October 9 - The Priorities of American Airline’s Doug Parker


INDUSTRY ANALYSIS

Doug Parker, the CEO of American Airlines, is outraged. The focus of his ire is a competitor that has the audacity to fly in “his” US-Europe market. Mr. Parker is so upset it is reported he met recently with US Secretary of State Mike Pompeo in hopes of stirring-up a diplomatic row between the United States and the carrier’s home country. 

Along with Delta Air Lines and United Airlines, American has a stranglehold on the US-Europe market. Together with foreign carrier alliance and joint venture partners, the Big Three control over 80 percent of US-Europe seats. Shielded from meaningful competition oversight by rampant and ill-advised government grants of antitrust immunity that allow carriers to jointly fix prices, set capacity at profit maximizing levels and coordinate schedules, the US-Europe market is a cash cow for the Big Three. It reliably delivers record profits.

How important is the US-Europe market to Mr. Parker and his Big Three oligopoly partners? Extremely. In August, the Wall Street Journal highlighted the critical role transatlantic profits are playing offsetting the Big Three’s higher fuel and labor costs.  Glen Hauenstein, the President of Delta, boasted “this is a very, very strong environment for the trans-Atlantic.” In other words, it is a very, very lucrative market for Delta and its oligopoly partners.

The target of Mr. Parker’s fury is Qatar Airways, one of American’s oneworld partners. Qatar has invested in a US-Europe carrier that indirectly participates in “his” market and offers passengers much needed, but unwelcome in Mr. Parker’s view, competitive choice. 

So which transatlantic carrier is in Mr. Parker’s crosshairs? Qatar has invested over $2 billion in a carrier group that, this summer, operated 71 daily US-Europe roundtrip flights serving 27 US airports. That carrier group, the International Airline Group (IAG), has four airlines – British Airways, Aer Lingus, Iberia and LEVEL – that serve the US-Europe market. It is 20 percent owned by Qatar Airways.

But, Mr. Parker has no apparent problem with Qatar’s multi-billion stake in IAG. Instead, Mr. Parker is fixated on Air Italy, a carrier Qatar invested a reported  $41.6 million dollars in for a 49 percent stake. This summer Air Italy launched first-time US-Europe service offering a whopping two daily flights to two US airports.

This soaring selective indignation and hypocrisy is remarkable, even for Mr. Parker. Qatar’s more than fifty times larger investment in IAG is fine. However, by comparison, its puny investment in Air Italy is not? Air Italy’s two daily US-Europe flights to two US airports pose a competitive threat worthy of spending the political capital to personally complain to Secretary of State Pompeo!?

What about competition from other carriers partially owned by Qatar that compete elsewhere? For instance, is Mr. Parker concerned about Qatar’s approximate $600 million investment in Latam Airlines, a key head-to-head competitor in the US-Latin America market that is very important to American? Crickets from Mr. Parker. How about Qatar’s $662 million investment in Cathay Pacific?  Again, deafening silence.

Mr. Parker might try to explain away the contradiction by pointing to the fact Qatar’s stake in Air Italy is 49 percent compared to 20 percent in IAG and 10 percent or less in both Latam and Cathay. However, that is hardly compelling given that the theory of Mr. Parker’s case seems to be that Qatar is on a subsidy-fueled investment binge.

Logically, if Mr. Parker had a principled objection, his indignation would be proportionate to the economic value of Qatar’s particular investments. The greater the investment, the more alleged subsidy used and therefore the louder the objection. Applying this reasoning, the decibel level of his protest would descend from what American regards to be the most “egregious” example – the multi-billion investment in IAG – to the one with the lowest economic value, Air Italy.

Here, however, the exact opposite is true. The lower the economic value, the greater his umbrage. It is logic defying. Mr. Parker’s sole focus is Qatar’s $41.6 million investment in Air Italy – less than two percent of Qatar’s investment in IAG and less than seven percent of its investment in either Latam or Cathay Pacific. 

This isn’t the only head-scratcher when it comes to Mr. Parker’s fixation on Air Italy. In August, American announced a high-profile retreat from the US-China market. It waved the white flag and exited the Chicago-Beijing and Chicago-Shanghai markets. The largest carrier in the world forced to terminate its Chicago hub flying to China. Humiliating, right?

Vasu Raja, American's Vice President Network and Route Planning, candidly admitted the two routes “have been a colossal loss maker for us.” Reuters noted this “underscore[s] increasingly tough competition from state-backed Chinese rivals as they aggressively expand their fleets with cut-price tickets.” American’s Raja echoed that point adding “[t]he current fare environment severely limits our ability to successfully compete between Chicago and Beijing.” It must be competition-distorting Chinese carrier subsidies materially impacting a US carrier, right?

One would think Mr. Parker would be fighting mad about China’s heavily subsidized state-owned carriers and the way those subsidies are skewing transpacific market share in favor of Chinese competitors. After all, Corrine Png, CEO of Singapore-based transport consultancy Crucial Perspective, recently declared “the North American and European airlines are no match for the Chinese carriers.” One needs to look no further than Mr. Parker’s leadership in the Big Three’s failed three year, $50 million lobbying campaign against Open Skies and Gulf Carrier competition to know he is not bashful about alleging market-distorting subsidies, even concocting fictitious examples when tangible ones like Chicago-China don't exist.

Yet, at a recent Washington DC aviation summit shortly after American’s retreat from the Chicago-China market, Mr. Parker gave Chinese carriers a complete pass choosing instead to solely whine about Air Italy and its two US-Europe flights to two US airports.

Mr. Parker’s success as a CEO is unquestioned. But, his sense of public policy priorities is puzzling. In addition to his obsession with Air Italy, there is American’s shareholder value destroying decision to focus its government affairs efforts on opposing Open Skies rather than air traffic control reform.

Given American’s massive fleet renewal, one can easily understand Mr. Parker’s past strong public statements about the critical need for air traffic control reform.  After all, without a modernized ATC system, American will be unable to secure the fullest possible economic return on that multi-billion investment. Without modernization, American will be unable to capitalize on that fleet advantage to gain a competitive edge over rival Delta that operates an aged fleet poorly suited for a state-of-the-art ATC system. Yet, when it came to crunch time for action with ATC reform legislation floundering and badly in need of American’s visible and vocal support, Mr. Parker and American’s attention was elsewhere. They were fatally distracted focusing instead on opposing Open Skies and trying to clip the competitive wings of Gulf Carriers.

There is more than a little irony when Mr. Parker laments the failure of ATC reform and expresses worry about the future of congested skies. Last year alone American reported spending $6.8 million on federal lobbyists. That amount dwarfed the other Big Three carriers. American’s legacy on ATC reform is a big “what if” – what if Mr. Parker and American had spent the political capital, money and management time and attention fully engaged in lobbying for meaningful ATC reform rather than waging a failed campaign against Open Skies and competitive choice?

Whether it is obsessing over Air Italy, ignoring Chinese carrier subsidies - even after American was forced out of the Chicago-China market - or making defeating Open Skies a higher priority than ATC reform, Mr. Parker’s choices are puzzling. The only certain thing about them is that they are detours with real and adverse commercial consequences for American shareholders. What other American commercial priorities are being overlooked while the boss focuses on Air Italy and the perceived threat its two US-Europe flights pose to the largest airline in the world?



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