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Summary

  • AAL is expanding its network in China by operating five daily flights between China and the U.S. beginning in the second quarter of this year.
  • By the end of this year American Airlines will modify its current set of fleets by adding more slim-line seats to reduce fuel expenses.
  • These strategies will enable American Airlines to increase its total revenue, which will help it compete with its rivals.

American Airlines Group (NASDAQ:AAL) reported a net profit of $1.9 billion for 2013 compared to the previous year's profit of $407 million. Last year the company adopted various strategies that enabled it to post such superior results, and I expect the company to continue its solid performance this year with below mentioned strategies:

Expanding fleet network

Last year, American Airlines Group initiated regular flight services between Dallas/Fort Worth and Bogota, Colombia and Roatan, Honduras. The company planned to expand in China by starting two new regular flight services from Shanghai and Hong Kong to Dallas, and it will commence this service in the second quarter of this year. The China-U.S route is one of the most profitable routes in the world. Air traveler traffic in China grew 7.1% year over year in 2013, around 5% faster than North America's air traveler growth. American Airlines will operate five daily flights between China and the U.S. including two new flights.

The company has a very small share in the China-U.S. air traffic market, and this initiative will allow it to enhance the presence on this route. American Airlines is in talks with Chinese aviation authorities regarding the approval of the take-off and landing slots and flight rights. Further, American Airlines will operate new long-haul higher capacity fuel-efficient aircraft, which will allow it to compete with other Chinese airliners such as Air China (OTCPK:AIRYY) and Hainan Airlines.

American Airlines will use Boeing's (NYSE:BA) 777-family aircraft on its two new China-U.S. routes, and Air China upgraded its fleet to the entire U.S. route, operating the Boeing 777-300 Extended Range (ER) aircraft. On the other hand, Hainan Airlines, to compete with these two, will be using the Boeing 787 Dreamliner fleet on all North American routes beginning this year. It is expected that by using higher seating capacity and fuel-efficient aircraft airliners will increase their passenger revenue per available seat mile (PRASM) and reduce fuel expenses, which is a major part of airliners' operating costs.

By adding new routes to its current services, American Airlines is expected to increase its capacity in seat miles flown by around 3.5% year over year. Operating higher capacity aircraft and adding more slim-line seats in its aircraft will drive this growth. By adopting these strategies the company can increase its PRASM and reduce the fuel cost, which is around 30% of its total operating cost. This will enable American Airlines to compete with its U.S. rivals like Delta Air Lines and United Continental Holdings.

Modification in its aircraft by increasing seating capacity

American Airlines year-over-year fuel and related cost increased 1.7% to $7.84 billion for 2013. To increase its revenue base and reduce the fuel cost the company has planned to modify its aircraft. It has successfully installed five more seats in its MD-80 aircraft and is planning to add more seats to its two other aircraft fleets this year.

Source: Company Data

Apart from MD-80 modification, American Airlines is expected to add 10 seats to 14 seats in its Boeing's 737-800 aircraft. The modification of 737-800 aircraft is expected to commence in the second half of this year, and it is also working on modifying the Boeing 777-200 aircraft to increase the seating capacity from 247 seats to 260 seats by the end of 2014. However, if the company plans to increase 777-200's seating capacity to 289 seats, then the complete modification is expected by 2015. I believe American Airlines can achieve its set target as Delta (NYSE:DAL) and United Continental (NYSE:UAL) already added 160 seats in total in its 737-800 aircrafts, and their 777-200 aircrafts have 269 seats. This strategy will benefit American Airlines as it is adding more slim-line seats without reducing legroom, which will provide the same comfort level to passengers.

It is also expected that by installing additional slimmer seats American Airlines could boost its bottom line by reducing fuel cost as other airliners like United Continental, Southwest Airlines (NYSE:LUV), and Alaska Airline (NYSE:ALK) have done. By adding six more slim-line seats in their 140 seat flights, these airliners expect to revenue to rise by more than 4%. In the case of Southwest Airlines, by installing additional slim-line seats in its aircraft the company expects to reduce the annual fuel cost by around $10 million. It is expected that these modification will also enable the airliners to enhance their revenue without operating an additional flight on the same route, which will in turn generate an extra fuel saving opportunity. I believe American Airlines, by operating a higher capacity aircraft on the China-U.S. route and installing more seats in its 777-family aircraft, will have opportunities for higher revenue at a lower fuel cost.

Conclusion

American Airlines is expanding its networks to the major parts of the world, and the current initiative of adding five daily flights between China and the U.S. will enable it to expand its footprint in the Chinese airline market. Along with this, the company's aircraft modernization strategy will allow it to increase the PRASM and reduce the fuel expenses. However, the average fuel prices for 2014 are expected to remain in the range of $3.00 to $3.05 per gallon compared to $3.07 per gallon last year, which will help the company further reduce its fuel cost. I expect that these strategies will enable American Airline to strengthen its financial position.

Source: American Airlines: Expanding Network In China And Modifying Its Fleets