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American Loses on Bad Capacity Planning: Analyst

Stocks in this article: AMRJBLULCCUAL

DALLAS ( TheStreet) -- Faulty capacity planning is costing American Airlines (AMR) $1 billion annually, according to a controversial new report by a veteran airline analyst.

In the report released Monday, Avondale Partners analyst Bob McAdoo said American could improve its annual results by $1 billion simply by bringing its worst markets to break-even. "More important than its costs are AMR's capacity decisions, its market selection and its unwillingness to halt or reduce flying in markets that are losers," he said.

Those losers, he added, include many of the carrier's highest-visibility, most prestigious routes: New York-London, New York-California, Chicago to Delhi, Beijing and Shanghai and Miami to Buenos Aires. The ten worst markets lose $450 million a year, he said.

Typically, McAdoo said, American puts too much capacity on the routes, thereby reducing its revenue per available seat mile to significantly less than competitors claim on similar routes, or it flies prestigious international routes because it thinks it should. "American's problems are clearly fixable, either by this management or by some other," he wrote.

For instance, on the Chicago-London Heathrow route, American loses more than $75 million a year flying four daily round trips with 980 seats, while United Airlines (UAL) flies three daily round trips with 549 seats. United's revenue per available seat mile is 10.9 cents, while American's is 8.7 cents, McAdoo said.

A problem is that United has a bigger share of the passengers who originate in Chicago -- 130 (or 23%) on its flights, compared with 183 (or 18%) on American's. American fills seats by bringing in passengers from Dallas and Los Angeles, undercutting fares on its non-stop flights from those cities to London, McAdoo said.

Similarly, American operates 10 daily flights in the New York-Los Angeles market, losing $70 million annually, and five daily flights in the New York-San Francisco market, losing $54 million annually. Since 2000, when American had similar service levels, its average fares in these markets have dropped from $397 to $279 as its principal competitors have shifted from United and TWA to JetBlue (JBLU) and Virgin America. United, McAdoo said, has chopped capacity and maintained its fare levels, but American apparently prefers to maintain market dominance.

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