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.