Double Heresy

Turning back a coveted limited-entry route to Japan? Not that many years ago, that would have been cause for commitment to an institution, or worse, for U.S. airline management.  How about launching a significant amount of new international service?  Aren’t legacy airlines supposed to be downsizing their way to financial success?  Won’t the financial community have conniptions about this?

Interestingly, both of these seemingly grievous errors were announced simultaneously, when American Airlines indicated that it was going to drop its New York (JFK) to Tokyo’s Haneda Airport route…and add nonstops between Dallas/Ft. Worth and both Hong Kong and Shanghai, along with a number of other international service adjustments.

Putting this into perspective, for many years in the 1980s, 90s and the early 2000s, routes to high-growth points in Asia were highly desirable, and Japan, in particular its capital, Tokyo, was deemed to be the gold standard.  United acquired its position in this market via the purchase of Pan American’s Pacific route system in the 1980s; Delta emulated this move more recently when it acquired and merged with Northwest. Some readers may recall when NW put ‘Orient’ in its name, and featured advertisements with a distinctive gong sound at their end, meant to evoke the carrier’s connection with this part of the world.

However, as Japan experienced economic difficulties in recent years, the situation has changed somewhat.  In addition to Tokyo, Osaka’s Kansai airport once was expected to add significant heft to the power of Japan’s airlines.  Two things happened, instead: Kansai now has nonstop service to only three points on the U.S. mainland (Seattle, by Delta; San Francisco by United; and New York/JFK by China Airlines of Taiwan); the large Los Angeles market is now bereft of service.  And yes, no mainland service by Japanese carriers.  The other big event in recent years?  The bankruptcy of Japan Airlines.

Still, even in the context of more difficult market conditions in the U.S.-Japan market, it may seem surprising that American would drop its service in a market as large as New York-Tokyo. However, after reading the airline’s forthright statement (contained in a Special Jetwire to its employees on October16) about why this happened, it becomes obvious:

          "While we are disappointed to end this route, our Tokyo/Haneda flight has been quite unprofitable, largely because we are allowed to operate only during severely restricted hours, limiting our customers’ options for connecting flights to and from other Asian markets."      

The morals of this story?  First, American is to be commended for exiting a market that might have been producing prestige, but definitely not profits.  ROIC (Return on Invested Capital) instead of market share?  A good idea, in my opinion.  Second?  While “Open Skies” may have been negotiated with Japan, it might have been useful to ascertain whether Haneda Airport was going to as open as the skies.  In the U.S., formal airport slots are unusual, if not rare.  Elsewhere, including Japan, they are often ubiquitous. Hopefully in the future, the U.S. government will be able to negotiate on the basis of allowing carriers from so-called open-skies countries access to U.S. airports only when U.S. carriers are able to obtain commercially-viable operating times at foreign airports.

And what of the new capacity to Hong Kong and Shanghai from DFW?  Aren’t significant capacity additions (particularly long-haul international ones, which produce lots of new ASM/Ks) frowned upon by the financial community currently?

The answer to this is that there should be nothing wrong with sensible expansion of service in markets, including U.S.-China, where there is above-average growth, and this condition is forecast to continue in the future.  Furthermore, this also will address the “limiting our customers’ options for connecting flights to and from other Asian markets” cited above, via the significant access to alliance partner Cathay Pacific’s intra-Asia (including China) route system that the new DFW-HKG route will provide.  Delta and United may not welcome the additional trans-Pacific competition, but travelers should benefit.

In effect, these two announcements are emblematic of coming changes on the North Pacific.  Japan will continue to be a very important market for U.S. carriers, and the issue of how they are able to serve Haneda Airport as international services return there in significant numbers – buttressed by significant domestic feed for Japanese carriers – needs to be addressed so that genuine competition results.  At the same time, the U.S.-China market is becoming increasingly more important, and at some point may become paramount, both for local traffic and connecting opportunities.  While it is a relatively late entrant on the North Pacific, it looks like American understands these dynamics, and intends to become a more significant participant in this arena.  It will be interesting to see how this plays out.