American Airlines’ Advantage in the Industry

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Introduction

Aviation is one of the fastest and dynamically developing sectors of the world economy. It remains in an increasingly strong position in the global transport system. These days, many airlines operate within the highly competitive market. The most prominent example is American Airlines, an aviation organization that provides all air transportation types. It is essential to analyze competitive advantages, barriers to imitating, business model, global expansion strategy, horizontal and vertical integration. It helps to evaluate methods that allow the company to hold a leading position in terms of passenger traffic, the size of the aircraft fleet and income from its activities.

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Competitive Advantages and Barriers to Imitating

Large-scale digital transformation has become one of American Airlines’ competitive advantages. The company concentrates on creating a friendly and comfortable work environment for both customers and employees. Another advantage is the intellectual resources represented by highly qualified employees and an optimal management system. In 2019, American Airlines became the airline with the most significant number of employees globally, employing approximately 130,000 people (History of American Airlines, n.d.). The HR department’s job was to ensure that all employees could work without any problems (History of American Airlines, n.d.). American Airlines attempted to create a unique corporate environment. Therefore, the accent has been shifted towards digital and business transformation, applying cloud services.

However, there is a particular disadvantage of the company’s performance. According to Moir and Lohmann (2018), airlines used to apply Porter’s competitive advantage model. It consisted of focusing on a cost leadership strategy, in other words, a low-cost carrier (LCC) model, or a differentiation strategy called the full-service network carrier (FSNC) model (Moir & Lohmann, 2018). American Airlines is considered to use FSNC; however, it ranked last for competitive advantage and cost index due to the outdated cost structures (Moir & Lohmann, 2018). Concerning barriers to imitating, American Airlines is one of the first companies in the world to use jet aircraft (History of American Airlines, n.d.). The company initiated e-ticketing in all 44 countries of its presence and boasts state-of-the-art equipment that effectively impacts productivity and service quality (History of American Airlines, n.d.). The AA 942 aircraft from such manufacturers as Boeing, Airbus, Embraer and MD Douglas are at disposal (History of American Airlines, n.d.). Thus, the barriers to imitating the distinctive competencies of the company involve the first-mover advantage.

Business Model and Strategy

The company used exclusive resource access and unique location to manage entry and manage rivalry in the industry. For instance, the headquarters and central hub are located in Dallas. It is the largest transport center, serving more than 50 million passengers per year (Zhang & Nozick, 2018). The airline also has subsidiary hubs throughout the east and west coasts and in Washington DC. On average, American Airlines operate more than 6,000 passenger flights daily (Zhang & Nozick, 2018). The concern’s zone of influence extends to all domestic routes and international flights on all continents with more than fifty airports.

With regard to the business strategy the company is using, American Airlines was in a deep crisis caused by a conflict between management and the employees. Parties could not agree on the amount of remuneration. The shareholders decided to merge with the more economically powerful US Airways (Zhang & Nozick, 2018). This merger helped create the world’s most considerable aviation concern, which controls 75% of all America’s passenger and shipping traffics (Zhang & Nozick, 2018). Since this company is a recognizable brand in the international arena, American Airlines’ identity was retained.

During the merger, the company invested in new products and services, improving the quality of service on board. It included new generation aircraft equipped with modern entertainment systems, communication and Internet access (Zhang & Nozick, 2018). It demonstrated an almost 60% increase in passenger traffic and a 20% increase in costs (Zhang & Nozick, 2018). Nevertheless, the merger affected efficiency; it dropped from 0.94 to 0.87 since the airline could not effectively dispose of the received resources (Zhang & Nozick, 2018). Therefore, these days, the airline had to rebuild the existing business model by training employees to work with new technologies. It aims to provide technical support to ensure that all new product opportunities for business development were constantly available.

Global Expansion

Over the years, American Airlines has acquired several airlines to serve transatlantic destinations, flights to Mexico and South America, and actively developed transcontinental flights to Australia, Oceania, Africa and East Asia. The airline establishes and expands its representation in various countries directly. For example, American Airlines acquired a minority stake in China Southern Airlines Company Limited (American Airlines buys stake, 2017). Besides, the carrier has invested approximately US $ 200 million in Hong Kong-listed shares of China Southern (American Airlines buys stake, 2017). This particular action towards expanding its presence in China can be profitable as it might become the most popular aviation market by 2024 (American Airlines buys stake, 2017). Moreover, American Airlines has also made attempts to increase its European presence. The company announced new flights to Europe to meet the growing demand for travel in Europe. Hence, global expansion represents a significant part of the company’s strategy.

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The strategy can be considered incorrect in terms of the current circumstance of the Covid-19 pandemic outbreak. Due to border closure, American Airlines is forced to seek additional funding. The company experienced $ 2.2 billion in losses in the first quarter of 2020 amid the coronavirus pandemic (American Airlines, 2020). The airline has a $ 6.8 billion liquidity cushion (American Airlines, 2020). The company’s management predicted that the number of American Airlines operated international flights in April by 75%, domestic – by 30% due to the pandemic (American Airlines, 2020). Thus, the company should shift its focus to a cost-containment strategy.

Horizontal and Vertical Integration

Due to the growing travel demand, there was a trend of horizontal integration in the aviation sector. It is mainly driven by the airline’s request to retain customers in highly competitive air travel markets rather than economies of scale (Shen, 2017). The forms are a partnership, code sharing and profit-sharing, joint advertising activities (Shen, 2017). Horizontal integration contributes to more efficient use of aircraft fleets, principally reducing vehicle downtime through joint operation (Shen, 2017). It significantly increases the number of route combinations, providing access to new sales channels, particularly expanding global computerized reservation systems.

Referring to vertical integration, it will allow the company to set high barriers to entry into the industry and discriminate against prices in different market segments. According to Wan (2019), such integration between major airlines and regional companies diminishes flight delays by a flexible schedule. Vertical integration may increase bureaucratic costs, including control and coordination problems(Kaiser & Obermaier, 2020). Expenses may increase by underutilized production capacity as throughput is not stable and balanced (Kaiser & Obermaier, 2020). Costs are also raised by unnecessary acquisitions of specific assets resulting in potential overload capacity and low economic efficiency.

Conclusion

To sum up, the high competition between airlines exacerbates the aviation sector. At present, the airline has official representations in multiple states worldwide. The Covid-19 pandemic has affected the industry negatively; therefore, the company might face economic failure in the short-term. The primary development strategy of American Airlines has been adopted, promoting directions for expanding its technical fleet, building its terminals at major American airports. The company emphasizes increasing the quality and volume of passenger and freight traffic on domestic and international flights.

References

American Airlines. (2020). American Airlines Group reports first-quarter 2020 financial results. Web.

American Airlines buys stake in China Southern Airlines. (2017). CNBC. Web.

History of American Airlines. (n.d.). American Airlines. Web.

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Kaiser, F., & Obermaier, R. (2020). Vertical (dis‑) integration and firm performance: A management paradigm revisited. Schmalenbach Business Review, 72(1), 1-37. Web.

Moir, L., & Lohmann, G. (2018). A quantitative means of comparing competitive advantage among airlines with heterogeneous business models: Analysis of US airlines. Journal of Air Transport Management, 69, 72-82. Web.

Shen, C. (2017). The effects of major US domestic airline code sharing and profit sharing rule. Journal of Economics & Management Strategy, 26(3), 590-609. Web.

Wan, X. (2019). What happened to inventory and cost after a vertical integration? A longitudinal analysis considering demand uncertainty. International Journal of Production Research, 57(24), 7501-7519. Web.

Zhang, Y., & Nozick, L. (2018). Investigating the Pricing Impacts of the American Airlines and US Airways Merger. Transportation Research Record, 2672(23), 15-19. Web.

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BusinessEssay. 2022. "American Airlines' Advantage in the Industry." August 2, 2022. https://business-essay.com/american-airlines-advantage-in-the-industry/.

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BusinessEssay. "American Airlines' Advantage in the Industry." August 2, 2022. https://business-essay.com/american-airlines-advantage-in-the-industry/.