ECON210 Research Paper: Drivers of Profitability at American Airlines

This report examines the factors contributing to the increased profits of American Airlines, focusing on the surge in demand during the third quarter of 2018. Despite initial setbacks from government shutdowns, the airline experienced a significant profit increase, attributed to heightened travel demand and strategic operational adjustments. The report delves into the debate surrounding cost-cutting measures versus genuine demand-driven growth, referencing perspectives from traffic security administrators and the CEO. It further analyzes the impact of rising fuel prices and ticket costs on demand, noting the unusual resilience of ticket sales due to increased corporate travel. The analysis also considers the potential for future profit decline due to fuel price volatility and possible increases in operational costs, along with potential stock price fluctuations. The report concludes that American Airlines' profitability is heavily reliant on customer demand patterns and external market factors, particularly fuel prices.

ECON210
RESEARCH PAPER TOPIC SUBMISSION

Contents
Increase in the profit of American Airlines................................................................................3
Reference....................................................................................................................................5

Increase in the profit of American Airlines
American Airlines, the biggest player in the civil aviation industry of the USA has
experienced an increase in profit due to the increase in demand. The company has faced lots
of difficulties due to the government shut down which reduced the demand for flight tickets
initially (Wanke & Barros, 2016). However, the representatives of American Airlines have
stated that demand for travel tickets have increased in the third quarter of 2018 that led the
company to earn huge profit worth of 319 million.
However, the traffic security administrators have pointed out that, after the shutdown, the
private players have been using fewer numbers of staffs for security. That means according to
the allegation, the companies have been cutting the operational cost and hence that created a
huge profit margin. The CEO, on the other hand, have pointed out that, after the shutdown by
the workers, screening processes have become indigenous and costing them even more than
before (Forsyth & Guiomard, 2019). The demands for the stock prices of American Airlines
have also increased due to the impressive performance of the company in the last quarter of
2018. The stock prices of the company has increased by $1.04 per share which is 2 cents
more than what was predicted by the data analyst of the company.
The performances of American Airlines have surpassed all the predictions of the analysts as
well. The data analysts of the company predicted an increase in profit as this quarter sees an
increase in demand for tickets each year. However, the demand has increased more than what
was predicted by the analysts of the company (Reynolds-Feighan, 2018). Limpanitgul,
Boonchoo, Kulviseachana & Photiyarach (2017) stated that the revenue of the company has
also increased in the given time. The increase in revenue has been driven by the increase in
the price of tickets which in turn have increased due to the increase in fuel prices. In this case,
the demands for the tickets for flights have not reduced with the increase in the price as it
would have in any other cases. The increase in key corporate travelers flying more has
increased the demand for the tickets more than predicted and hence it has increased the profit.
However, it is estimated that the demand and hence the profit margin of the company would
decline in the future due to the increase in the price of the fuel. The fuel charge is one of the
major components of the ticket prices and hence demand may reduce temporarily in the
future. Fuel and flight tickets are complementary in nature and hence the increase in the price
one reduces the demand for the other (Reynolds-Feighan, 2018). The article also points out
that there is a high chance for the stock price to decline in the future as well. Furthermore, the
operational cost of the company can also increase if the government staffs resume again.

Therefore, the performance and profitability of the company depend a lot on the pattern of
demand from the side of the customers and the other markets such as fuel.

Reference
Forsyth, P., & Guiomard, C. (2019). The economic approach to subsidies for foreign airlines.
Journal of Air Transport Management, 74, 47-53.
Limpanitgul, T., Boonchoo, P., Kulviseachana, S., & Photiyarach, S. (2017). The relationship
between empowerment and the three-component model of organizational
commitment: an empirical study of Thai employees working in Thai and American
airlines. International Journal of Culture, Tourism and Hospitality Research, 11(2),
227-242.
Reynolds-Feighan, A. (2018). US feeder airlines: Industry structure, networks, and
performance. Transportation Research Part A: Policy and Practice, 117, 142-157.
Wanke, P., & Barros, C. P. (2016). Efficiency in Latin American airlines: a two-stage
approach combining Virtual Frontier Dynamic DEA and Simplex Regression. Journal
of Air Transport Management, 54, 93-103.