American Airlines: Market Structure and Exposure

Running head: AMERICAN AIRLINES
Economic Report

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Table of Contents
Introduction to American Airlines and its Market.....................................................................2
Vulnerability of the firm............................................................................................................3
Market exposure.........................................................................................................................4
GDP Development and Income elasticity..............................................................................4
Customer Structure and degree of dependence......................................................................6
Competition and price elasticity.............................................................................................7
Macroeconomic Exposure..........................................................................................................8
Material price fluctuation.......................................................................................................8
Exchange rate.........................................................................................................................9
Government intervention.......................................................................................................9
Protection.................................................................................................................................10
Brand development and price positioning............................................................................10
Economics of scope..............................................................................................................10
Technology...........................................................................................................................11
Low cost of production and economies of scale..................................................................11
Current strategic position and competitive advantage.........................................................11
Conclusion and outlook............................................................................................................12
References................................................................................................................................13
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Introduction to American Airlines and its Market
American Airlines is one of the largest airline company of the United States of
America (USA) and the fourth largest airline in the world. The company was founded in
April 15, 1926 (93 years ago) and is headquartered in Fort Worth, Texas, within Dallas –Fort
Worth Metroplex. The first flight of the company though used for carrying mail only, the first
ever passenger plane of the company came into operation in 1934. Then onwards the
company has achieved many heights and still today it is among the largest airline company in
the world. In 1939, the company had been listed in the New York Stock Exchange. The
company is also among oldest airline company in the world and it operated under the name of
American Airways during its initial days. It completed providing service to 1 billion
customers in the year 1991(Americanairlines.in 2019). In terms of number of passengers
carried, size of fleet, passenger-kilometres covered and number of destination served the
American Airlines is the largest airline company in the world. The company has a fleet size
of 945 (mainline) aircrafts. As per record, the American Airlines along with its all
subsidiaries flies 6800 flights a day in more than 50 countries and 350 destinations. American
Airlines is among one of the founding members of the third largejst airline alliance of the
world, Oneworld Alliance (Reuters 2019).. It also employs a large number of people, in 2019
the number of employees in the company was 1,30,000 (Statista 2019). The company is
handling more than million passengers annually with an average of .5 Million passengers
daily. (Wikipedia, the free encyclopedia, 2020)
In 2013, AMR Corporation the parent company of American Airlines merged with
U.S. Airways and took the name American Airlines Group. The airline company, hold the
maximum market share among all the airline company in the US, it holds 26% of the total
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market share in 2014. American Airline Group (AAG) operates both in domestic and
international market and 57% of the total revenue it earns from the domestic market and the
rest 43% comes from the international market. Of the international earning, the contribution
of the Latin American region is 23% (Marketrealist.com 2014). The revenue that AAG earns
from the market depends upon several contributors and that includes passenger cargo and
other flight services. It serves a large number of passengers per year and is evident from the
data of the financial year 2016 that ended in the last day of December 2016. The number of
passengers it served until that day was 199 million. To serve such a large number of
passengers a year it operates 945 mainline aircrafts that were supported by 606 more regional
aircrafts. AAG penetrates the market by using several marketing strategy. It provides the
passengers to book hotel rooms, vacations cruises and cars, however it depends on the
category of the ticket booked. The airline company provides the option of four category of
seats that include Choice class, Premium economy class, First class and Business class. It
uses Boeing 777 in which luxury lounge facilities are provided. The passengers who fly
frequently via AAG flights are provided with status that has three categories namely Gold,
Platinum and Executive Platinum. AAG being the largest airline company in the world and it
operates in more than 50 countries around the world. To make the operations functional in all
of the countries, AAG has 10 main hubs in 10 major cities in the world.
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Strategy adopted during 2008-09 Financial Crisis
The year 2008-09 has seen its worst financial crisis in the history with many airlines
scrapping thousands of flights. Under the said condition, the fuel prices soared very high
significantly impacting the profitability of various airlines in the US. The American Airlines
during the said period was faced with a severe liquidity crunch and profitability issues with
parent company under severe debt burden piled up. The company adopted the strategy of cost
cutting and capacity adjustment to overcome the blow. However, the company reached the
brim of insolvency on account of such huge debts. Necessary actions were taken on the part
of the management, coupled with financial aid of the government as a bail out package, the
airline company survived one of the largest perils of the 2008. Thus, the strategy adopted by
the company in 2008 was average as other US airlines also adopted similar strategy.
Vulnerability of the Company
American Airline Group is one of the largest airline company in the world; however,
the company faces huge competition and other operational chain issues in the market that
creates vulnerable conditions for the company. The vulnerabilities are :
Procurement
Among many of its vulnerabilities, one is dependency for the aircraft parts that the company
takes from the different suppliers that are very limited in numbers. This creates a problem of
scarcity for the company as inadequate availability of airline servicing firms would delay the
process of solving the mechanical, design and performance related problems of the aircrafts
(Belobaba, Odoni and Barnhart 2015). It affects the smooth operation of the airline service
and increases the cost of operation for the company.
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Labour Problems
The company had four plans of pensions which were under funded by $ 10 Billion that it has
to pay for pending pensions as reported in the Reuters on December 1, 2011. (Reuters.com,
2020). Thus, after paying it out the company will face a significant amount of crunch in
liquidity.
Competition
Apart from internal and backward linkage vulnerabilities, it faces vulnerable conditions for
external factors such as emergence of new airline companies that operate at low cost and
offers tickets at low prices and thus market share of AAG is declining (Mbaiwa 2017). Due to
this the market share of the company has reduced over the years, in 2013 it has 26% of the
total share whereas in 2018 the percentage of market share for the company reduced to
17.8%. The said share has further decreased to 17.6% ad updated in October, 2019 as
reported by Statista. (Statista , 2020)
Many potential airline companies go into price war with the AAG both in domestic and
international market. In domestic market, the potential competitors are United Airlines,
Alaska Airlines, Southwest Airlines, Delta Airlines and Jet Blue Airlines and in the
international market there Qatar Airlines and Emirates that pose enough competition
(Borenstein 2017).
Security & Compliances
Moreover, security related issues have also been playing an adverse role against the overall
airline industry as recent hijacks and accidents have escalated the global concern regarding
security issues. Regulations regarding environment has to be complied by every airline
company in the industry. Apart from this, there exist significant amount of government
intervention in the industry and the fuel used in the aviation industry is very much costly that
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