American Airlines Analysis: History and Introduction to the Corporation

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American Airlines is considered the leader in passenger traffic worldwide. For example, over the past year, this air carrier made flights equal to approximately 250 million passenger-kilometers. This unusual unit of measure is obtained by multiplying the number of passengers in a company by the distance they have flown. The first flight was mail delivery from Chicago to St. Louis in a small biplane. A couple of years later, a company called American Airways was formed by the merger of several dozen smaller airlines. During the First World War, most of the company’s fleet was used for military purposes. In 1936, the first ever loyalty program for VIP passengers was organized, and in 1937 American Airlines carried its millionth passenger. The company has offices in many countries of the world and is the founder of the world’s largest alliance of air carriers Oneworld.

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Planes and Sources

American Airlines, Inc. is a flagship aviation concern that provides all types of air transportation and has been holding leading positions in terms of passenger traffic and income from its activities. The headquarters and main hub are located in Dallas, Fort Worth, Texas. It is the largest transport hub of the carrier, which can serve more than 50 million passengers a year (Schosser, 2019, p. 37). The airline also has subsidiary hubs throughout the east and west coasts, and in Washington DC. The concern’s zone of influence extends to all domestic routes, as well as international flights on 5 continents, in 50 countries and 356 airports. American Airlines is considered the oldest airline in America.

The first flights were operated by a group of independent air carriers, which had conditional agreements on the directions of flights. On their basis, 82 small companies were merged, which were mainly engaged in postal transportation (Schosser, 2019, p.50). In 1934, the company was acquired by the American businessman Kord, who renamed it, developed an efficient management scheme, and also introduced the opening of an independent passenger transportation industry. An electronic passenger service system has become a priority branch of the company’s development. An electronic ticket ordering system was installed, which made it possible to automate the booking of seats, introduce a loyalty program system and two-level tariff scales.

Flight Geography

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. One of the most significant events in the history of American Airlines is the merger agreement with the famous US Airways transit company. The management of both companies officially announced this back in 2013, but the deal was drowned in legal proceedings, and only in 2015 the renewed company received permission for air travel. This merger helped create the world’s largest aviation concern, which controls 75% of all America’s passenger and freight traffic (Vasigh et al., 2018, p. 17). Most of them are narrow-body old modifications, which are planned to be gradually decommissioned.

Company always uses expensive but high-quality planes, it is a principle of corporation. Among the wide-body airliners of the company, one can note the increased-capacity aircraft Boeing 787 Dreamliner and Airbus A330, the number of which is increasing (Vasigh et al., 2018, p. 17). The average age of the liners is 11 years, where the oldest Boeing 757-200 is 26.3 years old (Vasigh et al., 2018, p. 17). The youngest Boeing 737 MAX 8 is 0.1 years old. Most of the flights are carried out by the company in the USA – after all, this country is very large in territory, as well as to the countries of Latin America (Vasigh et al., 2018, p. 18). The airline’s home airports number five international airports in the United States – and all because of the carrier’s impressive air fleet.

Products and Programs of the Company

The company provides passenger customers with several programs and products that are aimed either at additional income or at increasing passenger loyalty. Thus, the organization provides a wide system of discounts provided for frequent flights, pre-passenger level, and also in the form of apologies. This aims to create benefits for those who prefer to fly more often, creating a bond between the two parties. Individual is forced to use the services of the company, since after a series of flights the prices become more favorable. The airline company combines cheap advertising and the production of its own products in one product. For example, clothing, phone cases, and suitcases with symbols and the corporate logo create advertisements similar to those used by Apple (Peoples & Bitzan, 2018). In other words, potential customers are increasingly seeing images and signs that are memorable and give the appearance that the company is highly trusted. In addition to all of the above, products are paid, which also creates a separate item of income for the corporation. It is important to emphasize that for many large organizations, products called merchandise can generate almost half of the total profit. Separately, it is worth highlighting that such loyalty programs are the most effective method of maintaining sustainable competitive advantages in the cost of services provided for the passenger.

Competitive Characteristics

The issue of the airline’s success is directly related to competitiveness in the general market. The mission of the corporation in question is to provide high-quality and comfortable services for the movement of passengers. First of all, such parameters as safety, completeness and timeliness of such a service are taken into account. It is important to note that American Airlines is one of the most profitable airlines, which allows the corporation’s management and engineers to buy and use the newest and most expensive aircraft (Peoples & Bitzan, 2018). In addition, the prevalence of the authority of the organization, as well as the frequency of its flights, creates a certain special position in the airport schedule, allowing passengers to choose the most convenient time. Taken together, it is these characteristics that distinguish the corporation as a leader in its field in the United States.

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It makes sense to emphasize that the characteristics of an organization differ in the period before and after the deregulation. The fact is that when the government and municipalities could dictate terms and conditions for companies that had serious weight, American Airlines was in many ways limited (Peoples & Bitzan, 2018). For example, in the use of aircraft dimensions, the number of flights to certain states or states, depending on the current political situation (Peoples & Bitzan, 2018). After the abolition of state regulation of the analyzed area, corporations have more opportunities for improvement. After the depoliticization of the sphere, American Airlines ceased to be limited in the number and frequency of flights to the territory of Mexico, Russia and China, which again favorably promoted the corporation in a competitive context.

Corporate Divisions and Planning

The organization has its own holding company called American Airlines Group. Despite the fact that the airline is mainly engaged in the transportation of passengers, cargo transportation is a separate area of ​​activity. The freight division provides freight and postal services along with professional equipment, guarantees and interline connections. The logistics system is developed practically all over the world in such a way that the corporation is able to provide communication with any continent, as well as the Arctic and Antarctic (Peoples & Bitzan, 2018). At the same time, there are also regional subsidiary airlines aimed at communication within the state, providing communication between states and neighboring states, for example, Canada (Peoples & Bitzan, 2018). Regional carriers operate under the American Eagle label, and carry out the transportation of small and fragile cargo around the country, while large orders are controlled by American Airlines.

Analysts suggested American Airlines was the right candidate for bankruptcy, and the only reason AAL has yet to file for bankruptcy is the anticipation of a government bailout package and the tenacity of Doug Parker. Without an injection of cash from the government, there is no way for any airline to break even while Covid-19 is still a significant factor (Peoples & Bitzan, 2018). American Airlines presented a report to the company’s management, reaffirming the following priorities: maintaining liquidity, reducing cash spending and restoring confidence in air travel.

Revenue Management Methods and Cost Structure

It is necessary to analyze the costs and revenues of the airline, as well as identify the factors affecting their control. In 2017, salaries and benefits accounted for approximately 35% of total operating expenses (Macrotrends, 2021). As of December 31, 2017, the company employed approximately 126,600 active full-time employees, approximately 85% of whom were members of various trade unions (Macrotrends, 2021). The financial results are heavily influenced by jet fuel prices. The decline in jet fuel costs in 2016 was driven by a 17.4% decrease in the average price per gallon of fuel compared to 2015 to $1.41 per gallon (Macrotrends, 2021). In 2017, the price of aviation fuel increased by 21.8% compared to 2016, the share of expenses for aviation fuel in the cost price increased by 2 points (Wyman, 2019, p. 123). The increase in the average price per gallon of fuel was partially offset by a 0.7% decrease in specific fuel consumption, which was due to the introduction of more efficient aircraft for operation during 2017 (Wyman, 2019, p. 125). American Airlines Group Inc. remained profitable in 2017, the economic recovery boosted the demand for transportation.

Compared to 2016, the profitability of passenger transportation increased by 3.2%, total revenues from passenger transportation increased by $1.55 billion, or 4.5%, mainly due to an increase in profitability (Wyman, 2019, p. 28). Internal consolidated profitability increased by 3.5%, and international yields were up 3.2%, mainly due to improved performance in Latin America (Wyman, 2019, p. 98). Cargo revenue increased due to an increase in the volume of cargo transportation.

Other income includes revenues related to the loyalty program, baggage fees, ticket change fees, airport lounges and lighting services. Other income increased by $373 million, or 7.6%, mainly due to higher income, related to the loyalty program (Wyman, 2019, p. 103). Total operating income increased by $2.0 billion, or 5.0%, mainly due to an increase in passenger revenues (Wyman, 2019, p. 15). Operating expenses increased by $3.3 billion, or 9.5%, according to the financial report (Wyman, 2019, p. 34). The increase in operating costs was mainly due to higher fuel costs and higher salary rates for pilots, flight attendants and engineering personnel.

The increase in maintenance, repair and material costs is attributable to changes in contracts: some flight equipment was transferred to contracts based on the payment of hours of flight, instead of payment of costs. The increase in ticket sales costs is attributable to higher commissions from higher sales, as well as an increase in award tickets, which have higher commissions. The increase in depreciation and amortization costs is related to the aircraft fleet renewal program (Vasigh et al., 2018). Other expenses increased due to improvements in in-flight catering and training costs. Compared to 2016, in 2017, regional operating expenses increased by $502 million, or 8.3%, due to an increase in aviation fuel costs and an increase in carrying capacity, mainly of its own regional companies (Wyman, 2019, p. 54). Special expenses, including expenses on integration mergers, fleet restructuring, income taxes, and payments under labor contracts, remained practically unchanged. In 2017, profit before taxes and net income amounted to $3.1 billion and $1.9 billion, respectively. In 2016, operating income of $4.3 billion and a net profit of $2.7 billion were received (Wyman, 2019, p. 101). Indirect costs are allocated by ship types in proportion to traffic volumes, taking into account correction factors for aircraft weight and number of seats.

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The operating result was mainly influenced by the decline in the cost of jet fuel in 2014. The decrease in the cost of transportation in 2015–2016 was constrained by the growth of wages, costs associated with the acquisition of new aircraft, and costs associated with reorganizations. Since 2017, the cost of transportation has been increasing due to the growth in expenses for the increased cost of aviation fuel and the maintenance of the aircraft fleet. The rates of payment for the carrying capacity of regional operators, airport and rental payments, and other production costs also increased. The cost reduction allowed American companies not to increase tariffs for passenger transportation in 2015-2016.

In 2017, the profitability of passenger traffic on domestic flights within the United States and Canada, as well as on international flights to Europe and Latin America, increased. Compared to 2015, in 2016 the cost of a seat-kilometer decreased at American Airlines Inc. – by 7.7% (Wyman, 2019, p. 89). The income rate per seat-kilometer also decreased, but the decrease was 1.5–2.0 times less (Wyman, 2019, p. 68). As a result of the excess of income over expenses from 2014 to 2016, operating profit increased compared to the previous period.

In 2017, an increase in the cost of transportation was not offset by an increase in profitability, which led to a decrease in profitability compared to 2016. A comparison of 2017 and 2016 statistics showed that American Airlines Inc. the cost of seat-km increased by 7%, the total profitability of seat-km increased by 4%, the profitability decreased from 13.0 to 9.6% (Wyman, 2019, p. 77). In general, the airline’s policy is aimed primarily at controlling fuel and energy costs, and the company’s main source of income is the transportation of cargo and passengers.

It is important to highlight that these methods are also used in other industries, for example, in the production of electrical engineering or professional sports. Any commercial organization, regardless of the work area, uses the maximum opportunity to save on advertising. This is done in the same way as the management of America Airlines, that is, with the help of merch. In addition, if for airlines a huge expense is fuel and aircraft maintenance, the same logic applies to other industries – for example, the maintenance of athletes and their provision. Therefore, the methods used by the company to control costs are applicable to all areas.

References

American Airlines Group revenue 2006-2021. (n.d.). Macrotrends. Web.

Peoples, J. E., & Bitzan, J. (Ed.). (2018). Transportation policy and economic regulation. Elsevier Science.

Schosser, M. (2019). Big data to improve strategic network planning in airlines. Springer Fachmedien Wiesbaden.

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Vasigh, B., Fleming, K., & Tacker, T. (2018). Introduction to air transport economics. Taylor & Francis.

Wyman, O. (2019). Airline economic analysis. Marsh & McLennan Companies.

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