Final case study Presentation

American Airlines (AA)

Name New England College Course and Semester

Agenda • American Airlines Details and Introduction

• US domestic airline market, competition and structure • Economic Concepts • Demand – Supply Analysis Concepts (Right/ Wrong analysis?) • Law of diminishing marginal returns (Right/ Wrong analysis?) • Network effect by creating hubs (Right/ Wrong analysis?) • What should AA do to comeback strongly (Right/ Wrong

analysis?)

• Conclusion

• References

American Airlines • Founded: April 15, 1926 • Headquarters: Fort Worth, Texas • Services offered

• Operations of a major network air carrier providing air transport to passengers • Providing freight services • Providing financial services to airline secondary services • In-flight services

• Major competitors • United Airlines • Delta Airlines • Southwest Airlines

• Market Structure – Oligopolistic market with strong barriers to entry • Regulation Authority – Federal Aviation Authority (FAA)

American Airlines: Market & Competition

American Airlines market share at 15% in an oligopolistic nature as market structure

American Airlines

Group

All Industry

Ratios

Debt Ratio 0.68 0.88

Current Ratio 0.45 1.5

Quick Ratio 0.3 0.67

Profit Margin 3.70% 5.60%

Operating

Margin 7.30% 10.50%

Despite having 30% market share, American Airlines has not been the most profitable or the most cost saving airline

Economic Concepts – ( Analysis)

Demand – Supply Analysis Concepts

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• Demand • Increased income and

good economy effects • Related goods pricing • Number of buyers • How customers perceive

the future • Supply – pricing, technology,

operations

• Law of diminishing marginal returns

• Network effect by creating hub

• Cancellation of routes • Conserving cash • Cutting operational expense • Creating more direct routes • Improve perception

Cost Analysis Concepts

Covid Comeback Analysis

Demand – Supply Analysis Concepts

If Peoples’ Income rises

If pricing of related goods (crude oil) rise

If number of buyers increase

If Outlook improves

Demand DETERMINANTS DETERMINANTS

If fuel and the landing slots pricing increases

If there are Improvements in

technology

If the weather is good

If Outlook improves

Supply

This is the strategy that AA has gotten right over the years where they have been able to manage demand and supply

Law of diminishing marginal returns

Busiest route

AA Revenue $ 675 Million

Delta Revenue

Diminishing marginal returns is an effect of increasing input in the short run after an optimal capacity has been reached. The law states that this increase in input will result in smaller increases in output.

Nash Equilibrium: a stable state of a system involving the interaction of different participants, in which no participant can gain by a unilateral change of strategy if the strategies of the others remain unchanged.

AA’s options to increase revenue from this route

Total Revenue

$ 464 Million

$ 1 Billion +

Nash equilibrium and Law of diminishing marginal returns

• Increase the number of flights on the routes • Reduction in profitability of route by

increasing flights cause customers may not increase

• Delta could retaliate by doing the same thing

• Do nothing • limited availability of seats keeps this route

very profitable • AA does not gain a unilateral advantage by

change of strategy

This is the strategy that AA has gotten right over the years where they have been able to avoid the diminishing returns

Network effect by creating hubs

• Network Effect: The network effect is created when increased numbers of people improve the value of the goods or service.

• Hub and spoke model of the airline industry helps reduce costs.

• Out of 7 hubs for AA, Charlotte is the most profitable costing 2.28$ • Charlotte also shares the revenue per take off with AA

• The purpose serves three things • Increased convenience and more choice for passengers • Cheaper costs of flying for both airline and customer • Cost center being converted to a revenue center

This is the strategy that AA has gotten right over the years where they have been able to manage hubs

Effects of Covid – 19 on airline industry

Estimated traffic revival

Estimated ASM

Is traveling for business overrated ?

What should AA do to come back strong? (1/2)

Reduction in operational costs

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Creation of Direct routes

Improve customer trust

• Cancelled 19 domestic routes

• Asking employees to take buy outs or early retirement settlements.

• Take advantage of the fall in crude oil prices by buying more upfront

• Leasing of landing slots in Charlotte

• Reduction of indirect flights to convert them to direct routes

• Stop using the hub spoke model until passengers are back

• General needs the government to provide it with interest free loans

• Emergency travel preferred airline

• wearing masks at all times on the airplane and leaving the middle seat open

This is the strategy that AA has gotten wrong, the efforts should have been more directed and faster

What should AA do to come back strong? (2/2) • Stop any chance of merger or takeover • any kind of attempt made in these regards should be thwarted by the

government. • Oligopoly should turn in to monopoly • A worse situation for the consumer

• Other generic actions • Utilizing passenger planes for cargo movement • Selling/mortgaging aircrafts and engine parts • Defer deliveries of the planes in production • Reduce in-flight espenses

Conclusion

• AA has not been the most profitable airliner in the last few years

• AA’s demand and supply curves depend on pricing of fuel, income levels, the number of buyers, technology outlook for cleaner fuels and cost efficiency, and peoples’ thinking of the future.

• Cost concepts can be discussed via network hubs and law of diminishing returns

• The Covid – 19 pandemic will see AA financially strained but a merger/take over should not be a solution

References

• Cook, G. (1996, August 8). A Review of Hist view of History, Structure , Structure, and Competition in the U.S. Airline e, and Competition in the U.S. Airline Industry. Retrieved from https://doi.org/10.15394/jaaer.1996.1183

• Duignan, B. (2013, February 14). American Airlines. Retrieved August 01, 2020, from https://www.britannica.com/topic/American-Airlines

• American Airlines. (2017, November 09). Retrieved August 01, 2020, from https://www.cleverism.com/company/american-airlines/

• Hopfer, E. (2020, April 15). American Airlines to receive nearly $6B in government aid package. from https://www.bizjournals.com/charlotte/news/2020/04/15/american-airlines-to-receive-nearly-6b-in.html

• Impact of COVID-19: Data Updates. (n.d.). Retrieved August 01, 2020, from https://www.airlines.org/dataset/impact-of-covid19-data-updates/

• FAA's major roles and responsibilities. (2019, November 06). Retrieved August 01, 2020, from https://www.faa.gov/about/safety_efficiency/

• Hayes, A. (2020, June 14). Law of Diminishing Marginal Returns. Retrieved August 01, 2020, from https://www.investopedia.com/terms/l/lawofdiminishingmarginalreturn.asp

• Grant, J. (2019, August 13). Billion Dollar Route - Jewels in The Network. Retrieved August 01, 2020, from https://www.oag.com/blog/billion- dollar-route-jewels-in-the-network

• Banton, C. (2020, January 29). Understanding the Network Effect. Retrieved August 01, 2020, from https://www.investopedia.com/terms/n/network-effect.asp

• Schlappig, B. (2015, December 30). You'll Never Guess American's Most Profitable Hub. Retrieved August 01, 2020, from https://onemileatatime.com/charlotte-hub-american/