Wednesday, May 21, 2008

Is It Time To Say Goodbye To American Airlines?

Based on today’s news from Reuters, it appears that American Airlines (AA) has its back against the wall and is trying to survive in this ever-increasing-fuel-cost environment. American Airlines, taking the old adage of “desperate times require desperate measures” to heart, is now charging $15 for the first bag, planning on slashing service domestically by about 11% to 12% by 4Q 2008, and removing 75 aircrafts, including old MD-80s, from service. It would appear that AA is desperately trying to stay alive by jettisoning highest cost routes and planes while trying to squeeze as much revenue from its passengers.

Now, back in April, I noted in Issues With The Delta-Northwest Merger - Part 1 that the MD-80s typically burn about 22% to 26% more fuel per seat miles flown than a more efficient airplane, on an apples-to-apples comparison. Additionally, 94% of American Airlines’ fleet is MD-80s (source: Wikipedia and respective airline’s website):

So, on a daily basis, America Airlines is using approximately 20.7% to 24.5% more fuel than other airlines that do not fly MD-80s. With jet fuel prices now averaging $2.58 per gallon, it is only a matter of time before the higher fuel cost completely erode American Airlines’ income and make it economically difficult to remain in business. Stay tuned for further analysis.

Ed Kim
Practical Risk Manager

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