American Airlines organizational structure and performance analysis

American Airlines: Analysis and Discussion

American Airlines

History (adopted from American Airlines, 2011)

American Airlines was formed in 1934 through the consolidated act of American Airways Inc. And several airline subsidiaries that had been acquired by the Aviation Corporation between 1929 and 1930. Cyrus Smith Rowlett was elected president -- a position he held until his appointment as U.S. Secretary of Commerce in 1968. By 1940, American had become the leading domestic carrier and had by far surpassed the one-million passenger mark. The first domestic scheduled freighter DC-3 was introduced in 1944, with DC-4, DC-6A, and DC-7 being put to service in the second half of the decade. By 1949, American was the only U.S.-based airline with a complete post-war fleet. The jet age began with the 1959 introduction of Boeing 707 and the Lockheed Electra; and progressed into the 1960s and 70s with the release of the Boeing 727 in 1964 and the Boeing 747 Freighter in 1970. Albert Cary was appointed president in 1974, steering the company to introduce the One-Stop automatic check-in system, and the SABRE network in Canada and Mexico.

Deregulation took place in 1978, and the company moved its headquarters from New York to Fort Worth, Dallas. L. Crandall assumed the company's presidency in 1980. In 1983, the McDonnell Douglas MD-80 was added, and the American eagle system connecting small communities to large cities introduced. Same-day service was introduced in 1988. In 1992, the company introduced the American Flagship Service for domestic services, and launched flights to Paris and Berlin. Ticketless travel was introduced in 1996; and in 2002, the company was rewarded by the CIO Magazine 2000 Web Business for its Room Throughout Coach customer strategy. It acquired TWA's assets in 2001 and in 2011, partnered with Etihad Airways to offer customers an opportunity to redeem earned frequent flyer points.

Effects of Deregulation

Prior to deregulation, the airline industry was controlled by the government, particularly by the Civil Aeronautics Board (CAB). The board regulated the industry's every move, determining all aspects, from M&As and alliance-formations to pricing, marketing, and entry/exit. The industry worked more like a legalized cartel (Cento, 2009). Airfares were high, and the load factor, in line with the law of demand, was relatively low. Gildner, et al., (2010) places the average load factor at 50% over the first half of the 1970s decade. However, by the beginning of 2008, the "average number of passengers on board a flight had greatly improved due to deregulation and the effects of competition in the industry," and the load factor had risen to 75% (Gildner, et al., 2010, p. 21).

Deregulation pushed airlines to make operating adjustments that would increase the accessibility of air transport and improve operational efficiency. A wave of mergers and alliances swept through the industry during the 1980s and 90s; and progresses even today as airline companies seek to raise their levels of competitiveness and increase their power to influence prices (Cento, 2009). Recently, American merged with U.S. Airways, its parent company, only years after another large-scale merger between Delta and Continental Airlines. Such large-scale M&As give rise to the issue of low competition as firms can essentially block some firms from entering some markets, a trend that would result in airfare increases, unhealthy eliminations, possible loss of preference and choice on the part of customers and heightened inefficiency (Cento, 2009). On a brighter note, however, merging companies are able to boost their competitiveness and strengthen their positions in external markets, as was the case when American got into a joint venture with Japan Airlines to strengthen its presence in the Asian market.

Another effect of deregulation has been the entry of low cost carriers (LCCs) such as Southwest Airlines into the market (Gildner, et al., 2010). These LCCs continue to gain "market share as traditional carriers increase prices to make up for losses of revenue during the current economic crisis" (Gildner, et al., 2010, p. 21). Over the last decade, LCCs have gained business because unlike the traditional carriers, they do not issue surcharges and charge extra fees to make up for lost revenues. As a result, they are able to offer more competitive prices than their traditional counterparts. American, like many other airline companies, has reported a stream of financial losses and loss of business to LCCs. The company's net profits have been on a notable downward trend for the better part of the decade, with significant deviations from the pre-deregulation revenues. As Cook and Goodwin (2008) point out, "four of the six largest airlines entered bankruptcy, with American avoiding the fate only by an eleventh hour concessionary agreement" (p. 52).

The structure of airline routes also changed as a result of deregulation. American changed from the point-to-point architectural system to the hub-and-spoke network system in 1981, opening a first hub in Dallas Foot Worth that year, and a second in Chicago O'Hare the next year. From these hubs, the company expanded its services into European and Japanese markets through the 1980s.

Deregulation also spurred a range of technological innovations, including computer reservations in the airline industry. Thanks to the SABRE innovation, American owns one of the most dominant systems, from which it has continued to reap revenues.

Route Architectures/Structures

Deregulation granted companies the privilege to choose, among other things, the business models and route structures they deem most efficient. This text will focus on the point-to-point and hub-and-spoke structures.

Point-to-Point: in this framework, all passengers "board at flight origin and deplane at the destination," as depicted in fig 1 (Cook & Goodwin, 2008, p. 52).

Fig 1: Point-to-Point Architecture

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(Source: Cook & Goodwin, 2008, p. 52)

The fundamental advantage of such a structure is that it is cheap and simple to operate. The total time taken for travel is less because circuitous routings and intermediate stoppages are eliminated (Cook & Goodwin, 2008). Both the airline company and the customers benefit from these time reductions, with the latter having ample opportunity to generate more revenues by utilizing aircrafts more effectively.

The system, however, has one key drawback -- its "inability to consolidate traffic bound for many destinations on a single flight severely limits the number of city-pairs in which non-stop flights can be economically operated" (Cook & Goodwin, 2008, p. 55).

Hub-and-Spoke Architecture: in this case, the flight origin marks the boarding point with the hub representing the deplaning point, where those headed for destinations other than the hub transfer to connecting flights, as represented in fig 2.

Fig 2: Hub-and-Spoke Architecture

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(Source: Cook & Goodwill, 2008, p. 52)

The hub-and-spoke framework provides two fundamental advantages. First, they allow an airline to offer a wide flight-range at the same hub, and to consequently create a customer base too strong to be captured by the low fares offered by LCCs. Secondly, they increase productivity and efficiency by allowing airlines to consolidate long-distance passengers from various markets through transfer stations -- the 'anywhere to everywhere' effect (Cook & Goodwill, 2008).

The framework is, however, not without its share of disadvantages. To begin with, it is costly to operate; first, because it requires substantive personnel and extensive facilities to ensure smooth transition at the hub; and secondly, because of the additional costs incurred in form of facility charges and landing fees at the hub (Cook & Goodwill, 2008). A second disadvantage draws from the complexities involved, which necessitate the charging of an additional fare premium for selected travelers (Cook & Goodwill, 2008).

Product Differentiation at American Airlines

Evidently, the competition within the airline industry is fierce, forcing companies to be on the look-out for new strategies to get ahead of the competition. Product differentiation is a common strategy for gaining competitive advantage. American engages in product differentiation in a number of ways; i) offering a frequent flyer program with no time-to-expiry feature; ii) serving Star Buck coffee on flights; and iii) offering more space on flights to increase customer comfort through the Room Throughout Coach strategy.

The Airline's Departments and Role in Planning, Development, and Execution of Flight Operations

The airline has a total of 11 departments. These include: administrative support services; cargo; customer service; engineering; finance/accounting/audit; human resources; information technology; airline operations; marketing/planning/sales; revenue management; and simulator services (American Airlines, 2014). Of these, I will concern myself with four departments as I seek to highlight the role of the selected departments in planning, development, and execution of flight operations. These are the customer service department, the finance/accounting/audit department, the human resources department, and the information technology department.

a) The Customer Service Department

The airlines customer service department is responsible for not only the formulation but also the implementation of the customer service plan. The department, as highlighted in the plan, seeks to "provide safe, dependable and friendly air transportation to our customers, along with numerous related services" (American Airlines, 2014). As per the plan, the department is committed to making each and every flight clients take special -- and it is for this reason that the comfort, safety, as well as convenience of customers remains the number one priority. The airline submitted its customer service plan to the Department of Transportation for the first time 15 years ago. The submission was made jointly with American Eagle, the airline's regional partner, with updates to the said plan having been made in 2010 and 2011. More specifically, the customer service department, as has been captured in the plan, amongst other things, makes every attempt to accommodate customers with special needs, rewards customers for their loyalty with the AAdvantage Loyalty Program, develops and adjusts the refund policy as may be appropriate, communicates important information such as known diversions, cancelations and delays, and tailors fares to correspond with customer needs (American Airlines, 2014).

b) The Finance/Accounting/Audit Department

This is yet another important department when it comes to the planning, development, as well as execution of flight operations. In addition to financial reporting and the preparation of financial statements, the airline's finance/accounting/audit department also engages in financial controls with its key responsibilities on this front being ensuring compliance with all the relevant accounting standards, principles, and conventions. The department also puts in place measures to enhance compliance and hence prevent errors, theft, and fraud. It is important to note that like any other business, American Airlines is expected by its various stakeholders to act in their best interests. These stakeholders include, but they are not limited to, shareholders, suppliers, customers, and employees. To ensure that this special class or group of stakeholders is well taken care of, the airline's finance/accounting/audit department seeks to ensure that funds are effectively managed and allocated in a way that rakes in a reasonable return for shareholders and helps meet its obligations to employees and suppliers, while at the same time adequately remaining a competitive, cost effective, best-value alternative.

c) The Human Resources Department

It is often said that people that work for an organization are such an organization's greatest resource. This is particularly the case for commercial carriers where commitment to customer service, safety, and efficiency of operations is critical to success. American Airline seeks to ensure that it hires the most qualified individuals to ensure that flight operations are executed seamlessly. As it has been pointed out on its website, all those who work at the airline ought to understand its "commitment to industry leadership" (American Airlines, 2014). It is for this reason that the human resource department ensures that all the employees are granted competitive employee benefits, job training, the necessary life and work support, and wellness and health packages. Employee support is of great relevance in the execution of flight operations.

d) The Information Technology Department

During the past two decades, information technology, as Doganis (2006 p. 197) points out "has underpinned and affected every aspect of airline operations, from airline maintenance to crew rostering and from revenue accounting to gate allocation at airports." Information technology remains critical to the success of American Airlines and the successful execution as well as planning of the airline's flight operations. The information technology department is responsible for the development of various technological platforms that enhance efficiency; from reservations to sales execution to the onboard experience. In seeking to ensure that both the planning and execution of flight operations is seamless, American Airlines continues to modernize its applications as well as back-end infrastructure, with the most recent development being "providing flight crews, airport agents and maintenance staff with access to operational information from a range of new mobile devices.." that "…provide new capabilities to different staff functions" (Ambrosio and Mitchell, 2013).