Aviation Economics: Analysis of American Airlines' Financial Woes

This report analyzes the poor financial performance of American Airlines from 2016 to 2018, applying microeconomic principles to real-world operations. It examines factors contributing to the airline's profit decline, including rising crude oil prices, decreased demand for flight tickets, and increased employee expenses. The analysis incorporates a literature review of various perspectives on American Airlines' performance and uses graphical representations to illustrate key economic relationships. The report concludes that a combination of external economic pressures and internal cost factors led to the airline's financial challenges, suggesting improvements in service enhancement and expense management to enhance profitability. The study was prepared for Embry-Riddle Aeronautical University.

Aviation Economics - American Airlines poor financial performance (2016-2018)
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Economics 1
Contents
Introduction......................................................................................................................................2
Literature review..............................................................................................................................3
Economic analysis...........................................................................................................................5
Conclusion.......................................................................................................................................9
References......................................................................................................................................10
Appendix........................................................................................................................................12

Economics 2
Introduction
The aim of the paper is to analyse the current events to basic principles of microeconomics that
is covered in the course. It demonstrates the application of microeconomic theory with the
outside world or real company’s operations. This research paper is prepared on the American
Airlines poor financial performance (2016-2018) which is supported with the different statistics
and facts. In the research, different opinions on the performance of the American airline have
been considered for which literature review has been conducted. The literature review will offer
a detailed summary of the different economic circumstances and facts majorly serve the basis for
the economic analysis. The economic analysis will reflect that different graphical analysis of the
research concern. In the end, the summary of the research paper is included, which shows the
outcomes of the research.

Economics 3
Literature review
American airline is considered as a major player in the airline or aviation industry of the US who
has majorly faced the decline in the performance that can be evaluated in terms of the profit of
the airline. According to the American Airlines Group Inc. (2019), the American Airlines profit
fell by approx. two-third comparing it to the 2015 but airline still managed to cover up the loss in
the second-best year ever financially. This is clear that American earned $2.7 billion for the
entire year comparing it with the record $7.6 billion that is earned by them in the year 2015. The
research reflects that the difference in the revenue has been attained by the Airline because of the
$3 billion tax benefit of the company at the end of the year 2015. Thus, after considering the tax
benefit also it has been found that airline has attained the loss in the year 2016.
Agreeing to same, the Reynolds-Feighan (2018) stated that the American airline found the
surging of oil prices and the government shut to reduce the demand for the flight tickets. In the
research, this has been found that fuel costs constitute one-third of an airline’s operating costs in
the year 2016. This shows that the marginal change in the crude oil prices can majorly create an
impact on the profitability because this leads to a rise in the expenses of the company. The rise in
the expenses has an inverse relationship with the profit of the airline, which means a rise in
expenses leads to a decline in profit or vice versa (Forsyth & Guiomard, 2019). In addition to
this, the analysis shows the cost of American fuel is increasing continuously from the year 2016
to 2018. The prices of the oil got double from the year 2016 to 2018 that leads to increase in the
prices of the company’s expenses and reduce the net profit attained by the company.
Contradicting this, Krauss, (2018), found that American airline was considered as poor
performing airline in the year 2018, leading the stock prices to sink 48% YOY because of the

Economics 4
surge of oil prices and performance of the company. The prices of the shares majorly affect the
profit and performance of American airline.
In addition, considering the views of White (2018), the demand for the flight tickets has been
decreased in the past few years due to which the performance of the American Airlines has
reduced behind all the estimates. The data analysis has estimated that the net income of the
company increases with the rise in the demand for tickets. According to the research, the net
income for the year 2018 was approximately 26.42% less than in 2017. This clearly shows that in
the year 2018 there was a decrease in the airline tickets demanded by the customers.
Agreeing to this, the Kristjanpoller & Concha, (2016) said that the services that are offered by
the company somewhat make the customers change their demand for the airline tickets of
America. However, the airline is paying a lot of attention to make their customers satisfied with
the additional services. Contradicting this, Shine, (2017) said, in the year 2017, the airline was
swinging back to the solid profitability as the company gave the large rise to its pilots and flight
attendants two years early because the union contracts were supposed to get expire. The rise in
the pay of the employees of the airline improves the cost of the airline for about more than $350
million a year over the two years. For a company who is majorly producing the pre-tax annual
profit of around $3 billion which is not a trivial amount.
Agreeing to this, the Barro, (2015) exhibits, American Airline pay a comparatively high amount
as a salary to their employees. This rise in the salary of pilots and flight attendants leads to the
rise in the expenses of the company that ultimately creates the impact on the profit that is
attained by the American airline while performing their business operations. In the research, this
has been found that paying more to the employees will not lead to the satisfaction to the

Economics 5
customers and clients. Moreover, this will not allow the American airline to compete effectively
with the competitors. Thus, it is very clear that American airline has increased the pay of the
employees with the objective to enhance the customer services but this only affects the
profitability of the company.
Economic analysis
How Sensitive Is American Airlines' Price To Crude Oil Prices?
(Source: Forbes, 2018)
The above-given image reflects the figures related to the prices of the American fuel that has
jumped. According to the analysis, a $1 per barrel increase in the crude oil price that could lead
to a 1% increase in the fuel cost of American. For example, if the prices of the oil jump by $5 per
barrel and it will cause a rise in the expense of the airline by approximately 5% (Forbes, 2018).
Thus, the rise in the expenses of the company leads to a decline in the airline’s net income
margin and affect the lower earnings per share to the stakeholders.

Economics 6
This is supported with the opinion of the Forsyth & Guiomard, 2019 who also believes that the
rise in crude oil can affect the profitability of the company. The researcher has reflected that the
rise in crude oil will lead to an increase in the expenses of the company that ultimately creates an
impact on profitability. Thus, this has been proved that the profitability of American airline has
poor financial performance that is witnessed from the profit of the company.
American Airlines profit warning hits US airline stocks
American Airline set off a fresh round of selling in US airline shares on Thursday after the
carrier sharply cut its full-year profit guidance.
(Source: Financial Times, 2018)
The image given above reflects that American shared tumbled as much as 10.9% that warned
earnings of the company would fall according to the previous year forecasting. It is now
expected to adjust the diluted earnings for the year 2018 to come in between $4.40 to $4.60 a

Economics 7
share that is will be down in the list from the $4.50 to $5.00 range (Financial Times, 2018).
Thus, this has been found that the stock of American airline affected the profitability of the
company.
This is supported with the opinion of the Kristjanpoller & Concha, (2016), the share price
American airline is one of the factors which influence the investors and profitability of the
company. The fall in the prices of the stock during the year 2016-2018 has affected the
profitability.
2017 Annual and 4th Quarter U.S. Airline Financial Data
The US Airline financial Data is presented below which shows that in the year 2016 and 2017,
the profit of the company comparatively reduced. The airline also reported a $21.4 pre-tax
operating profit in the year 2017 that is reduced from $25.4 billion in the year 2016. American
airline recorded a pre-tax operating profit majorly for the ninth succeeding year.
(Source: Bureau of Transportation Statistics, 2018)

Economics 8
This is supported by the opinion of the Shine, (2017), the company has increased the prices of
salaries due to which the expenses of the American airline. In addition to this, the company is
majorly manufacturing the pre-tax annual profit.

Economics 9
Conclusion
At the end of the research, this can be concluded that American Airline had registered the poor
financial performance for the year 2016-2018. The principles of the microeconomics and their
application in American airline have been done. The opinion of different authors has been taken
on the research concern that is presented under the heading of the literature review. In the
research, this has been found that are numerous reasons that include a rise in the prices of crude
oil, stock prices, reduce in the demand of the tickets, increase in the expenses due to increase in
salaries of employees of American airline and many others. These are the emerging issues, which
creates a direct impact on the profitability that affects the financial performance of airline. It is
suggested to the company to enhance the services and to focus more on the expenses as this
helps them to enhance the profit. The expenses of the company affect profitability due to
effective management were required.

Economics 10
References
American Airlines Group Inc. (2019, January 24). AAL 2018 Annual Report. Retrieved February
17, 2019, from http://news.aa.com/news/news-details/2019/American-Airlines-Group-
Reports-Fourth-Quarter-and-Full-Year-2018-Profit/default.aspx
Barro, J. (2015). American Airlines Wants to Be Nice But Doesn’t Know How. Retrieved
February 17, 2019, from http://nymag.com/intelligencer/2018/10/american-airlines-
wants-to-be-nice.html
Bureau of transportation Statistics (2018). 2017 Annual and 4th Quarter U.S. Airline Financial
Data. Retrieved February 17, 2019, from https://www.bts.gov/newsroom/2017-annual-
and-4th-quarter-us-airline-financial-data
Financial Times (2018). American Airlines profit warning hits US airline stocks. Retrieved
February 17, 2019, from https://www.ft.com/content/3bc09a5a-14dd-11e9-a581-
4ff78404524e
Forbes. (2018). How Sensitive Is American Airlines' Price To Crude Oil Prices?. Retrieved
February 17, 2019, from
https://www.forbes.com/sites/greatspeculations/2018/06/07/how-sensitive-is-american-
airlines-price-to-crude-oil-prices/#3c483a4e1388
Forsyth, P., & Guiomard, C. (2019). The economic approach to subsidies for foreign airlines.
Journal of Air Transport Management, 74, 47-53.

Economics 11
Krauss, C. (2018, December 18). Oil Prices Plummet 7% on Fears of a Glut. The New York
Times. Retrieved January 25, 2019.
Kristjanpoller, W. D., & Concha, D. (2016). Impact of fuel price fluctuations on airline stock
returns. Applied energy, 178, 496-504.
Reynolds-Feighan, A. (2018). US feeder airlines: Industry structure, networks, and performance.
Transportation Research Part A: Policy and Practice, 117, 142-157.
Shine, C. (2017). Why American Airlines' drop in profit at the end of 2016 isn't as bad as it
seems. Retrieved February 17, 2019, from
https://www.dallasnews.com/business/american-airlines/2017/01/27/american-airlines-
reports-27billion-2016-profit
White, M. C. (2018, June 06). As Fuel Prices Rise, Airlines Warn of Higher Fares. The New
York Times. Retrieved January 25, 2019.

Economics 12
Appendix

Economics 13