2011
Executive Summary

AA is burdened by high labor costs, a weak balance sheet, perpetual union issues, increasing pressure from low-cost carriers (LCCs), incessant losses. AA must address its high costs, improve its international offerings, and find a solution to the competitive threat posed by LCCs

Chiu Cloud Supreeth Kini Fabien Levet Amruta Vantipalli

9/1/2011

Table of Contents
Introduction........................................................................................................................................................... 2 Financial Health ..................................................................................................................................................... 2 Market Forces ........................................................................................................................................................ 2 Barriers to entry ................................................................................................................................................. 3 Substitutes ......................................................................................................................................................... 3 Suppliers ............................................................................................................................................................ 3 Buyer Power ...................................................................................................................................................... 3 SWOT Analysis ....................................................................................................................................................... 4 Strengths ........................................................................................................................................................... 4 Weakness .......................................................................................................................................................... 4 Opportunities..................................................................................................................................................... 4 PEST ................................................................................................................................................................... 4 Conclusion ............................................................................................................................................................. 4 Appendix ............................................................................................................................................................... 5 References ............................................................................................................................................................. 6

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Introduction
AMR Corporation (AMR), incorporated in October 1982, operates in the airline industry. The Company’s principal subsidiary is American Airlines, Inc. (AA). AA provides scheduled jet service to approximately 160 destinations throughout North America, the Caribbean, Latin America, Europe and Asia. AMR Eagle Holding Corporation (AMR Eagle), a wholly owned subsidiary of AMR, owns two regional airlines, which do business as American Eagle American Eagle Airlines, Inc. and Executive Airlines, Inc. (collectively, the American Eagle carriers). AA also contracts with an independently owned regional airline, which does business as American Connection (the American Connection carrier)1. To improve access to each other’s markets, AA has established marketing relationships with other airlines (through the Oneworld Alliance) and rail companies (see Exhibit 1).www.aa.com is a great resource for making and viewing reservations, flight check-in, status, baggage check in, change and book flights etc. Keeping up with technology, AA has recently rolled out smart phone travel apps2. AA has established the AAdvantage frequent flyer program (AAdvantage) which is currently celebrating its 30th year3. AAdvantage members (67 million)4 earn mileage credits by flying on AA, American Eagle and the American Connection carrier or by using services of other participants in the AAdvantage program. Mileage credits can be redeemed for free, discounted or upgraded travel on AA, American Eagle or other participating airlines, or for other awards. AA sells mileage credits and related services to other participants in the AAdvantage program. There are over 1,000 program participants, including a credit card issuer, hotels, car rental companies, and other products and services companies in the AAdvantage program.

Financial Health
It has revenue of approximately 22 billion and a net loss of 471 million in 20105. Cargo accounts for 3 % of the airline’s revenue. The financial health is not sound currently due to the economic downturn. All its major ratios are low or negative. The stock price is in a downward trend since the last 5 years (see Exhibits 2 and 3).

Market Forces
Competitor Analysis: AA’s business faces competition from both legacy hub-and-spoke carriers like Alaska, Continental, Delta, Northwest, United and U.S. Air, as well as point-to-point low cost carriers including JetBlue, 2

Southwest and Airtran. AA also faces competition on international routes, especially from Air France and Lufthansa. Since, there is very little product differentiation in this industry; most of the competition takes place in the price arena. The Airline deregulation act only aggravated this situation6. AA, which uses the hub and spoke system, faces stiff competition from point to point low cost carriers. Though hub and spoke system allows AA to have a large network it loses out on some advantages of point to point system like cherry-picking profitable routes, flying to secondary airports in major regions, offering no-frills service with “sardine-packed” seating etc. The competitive threat posed by LCCs has grown significantly in the past decade with the proliferation of online ticketing. While passengers have always been price sensitive, increased availability of pricing information has greatly aided LCCs in stealing market share7. Barriers to entry are significant to new entrants because of the high fixed costs involved. In addition to economic difficulties, there are regulatory and logistical barriers as well. The airline industry is still highly regulated, both in terms of route scheduling and homeland security. Operating rights to major airports are limited and expensive. Exit from the airline industry is also a difficult process. In addition to the liquidation of fleet, equipment, plant, property and operating rights, airlines are obligated to honor the existing passenger reservations. Substitutes for airline industry are few viable for long distance travel in the US. There is no high speed rail network. Over short distances, the advantages to trains and road travel are amplified, especially in light of heightened security measures that extend the length of time it takes to travel by plane and cost8. Suppliers There are three key inputs to operations involved in the transportation of freight and passengers by air: fuel, aircraft and labor. Supplier power in each of these areas is significant. Aviation fuel is the largest single expense. Despite the immense amount of fuel consumed by the company, there is very little bargaining power as market rate is determined externally by long-term contracts, futures markets, and spot prices. American is limited in its ability to hedge fuel prices. Boeing and Airbus dominate the supply for commercial airliners which gives a fair amount of bargaining power to the supplier. Labor is the third major input to operations in the airline industry. Labor in the airline industry is highly unionized, and wages, salaries and benefits constitute about a third of AA’s total operating expenses. Some of AAs’ competitors have achieved labor cost reductions through bankruptcy proceedings. The bargaining power lies with the unions9. Buyer Power Proliferation of online ticketing, price sensitivity from undifferentiated nature of airline service, low switching costs contributes to the buyer power in the industry9. 3

SWOT Analysis
The current status and future potential of AA and AAdvantage10 is appropriately demonstrable through an empirical SWOT11 and PEST study. Strengths12 AA: domestic and international network worldwide13 carrying a very substantial number of passengers to 50 countries, strong brand reputation, powerful alliances (Oneworld) and marketing tie-ups, the efforts made towards the China market, and a strategic locations of airports (several hubs). AAdvantage: ranked among the best customer loyalty programs in the world airline industry (not only in the US where it could enroll over 50 million of frequent fliers) through its commitment towards customers and its general organization. AA has taken advantage of its solidly established reputation beforehand, offering its Frequent Flyer program and brand equity hardly reached in other programs, and a strong logistical organization of the airline itself. Threats AA: volatility of the fuel market, intense competition and price discounting, economic slowdown in Europe and the US, in parallel with the growth of videoconference and travel substitutes, added to a militancy of labor union force. AAdvantage: affected by the customers’ preference for cheaper prices than for a quality loyalty program that appears already sufficient: increase of fuel costs, labor unions strengthening, Low-Cost airlines dynamism and ambitions, but the Sabre computer system14 as well: although very popular, a frequent-flyer program can hardly support a trend of costs reduction in the industry, disaffection of customers for legacy airlines, and a difficult economic context. Weakness AA: weak margins and financial position, difficult Labor and union issues, inability to compete on international flights, and a dependence on demand are undermining AA’s potential for the coming years; weaknesses related with flight experience of customers. AAdvantage: negative financial context of the current period that has seen a decrease of travelers, including frequent-flyers (business and tourism), added to a deficit in efficiency regarding international flights’ market share, especially towards European or Asian destinations. Opportunities There are several notable opportunities for AA and its loyalty program, demonstrated through the recent New Cost Control Plan, including: a new fuel economic plane, new Flight attendant union negotiations, maintenance outsourcing, an enhancement of international flights’ offering, and a partnership with JetBlue regarding its low price domestic service. AAdvantage Program opportunities: excellent rating, substantial Flight Plan 202015, promotion of its Loyalty Program to Asian customers which are increasing from/to the West coast. PEST (PEST16) characterizes a useful tool to add little information about AA current status. Politically: since 10 years, the airline industry is affected by a strong political instability (Sept 11th attacks), added to the deregulation policies of 1978, union requirements, security measures etc. Economically, September 11th event have simply been a final stroke for US and worldwide airlines that were already having huge difficulties to face: increase of fuel costs and a decrease of the US Dollar. Socially, number of US travelers declined, while security issues didn’t encourage an increase of the tourism worldwide, on the contrary. Technologically, Internet (notably the ‘Sabre’ system) has liberalized the industry.

Conclusion
Some strategic recommendations for AA would be to address labor costs, explore maintenance outsourcing, continue fuel efficiency initiatives, pursue strategic alliances and enhance international offerings9. The future would look bright for AA if economy improves and it utilizes its vast network and makes above improvements. 4

Appendix
Exhibit 1 - One world member airlines

Exhibit 2 – Price and Volume LTM

Exhibit 3 – Financial Ratios

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References
1 2

AMR Annual Report 2010 http://www.aa.com/i18n/urls/mobile.jsp?anchorLocation=DirectURL&title=travelappsfooter_5-8#!mobile-apps 3 http://en.wikipedia.org/wiki/American_Airlines#Company_affairs_and_image 4 http://www.reuters.com/finance/stocks/companyProfile?rpc=66&symbol=AMR
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http://phx.corporate-ir.net/phoenix.zhtml?c=117098&p=irol-reportsannual https://www.thomsonone.com/Workspace/Main.aspx?View=Action%3dOpen&BrandName=&IsSsoLogin=True 7 http://economics-files.pomona.edu/jlikens/SeniorSeminars/vector2010/pdf/amr.pdf
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http://economics-files.pomona.edu/jlikens/SeniorSeminars/vector2010/pdf/amr.pdf http://economics-files.pomona.edu/jlikens/SeniorSeminars/vector2010/pdf/amr.pdf 10 http://www.reportlinker.com 11 http://www.crmtrends.com 12 Strategic Report for American Airlines, Vector Strategy Group, April 7th, 2010 13 Datamonitor, AMR Corporation SWOT analysis, 2009
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http://www.sabre.com http://www.aa.com 16 Strategic Analysis Tools, Topic Gateway Series No. 34, October 2007

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