General Motors Presentation

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

Talk through the reasons why a merger will be bad for the passengers where the buying power of the consumer reduces.

Other plans to revive the airline

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Talk through agenda

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Talk through deregulation: The airline industry in the United States of America has had a major shift after the Airline Deregulation Act of 1978, and then has been subject to the full force of the market. The airline industry dates back to 1918, when subsidies and regulation drove the Post Office to use its first airplanes to deliver mail. This changed to Post Office giving contracts to private carriers to carry mail through the Kelly act, in 1925 (Cook, 1996).

A significant acquisition in Transworld Airlines in 2001 and a merger with US Airways made American Airlines Group (AAG), one of the prominent players in the airline industry today (Duignan, 2013).

The market structure of the airline industry is oligopolistic which means that there are only a few major players that provide the service. AA’s competitors include other major airlines such as Southwest Airlines, Delta Airlines and United Airlines with market share of 20%, 16% and 11% respectively.

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Oligopoly: a state of limited competition, in which a market is shared by a small number of producers or sellers.

Ratio analysis: the analysis of different statistics on the balance sheet of the company

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For AA, the demand curve can be determined through three different determinants – income of the people using the service, pricing of related goods, and the number of buyers.

While the production costs incurred in the airline industry are pretty commonly discussed, I would like to talk through two new concepts that I learned in chapter 8 of this course. There are two major cost concepts that perfectly relate to the airline industry in general and AA in particular. These are namely., the law of diminishing marginal returns and the network effect.

One may be able to judge from the above discussion around the pandemic, that AA will have a tough time on the demand curve for the next few years. People losing jobs in turn leading to a loss in income, the negative sentiment about travel among the people, and the volatility in fuel pricing will hurt AA’s demand. The future also looks bleak considering the fact that there is no current vaccine available to treat the disease and people will postpone travel both for business as well as leisure which happen to be the main source of income for AA.

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Talk through the determinants on both demand and supply side.

From the above, we can understand that the airline pricing is highly elastic. This means that an increase in pricing reduces the demand. This can lead to either usage of substitute goods such as a competitor or even a different mode of transport. Thus AA has to be very careful to ensure constant demand to maintain a good price.

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The law of diminishing returns states that after some optimal level of capacity is reached, adding an additional factor of production will actually result in smaller increases in output (Hayes, 2019). The Los Angeles – New York route (LAX – JFK) has turned out to be the most profitable route for AA making 675 Million USD. Delta Airlines made 464 Million USD. Together they control over a billion dollars of the traveler’s market in this route (Grant, 2019). AA could decide to increase the number of flights on this route considering demand, but it will have to face two major issues – it cannot guarantee the number of passengers will keep increasing, which would reduce the profitability of the route. Moreover, if AA increases the number of flights, Delta could do the same further reducing profitability. If Delta decided not to increase the flights then AA might get some more market share from Delta but, the possibility of this happening is really low. Thus, the companies have maintained a Nash equilibrium by making sure the limited availability of seats keeps this route very profitable. AA does not gain a unilateral advantage by change of strategy, if Delta’s strategies remain unchanged. In other words, the market share could increase by adding a few more flights on the route but in general, the profitability could reduce.

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The airline industry works on the hub and spoke model. The hub and spoke models allow the airliner to focus/concentrate passenger traffic and operations at a particular airport. AA has its six biggest hubs in Charlotte, Chicago, Dallas, Miami, New York JFK, and Philadelphia. The most profitable one is that at Charlotte on a per passenger basis. It is also the hub that experiences the most connecting passenger flight traffic in the US. AA operates over 90% of the flights from the Charlotte airport. According to a 2013 study, the cost per passenger at Charlotte Airport is $2.28, while it’s $6.86 in Dallas and $19.13 in Miami (Schlappig, 2015). One can see the stark difference in being able to maintain a low cost at this hub for AA. Thus, Charlotte hub has created a network effect for AA. The value is commonly shared by both AA and its customers. AA will be able to keep saving money on passenger cost and then eventually pass it on to the consumer by providing a cheaper ticket. The customers get the added advantage of having multiple options to choose from when selecting a flight via Charlotte

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Estimated traffic revival : Will take 5 years to revive

Estimated Average Seat Per Mile : less than 9 cents in Q3 and Q4

Zooms rise to fame on business networking

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AA has cancelled over 19 routes, received government aid through the payroll protection program and has made changes to the operational costs by asking employees to take buy outs or early retirement settlements. I think all these actions are good to stay afloat. But to get back to be a profitable airline, I would propose that firstly, AA should work on creating more direct routes for the time being. This would mean not using the most profitable hub at Charlotte for connecting flights. There are two reasons that people will travel on an airplane – emergency or any other urgent matter that is not related to health. People will look to save time and exposure on the route, and I believe by providing a direct flight will increase demand. Secondly, the airline industry in general needs the government to provide it with interest free loans both to avoid massive job losses and keep afloat. While the pandemic will not go away unless a vaccine/remedy is created, there will be a day when man’s need to fly will

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Talk through the reasons why a merger will be bad for the passengers where the buying power of the consumer reduces.

Other plans to revive the airline

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Conclude with details of different points in agenda and end with thanking class for their times.

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