American Airlines - The economic aspects
American Airlines exhibits all of the characteristics of a firm in airlines industry where good tactical management is the key to success. This company and its regional airline partner American eagle serve almost 250 cities around the world and operate more than 3600 daily flights. Its goal is to provide safe, dependable and friendly air transportation along with related services. It is one of the airlines that have played an important part in the history of air transportation in the United States. The company has 69 years of History in the industry. As per American Airlines website, Starting as a mail company called ...view middle of the document...
The Merger with US Airways that was once seen as US Airways was about to takeover American Airlines.
As for the threat of new entrant there is a very little threat exists for the current market in the airline industry. JetBlue one of the newest and most successful competitors has survived and thrived in an industry with high initial capital costs and many legal requirements. JetBlue has differentiated itself and started taking up the slack of the major players by providing better customer service and lower fare tickets. Like JetBlue Southwest Airlines had a rough time getting into the market. New entrants have to be different and count on that niche in service or price to be able to gain competitive advantage.
The threat of substitute service availability is enormous. With the popularity of the internet since 1990s, many smaller airlines have taken advantage and been able to undercut the larger airlines in pricing strategies as advertising and providing online ticketing and check-in capabilities are helping them cut cost. Getting to one place from another at the lowest price appeals to most consumers and this makes the threat of substitutes a key factor to be dealt.
American Airlines (American) made four fundamental changes to its rates. First, it moved to a four-tier rate structure; American offered first-class rates and three tiers of coach: full-fare, 21-day advance purchase and 7-day advance purchase. Overall, it expected to reduce coach fares by 38% and first-class fares by 20% to 50%. Though full fare coach prices dropped by about 38%, advance-purchase fares dropped by 6% when compared to the advance purchase tickets already being offered. Through this fare structure, American also eliminated deep discount tickets. Second, American eliminated the negotiated discount contracts of many large companies. Though it intended to fulfill any outstanding contracts, it did not intend to renew any of these contracts. Third, American realigned its pricing with its costs. Under the new structure, American fares were more distance based (therefore cost-based) than they had been in the past. Finally, American changed its non-refundable policy. Advance purchase tickets could now be rescheduled for a $25 processing fee.
Major challenges are faced by the larger carriers including high debt loads and pension funding deficiencies. American's purchase of TWA couldn't have come at a worse time. American and other large carriers are famous for their high amount of unfunded pension liability accounts. Cullen, Yamazaki, and Chew (2010) defines “In 2009, AMR recorded a net loss of $1.47 billion, compared with a 2008 net loss of $2.1 billion.9 This past year’s loss was driven by a decrease in air travel as a result of the economic downturn, leading to significant reduction in passenger revenue. Industry-wide fare discounting exacerbated such declines, further American Airlines diminishing American’s passenger revenue...