An overview of AMRcorporations past andfuture financesBy: Team 1E Professors:Patrick Ayers Jeff AndersonMaggie Bihn Jamie CarterJulie Brunton Mike MartelAdam DeBellis Scott WrightKabir Uppal
Introducti Analys Recommendations & Outco Appendice on is Conclusions me sIntroduction Letter of Transmittal……………………………………………….……….4 Executive Summary………………………………………………….………5 Mission Statement……………………………………………………………6 Corporate Responsibility………………………………………....………..7 Key Strategic Issues Facing AMR……………………………………….8Analysis Corporation Overview………………………………………………………9 Industry overview…………………………………………………..………11 Current Competition……………………………………………..………...12 Porter’s 5 Forces…………………………………………………..…………13 SWOT Analysis……………………………………………………..…………14 Strategic Direction………………………………………………..…………15 Financial Analysis………………………………………………..………….16 Fuel Analysis…………………………………………………......……………18 Stock Analysis…………………………………………………..……………..20 Debt Analysis…………………………………………………..………………22 Employee Analysis…………………………………………..………………23
Introducti Analys Recommendations & Outco Appendice on is Conclusions me sRecommendations……………………………………………………………23 #1: International Growth Recommendation………………….24 Foreign Student Growth Plan……………………………………26 Study Abroad Market……………………………………………….27 The Contract…………………………………………………....………30 Incoming Foreign Students…………………………….…………31 Recommendation for Incoming Foreign Students….…..33 Benefits & Limitations………………………………………..…….35 Conclusion: International Growth Plan……………..………36 #2: oneworld & Open Skies Recommendation……..………..37 oneworld not Revolving………………………………..…………38 Global Sporting Events………………………………..……………39 Olympic Games…………………………………………...……………40 Men’s FIFA World Cup……………………………………………….41 Conclusion: oneworld & Global Sporting events……..…42 Low-Cost Carriers Analysis……………………………………….44 #3: American Eagle Recommendation……………………………45 Cost Comparison (Fleet)…………………………………………...48 Benefits & Limitations………………………………………………49 Conclusion………………………………………………………………..50Outcome and Effects of Forecasting…………………………………….51Appendices………………………………………………………………………..52References…………………………………………………………………………62
Introducti Analys Recommendations & Outco Appendice 4 on is Conclusions me sOctober 11, 2009AMR Corp. Board of Directors4333 Amon Carter BlvdFort Worth, TX 76155Dear Board of Directors:As requested by AMR Corp., our consulting firm prepared a report of recommendations toimprove your corporation’s revenues during this period of economic turbulence and thereafter.Our recommendations to increase international travel, manage fleet efficiently, and capitalize onglobal opportunities through oneworld were based on the following criteria:Internal/External ForcesPorter’s Five Forces modelCurrent position and market share within the industryBenchmark against competitorsFinancial data and trends of revenueInternational travel is steadily increasing and it is essential for American Airlines to marketthemselves for opportune global customers. Currently American Eagle is showing weaknesswithin the company. Investing in more efficient aircrafts to increase the load factor wouldgenerate more revenue. Our recommendation for oneworld is based upon the fact that it has lowmarket share compared to other trans-Atlantic alliances. Capitalizing on global opportunitiesthrough strategic marketing can improve oneworld’s situation. These recommendations arebeneficial to the corporation because they entail a positive outlook for the future and better timesto come for the company.Thank you for the opportunity to analyze AMR Corp. current business strategies and recommendimprovements for the future success of the company. If there is anything more you may needassistance with, please feel free to contact us.Sincerely,Group 1EPatrick Ayers, Maggie Bihn,Julie Brunton, Adam DeBellisKabir Uppal
Introducti Analys Recommendations & Outco Appendice 5 on is Conclusions me sThis report presents a comprehensiveassessment of AMR Corporation’scurrent economic and financialposition in relation to it’s competitorsand industry. AMR’S major business segments will be analyzed and evaluated. We provide recommendations in which its affects will be outlined and rationalized in addition to a five year financial forecast Current Problems facing the AMR Corporation1. Global and domestic recessions have led to a decline in air traffic.2. Regional airline American Eagle is in a struggle to earn profits3. oneworld Alliance is losing global market shares. Solutions1. Strengthen global market position of AA2. Optimize American Eagles fleet3. Increase oneworld’s market shares though capitalizing on opportunities
Introducti Analys Recommendations & Outco Appendice 6 on is Conclusions me s “American Airlines and American Eagle are in business to provide safe, dependable and friendly air transportation to our customers, along with numerous related services. We are dedicated to making every flight you take with us something special. Your safety, comfort and convenience are our most important concerns.” “The purpose of our team is to analyze the AMR Corporation and the current industry climate to make recommendations that will help AMR successfully adapt their company to be more profitable in the Airline Travel and Cargo industry.”
Introducti Analys Recommendations & Outco Appendice 7 on is Conclusions me sAs a global airline carryingmore than 100 millionpassengers and more than500,000 tons of cargo a year,AMR promotes commerce,trade, and economic prosperity,as well as a sense of globalcommunity and citizenship. Ourbusiness also affects theenvironment around us, and weare committed to being goodstewards by minimizing ourenvironmental footprint…Ourcommitment to corporateresponsibility is more than abusiness decision. It’s animportant part of our culture—part of who we are. At AMR,operating in a responsiblemanner is not just anaspiration; it’s the way we dobusiness. Source: 2008 AA Corporate Responsibility Report
8Introducti Analys Recommendations & Outco Appendice 8 on is Conclusions me s Capacity Cuts • American has aggressively cut capacity where possible in the domestic market. • In multiple flight markets, American has tried to cut flights where possible, or at least gauge capacity. Economic Demand • Global and domestic recessions have led to a decline in air traffic. • U.S air traffic is down approximately 10% for 2009 Decline in Premium Passenger Traffic • American Airlines is experiencing severe revenue decline due to sinking demand for premium-cabin seats. • Business & First Class account for 7%-10% of a major carriers passengers, but 25%-30% of its revenue. • Trans-Atlantic premium passenger traffic is down over 27% since 2008. • Premium Passengers mostly consist of business related travel. The Burden Of American Eagle • Accounts for about 11% of American Airlines revenues but is losing more than that • The scarce availability of resources and ineffective fleet management are resulting in losses for the regional airline Alliances & Global Consolidation • Oneworld has a strong market share at Heathrow in London but are losing out to its other global alliance competitors. • Openskies agreement has enabled more competition to enter the European market from US based airlines Fuel Hedging • Helps airlines reduce the impact of unpredictable fuel prices by signing contracts to pay a set price for future fuel costs. • American airlines has been particularly successful by fuel hedging their costs of fuel in recent years. • In 2008, American saved $380 million by fuel hedging. Employee Optimization • American Airlines has recently cut about 5,000 employees. • American Airlines total revenue per employee was $282,592 in 2008
9Introducti Analys Recommendations & Outco Appendice 9 on is Conclusions me s AMR Corporation operates in the airline service industry. They provide domestic and long haul flight services through its different subsidiaries. The corporation’s main subsidiary is American Airlines. AMR’s other subsidiary is the AMR Eagle Holding Corporation, which consists of 2 regional airlines (known as the American Connection): American Eagle Airlines and Executive Airlines. American, AMR Eagle and the American Connection airlines serve 250 cities in 40 countries with, on average, 3,400 daily flights. The corporation’s network fleet numbers are about 900 aircraft. American Airlines American Eagle •Worlds Largest Airline •Regional Partner of American Airlines •Founder of OneWorld Alliance •Operates fleet of 305 aircrafts •3rd Largest Fleet in the World •Hubs in Boston, Chicago O’Hare, Dallas/Fort Worth, Los Angeles, Miami, •Only Airline that hasn’t declared New York LaGuardia and San Juan bankruptcy •Employs more than 13,000•Total revenue for 08 was 23.8 Billion •$18.2 B from Mainline division •Serves 159 cities with more than 1800 •$2.49B from Regional daily flights and 1400 daily jet flights •$874 M from Cargo
Introducti Analys Recommendations & Outco Appendice 10 on is Conclusions me s•Cash position stands at a solid competitive •International travel is steadily increasing, thusaverage at $2,840 AA should continue to promote “going global”.•AA could last 52 days on its current •Domestic travel soaks up the majority ofcash, which is significantly lower then it’s other profits, but its decline in traffic has lead to acompetitors focus in the Latin American markets as well as•AA outsources around 11% of profits to its the pacific.regional partner. American Airlines Revenue AA Mainline RPM Distribution Trend 70.00% 60.00% $25,000 50.00% $20,000 $ In Millions 40.00% $15,000 30.00% $10,000 20.00% $5,000 10.00% $- 0.00% Latin Domestic Atlantic Pacific America 2002 2003 2004 2005 2006 2007 2005 2008 66.40% 14.20% 15.50% 3.90% 2006 65.30% 14.30% 15.80% 4.60% 2007 64.90% 14.50% 16.60% 4.00% Outsourced Mainline 2008 63.20% 14.70% 17.90% 4.20% Cash Position in 2Q 2009 Cash Days in 2Q 2009 100 $6,000 $5,000 80 $ In Millions $4,000 60 $3,000 40 $2,000 $1,000 20 $- 0 AA CO DL UA US AA CO DL UA US
Introducti Analys Recommendations & Outco Appendice 11 on is Conclusions me s Airlines that establish credibility•International travel continues to through effective customergrow, presenting airlines with a loyalty programs placevariety of customers each withdifferent needs. themselves at a greater advantage than other carriers within the•Major carriers in the industry industry.dominate hubs domestically andglobally, defining themselves as keyplayers in the market. •Substitutes for airline travel have•Regional carriers substantiate the increased due to the effects of volatile fueldomestic markets. prices. •Lost profits continually threaten labor, as capacity cuts are the easiest way to relieve expenses and other costs. •Decreased amounts of discretionary Revenue $ Billion income has led to a decline in leisurely135 travel.130125120 Profit (Loss)$ Billion115 5110 4105 3 2100 1 2005 2006 2007 2008 0 -1 2005 2006 2007 2008 -2 -3 -4 -5
Long Term Intro Analysis Outcome Conclusion Rec’s Introducti Analys Recommendations & Outco Appendice 12 on is Conclusions me sAMR’S Major Competitors:• Delta Airlines • America West Airlines• Southwest Airlines • Northwest Airlines• United Airlines • Continental Airlines• U.S Airways • Alaska Airlines The recession and impact of oil prices has resulted in a decline in the majority of the industries stock prices.COM∙PE∙TI∙TION - THE EFFORT •AMR : 08’ Revenues of $23.8 Billion, will lose $1.01 per share in 09’ OF TWO OR MORE PARTIES •Delta: 08’ Revenues of $22.7 Billion, will ACTING INDEPENDENTLY TO earn $.54 per share in 09’ •United: 08’ Revenues of $20.2 Billion, will SECURE THE BUSINESS OF A lose $4.97per share in 09’ THIRD PARTY BY OFFERING •Continental: 08’ Revenues of $15.2 Billion, will lose $.33 per share in 09’.THE MOST FAVORABLE TERMS •U.S Airways: 08’ Revenues of $12.1 Billion, will lose $1.16 per share in 09’. •SouthWest: 08’ Revenues of $11 Billion, will earn $.33 per share in 09’. Market Share (June 2009) American 12% 22% Southwest 17% Delta 20% U.S 13% United 16% Continental
Introducti Analys Recommendations & Outco Appendice 13 on is Conclusions me s Competitive Rivalry: Threat of New Entry:The airline industry contains a large number In the airline industry there is an ease of of firms, which increases rivalry because access to capital, and because it is easy for more airlines must compete for the same weaker airlines to obtain credit, the industry customers and resources. This results in has become saturated. Larger airlines benefitairlines striving for a competitive advantage. from a strong brand identity, and major Flying incentives have been successful in airlines allocate substantial resources to attracting travelers to fly with certain marketing efforts. airlines. Frequent flyer incentives and the lack of extra fees can be strong enough tocause a customer to choose a certain airline. Bargaining Power of Buyers: Bargaining Power of Sellers: In economic recessions customers will The airline supply business is predominantlyalways search for the best deals. Airline travel dominated by Airbus and Boeing. The result is expensive, and the demand is very elastic. of the concentration of suppliers is that American Airlines strives to provide airlines cannot implement leverage over the safe, dependable and friendly air supplier to obtain lower prices or play one transportation to our customers, along with supplier against another. numerous related services. These are reasons one customer may pick American Airlines over another airline. Availability of Substitutes: To truly consider all substitutes one must consider personal preferences, time, and money. Trains, buses, and other automobiles can only substitute for a regional airline. The most potentially serious threat to the airline industry is the development of electronic methods of communication and its effect on business travel. The virtual reality and its new real-time video conferencing will have a chance to start satisfying businesses need for effective and cheap communication. This is a existing threat for American Airlines.
Introducti Analys Recommendations & Outco Appendice 14 on is Conclusions me s Strengths & Opportunities •Global Network•Strong Alliances & Marketing Tie-Ups •New Financing •Solid Capital Structure •Frequent Flyer Program •Growth of Global Airline Market •Growing Domestic •Freight Market Threats & Weaknesses •Declining Operating Efficiency •Declining Premium Cabin sales in External Forces Long-Haul Flights •Fleet Management •Inefficient Use of Employees •Global Economic Slowdown •Competition for Market Share •Price Competition •Fuel Prices
Introducti Analys Recommendations & Outco Appendice 15 on is Conclusions me sOne plan, one direction. AMR hasdecided to allocate additional resources A positive outlook:to more profitable flight areas. Their •$2.9 Billion in new financing.strategy is to increase flight activity intheir most profitable hubs, while •Sold $1 billion in frequent flier miles todecreasing activity in their least Citigroup.profitable ones. The company’s plan alsoincludes placing a larger emphasis on •Borrowed approx. $300 million frominternational travel. AMR has raised General Electric Capital Aviation Services (GECAS), using their aircrafts asexternal cash to prepare themselves for collateral.investments in new fleets for the growthof international travel. •Initiated financing agreement with GECAS worth $1.6 billion to buy new Boeing 737 aircrafts •737’s will help to conserve cash and replace the less-efficient MD-80s •GECAS granted a exclusive agreement to purchase AMRs NextGen engines to power the newly ordered 787’s.AA identifies New York, Dallas/Fort Worth, Chicago, Miami, and Los Angles as itsmost profitable hubs. 57 new flights are being added to the Chicago O’ HareHub, which includes 12 domestic cities and 3 international ones, includingBeijing and Vancouver. The Dallas-Ft. Worth hub is adding 19 new flights, Miamiis adding 23, Los Angeles 3, while JFK seeks 6 new destinations, includingMadrid, Manchester, UK, and Costa Rica. These additional profitable routes aremade possible by replacing 46 flights from St. Louis and service to 20 cities. Inaddition, Raleigh-Durham is scheduled to lose 9 flights and cutback on 3destinations.
Introducti Analys Recommendations & Outco Appendice 16 on is Conclusions me s Liquidity• The current ratio, 0.63, is greater than the industryaverage of 0.61, but lower than its top competitorsaverage of 0.82 Industry Comparison•The quick ratio, 0.53, is greater than the industryaverage of 0.4, but lower than its top competitorsaverage of 0.76 Leverage•Inventory turnover and DSO ratios are at asignificant disadvantage to both the industry andtop competitors, meaning the company has toomuch inventory or simply ineffectively managing it Industry Comparison•The asset turnover, 0.94, is similar to the industryand its competitors; a constant trend seenthroughout the fiscal years of ‘06 and ‘07 Equity•The total debt has fluctuated between 91-112%within the past three fiscal years Industry•The debt to equity ratio is at a disadvantage Comparisoncompared to its competitors, this can be attributedto the company’s resistance of bankruptcy
Introducti Analys Recommendations & Outco Appendice 17 on is Conclusions me s •AMR Corp. gross profit margin has decreased 9.3% since 2007 Gross Profit Margin •It has the highest GPM 100.0% in 2008 compared to its AMR Corp. competitors 80.0% 60.0% Delta Air Lines 40.0% UAL Corp. 20.0% Continental 0.0% Airlines 2006 2007 2008•Revenue began toincrease due to capacity Operating Profit Margincuts 120.0%•Volatile fuel prices 100.0%hiked up 80.0% AMR Corp.expenses, offsetting 60.0% Delta Air Linesrevenue 40.0% UAL Corp. 20.0% 0.0% Continental -20.0% Airlines -40.0% 2006 2007 2008
18 Introducti Analys Recommendations & Outco Appendice 18 on is Conclusions me sThe United States Airline Industry spent around $60 Billion on fuel in 2008. According to acollection of statistics by Standard & Poor’s, fuel costs absorbed about 36% of total airlinerevenues in 2008. Fuel hedging is a common practice in the airline industry that helps reducethe impact of unpredictable fuel prices. Fuel hedging is a contract an airline makes to pay a setprice for future fuel purchases. Factors that influence an airlines ability to hedge fuel include:cash position, credit strength and overall financial state. Individual airlines evaluate the samemarket conditions and factors, but make different choices on how to deal with the risk andimprobability related with fuel expenses. % of 09 Fuel Hedged Avg. Price Avg. Floor American 35% $2.59 $1.94 Continental 27% $2.98 $2.43 Delta 63% $2.31 $2.20 United 36% $2.81 $2.80 U.S 19% $3.66 $3.46Americans hedging strategy is not aboutmaking a bet on oil prices going up ordown, but finding a way to systematically 1¢dampen the price unpredictability of a $28 In 1 Gallon Millionsignificant operating cost (AA Inc). Thisstrategy compares very favorably to its of Fuel in costscompetitors and in recent years has helpedreduce fuel expenses by hundreds ofmillions of dollars. In 2008, American saved$380 million. American works with financial institutions and trading counterparties to buy contracts for future oil (AA Inc.) If the market price for fuel at the time of purchase is above the capped price in the hedge contract, AMR receives a financial gain. However if the market price at the time of AMR’s purchase falls below the minimum price specified in the fuel hedge, the hedge contract results in a cost to American. Even if fuel falls below the capped price, AMR benefits because they buy the majority of their fuel at current market prices.
19 Introducti Analys Recommendations & Outco Appendice 19 on is Conclusions me sThis graph shows the Pre-Fuel Cost Results- 2008major airlines profitexcluding fuel, compared $9,000to its fuel expense. $8,000American is doing very $7,000well in comparison to its $6,000 $ In Millionscompetition $5,000 $4,000 $3,000 $2,000 $1,000 $0 Americ Southw Contine United U.S Delta an est ntal Profit Excluding Fuel $6,924 $4,034 $5,474 $1,348 $4,024 $5,821 Fuel Expense $8,158 $3,713 $7,725 $3,600 $4,726 $6,327This graph shows themajor airlines total Cost Per Avail. Seat Milesystem ASM costs with ¢14.00fuel and ¢12.00without, compared to itscompetition. The most ¢10.00important factor is the ¢8.00CASM ex-fuel, whichreflects the actual cost of ¢6.00running the airline. Only ¢4.00United and Continentalhave higher costs then ¢2.00American. (Delta and U.SAirways numbers are ¢0.00 America Southwe Contine United U.S Deltaskewed because of their n st ntalbankruptcy) CASM Excluding Fuel 10 5.23 10.22 8.36 10.45 8.33 CASM Fuel @ $1.85 13.07 7.93 13.06 11.3 13.09 11.27
Introducti Analys Recommendations & Outco Appendice 20 on is Conclusions me sThis graph represents thehigh, low, and closing stock Stock Price (High-Low-Close)prices for AMR from years $80.001999 to 2008. $70.00AMR stock is considered a $60.00moderate buy by many $50.00financial analysts because $40.00of its large cash $30.00position, good free cashflow generation, hidden $20.00assets, and a $10.00focused, financially $0.00oriented managementteam.(Forbes) Closing PriceAMR Corporation reported Earnings Per Shareannual 2008 losses of $4.57per share on 01/21/2009. $200.00(BuisnessWeekly) $100.00 $0.00 -$100.00 -$200.00 -$300.00 -$400.00 -$500.00 -$600.00
Introducti Analys Recommendations & Outco Appendice 21 on is Conclusions me s Book Value $60.00 $50.00 $40.00 $30.00 $20.00 $10.00 $0.00 -$10.00 -$20.00•AMR is considered a buy stock in the current market.Analysts believe that AMR is taking care of currentissues while investing for a greater future. The bookvalue and price earnings ratio are skewed due to AMRnever having to file for bankruptcy P/E Ratio 08-99 30 25 20 15 10 5 0 (5) (10)
Introducti Analys Recommendations & Outco Appendice 22 on is Conclusions me s Debt (In $Millions) Delta Continental U.S United SouthWest American $0 $2,000 $4,000 $6,000 $8,000 $10,000 $12,000 American SouthWest United U.S Continental Delta Long-Term Debt $8,292 $3,278 $6,971 $3,734 $5,360 $8,338 Current Debt $1,124 $105 $1,454 $423 $578 $1,769•Only major U.S airline to havenever declared bankruptcy•Around $9 Billion in debt•Will pay $1.8 Billion of principalpayments on long-term debt alone Leveragein 09’ 100•This debt leaves American 50vulnerable if the economy furthersuffers. 0 (50)•The debt takes a significantamount of cash flow in the form of (100)interest expenses, which mayaffect operations and future (150)investments (200) (250)
Introducti Analys Recommendations & Outco Appendice 23 on is Conclusions me sIn 2008:•AA had 71,800 employees. But cut downto 67,000 in the 1st quarter of 2009.•AA ASM Per Employee was $2,277,563•AA Labor Cost Per Employee was $88,251 Revenue Per Employee in 2008•AA Employees per Aircraft was 117 $450,000 $400,000•American Airlines total revenue per $350,000employee was $282,592 in 2008. (table) $300,000 $250,000 $200,000 $150,000 $100,000New Incentive Program: $50,000 $0•Pay for performance method which AMR Delta Continental Unitedgives employees concrete goals withthey can see and achieve•Stripped weather and air-traffic issuesfrom its employee-specificperformance metric•Bonuses vary depending on the marksthe team receives in customer-satisfaction surveys
24 Introducti on Analys is Recommendations & Conclusions Outco me Appendice s 24 Goal #1 Identifying strategies to create a strong market position for AA in the crucial global market. Recommendation: •Global market growth plan oStudy Abroad students Goal #2 oForeign Students Strengthen Oneworld Alliance by identifying new global markets Recommendation: •Plan for service to teams, staff and fans for upcoming international sporting events. oOlympics oFifa World Cup •Using new and old members efficientlyGoal #3 to increase load factor and feed for the alliance.Cutting costs on routes losing money andcreating new profitable routesRecommendation:•Redesigning fleet and reinvesting it for newroutes oReplacing current fleet not operating profitably on certain routes with more efficient aircrafts. oUsing replaced fleet to rescue member airline and create more routes and scheduled capacities for Oneworld.
25Introducti Analys Recommendations & Outco Appendice 25 on is Conclusions me s Problem American Airlines is experiencing declines in per-passenger revenues in long-haul international markets. Solution Identify long-term international markets for passengers, and create a marketing + sales promotion to increase the total amount of international passengers Strategies: Increase Travel in international market by Looking at the students Looking at the high who travel to the U.S to attending audience of study as well as the global sporting events students who leave the U.S to study
Introducti Analys Recommendations & Outco Appendice 26 on is Conclusions me s Outgoing Study Abroad Students•Rising number of students enrolling in studyabroad programs especially in European countries• Can further add to market share of long-haultraffic going from the US to EU and other studyabroad destinations.• Establish contracts with states that operate Ultimate Resultschools sending students for study abroad The Combination of theprograms. specially designed package in alliance with Jet Airways and the contract with states and universities, we expect the gain in AA’s Incoming Foreign students share in the global market to generate an increase in sales and revenues by at least 10%. • Number of students increasing every year • Can generate greater global market share • Strategic partnership with airlines from top places of origin • Utilizing new routes • Marketing and Sales of student Packages
Introducti Analys Recommendations & Outco Appendice 27 on is Conclusions me s“International experience needs to be a component of everystudent’s education, equipping them for 21st century careers andfor global citizenship,” Allan E. Goodman, President & CEO of the Institute of International EducationRecognizing the magnitude of an international education in today’s globalsociety, U.S. students are studying abroad in record numbers. Over the pastdecade, the number of U.S. students studying abroad has increased by over 150percent. In academic year 2006-2007, 241,791 U.S. studentsstudied abroad, an increase of 8.5 percent from the previous year. # Of U.S Students Studying Abroad 300,000 250,000 200,000 150,000 100,000 50,000 0
Introducti Analys Recommendations & Outco Appendice 28 on is Conclusions me sA portion AMR’s recent financing of $2.9 Billion will be allocated to its main hubs, in order tosatisfy the highly profitable international market and improve the future for AA growth by gainingmore global share. AA defines its major and most profitable hubs as Chicago, Dallas-FortWorth, Miami, New York and Los Angeles. AA also receives a substantial amount of traffic throughtheir Philadelphia and Boston markets.Our recommendation calls for a sales /promotion contract with individual states educationprograms. AMR has the potential to dominate the market for American students who studyabroad, because of the high density of students traveling abroad through their main focus hub’scities.Currently, the common way for students to travel to their global destinations is to book tickets atcurrent price. If Texas, New York, California, Illinois, Florida, Massachusetts, and Pennsylvania allaccept contract bids with American Airlines to have exclusive packages with their students, thestudents would get cheaper flights, and bonus miles added to their AAdvantage account. This planwould have introduced 90,381 flyers in 2006, and 96,841 flyers in 2007. With the numbers ofstudents taking the opportunity to study abroad steadily increasing, AA can take advantage oftheir new international flight strategies. # Of Students That Study Abroad (By State) 30000 25000 20000 15000 10000 2005/2006 5000 2006/2007 0
Introducti Analys Recommendations & Outco Appendice 29 on is Conclusions me sNot only has the number of students increased, but 17 of the 20 leadingdestinations of U.S. study abroad students witnessed increases in thenumber of American students studying at those destinations. U.S studentshave recognized that China and India are economies with high growthrates, which in turn lead to better opportunities. The numbers of U.Sstudents that studied in China has increased by 25% and 24% in India. U.Sstudents have also recognized the importance of learning the highestgrowing language in their country, Spanish. Top 10 Markets For U.S Students-200740,00030,00020,00010,000 0 # Of U.S Students % Change In # Of U.S Students (2006-2007) 30.0% 20.0% 10.0% 0.0%
Introducti Analys Recommendations & Outco Appendice 30 on is Conclusions me sOne part of our recommendationfor AA’s international growth planis that they should develop acontract with states and specificuniversities that have a high rate ofstudents being sent for studyabroad programs.Most students travelling out of thestates are likely to fly out of largehubs present in them. Forexample, a student travelling out ofIllinois would probably fly out ofChicago which is one of AA’s main It wouldn’t be wise to justhubs. develop a contract for states as they only fund state universities, we also recommend that AA makes a contract for private universities that send students abroad for programs. Presently most study abroad programs require students to book their flights, the university usually takes care of living arrangements. Through this contract, the university or state would get special discounts and packages for their program students.
Introducti Analys Recommendations & Outco Appendice 31 on is Conclusions me s The inflow of foreign students is increasing . Acquiring a good education is being seen as an essential element to surviving in today’s shifty job market. According to the Institute of International Education (IIE), just in 2008 623,805 foreign students landed in the US to pursue an education, a 7% increase from 2007. The top places of origin bringing in foreign students were India and China.Foreign Student IncreaseIndia – Increased from 76,503 in 05-06 to 94,563 in 07-08China – Increased from 62,582 in 05-06 to 81,127 in 07-08 100,000 80,000 60,000 07 -08 40,000 06 -07 20,000 05 -06 0 India China
Introducti Analys Recommendations & Outco Appendice 32 on is Conclusions me s # of Students per top 5 states100,000 IIE prepared a table on number of 85,009 international students in US states 80,000 69,940 and how much they contributed to them in 2008: 60,000 51,823 CA- $2,452.3 million NY - $1,952.7 million 40,000 31,683 28,604 TX - $1,055.4 million 20,000 MA - $1,004.0 million IL - $710.2 million 0 CA NY TX MA IL 800,000 700,000 IIE also recorded the number of foreign 600,000 family members that 500,000 were accompanying Children the students. AA and 400,000 Jet can offer special Spouses discounts and 300,000 Students services for students 200,000 flying with there families. 100,000 0 05-06 06-07 07-08
Introducti Analys Recommendations & Outco Appendice 33 on is Conclusions me s Our recommendation after doing research about students from India and China is that AA should form a strategic partnership with airlines from the east to capture a higher share in this global market.Jet Airways (India) American Airlines has already tied up with Jet Airways.Jet Airways is India’s second In February 2008, AA established a code-sharinglargest airline and largest private agreement with Jet.airline. In July 2008, UK based Jet offers travelers frequent flyer miles called JetPrivilegeconsumer magazine miles on all Jet Airways code-share flights operated byWhich?, ranked Jet Airways as the American Airlines from their JFK hub going to certain USbest long-haul airline after cities that are to/from India or Jet’s EU hub inSingapore Airlines having an 84% Brussels, Belgium. Foreign students, especiallycustomer satisfaction rate undergraduate students have the tendency to buy round-trip tickets between the US and their home countries at least once or twice a year whether it is for summer or winter break.The Plan: Jet can fly students from India to itsIf AA can establish an agreement with Jet hub in Brussels or to AA’s hub into create a specialized travel package for London and AA can fly them to theirthese foreign students it could generate destinations here in the US.high amounts of revenue. Jet couldpromote this package to the Indian marketas it is a highly reputed service provider inIndia and can reach out. AA can market it Benefits:to the students already here or going The agreement between these two airlines could resultabroad. in: •Higher global market share for AA and Jet.Assuming that AA already has a share in •More RASM for both with higher load factors onthe total number of students flying to the respective routes.US, this package should increase their •Increased traffic for Jet at Brussels hub.share in this market by about 10%. •Increased load factor for Eagle, as they would handle regional flights with these customers. •Consumers in this case will be able to gain frequent flyer miles from both airlines.
Introducti Analys Recommendations & Outco Appendice 34 on is Conclusions me sAmerican Airlines has received AA can also approach China Easterntentative approval by the U.S. DOT for Airlines to provide the package as theyauthority to offer service between currently codeshare with AA, JapanChicago and Beijing, China. Starting Airlines and Qantas, all members ofApril 4, 2010, American Airlines plans oneworld. CEA can market the package toto offer nonstop service from Chicago students traveling to the US from China.OHare International Airport (ORD) toBeijing, China with its 245-seat, three-class (First, Business and With the addition of this route to it’sCoach/Economy) Boeing 777 aircraft. schedule and an agreement with CEA , AA can make an effort to develop marketing strategies to capture the foreign student market from China. OHare being one of AA’s main hubs can easily manage the inflow of traffic and Eagle can provide regional support for flying the students to their respective destinations.Further Marketing this Package Students in 07/08IIE prepared a database which recognizes 8,000 7,189the Universities which enroll the mostinternational students. The Top four are: 7,000 6,404 6,297 5,933University of Southern California, New 6,000York University, Columbia University andUniversity of Illinois at Urbana 5,000Champagne. 4,000AA should get in touch with these 3,000Universities and offer packages throughthem to the students which will further 2,000contribute to the 10% increase in RASM. 1,000 0 USC NYU Columbia UIUC
Introducti Analys Recommendations & Outco Appendice 35 on is Conclusions me s Benefits Limitations Increased share in global market as a Students that are already travelling result of: have established preferred service Contracts with states and their Ineffective marketing strategy that isn’t universities as well as private sensitive to important factors such as universities culture, language and finances in a foreign market Larger customer base through Jet and CEA Strengthening dollar could affect the number of foreign students coming to Service to students that if satisfied the US could be potential loyal customers During high flying season availability of Expansion of AAdvantage incentive seating will determine offer of program discounts for students as a normal passenger would be paying more Increased operations in Europe, Latin America and Asia through oneworld and other codesharers.
Introducti Analys Recommendations & Outco Appendice 36 on is Conclusions me s Both the strategies that have been recommended for travelling students can be operated in coordination. Many of the study abroad students are going to India and China as well. The deal with Jet and CEA will also include students going from the US to India and China, students will gain miles with AA, Jet as well as CEA. Jet also met with the members of oneworld in June 2009, its potential entry could add to the alliances feed and reach. The new hub in China will open the Asian market for AA to expand their base. The full effects of student targeted strategies can only be realized in the long-term as more students adopt the package. The marketing mix must be carefully established in order to capture the share desired. We have put together a marketing mix for AA to market their services: Product – A specialized package for students pursuing an education in a place away from home to provide safe, affordable and satisfactory transportation. Price – Discounted rates for booking 1 or 2 round-trips that can be used in a 2 year span. Place – Offer package through universities, states, travel agents, recruiters and company websites. Promotion – Advertising through universities, foreign media, College Board and ETS. All students have to submit SAT and TOEFL(test of English as foreign language) scores .
Introducti Analys Recommendations & Outco Appendice 37 on is Conclusions me sOne World(stylized as oneworld) whose founding member isAmerican Airlines was formed in 1999. In February 2009, theycelebrated their ten year anniversary along with its members Britishairways, Cathay pacific, Iberia, Finnair, JapanAirlines, Malév, LAN, Qantas and Royal Jordanian. In today’s globalmarket, trying to capture a significant share is not easy as anindependent airline. To capture huge flows of passengers and goodsbetween different regions(countries and continents) being part of atransatlantic alliance is necessary.Each airline in the alliance contributes to total traffic captured makingit possible for all members to service traffics they would not have seenotherwise. This alliance provides AA with incremental feed and avirtual connection to places where AA cannot fly profitably or whereaircrafts and assets would not provide sufficient return oninvestments. Open Skies Closing Business: The US- EU open skies agreement essentially allows any EU carrier to fly anywhere within US boundaries and conversely allows any US carrier to fly within the EU countries. This doesn’t help AA much as the US is a country and the EU is a union of multiple nations in Europe. The opening of the EU skies unleashes a swarm of US carries that are competing to service them. Before the OpenSkies agreement AA and BA through oneworld dominated the US-UK service as they had slots. Other airlines had to fly through Gatwick. OpenSkies has weakened the US- Heathrow traffic for AA.
Introducti Analys Recommendations & Outco Appendice 38 on is Conclusions me sOneworld is currently #3 in the US-EUmarket after Skyteam and Star Alliance. It Capacity Shareis also behind its competitors when One Worldcomparing capacity scheduled at each keygateways. They are competing for their 15.3% 21.4% SkyTeamhub in Heathrow as well as trying to gain ahigher share at other high-traffic EU hubs Star Alliance 36.1% 27.1% Virgin Atlantic/Other Alliance Major Hub Shares 100% It has the highest 90% share at Heathrow but 80% stands third with 70% respect to share from 60% Paris, fourth 50% from Frankfurt and has no share 40% at Amsterdam . 30% 20% 10% 0% LHR-US CDG-US FRA-US AMS-US Virgin Atlantic/Other 15.1% 1.90% 8.30% 3.70% Star Alliance 18.5% 18.10% 79.70% 18.00% SkyTeam 6.0% 64.90% 7.40% 78.30% One World 60.3% 15.20% 4.50% 0%
Introducti Analys Recommendations & Outco Appendice 39 on is Conclusions me sGlobal sporting events are very profitable. The high attending audience, not only watchthe events, but they spend money on traveling expenses in the host cities. The top threemost attended global sporting events are: Summer & Winter Olympics and the Men’s FIFAWorld CupThe major global sporting events contain similarcharacteristics: •Held over a course of several days •Held in or around a “Host-City” NA·TION·AL·ISM •Tend to be with a 2-4 years gap between every event DEVOTION TO •Countries send national teams to each THE INTERESTS competition •Large amount of money spent on these OR CULTURE OF events. ONES NATION Fans of large nations tend to be very loyal in attending events world-wide. The population of these fans will continue to always travel because of a loyalty to an “imagined community.” It creates a sense of common identity even among people who have never met one another and probably never will. (Billing)
Introducti Analys Recommendations & Outco Appendice 40 on is Conclusions me s•The Olympic Games is the most attended world-wide sporting event.•Uniquely every two years the games switch from summer games to winter games. •The last 7 Summer Games had average ticket sales of 5,323,428 •The previous 6 Winter Games had average ticket sales of 1,235,000•The host city for an Olympic Games is usually chosen seven years before their set event.•Summer Olympics typically happen occur around late summer-early autumn.•Winter Olympics typically occur in the month of February. Summer Olympics Tickets Sold Winter Olympics Tickets Sold10,000,000 2,000,000 8,000,000 1,500,000 6,000,000 1,000,000 4,000,000 500,000 2,000,000 0 0
Introducti Analys Recommendations & Outco Appendice 41 on is Conclusions me s •The average tickets sold in the last 6 years totals 2,890,194. •32 Nations compete for the World Cup at venues within the host nation(s) over a period of around a month. •The World Cup is very popular, it is the most viewed sporting event in the world, with an estimated 715.1 million people watching the 2006 final(FIFA.COM) •2010 In South Africa •2014 In Brazil •Occurs in the Summers, opposite of the Summer Olympics Mens World Cup Tickets Sold # of Qualifying4,000,000 Teams by Region(86-3,000,000 Region 06)2,000,0001,000,000 Europe 85 0 South America 26 North&Central America/Caribbea n 16 Africa 22 Asia 18 Oceania 1
42 Introducti Analys Recommendations & Outco Appendice 42 on is Conclusions me s The JAL situation: Japanese airlines is highly in debt and is under pressure from theWith oneworld not doing very well in Japanese government to develop a newcomparison to its competitors, it must take survival plan. There are 3 possible endings toadvantage of these international sporting this situation:events to increase revenues and market •JAL joins Delta and leaves Oneworld. Penaltiesshare. of them leaving the Oneworld agreement get absorbed by Skyteam.Oneworld and all its members should •JAL gets refinanced by AA, British Airways anddevelop a preplanned itinerary in the form Qantas and stays in Oneworld.of a travel package to market to the mass •Japanese government bails out JAL and itamounts of people attending these remains in Oneworld.sporting events. •The 2nd and 3rd result would be beneficial for AA and Oneworld. Marketing Mix: Product: Travel packages for Olympic Games(Summer and Winter) and Fifa World Cups. Price : Discounted rates for early bookers, groups larger than 8 and Families larger than 4 Place: oneworld website, travel agents. Promotion: Advertise on Sports channels and journals, at qualifying events leading up to final event. 2010 2012 2014 2016 TOTAL 30% 1,237,558 1,597,028 1,237,558 1,597,028 TOTAL 20% 825,039 1,064,686 825,039 1,064,686 TOTAL 15% 618,779 798,514 618,779 798,514 TOTAL 10% 412,519 532,343 412,519 532,343
43 Introducti Analys Recommendations & Outco Appendice 43 on is Conclusions me sThe 7-year notice of the selection of host citiesallows oneworld a lot of planning time toconfigure code-sharing and to effectively use theirfleet.Every 2 years a new large scale influx ofcustomers will flood the international markets.•The IATA monthly traffic analysis shows that Winter Olympics take place February 2012 inFebruary is the least traveled month in the global Vancouver, Canada. February is the leastmarket. traveled month in the global market.•The Asia/Pacific, European, and North American Oneworld can gain a significant share if theymarket all incurred passenger per kilometer market their package plan well before 2012.declines between 10%-12%. A team set up by the Japanese government is•The 3 major markets also experienced capacity analyzing JAL’s situation to advise on thecuts. company’s overhaul and should decide by the end of November. If the JAL situation results in AA andThe Fifa World Cup will be held in the summer of Oneworld’s favor, they can use the ERJ-2010 in South Africa. This event will bring in 145(50-seater) cut out from Eagle’s fleet tomillions of fans from around the globe. add to JAL’s current fleet. This can increase scheduled capacity and introduce new routesMexicana Airlines which services Mexico and in the North-Eastern pacific market.Central America is joining the Oneworld alliancein November,2009. Mexicana will further increasefeeds and scheduled capacities for oneworld andits members.Being able to reach as many regions to transportfans for these sporting events and utilizing theresources we have will contribute to ultimate goalof creating a strong position in the global market.
Introducti Analys Recommendations & Outco Appendice 44 on is Conclusions me sIn the past, low fare carriers have successfully been able to generate demand from thepassenger as well as utilize its fleet to cover costs.According to a report prepared by the Allied Problems for LCC’s, OpportunityPilots Association (APA), there is amisconception about LCC’s having lower for AA:costs than Comprehensive NetworkCarriers, CNC’s. Airlines such as Southwesthave approximately the same unit cost as AAbut are able to spread them out through highaircraft utilization and efficient management Southwest reported three straight quarterly losses forof resources. the first time in 17 years. They currently face the following problems: Require flying many hours in a market where they need to capture strong passenger loads. Main Point Demand has declined for every segment of this industry and easy-entry markets have been exhausted. Trying to enter larger airports to take share from other carriers as opposed to stimulating new traffic•The massive growth potential for these through lower farescarriers has ended No longer have a competitive advantage as•Affected by the same market forces as the competitors immediately match pricings initiated byCNC’s. Southwest.•All main players of LCC sector are reducingcapacity.•Based on currently filedschedules, Southwest is cutting 6.2%capacity this year across its current routesystem.•As of 4Q of 2009, it will have reduced itsservice at 90% of the cities served in January2008.•According to Fitch Ratings, Southwest’slong-standing cost advantage to the rest ofthe industry is being eroded gradually asnon-fuel unit operating costs continue to riseat a high single-digit percentage rate
Introducti Analys Recommendations & Outco Appendice 45 on is Conclusions me sRepresents about 11% of AA’s revenuesHas 266 units under its wing which comprises 29% of AA’s fleet.Contributes feed and revenues to AA’s hubs but is losing a lot ofmoney at this stage and is not competing effectively with itscompetitors. Problem %Outsourced in 2008AA puts the least amount of resources 25.0% 22.7%towards the operation of its regionalpartner as compared to its competitors. 20.0% 17.1% 16.8%As of the first quarter of 2009, the 15.0% 12.0%percentage dropped from 12% to 11%. Eagle’s fleet is making significant 10.0%losses coming out of all its main hubs.Especially with the flights with 50 or 5.0%under seating. 0.0% AA CO DL UA Our Solution AMR corp. can take advantage of the potential drop in the share of Southwest and other regional carriers by rethinking the way they operate American Eagle. Our recommendation to redesign the fleet of American Eagle will allow them to use less aircrafts and not waste resources that are being fed into American Eagle currently. This is not a recommendation for them AA to increase revenues, but to cut costs and utilize the resources available more efficiently.
Introducti Analys Recommendations & Outco Appendice 46 on is Conclusions me s American Eagle has the potential to operate more efficiently by capturing a higher market share through fleet management to efficiently use the resources they have. This capture would generate higher load factors which are essential to earn revenues to cover costs.Current Inefficient fleetWe looked at the 50, 44 and 37-seaterjets that Eagle owns and theefficiency of their operations. As ofnow they own:110 50-seater jets (Embraer-145)59 44-seater jets (Embraer-140)33 37-seater jets (Embraer-135) 50-seater on a 300 mile route: •Paying an average of $1.85 per gallon of fuel •ASM cost of 17 ¢ •Average 80% load factor generates 21.3 ¢ per mile. 37-seater: bringing Eagle down: 37-seater jets are doing worse. At current fuel costs with a 22.5 ¢ ASM cost, the 37-seater Embraer ERJ-135 would have to generate about 28 ¢ from the feed passenger on the 300 mile route.
Introducti Analys Recommendations & Outco Appendice 47 on is Conclusions me sWe analyzed the 50-seaters and under that are flying Our recommendation for AA is to redesignout of DFW, only three are making profits in the over their regional fleet, cutting out all the 50600 mile market. Some flights have a frequency of and 44-seater airplanes and replacing themabout 4 or more times a day. Their average load with the Embraer 190 which has 98 to 114factor is 80% but the routes that are losing the most seats. The costs associated with themoney have a load factor between 60% and 70%. For Embraer-190 are the same or less than theexample the route from DFW to CVG in Cincinnati Embraer-145(Table on next slide). Asmade a loss of over one million dollars in 2008 as shown in the table, the EMB-190 canwell as the route to Lexington which lost about 1.1 transport the same amount of people on amillion. SEE TABLE route with less frequency. Although this could hinder the competitive strategy to capture traffic, at high density hubs this could help AA optimize their fleet. For example AA’s flight schedules from Boston to Chicago in one day run 9 flights. This could be cut down to 5 by the EMB-190. $3,000,000 $2,500,000 $2,000,000 $1,500,000 Load Factor CVG - Cincinnati, OH – 63.1% $1,000,000 Revenue LEX - Lexington, KY – 65.4% $500,000 Profit/Loss PNS - Pensacola, FL – 73.4% VPS – Northwest Florida $0 Airport, FL - 67.8% CVG LEX PNS VPS ($500,000)($1,000,000)($1,500,000)
Introducti Analys Recommendations & Outco Appendice 49 on is Conclusions me s Benefits Limitations •Optimized fleet capacity to •Unavailability of buyer for cut costs on failing routes excess fleet •Increased load factor and •Still could incur low capacity RASM rates •Efficient use of available •Increase in fuel price could resources cause cost of operating of EMB- 190 to exceed cost of ERJ-145. •Increased share in domestic market as a result of plan •High investment required and decline in LCC
50Introducti Analys Recommendations & Outco Appendice 50 on is Conclusions me s This recommendation is designed to reorganize eagle’s routes and aircrafts that are losing money for the company as of now. Our recommendation calls for the cutting out of some routes and their frequency of trips they make in a day. Using more efficient planes with higher seat capacity which cost the same as our current fleet to run routes to maximize load factor. This recommendation requires AA to invest in at least 45 EMB-190 ‘s which will run up a total investment of approximately $1.35 billion. We suggest that AA finance this plan by reinvesting 50% of this amount from retained earnings and investing 50% from our cash holdings. when the company is in profit and can afford to invest. Investing retained earning s- $675,000,000 Cash - $675,000,000
51 Introducti Analys Recommendations & Outco Appendice 51 on is Conclusions me s International Growth plan to increase revenue by 10% oneworld alliance plan and global sporting event plan to increase revenues by 7% Increase in revenues from Eagles new fleet, cutting losses on failing routes. Increase in revenue by 1%.2009 – 3% increase in revenue andpassenger load – Student package salesin Fall and Winter.2010 – 4% increase in revenues andpassenger load – Fifa Worldcup(summer) + Studentpackages(summer, fall and winter)2011 – 3% increase in revenues and oneworld and global sporting eventpassenger load – student growth recommendation to increase share by: Entering high traffic EU hubs2012 – 5% increase in revenues and Establishing new hubs in Latin America andpassenger load - Olympic games in AsiaFebruary, increase in assets(Investment By efficiently using Mexicana and JAL toin New aircrafts) Decrease in cash and generate feed at oneworld hubsretained earnings.2013 – 3% increase in revenues and American Eagle fleetpassenger load – Student package plan recommendation to increase load factors , cut expenses by using more efficient fleet. Putting old fleet into JAL and creating new routes in North- East pacific region.