American Airlines CEO Doug Parker: ‘China Has Huge Potential’

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William Douglas Parker, CEO of the American Airlines Group, is an expert on aviation mergers & acquisitions (M&A). He was CEO and chairman of America West when it merged with US Airways in 2005. He took over as CEO of US Airways after the merger. US Airways and American Airlines merged in late 2013, and Parker was elevated to the helm of the combined entity. He had also made an unsuccessful bid for Delta Air Lines.

Although the group is the largest airline in the world, it has been late to target the China market. China has been Parker’s first visit abroad since becoming the group’s chief executive. “The reason why I visited China is because we think China is a crucial market, and it is very important for our future growth,” he told Knowledge@Wharton during an interview in Shanghai. He also discusses the benefits of M&A and other issues.

An edited transcript of the interview follows.

Knowledge@Wharton: At the end of last year, there were 25 direct flights between the U.S. and mainland China. There were three American companies and four Chinese companies servicing these routes. This year, the competition has become heated, as United Airlines, China National Airlines and Hainan Airlines have all started new flights between the two countries. The American Airlines Group has a smaller presence in Asia — especially China — than its peers. How do you propose to address that?

Doug Parker: The reason I visited China as my first destination abroad since taking up the new position is because we think China is a crucial market and it is very important for our future growth. Twitter  China is relatively small for us now, but it has huge potential. China will become a very important emerging market for us in the future.

We think that the Asia-Pacific market will grow the fastest in the future, as the economic growth here is the fastest in the world. Second, we are also smaller than our competitors in this region, [so our growth rate can be higher].

We are the biggest airline company in the world. But that is not reflected in this region. Many of our peers operate on a much larger scale here. However, our performance in China has exceeded both expectations and targets. Since our first flight seven years ago, there has been a strong growth momentum.

At present, our flights to China mainland include Shanghai to Chicago, Los Angeles and Dallas, and Beijing to Chicago. We have added 60% passenger capacity on flights connecting China and the U.S.; the first direct flight from Shanghai to Dallas started this June.

Dallas is the biggest hub for American Airlines in the U.S. It connects 90 cities in the U.S. and Canada and also has a competitive presence in Latin America. The flight from Shanghai to Dallas will make it easy for passengers to go to other cities in the U.S. or transfer to Latin America.

“Our performance in China has exceeded both expectations and targets. Since our first flight seven years ago, there has been a strong growth momentum.”

In addition, our new products and new aircraft are also very competitive. For example, the Boeing 777-300ER to Hong Kong is the best aircraft on the route. The Boeing 777-200 to mainland China has also been refurbished recently. The new business class space is almost double. We have also set up a super economy class, which has added six inches in space and offers global Wi-Fi service to passengers.

We have purchased nearly 100 new aircraft. There will be deliveries of more than two aircraft every week.

Knowledge@Wharton: What specifically do you plan for the China market?

Parker: We will continue to talk with China’s civil aviation regulation authorities on aviation rights and schedules. The future growth will be determined by the results of these negotiations. In the short term, we will focus on China’s Tier 1 cities. As the economy grows further, we will look at Tier 2 and Tier 3 cities.

Knowledge@Wharton: If we can move away from China a bit, you have an extensive experience of M&As. Can you tell us about the advantages and disadvantages?

Parker: First of all, M&As between airline companies bring cost reduction — management expenses, sharing of airport facilities, consolidation of insurance fees and the cost of information systems. For us, this will save around $500 million to $1 billion every year.

Although the merger only got approved at the end of last year, American Airlines has already achieved a much better financial performance in the bankruptcy protection period before the merger officially took place. [AMR Corporation, the parent company of American Airlines, had filed for bankruptcy protection under Chapter 11 in November 2011.] The 2013 results show that total revenue grew 4.7% over the previous year. In the first quarter this year, the net profit of $480 million is an historical peak.

The second advantage of the merger is the expansion of the flight network. For US Airways, the biggest challenge was that we were not strong enough to compete with others in getting flight routes. After the merger with American Airlines, this has changed. We have now entered hub airports in the U.S.; passengers have more choice in flight transfers. However, to avoid charges of monopoly, the two companies had to concede 52 pairs of takeoff and landing slots at Washington’s Reagan National Airport, and 17 pairs at New York’s LaGuardia Airport.

Knowledge@Wharton: What do you think will be the biggest challenge or problem in the process of this consolidation?

Parker: Airline mergers are very complicated and difficult. Twitter  At the moment, the biggest challenge is to consolidate the cultures of the two companies; we are working very hard on it. We are optimistic that the essence of these two companies can be integrated well and form a new and powerful corporate culture.

The other major challenge is to integrate the information systems. Luckily, our team has done this in the past and gained experience. We are currently using American Airlines’ information system, as it is bigger than US Airways’.

“Airline mergers are very complicated and difficult. At the moment, the biggest challenge is to consolidate the cultures of the two companies.”

We expect that the consolidation process will need 18 to 24 months.

Knowledge@Wharton: What is likely to change in the U.S. airline market? What’s your view on the industry outlook?

Parker: Before our merger, the airline market witnessed a lot of consolidation. Delta Air Lines merged with Northwest Airlines; United Airlines merged with Continental. This was one of the reasons we went in for consolidation; US Airways was not big enough to compete with the others. Now the situation has changed. American Airlines has the biggest flight network in the world. We will continue to grow, though not through M&A.

On the industry outlook, the current competition in the U.S. market is relatively healthy. The top three companies (American, Delta and United) can offer global flight routes. Southwest Airlines and JetBlue Airways have low-cost flights. I don’t think this pattern will change significantly in the future, although there may be some minor adjustments.

We expect that 2014 will be a good year. The U.S. economy is growing and GDP growth this year is estimated to be 2% to 3%. This will translate to 2% to 3% growth in demand for flight seats. In addition, we will launch new products to bring new values to passengers. We, therefore, expect that we will perform better in 2014 compared to 2013.

Knowledge@Wharton: What is your plan for the global markets?

Parker: Our global network has grown significantly. We have added two routes within Europe, one new flight to Seoul, and also added new routes from the U.S. to Europe. Our expansion in global markets is much faster than domestic growth. American Airlines used to have 25% global flying routes; it is now 40%. We have ordered several wide-bodied commercial aircraft which will allow us to address international routes.

Knowledge@Wharton: Why have none of the U.S. airlines ordered the Airbus A380 Superjumbo?

Parker: The A380 is more suitable for the big-hub airports which are very tight on flying schedules. However, American airports are not that tight on flying schedule. For us, increasing aircraft use frequency is more effective than buying large planes.

In the future, we hope to provide sleeping facilities in the business class on international flights. The entertainment system needs to be upgraded. From the angle of the airline companies, we have to use gas more efficiently and become more environmental friendly.

Knowledge@Wharton: Will super economy class replace business class in the future?

Parker: I don’t think it will replace business class or first class. First class is very important for domestic passengers. It is even more important for international markets as distances are so long. Many will be willing to pay more to travel business or first.

Knowledge@Wharton: What do you see as the major opportunities and challenges for the airline industry?

Parker: The biggest challenge is to react quickly to changes in the new world, while maintaining growth in profits. In terms of opportunity, a financially sound airline can offer better products and services.

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