2018. It generated a pre-tax margin of 4.2% during the period versus 11.6% at Delta and 5.3% at United.

Even Doug Parker, chairman and chief executive of American, called 2018 a "challenging year for us financially", during an investor call in January.

American's plan to grow capacity at its most profitable hubs – Charlotte, Dallas/Fort Worth and Washington National – was announced last summer when Wall Street analysts were already questioning whether the carrier had slipped to third among the US big three. At the same time, it has trimmed some loss-making routes, for example from Chicago O'Hare to Beijing and Shanghai.

The first wave of that expansion began in May with the opening of 15 new gates for American Eagle at Dallas/Fort Worth International airport. Those gates, which will be used by smaller regional jets with up to 50 seats, allow American to add more than 100 flights at the hub with a target of 900 daily flights on peak days this summer.

The new Dallas/Fort Worth flights are already performing at the system average, if not better, in terms of load factors and yields, says Isom. He expects continued improvement as the new markets and flights mature.

American targets $4-6 earnings per share (EPS) in 2019, a number it reduced by $1.50 due to the Boeing 737 Max grounding and other headwinds it faces unrelated to the hub growth strategy.

The carrier will add four more gates in Charlotte by year-end, allowing it to add flights there in 2020. A new 14-gate concourse capable of handling large regional jets like Embraer 175s opens at Washington National in 2021 that will enable the airline to replace 50-seat jets with the larger models on flights.

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