Description of American Airlines

American Airlines

Brief description of the Airline History:

American Airlines -- AA till date is credited to have the twin distinction of being the world's largest scheduled passenger airline as also the biggest scheduled air freight carriers extending a broad range of freight and mail services across its systems. At the latest count, AA operates scheduled jet service to nearly 150 destinations in the entire N. America, the Caribbean, Latin America, Europe and Asia. ("AMR Corporation 2006 Annual Report," 2006) A table showing the top ten airline by traffic as on June 2007 is stated in Exhibit -I ("IATA Economic Briefing: World Air Transport Statistics 51st Edition June 2007.," 2007)

Looking back, April 15, 1926 was a momentous occasion in the history of American aviation.

On that date, Missouri's Robertson Aircraft Corporation's chief pilot Charles A. Lindbergh took off from Chicago in his small DH-4 biplane headed for St. Louis with bag of mail. Subsequently it was one of the many companies which finally consolidated to constitute the present day American Airlines. The consolidation started in 1929 when the Aviation Corporation was constituted to take over young aviation companies, Robertson included. During 1930, the Aviation Corporation's airline subsidiaries were incorporated into American Airways, Inc. And it was in 1934 when American Airways came to be known as American Airlines, Inc. AA became the first airline in June 25, 1936 to fly the Douglas DC-3 in a commercial trip. By the end of the decade, AA achieved the unique distinction of becoming the country's top most domestic aircraft as regards revenue passenger miles is concerned and on Feb 16, 1937 reached a major milestone in flying its one-millionth passenger. ("American Airlines History," 2007)

From the period 1945 to 1950, AA ran American Overseas Airlines -- AOA, a transatlantic division servicing several European nations and with it forayed into Europe. AA started the Family Fare Plan during 1948 helping families to travel together at lower rates and the year 1953 saw AA flagging off the transcontinental service without break in both directions across the U.S. with Douglas DC-7. Another first for AA was becoming the first airline to offer coast-to-coast service with Boeing 707. In the initial part of 1960, AA tied up with IBM to launch and implement the SABRE -- Semi-Automated Business Research Environment which is the biggest electronic data processing system for business application. ("American Airlines History," 2007)

Over the years it came to be recognized as the biggest real-time data processing system, just next to U.S. government's SAGE system. Fleet additions were made during 1960s and 1970s including the Boeing 727 and Boeing 747 and in 1968 AA achieved the unique distinction to place orders for the McDonnnel Douglas DC 10 that began its first scheduled flight in 1971. AA made history by launching the most popular fare i.e. The SuperSaver. During the initial stages giving discount fares from New York and California, the Super Saver was extended to every AA route during March 1978 and thereafter to Mexico and Canada. Deregulation in the airline industry took place in 1978 and in January 1979, AA started with a major route expansion, starting off with new routes and new destinations in the U.S. And the Caribbean. During 1981, AA launched the ADVANTAGE travel awards program, an innovatory frequent flier marketing program. During May 1982, stockholders consented to a plan of reorganization that led to the formation of a new holding company, known as AMR Corporation that came to be the parent company of AA. ("American Airlines History," 2007)

More marketing offers were introduced with Ultimate Super Saver fares in 1985, thereby offering AA passengers up to 70% discounts and competition for the low-service, cut-rate carriers that had come up in the stir of deregulation. Besides, AA also began its Senior SAAVers Club that gave discounts to senior citizens. In its foray into freight delivery, AA expanded its network to give delivery into same-day service by 1988. AA grew rapidly making investments in infrastructure for expanding the facilities at DFW International Airport. Besides, expansion of the pilot-training facilities at AA's Flight Academy in the headquarters complex was done as also new reservations center in Tucson. An ultra-modern System Operations Control -- SOC was also opened in 1990. The year 1990 also marked the launching of the AA's premiere international service, International Flagship Service. The following year AA again broke new ground to fly its billionth passenger and expanded its European routes, opened its western reservations office in Tuscon and purchased its first McDonnell Doughlas MD-11 and Fokker 100 airplane. ("American Airlines History," 2007)

During 1993, AMR Corporation, the parent of AA constituted the SABRE Technology Group that consisted of the AMR Information Services -- AMRIS, SABRE Travel Information Network -- STIN, SABRE Computer Services -- SCS, SABRE Development Services -- SDS and AMR Project Consulting and Risk Assessment Units. Carrying on with its policy of various programs, AA and four other airlines launched a new customer -driven global alliance called OneWorld which is a multimillion dollar scheme systemized to upgrade the standard of global air travel and the new alliance was launched on Feb1, 1999. The year also marked the introduction of the Boeing 777 and the 737-800 with installation of defibrillators in all its aircraft. Besides, AA also earned recognition in becoming the first airline to give the facility of DVD in-flight video players in its scheduled flights. In 2000, AMR did the spin-off of SABRE into its own company. In 2001, AA received the recognition of State of California EPA's 2001 Governor's Environmental and Economic Leadership Awards Program. ("American Airlines History," 2007)

During October 2001, AA made a major announcement for speeding up construction of its new $1.3 billion terminal at New York's JFK Airport, slated to complete by September 2006. AA celebrated its 30th anniversary on January 14, 2004 of running the first commercial flight. More addition to infrastructure was made with AA opening its first phase of its latest 1.5 million square foot terminal at NY's Kennedy International Airport. In Nov, 2005, AA started a daily nonstop service between Chicago and Delhi covering 7,500 miles earning itself the distinction of running its longest nonstop route with Boeing 777 aircraft. The AAdvantage Program completed its 25th anniversary during 2006 which was the first frequent flyer program which transformed the airline history and initiated the standard for such type of projects in a lot of other businesses. Starting with just 3, 00,000 members, the AAdvantage program's membership have risen to a mammoth 50 million. AA again broke new ground by launching its first ever service to China on April 2, 2006 by launching a daily nonstop Boeing 777 flight between Chicago and Shanghai. During October 2006, C.R. Smith, the pioneer of aviation and chief of AA since long was included into the Texas Transportation Hall of Honor. ("American Airlines History," 2007)

2. Financial performance in the post deregulation environment:

Deregulation within the U.S. airline industry was brought about during 1978. Deregulation, through lifting constraints on operations, allows airlines to build efficient economic systems. These are the hub-and-spoke networks which have developed to typify the airline operations in the U.S. during the past decade. It is a fact that the hub-and-spoke let airlines to gather passengers to and from a lot of destinations, to put them on a bigger and more economical aircraft, and therefore cater to the lower density routes with greater frequency and lower fares. Through lifting constrains on fares and services, the policy of deregulations pushes airlines to make experiments? They react by regularly altering their patterns of performances. (Neufvillee; Barber, n. d.)

The year 2006 was a turnaround year for AA as the company recorded net earnings of $231 million in 2006 as against a net loss of $857 million during 2005. AA's revenue saw an upward rise of roughly $1.9 billion in 2006 compared to 2005. The passenger revenues went up 7.5% in spite of a capacity decrease of 1.2%. Whereas the passenger yield displayed a considerable year-over-year enhancement as AA instituted fare hike to partly cover the relentless rise in the cost of fuel. ("AMR Corporation 2006 Annual Report.," 2006)

Before deregulation in 1978, the Civil Aeronautics Board -- CAB used to control entry, routes and fares in order to promote stability within the air transportation system. The Airline Deregulation Act of 1978 removed CAB's authority over routes and domestic fares which set the ball rolling that reshaped domestic air travel demand. The spiraling of air transportation following deregulation can be witnessed through rise in capacity in terms of Available Seat Miles -- ASMs and traffic that is calculated through Revenue Passenger Miles -- RPMs. Scheduled RPMs went up at a very faster rate following deregulation compared to earlier periods. Within 1954 and 1978, RPMs went up at an average annual rate of 5.8 million RPMs annually, however this more than doubled in the period between 1978 and 2002 to clock an average rate of more than 11.7 million RPMs annually. Capacity in airlines also went up in accordance with this rising demand. Scheduled annual ASMs went up from 300 billion in 1978 to more than 700 billion by 2000. (Tam; Hansman, 2003)

Of late, the close association between economic growth and the demand for air traffic travel also led to unprecedented traffic loads and profits for the airline industry during the economic growth cycle during the later part of 1990s. The rise in the airline industry following deregulation and the average decline in prices has also resulted in a change in air travel dynamics. According to the survey data on long-distance travel, there was a rapid rise in the reported number of long distance trips by air. Whereas overall long distance air travel has risen, the ratio of work to non-work visits has also undergone a change. During 1972, below 40% of travels were undertaken for non-work associated reasons, but this had risen to 70% by 1990. The surge in the quantum of non-work trips signifies that airline deregulation has contributed positively. (Tam; Hansman, 2003)

The rising connectivity and accessibility of the air transportation system seems to have facilitated air transportation to be more completely unified into the social structure of the country. On the revenue side, the airline has witnessed revenue threats in the post-deregulation environment. The price and revenue balance has changed to a great extent recently. During 2001 and 2002, the industry lost $18 billion. U.S. carriers included the likes of AA have experienced losses during periods of recession, nevertheless the quantum of losses in case of major carriers leaving aside Southwest is apparently a never before feature. Along with the influence of 9/11, the extent of losses has metamorphosed the financial atmosphere of the airline industry and endangers the long-standing profitability of the bigger U.S. network carriers such as AA. A graphic of the quarterly profits of major U.S. airlines is given in Exhibit -II (Tam; Hansman, 2003)

3. Aircraft mix, hub structure:

In 1936, AA added to its fleet the first Douglas Sleeper Transport -- DST with its introduction into the NY-Chicago route and the company named these services as American eagle and American Arrow creating benchmarks for nonstop passenger flights. From 1933 and 1937, the passenger strength became three times, and the number went up 11 times in the subsequent years. The company started using the Douglas DC-4 cross country during 1946 for trips lasting 13-14 hours. Besides, it was also the first company to extend pressurized cabin service at the time when it started off with its DC-6 on the NY-Chicago route. Among the big-ticket domestic airlines, AA was the pioneer to start off domestic jet service using procured instead of leased aircrafts. On January 1959, American started flying the Boeing 707 airplanes from New York to LA. Throughout the 60s, AA put into service a mix of Boeing and 720 and 727 airplanes. Apart from that it also bought 30 of the British Aircraft Corporation -- BAC One-Eleven 401s, a big coupe for a jet maker in Britain. Thereafter in August 1971, AA came to be the globe's first airline to press the new Douglas DC-10 having a wider body into service. ("American Airlines," n. d.)

AA manages five hubs namely Dallas/Fort -- DFW, Chicago O'Hare, Miami, St. Louis and San Juan, Puerto Rico. Other industry players like United Airlines also has a hub operations at Chicago O'Hare. Similarly Delta Airlines earlier managed a hub at DFE. However in January 2005, Delta stopped hub operation at DFW. In bulk of its domestic non-stop routes, AA encounters competition from other players like Southwest, United and their regional companies. Besides, competition is also higher in cities that need a connection wherein the major airlines make competition through their respective hubs. Apart from that AA experiences competition on some of their routes from companies running point-to-point services on such routes. In its effort towards increasing efficiency and revenue and lowering cost that formed the Turnaround Plan for the company, it took measures for 'de-peaking' its hub at Miami, the lowering in the size of its St. Louis hub and making its domestic operations uncomplicated. ("AMR Corporation: 2005 Annual Report," 2005)

4. Labor relations issues:

AA's labor costs are among the highest in the industry and its faces a three-pronged war to contain its labor costs. The three unions are bent upon recouping the double-digit wage and benefits denials in 2003, at the time when the company was on the edge of insolvency. It has been the union's claim that solely on the strength of their sacrifices AA was saved and the time has come when the company must reciprocate its employee with bigger pay benefits. There were disagreements with the management on a limited contract extension and pay hikes and talks are slated to resume during November 2007. A lot of members of the union feel that is would be difficult to overstate the significance of the negotiations to the company's profits. Following five years of losses, AA registered a $231 million profits during 2006. The company has spent close to 31% in the initial six months of the year 2006. In the opinion of research professionals from MIT, AA's labor costs were the highest in the industry. In percentage terms, this is 14% more than Northwest Airlines, and 26% higher than the average of the five biggest low-cost airlines inclusive of Southwest Airlines and JetBlue Airways. ("American Airlines faces labor battle," 2007)

According to Jeffrey Brundage, Senior VP, AA lacks strength on the cost aspect. He maintains that the objective of the company is keeping the unit labor cots low and possibly performing it in a manner which they are able to accept and that does not entail pay decreases. Among its three labor outfits, AA has maintained cordial associations with the Transport Workers Union that accounts for in excess of 25,000 baggage handlers, technicians and other ground workers. The union and AA work closely to raise efficiency at maintenance hangers. In October 2007, the company offered the unions pay hikes in exchange for extension of their contracts till 2010. The issue of pilot's pay hike in which the Allied Pilot's association demanded pay increases of 30.5% and a 15% signing bonus. AA feels that wage hike would not be a feasible proposition since a 10% rise in AA's net labor costs will eat away the whole profit which AA is supposed to earn this year. Besides, it will have a tendency of lowering the stock prices and compel the company to dispose off portions of the business like American eagle or its AAvantage frequent flyer program. ("American Airlines faces labor battle," 2007)

5. Marketing plan:

AA main marketing ploy is the AAdvantage - a frequent flyer program to develop passenger loyalty and thereby rewarding them for their continued support. The program has been one of its main competitive strengths. AAdvantage members earn mileage credits by flying on the AA or American eagle or through using the services of other program participants, inclusive bank credit card issuers, hotels, companies offering car rentals, besides other retail companies. AA sells mileage credits and other services to the other companies taking part in the program. ("AMR Corporation 2006 Annual Report.," 2006)

In recognition of the rising women travelers, AA has started the AA.com/women and in his way the company has become the first airline within the industry to start an easy online resource particularly catering to its female customers. With almost 50 million female passengers traveling its flights annually, this has been the recent instance of AA's concentration on improving the customer experience. Through AA.com.women, the company is able to extend additional chance to offer women customers and request their insights, as also present women an exclusive place for women to stay connected with one another and also with the company. Aviation research reveals that 75% of women in the U.S. use the Internet services for general purpose usage. During, 2006, 35% of women travelers booked their tickets online. The most attractive feature has been that the buying power of U.S. women has been estimated to be $6.1 trillion and AA wants to ride high on this finding. Keeping this in view AA has been the first and the sole airline to build a stand exclusively focused on women's sales and marketing. It has been observed that in any year, roughly 48% of AA customers constitute women. The company's estimates has been that if it is able to raise the number of women travelers by 2%, it will translate to an additional revenue earnings of $94 million in revenue on a year-to-year basis concurrently delivering added value and travel information to female customers without any added expenses to them. ("American Airlines Launches AA.com/Women Increasing Its Focus on Women's Travel Market," 2007) recent initiative in marketing of AA has been entering into strategic alliance with Points International Ltd. who runs the pointsxchange, the sole independent loyalty program currency exchange at www.points.com.AA by making alliance with Points has triggered the world's biggest and most powerful loyalty programs. The continuous commitment presents thrilling scope for growth and a sustainable development program. The agreement creates a present relationship that Points has formulated a developing chain of solutions to improve the AAvantage program which has been a pioneering pointsxchange participant and gives several existing short-term agreements through 31.12.2007, inclusive those for pointsxchange, pointspurchase and pointstransfer. The new marketing plan will help in making the revenue base stable for both the companies founded on positive, long-standing and intense promises. ("Points and American Airlines Expand Relationship with Comprehensive Multi-Year Agreement," 2007)

This apart, Points and AA together dedicate themselves to co-market loyalty offering to several AAdvantage members in the span of forthcoming five years. AA has given itself a target to promote the new product i.e. pointsxchange within the AAdvantage program's 45 million member base which has been the most valuable and continued target market for the business of AA. The President, AAdvantage Marketing Program also agrees that Points has contributed significantly in allowing the company to offer new, dynamic products to fulfill the requirements of their customers as a part of their future marketing plans. By means of an assortment of custom marketing and technology solutions, Points is creating satisfying partnerships with the globe's major loyalty players. Extra Points Solutions comprise the innovative pointspurchase and pointsgift solutions that fuel the online sales of miles and points to members of major loyalty programs. ("Points and American Airlines Expand Relationship with Comprehensive Multi-Year Agreement," 2007)

6. Reservation strategy. Web vs. Travel agency:

AA follows an ideal combination of Internet ticketing as well as sales through Travel agency and also by bundling the two. In an effort to ensure that Internet fares reach customers widely and at the same time it helps in lowering its distribution costs, AA launched the innovative EveryFare Program in Sept 2002. With EveryFare, AA offers pure-play travel agents in U.S. And Canada, the choice to access sell its very low Web fares which were earlier offered exclusively through AA's own web site and limited long-term distribution cost savings through an innovative cost-sharing system. ("American Airlines History," 2007)

In taking its reservations and ticketing to the next level of efficiency, AA will augment its prior declared participation in a new travel website that has been started by the other four major airlines such as United, Delta, Northwest and Continental. AA has already become a member among several airlines that earlier acceded to take part in the website on a non-equity basis. Mike Gunn, AA's Executive VP, Marketing and Planning has risen to the occasion that customers are increasingly using the Internet to go through every alternative in a single place, regardless of the airline involved. According to him, the customers must be provided in terms of their need and that type of initiative will become a good e-commerce investment for AA. Customers will be offered through the travel portal the details of every schedule and fare options, inclusive of the lowest fares. The website will be equipped with a new flight and airfare search engine and according to him this is going to be best in terms of fare and searching technology on the web. It will be able to trawl through billions of fare and schedule options every second, making sure that the consumers will check from the information shown in a completely impartial manner. AA not just wants its scheduled and fares available to its users of the website, but also to users of every other distribution channel for air travel, inclusive of conventional travel agents, the company's own web site and other online travel agents. ("American Airlines to expand partnership in New Online Travel Agency, American will become One of Web site's Equity Owners," 2007)

7. International presence and alliances:

The details of the alliances with AA's within the OneWorld Alliance and others alliances within the airline industry is given in Exhibit -III ("Airline Alliances," n. d.) Being the largest carriers and having its all-round presence, AA is eying the lucrative Asian market to make more international presence. In Jan 2007, AA moved into Tokyo's Narita airport which is one of the globe's most desirable airports as it has access to the other points in Japan and Asia. In the terminal AA joins ranks with Japan Airlines which has become the company's partner in the OneWorld alliance. Besides, AA even opened a new lounge in the terminal. AA operates five round trip everyday: i.e. two to Dallas and one each to Chicago, Los Angeles and New York. Capitalizing on the Japan Airlines -- JAL alliance, this helps AA to compete in an efficient manner with Northwest and United. The two airlines set up Narita operations since long which cover beyond rights into Asia. Northwest Airlines first served Narita during 1947 under route authorities which permitted it to compete with Pan Am. However, Pan Am sold its routes to United during 1985. (Reed, 2007)