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American Airlines acknowledged its distribution approach
diluted revenue during the first three months of 2011, a period in which it
briefly pulled out of some channels, litigated with distributors, expanded its
Direct Connect strategy and found itself the target of distributor biasing. The
revenue impact lessened as the quarter wore on, AA executives claimed, adding
that they remain confident the strategy will help it make revenue gains in the
Deutsche Bank airline analyst Michael Linenberg last week in
a research note commented "that American’s below industry average revenue
performance is partially due to its ongoing distribution battles," a
sentiment AA acknowledged this week in its first-quarter earnings call with
investors and media.
Other non-fuel-related events, including winter weather and
the earthquake in Japan, hit first-quarter revenue by more than $100 million,
"We included distribution impacts that we saw in that
amount, and the only thing I would add at this point is that they were more
significant earlier in the quarter and moderated as the quarter
progressed," AA CFO Bella Goren said during the call4.
American was "quite encouraged" by agreements to
use the Direct Connect from Priceline and Expedia, AA president Tom Horton
said, claiming those deals "achieve the objectives we're after here and
allow us to proceed with Direct Connect technology." Noting its litigation
with Sabre—on hold until June 1—Horton said AA continues to negotiate "a
deal that we think will help accomplish the objectives we're trying to
American CEO Gerard Arpey, meanwhile, would not disclose a
timeframe for fully implementing Direct Connect with Expedia. "While I
said technology is not an obstacle, there is a lot of embedded ways that we
have been doing things historically, so inevitably it will take time to do
things," he said.
Horton claimed the revenue opportunity is worth "many
times over" the first-quarter revenue loss attributed to distribution,
reiterating for investors that the purpose of its strategy is to "better
target customers' needs," lower distribution expenses and generate new
Goren called American's approach "both evolutionary and
revolutionary in the industry, but we are going through some hard times as a
result of that because we are leading that effort, and some people give us
credit for it and some don’t. But the reality is, we're taking a quite
significant leadership position in changing how the industry presents its
products and services with respect to generating additional revenue."
In an exchange with J.P. Morgan airline analyst Jamie Baker,
Arpey framed AA's distribution approach in the context of revenue generation,
rather than mere cost savings.
Baker began a rant with, "I'm normally not the type to
go around quoting Einstein, but I'm pretty sure he was the one who said
insanity is defined as doing the same thing over and over and expecting
different results." Baker claimed AA "at one time was an airline that
was willing to take a pioneering role in the industry."
"Is there any assurance you can give us that you might
be working on something similarly radical today … something truly different
that would signal that you're trying to retake a leadership position in the
industry that AMR once held and produce profits for your stakeholders?"
Baker asked Arpey, who characterized the carrier's distribution strategy as a
"In terms of things that we're doing right now, I think
I guess I would highlight the fact that we are aggressively moving on the
distribution front to think differently about the way that we distribute our
product," Arpey said. "There's been a lot of focus on that in terms
of managing our costs, and that of course is an important consideration, but
the real leverage in what we are attempting to do there is to become much more
aggressive and in control of our ability to merchandize."
Baker's response: "I'll give you GDS, but still,
distribution is a relatively small percentage of overall cost."
Source: The Beat