American Airlines: Operations, Strategy, and Market Position

Company History and Formation

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 US Secretary of Commerce in 1968. By 1940, American had become the leading domestic carrier and had 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 into service in the second half of the decade. By 1949, American was the only US-based airline with a complete post-war fleet.

The jet age began with the 1959 introduction of the Boeing 707 and the Lockheed Electra, and progressed into the 1960s and 1970s 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 was 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 CIO Magazine for its Room Throughout Coach customer strategy. American acquired TWA's assets in 2001 and in 2011 partnered with Etihad Airways to offer customers the opportunity to redeem earned frequent flyer points.

Effects of Airline Deregulation

Prior to deregulation, the airline industry was controlled by the government, particularly by the Civil Aeronautics Board (CAB). The board regulated every aspect of the industry, from mergers and acquisitions and alliance formations to pricing, marketing, and market entry and exit. The industry functioned more like a legalized cartel. Airfares were high, and the load factor—in line with the law of demand—was relatively low. Gildner et al. (2010) place the average load factor at 50 percent 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 percent.

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 1990s, and continues even today as airline companies seek to raise their competitiveness levels and increase their power to influence prices. Recently, American merged with US Airways, only years after another large-scale merger between Delta and Continental Airlines. Such large-scale mergers and acquisitions give rise to concerns about reduced competition, as firms can essentially block some companies from entering certain markets—a trend that would result in airfare increases, unhealthy eliminations of competitors, possible loss of customer preference and choice, and heightened inefficiency. 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 entered 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. These LCCs continue to gain market share as traditional carriers increase prices to make up for revenue losses during economic downturns. Over the last decade, LCCs have gained business because, unlike 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 much of the decade, with significant deviations from 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."

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–Fort Worth that year and a second in Chicago O'Hare the following 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 systems in the airline industry. Thanks to the SABRE innovation, American owns one of the most dominant systems, from which it has continued to generate significant revenues.

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

Route Architecture Models

In the point-to-point framework, all passengers "board at flight origin and deplane at the destination." The fundamental advantage of such a structure is that it is cheap and simple to operate. The total travel time is less because circuitous routings and intermediate stoppages are eliminated. Both the airline company and customers benefit from these time reductions, with the airline having the opportunity to generate more revenues by utilizing aircraft 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."

In the hub-and-spoke system, the flight origin marks the boarding point with the hub representing the deplaning point, where passengers headed for destinations other than the hub transfer to connecting flights.

The hub-and-spoke framework provides two fundamental advantages. First, it allows an airline to offer a wide flight range at the same hub and consequently create a customer base too strong to be captured by the low fares offered by LCCs. Secondly, it increases productivity and efficiency by allowing airlines to consolidate long-distance passengers from various markets through transfer stations—the "anywhere to everywhere" effect.

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

Departmental Operations and Planning

The airline has a total of 11 departments: administrative support services, cargo, customer service, engineering, finance/accounting/audit, human resources, information technology, airline operations, marketing/planning/sales, revenue management, and simulator services. This section examines four departments critical to planning, development, and execution of flight operations: customer service, finance/accounting/audit, human resources, and information technology.

The airline's customer service department is responsible for both the formulation and implementation of the customer service plan. The department seeks to "provide safe, dependable and friendly air transportation to our customers, along with numerous related services." As per the plan, the department is committed to making each customer flight special—and it is for this reason that the comfort, safety, and 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 prior, jointly with American Eagle, the airline's regional partner, with updates made in 2010 and 2011. More specifically, the customer service department 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 appropriate, communicates important information such as known diversions, cancellations and delays, and tailors fares to correspond with customer needs.

This is another important department for the planning, development, and execution of flight operations. In addition to financial reporting and preparation of financial statements, the airline's finance/accounting/audit department engages in financial controls with key responsibilities on this front including ensuring compliance with all relevant accounting standards, principles, and conventions. The department also implements measures to enhance compliance and prevent errors, theft, and fraud. Like any other business, American Airlines is expected by its various stakeholders to act in their best interests. These stakeholders include shareholders, suppliers, customers, and employees. To ensure this stakeholder group is well served, the airline's finance/accounting/audit department seeks to ensure that funds are effectively managed and allocated in a way that generates reasonable returns for shareholders and helps meet obligations to employees and suppliers, while remaining a competitive, cost-effective, best-value alternative.

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

During the past two decades, information technology 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 and planning of the airline's flight operations. The information technology department is responsible for developing various technological platforms that enhance efficiency—from reservations to sales execution to the onboard experience. In seeking to ensure that both planning and execution of flight operations is seamless, American Airlines continues to modernize its applications and 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."

Revenue Management Methods

Airlines achieve sustainable competitive cost advantages over competitors through different methods. American Airlines achieves cost reductions by increasing the number of aircraft and operations frequency, in which case costs are spread across larger output levels. Additionally, the company operates primarily out of its central markets, where it has control over airport resources.

According to Wisner and Stanley (2007), "yield management, also called revenue management, refers to the objective of trying to sell a limited or fixed capacity to the right customers at the right place, so as to maximize revenues." American Airlines is largely credited with having contributed immensely to the revenue management field, particularly after the deregulation of the airline industry. At that point, it was making use of the SABRE computer reservation system. The airline's strategy regarding yield management was to permit low-fare sales of some seats to compete with newly entering carriers while making use of what Wisner and Stanley refer to as "differential pricing for its remaining seats." This strategy proved effective: during the three-year period preceding 1992, the airline attributed 1.4 billion dollars in additional sales to this revenue management system. Over the last decade, the airline has employed a revenue management approach consisting "of a combination of overbooking, allocating capacity among customer segments, and a differential pricing scheme for customer segments." The airline industry has predominantly made use of the leg/class control method, in which "airlines establish a collection of products known as booking or fare classes that are designated by a single alphabet character."

A SWOT analysis provides researchers with important information concerning the environment in which a company competes as well as the internal aspects of an organization that can facilitate or constrain the achievement of corporate goals. There is no specific philosophical approach required for the formulation of a SWOT analysis, and all internal and external aspects of the organization can be taken into account. The SWOT analysis examines internal strengths and weaknesses and external opportunities and threats. A SWOT analysis is applied to American Airlines below.