United CEO Doesn’t Think American Can Become A Premium Airline

United CEO Scott Kirby provides the most interesting insights of any US airline CEO. At the JP Morgan Conference this week, he chimed in on a wide range of topics, ranging from a possible merger with JetBlue, to a unique claim about hub profitability.

Here’s another fun tidbit — Kirby was asked about the possibility of American becoming a more premium airline, and his response was quite something. American has been struggling financially (compared to Delta and United), and we know American executives believe the airline needs to become more premium to compete. Is that realistic, though?

Kirby thinks there can only be two premium US airlines

JP Morgan airline analyst Jamie Baker asked United CEO Scott Kirby a question about comments he has made in the past. Specifically, in the past, Kirby has claimed that the US only has room for two premium airlines. Baker asked Kirby if he really believes that, and if he truly doesn’t think the market can support another premium airline.

Kirby’s answer is quite something:

Well, the first time I actually remember saying that was 12/09/2013, which was the day the American Airlines US Airways merger closed. And at the end of a successful day, I got everyone in the room and said there’s only room in the country for two successful premium airlines. We’re going to be it.

Here’s what we’re going to do. We’re going to seat back entertainment. We’re going to sort of the same playbook. We’re going to do all this stuff. We’re going to push United out of the transcon market, then we’re going to push them out of Los Angeles, then we’re going to push them out of Chicago.

I said that on 12/09/2013. So I’ve thought that for a long time. The airlines decided to flip the playbooks, but I still think there’s only room for two. It’s just the size of the market. You just look at the big metro areas like New York is big enough to have two.

It’s really hard to be three in there. It’s hard to have a competitive advantage. Here in New York, Delta is bigger on one side of the river, we’re bigger on the other. We can each kind of be number one, but it’s hard to be the real point is it’s hard to be number two. And you just run out of big cities where you can be number two.

You can be really big in a place that’s not New York or Chicago or Los Angeles, but it’s hard to be kind of global and comprehensive if you can’t be number one in those big cities. And there was always I thought there was always only room for two as you just look at the map. And I still think there’s only room for two.

Isom thinks there’s room for three premium airlines

American CEO Robert Isom was also attending the conference, and heard Kirby’s response. So Baker asked Isom why Kirby was wrong in clearly insinuating that American can’t be a premium airline:

So, I’ll just start with this. I worked for Scott and with Scott for a long time. So, you know, I’ve seen him be right on a lot of stuff. He’s a brilliant man. I’ve seen him wrong in a lot of stuff.

And in this case, he’s dead wrong. And, you know, the reason for that is Americans been around for a long time. American probably had, you know, a weaker hand going into into the pandemic. Certainly, we were hamstrung on the way out. We didn’t again, I mentioned that we had 200 aircraft over 200 aircraft that, we couldn’t fly because of regional pilot shortfall.

You know, I love our regional network. It flies incredibly well. We’ve got a great fleet. But by the same token, you have to have pilots to fly. You know what?

We’re back at. You know? Scott says that kind of stuff. I’m sure because he would like nothing better than to not have American as a competitor. He would guarantee he doesn’t like us being a competitor in his backyard in some places.

But to that end, we’re a premium product carrier. We’ve got a great fleet. We’re not dependent on a lot of the issues that Boeing or Airbus has to deal with. Our growth is fairly metered as we look at. We’ve grown in DFW in Charlotte.

We have an incredible position with, you know, Sunbelt position, hub position, enviable relationships. I see Luis Gallego here from IAG. Anyone would love, you know, to have a partner with, you know, Iberia and and and BA in their network of carriers. The same thing holds true across, you know, the Pacific with with with JAL, and and our other partners. American is not going anywhere.

American is recovering. And I can guarantee you that anything that you hear to the contrary is just concerned that we’re actually making a lot of progress.

My take on the comments of Kirby & Isom

I’ve gotta say, this sure is an interesting discussion, especially given the dynamics, and that Kirby used to number two at American, and was Isom’s boss. A few thoughts come to mind…

To recap, Kirby’s argument ultimately comes down to claiming that you can’t be a premium airline if you don’t have a dominant position in multiple large markets, like New York, Chicago, or Los Angeles. In other words, American can’t be premium because he doesn’t view the markets where American has dominant market positions as being premium enough, and there’s not much room to grow.

Isom’s rebuttal is… not much of a rebuttal at all? I mean, he just kind of goes off on a tangent about how the airline has “a great fleet” (whatever that means), how the airline is growing in Dallas and Charlotte (which kind of reinforces Kirby’s point), how it has a strong sunbelt position (is that premium?), and how American couldn’t fly regional jets at the start of the pandemic (okay?).

I love how Isom finishes by claiming that anyone who doesn’t see much upside for American is simply scared of the airline. I like Isom’s optimism, but to be honest, I think Kirby spends most of his energy thinking about how to beat Delta, and not about whether American is catching up.

What’s my take on this? Well, I guess the question is how we’re defining a “premium” airline. Ultimately as far as airline executives go, what matters is profitability, and the belief is that the only way to increase profitability is through going upmarket.

I don’t want to say that it’s impossible for American to catch up with Delta and United in terms of economics, but odds are definitely stacked against the airline:

• American can’t figure out a winning strategy in New York, and has already tried to become the number one carrier in Los Angeles, and ultimately gave up, so the airline doesn’t have particularly competitive coastal hubs
• American has been so focused on being a domestic airline, and doesn’t have nearly as compelling of a long haul route network as United, despite its compelling joint ventures
• That all says nothing of American’s lack of a customer service culture, its disadvantage with business travelers, and its uncompetitive aircraft interiors

Bottom line

United CEO Scott Kirby thinks there’s only room for two premium airlines in the United States. He claims that he realized this over a decade ago at American, following the merger with US Airways, and tried to implement that strategy there. But when it failed and he left for United, the goal was to make United one of the two premium airlines.

He doesn’t think there’s room for three premium airlines due to the need to have a number one position in major cities like New York, and there’s an area where he doesn’t think American can grow. American CEO Robert Isom disagrees with Kirby, but I can’t say he makes a very compelling case.

What do you make of Kirby’s comments about American becoming premium?