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American Airlines Doubles Down on Transatlantic Flights

Adam Levine-Weinberg, The Motley Fool

Last year, American Airlines (NASDAQ: AAL) decided to implement deep cuts to its Asia route network, in the face of big losses on various routes from Chicago to East Asia. The carrier has redeployed most of this capacity on new transatlantic routes in 2019.

So far, it looks like that strategy is paying off for the largest U.S. airline. As a result, American Airlines plans to double down on transatlantic growth in 2020. Last week, the carrier announced five new transatlantic routes that will be launched between May and September of next year.

Europe is the new focus of American's international growth

American Airlines has launched a slew of new routes to Europe this year, in an effort to boost the profitability of its long-haul network. In Charlotte, its second-largest hub, the carrier began year-round flights to Munich. However, most of the new service has consisted of seasonal routes.

An American Airlines plane in flight, with mountains in the background

American Airlines has added a bunch of new routes to Europe this year. Image source: American Airlines.

American Airlines has begun summer-season service from Philadelphia to Berlin and Edinburgh -- two common destinations for U.S. airlines -- as well as Bologna, Italy and Dubrovnik, Croatia (both of which are off the beaten path). It has launched seasonal flights connecting Phoenix to London, Chicago to Athens, and Dallas-Fort Worth (DFW) to Dublin and Munich. American added extra flights on its existing routes from DFW to Paris and Madrid, too.

These moves have paid off in a big way. Last quarter, American Airlines increased its capacity 5.2% year over year in the transatlantic market. Nevertheless, passenger revenue per available seat mile (PRASM) rose 3% in the region.

Meanwhile, American Airlines slashed its capacity in Latin America by 7.4% and cut transpacific capacity by 13.5%. These cutbacks on underperforming routes enabled it to post PRASM growth of 4.4% in Latin America and 0.5% in the transpacific market. Shifting capacity from Asia (and to a lesser extent, Latin America) to Europe is thus driving strong unit revenue growth for American Airlines' international network as a whole.

More of the same is coming

For the 2020 summer season, American Airlines will drop the Bologna route it added this year, but it will increase capacity on its new seasonal Berlin and Dubrovnik routes. The carrier also plans to continue testing various new transatlantic routes.

A rendering of two American Airlines jets flying side-by-side

Image source: American Airlines.

From DFW, American will begin year-round service to Tel Aviv next September. The airline used to serve Tel Aviv from its Philadelphia hub but dropped the route in early 2016 due to persistent losses. Management has higher expectations for the new route, as DFW is its largest hub -- with more than twice as many daily flights as American's hub in Philadelphia -- and serves a unique catchment area that doesn't have good service to Tel Aviv today.

American Airlines also plans to start seasonal service from Philadelphia to Casablanca, Morocco next June. This will be the airline's first route to Africa. Customers will eventually benefit from connections to other destinations in Africa on Royal Air Maroc, which is set to join American's oneworld alliance in mid-2020.

Finally, American Airlines plans to launch seasonal routes from Chicago to Budapest, Krakow, and Prague in May 2020. Management expects the new routes to benefit from strong local demand in Chicago, while also complementing its existing seasonal service from Philadelphia to Budapest and Prague.

A template for profitable growth

American Airlines has fallen behind its top rivals in terms of profitability in recent years. That said, it has a solid plan for becoming more profitable on domestic routes, by concentrating its growth in its three most lucrative hubs of Dallas-Fort Worth, Charlotte, and Washington, D.C. between 2019 and 2021.

Improving American's international network is a trickier task. The airline faces stiff competition in Los Angeles (its main West Coast hub), it has an undersized presence in New York, and its Philadelphia hub doesn't benefit from the same level of high-yield international business traffic as competitors' nearby hubs in New York and Washington, D.C.

However, American Airlines is gradually finding opportunities for profitable growth outside of the U.S. Its moves to shift capacity into Europe over the past year are driving PRASM increases. It will try to build on this success with further transatlantic expansion in 2020.

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Adam Levine-Weinberg is long January 2020 $20 calls on American Airlines Group. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

This article was originally published on Fool.com