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American Airlines Bites the Bullet and Slashes International Growth Plans

Entering 2016, American Airlines (NASDAQ: AAL) had aggressive plans to grow outside the U.S., particularly in the transpacific market. As of January, the company planned to increase its international capacity 6% year over year in 2016. However, overcapacity and weak demand in numerous international markets has forced it to trim its growth plans again and again.

Moreover, there's no sign that supply demand trends will change soon for long-haul international routes. As a result, American Airlines is finally reducing its near-term international growth plans. On Friday, it announced that it will defer the delivery of 22 Airbus (NASDAQOTH: EADSY) A350s.

American Airlines has dramatically reduced its international growth plans. Image source: American Airlines.

This move has set off a new wave of worries about widebody aircraft demand, impacting Airbus -- and by extension, Boeing (NYSE: BA). Yet while the deferral clearly confirms that the market can't support much long-haul growth from a legacy carrier, the long-term implications for Airbus and Boeing are far less dire.

International results remain weak

American Airlines, like its legacy carrier peers, faces weak unit revenue trends across much of its international route network. In the transatlantic market, passenger revenue per available seat mile (PRASM) fell 5.9% in Q2 on 1.2% capacity growth. In Latin America, PRASM slumped 10.2% last quarter, even as American cut capacity by 4.3% year over year.

Finally, American has been adding numerous transpacific routes lately, seeing that region as a promising long-term growth opportunity. However, in the short term, that market has been anything but attractive. American's transpacific PRASM declined 14.5% last quarter on a 21.3% jump in capacity.

If anything, the transatlantic market -- the best of the bunch for American Airlines recently -- is at risk of an even bigger downturn. Industry capacity growth is high, driven in part by the expansion of low-cost carriers like Norwegian. Furthermore, Brexit-driven concerns may negatively impact transatlantic travel demand.

American Airlines cuts growth plans

Thus, American Airlines has very few attractive long-haul growth opportunities right now. It appears to recognize that fact, as it has cut its international capacity growth plan from 6% at the beginning of the year to just 2% now.

However, entering 2016, American Airlines' fleet plan was designed to provide ample long-haul capacity growth for the next few years. The carrier planned to add four Airbus A350s to its fleet in 2017 and another 10 in 2018. It also had 13 Boeing 787s scheduled for delivery in 2017 and eight more scheduled to arrive in 2018.

Thus, American planned to add 35 new widebodies to its fleet in the 2017-2018 period. Yet it had as few as six widebodies scheduled to retire during that time frame.

In May, American revealed plans to accelerate the retirement of eight Boeing 767s and nine Airbus A330s to 2017 and 2018. This reduced its growth commitments significantly. Last week's A350 deferral pushed out 12 scheduled deliveries from the 2017-2018 period to 2020 and beyond.

American Airlines has delayed its A350 deliveries by an average of 26 months. Image source: Airbus.

The net result is that American Airlines is now scheduled to have no growth in its widebody fleet count from the end of 2016 to the end of 2018. (It will have a modest capacity increase from a higher average seating density, though.) Of course, if conditions improve, the company could return to growth by keeping some of its older aircraft a little longer.

Airbus and Boeing should look elsewhere for growth

Six months ago, American Airlines planned to grow its international capacity at a mid-high single-digit rate over the next several years. The company now realizes that doing so would be a money-losing proposition.

It's not all that surprising that a U.S. legacy carrier can't profitably support that kind of growth. This is why the deferral is not as bad for Airbus and Boeing as many pundits suppose. Low-cost carriers and airlines in key developing nations -- most notably China and India, where air travel is exploding -- will be the key drivers of demand growth in the future.

Meanwhile, even with much more modest annual fleet growth of 1% to 2%, American Airlines and its U.S. legacy peers will probably need to order hundreds more widebodies in the next 10 to 15 years. Most of those planes are needed to replace aircraft ordered during the late 1990s airline boom.

With American Airlines' capitulation on growth, the U.S. legacy carriers all seem determined to better manage capacity on international routes. But as long as air travel demand in places like China and India continues to grow at a healthy clip, Airbus and Boeing will be fine.

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Adam Levine-Weinberg owns shares of Boeing and is long January 2017 $30 calls on American Airlines Group. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.