American Loses on Bad Capacity Planning: Analyst

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.

Another problem is that American lacks domestic traffic to feed its international flights at Kennedy, with service to about 50 fewer markets than US Airways ( LCC) has at its Philadelphia hub.

On its Chicago-Delhi route, American loses $40 million a year, McAdoo said, noting that "American should not be ashamed if it were to eliminate service to India." The carrier also loses $40 million annually on Chicago-Beijing and $13 million annually on Chicago-Shanghai.

In his report, McAdoo downgraded American to under-perform, with a price target of $7.50.

McAdoo's view, it should be said, is not unanimous.

On Monday, two other veteran analysts upgraded American. Standard & Poor's analyst Jim Corridore upgraded to hold from sell with a price target of $7. Corridore wrote that "lower jet fuel costs than we previously anticipated will allow the company to preserve needed cash although we still think AMR faces challenges related to higher labor and other costs vs. peers."

Meanwhile, J.P. Morgan analyst Jamie Baker on Monday upgraded American to overweight from neutral with a price target of $8.50, primarily as a result of fuel price declines. In fact, Baker upgraded price targets for the seven large carriers. American shares closed Monday at $6.69, up 31 cents or about 5%.

American executives have long maintained that the carrier's money-losing, below-average performance is due largely to higher labor costs, resulting from its decision not to go along with the crowd and file bankruptcy in the early part of the last decade. Last year, for instance, American lost $471 million while its peers made money.

McAdoo estimated losses based on third-quarter U.S. Department of Transportation data, the most recent available, and on estimated fuel cost of $94 a barrel, the first quarter average price.

-- Written by Ted Reed in Charlotte, N.C.

>To contact the writer of this article, click here: Ted Reed