American Airlines Strategic Report for American Airlines Jed Cullen Kevin Yamazaki Deirdre Chew April 7, 2010 April 7, 2010 Page 1 American Airlines Table of Contents Executive Summary ............................................................................................3 Company History.................................................................................................4 Financial Analysis ...............................................................................................8 Current Financial Position..................................................................................8 Industry Comparable Analysis .........................................................................12 Stock Performance ..........................................................................................14 Management and Analyst Outlook...................................................................15 Competitive Analysis ........................................................................................16 Internal Rivalry.................................................................................................17 Supplier Power ................................................................................................18 Buyer Power ....................................................................................................19 Entry and Exit ..................................................................................................19 Substitutes and Complements.........................................................................20 SWOT Analysis..................................................................................................23 Strengths..........................................................................................................23 Weaknesses ....................................................................................................23 Opportunities ...................................................................................................24 Threats.............................................................................................................24 Strategic Recommendations............................................................................25 Address Labor Costs .......................................................................................25 Explore Maintenance Outsourcing...................................................................26 Continue Fuel Efficiency Initiatives ..................................................................27 Pursue Strategic Alliances...............................................................................27 Enhance International Offerings ......................................................................27 Exercise Political Power of Legacy Carriers ....................................................28 Appendix ............................................................................................................30 References .........................................................................................................34 April 7, 2010 Page 2 American Airlines Executive Summary American Airlines, a brand that has weathered world wars, deregulation, fuel price volatility and growing threats of terrorism, is continuing to face challenges in the struggling airline industry. American Airlines is burdened by high labor costs, a weak balance sheet, and perpetual union issues. While nearly all of American’s legacy carrier peers are facing a difficult market environment, most were able to achieve cost reductions through bankruptcy or bankruptcy protection, a step that American Airlines has stated strongly that they will not take. Furthermore, AA, like other legacy carriers, faces increasing competitive pressure from low-cost carriers. The enhanced ability for consumers to compare prices further exacerbates this pressure. Despite its excellent management team, the company has recorded an annual loss in seven out of the past nine years. American Airlines must address its high costs, improve its international offerings, and find a solution to the competitive threat posed by low-cost carriers. We recommend that AA avoid excessive concessions to the flight attendants union, citing that AA flight attendants are among the best paid in the industry. To further reduce costs, American should explore maintenance outsourcing, and continue taking initiatives toward greater fuel efficiency. With regards to American’s inability to compete with foreign carriers on international routes, we believe that the company needs to invest in flat bed seating in business class on long haul flights. We also believe that American stands to gain by opening routes to Seoul and Hong Kong, which will link them to new markets and are accessible without expanding the current fleet. To address the domestic threat posed by low-cost carriers, we recommend that American and other legacy airlines lobby for a tax credit system, distributed in an auction method, to ease the burden on carriers who provide access to underserved areas. These strategies, combined with planned fleet replacement and a recent interline agreement with JetBlue, will position AA to thrive as the economy recovers. April 7, 2010 Page 3 American Airlines Company Overview and History American Airlines, American Eagle, and AmericanConnection currently provide scheduled service to 250 cities in 40 countries, with an average of over 3,400 daily flights. Together, these carriers operate a fleet of over 700 aircraft, and are subsidiaries of the AMR Corporation. Though AMR was founded in 1982, the American Airlines brand has been a major player in air travel for over three quarters of a century. In 1929, the Aviation Corporation acquired scores of independent airlines as the airline industry experienced sweeping consolidation. The following year, the Aviation Corporation changed its name to American Airways, to reflect the brand under which many of the regional carriers flew. The company was headquartered in New York, and ran routes from New York, Boston, and Los Angeles to Dallas.1 The company was renamed American Airlines in 1934, and Cyrus Rowlett Smith became the president. Smith went on to run the company as CEO until 1968, when he resigned to serve as United States Secretary of Commerce.2 Within its first decade of operation, American Airlines flew its one-millionth passenger, became the number one domestic carrier in the United States (by revenue), and began trading on the New York Stock Exchange. The airline had also collaborated with New York City Mayor Fiorello LaGuardia to develop LaGuardia Airport. As a first-mover among airlines, and a critical player in the development of the project, American was also granted extra hangar space and real estate. AA opened the world’s first airline lounge, the Admirals Club, in 1939.2 The 1940’s offered American myriad opportunities to expand into other areas of the airline industry. In 1942, American launched the catering subsidiary SkyChefs, which provides in-flight meals to American and other carriers. In 1944, American, which had become the first commercial airline to fly the DC-3 eight years earlier introduced a freight route making use of this line of aircraft. Though April 7, 2010 Page 4 American Airlines half of their fleet was turned over to the military during World War II, the company launched American Overseas Airlines, (AOA), its first European service, in 1945.2 AOA was acquired by Pan American World Airways in 1950.3 After the war, American Airlines quickly renewed its fleet to match growing demand for air travel in the United States. By 1949, AA was the “fleet of the future,” and the only airline with a ubiquitous use of pressurized, post-war planes.2 As the company expanded, American Airlines introduced programs to make flying more affordable for families, and introduced coach service as an economic alternative to first class. The fifties brought further advances for the company in reservation and flight tracking technology, as well as the implementation of transcontinental nonstop flights with the Douglas DC-7. By the end of the decade, American Airlines was moving into the jet age, becoming the first airline to offer coast-to-coast jet service on the Boeing 707. In the following two years, American Airlines also pioneered turbofan and turboprop service on the Corvair 990 and Lockheed Electra, respectively. American Airlines spent the first half of the 1960’s working with IBM to create SABRE, which at the time of its introduction in 1964 was the second largest and most powerful electronic data processing system after the US government’s mainframe. American Airlines’ iconic AA logo was designed in 1967. The sixties also saw the introduction of the Boeing 727 and 747, with the freighter edition of the latter debuting in 1974. As American added new planes to its fleet, it expanded its route offerings through a 1970 merger with Trans Caribbean Airways, and with the acquisition of routes in 1975 from Pan-America. The Airline Deregulation Act of 1978, which removed government control over routes in exchange for market allocation, prompted a massive campaign of route expansion for American Airlines. At the same time, AA moved its corporate headquarters to Dallas/Fort Worth, where it had already established training facilities and reservations offices. By 1981, the Dallas/Forth Worth airport April 7, 2010 Page 5 American Airlines became the major hub of American’s