Carnegie Consulting Strategic Solutions for Business
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Carnegie Consulting Strategic Solutions for Business Ensuring Corporate Vitality in a Changed Industry Prepared for: AMR Corporation - Table of Contents - Executive Summary..............................................................................2 Company Overview ..............................................................................2 Internal Rivalry......................................................................................5 Substitutes and Complements..............................................................7 Conditions of Entry and Exit .................................................................8 Buyer and Supplier Power....................................................................9 Financial Overview ............................................................................ 11 Strengths, Opportunities, Weaknesses, Threats............................... 12 Strategic Analysis: Ensuring Corporate Vitality in a Changed Industry ........................................................................................................... 14 ______________________________________________________________________________ Carnegie Consulting 425 N. College Avenue s Claremont, CA 91711 -1- Executive Summary As the United State's largest airline, the AMR Corporation, parent of American Airlines and American Eagle, has for over seventy years been synonymous with air travel in the US. Today, the air industry is as competitive as it has ever been, and the AMR Corporation faces threats from a number of dimensions. This report analyses the air industry through a five forces methodology with specific focus on AMR's business. A summary of the threat of each of these forces to profits is below. Following the five forces analysis, the report explores the strengths, weaknesses, opportunities, and threats (SWOT) that face AMR before providing a strategic plan for continued corporate vitality. The strategic plan, presents a three-tiered approach that focuses on increased political lobbying, the continuation and expansion of cost cutting mechanisms, and, most importantly, the recommitment to customer service and satisfaction. Summary of Five-Forces Analysis of the Airline Industry in the U.S. Force Threat to Profits Internal Rivalry Medium to High Entry Low to Medium Substitutes and Complements Low to Medium Supplier Power High Buyer Power Medium Company Overview Company History The AMR Corporation traces its roots to Charles Lindberg, who was the chief pilot for Robertson Aircraft Company, one of many aviation companies that consolidated in 1929, eventually forming first American Airways in 1930 and then American Airlines in 1934. American Airlines enjoyed early successes-- by 1937 American had carried its millionth passenger, and by the end of that decade American was the nation's top domestic air ______________________________________________________________________________ Carnegie Consulting 425 N. College Avenue s Claremont, CA 91711 -2- carrier in terms of revenue passenger miles. American's freight service was initiated in 1944 and grew over the late 1940s and 1950s. During World War II American Airlines turned over half of its fleet and crew to the military airline, Air Transport Command. At the same time, the remaining fleet experienced a vast increase in demand for air travel. Between 1945 and 1950, American operated American Overseas Airline (AOA), which would eventually merge with Pan American World Airways. AOA marked American's first European service, and it wouldn't be until 1982 that American would resume service to Europe. At the same time, American had expanded its fleet and was able to offer the only complete fleet of pressurized passenger airplanes. Also during this period, American introduced the Magnetronic Reservisor, which kept track of available seats. 1953 saw the first transcontinental nonstop service in both directions and in 1957 American built the world's first facility specifically for flight attendant training. In the early 1960s, the Magnetronic Reservisor, through a partnership with IBM, evolved into SABRE (Semi-Automated Business Research Environment), which would extend from coast to coast and become the largest data processing system for business use, and second only to the U.S. government's SAGE system. The 1960s and 70s saw a modernizing of American's fleet, and also the addition of Caribbean routes through a merger with Trans Caribbean Airways and acquisitions from Pan American World Airways. In the late 70s American introduced its most popular fare, the Super Saver, which expanded in less than a year from discounts on flights from New York and California to fares across the entire country. The deregulation of the Airline Industry in 1978 and 1979 was met by American with increased service and new routes across the U.S and Caribbean. It was at this time that American also moved its headquarters from New York City to Dallas/Fort Worth. The AADVANTAGE travel program, revolutionary at the time, was introduced in 1981. Also in that year, American established its Dallas/Fort Worth hub. The following year American established a hub in Chicago. It was also in 1982 that American Airlines carried its 500 millionth passenger. The AMR Corporation was created on May 19, 1982 through a stockholder approved reorganization plan. American Eagle was added as a subsidiary in 1984. Also in that year, AMR stopped flying its fleet of 747 cargo planes, instead focusing on smaller cargo shipped on passenger flights. In 1988 AMR launched its same-day freight service. 1986 saw the establishment of hubs in San Juan and Nashville, and for the first time, AMR employed over 50,000 people. The Miami hub opened in 1989. SABRE, which continued to grow, was used by over 10,000 travel agents by the end of 1985. The system moved to a secured underground facility, protected against all major ______________________________________________________________________________ Carnegie Consulting 425 N. College Avenue s Claremont, CA 91711 -3- disasters in 1987, and at the same time was opened to the public for access via personal computer. SABRE was taken public in 1996. The early 90s were witness to several new services, including the International Flagship Service, American Flagship Service, and Value Pricing. Also during this time, AMR was expanding their facilities, the highlight of which was the first maintenance facility built in the U.S. in more than 20 years. It was during this activity that American Airlines’ billionth passenger flew. In 1998, AMR acquired Reno Air and Business Express. It was also at this time that AMR, partnered with four other airlines to launch the ONEworld alliance, allowing passengers access to frequent flyer miles, lounges, and other benefits of partner airlines in a code sharing agreement that covers over 130 countries. American's "More Room Throughout Coach" program was launched in 2000, and in 2001 American boasted larger overhead bins. It was also in 2001 that American announced plans to acquire Trans World Airlines. At this same time American sped the construction of a new $1.3 billion terminal at New York's JFK airport. American Airlines lost two planes in the terrorist attacks on September 11th, and a third plane in a crash on November 12, 2001. Regulation Prior to deregulation in the late 1970s, the Civil Aeronautics Board (CAB) controlled entry, routes and ticket prices. Deregulation ended the CAB's management of this domestic cartel, and granted the Department of Transportation (DOT), the recently formed Transportation Security Administration (TSA), and the Federal Aviation Administration (FAA), with scaled back regulatory control of the air industry. For the first time, these three agencies allowed any "fit, willing, and able" airline to fly on any route and charge any rate. The shift marked, in general, a focus from promoting and ensuring that the airlines served the public's economic interests to primarily ensuring that they operated safely. Even after deregulation, the air industry faces significant regulation. The DOT has maintained jurisdiction over many international matters and consumer protection issues such as advertising, denied boarding compensation, and baggage liability. The FAA, meanwhile, has jurisdiction over general flying operations, including personnel, aircraft, and security standards. For example, the FAA has recently issued a number of requirements that American Airlines is currently implementing such as enhanced ground proximity warning systems and Airbus A300 structural improvements. In addition, air carriers face regulation from local governments and municipalities who own airports and whose environmental controls, allocation of gates and runways, and other regulations can be both considerable and inconsistent. Further, some (but not all) of the busier airports are regulated federally, in an (mostly ill fated) attempt to alleviate congestion. International routes remain more heavily regulated that domestic routes, and restrictions remain in place that prohibits a foreign carrier from flying between two destinations ______________________________________________________________________________ Carnegie Consulting 425 N. College Avenue s Claremont, CA 91711 -4- within the US, and vice versa. The DOT maintains regulatory control over the approval of code share agreements and international route authorities. With the recent terrorist attacks, the industry is likely to see increased regulation and government participation in all areas of its