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Public Management: Strategic Report for American Airline
Name
Institution

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Table of Contents
Executive summary......................................................................................................................... 3
Introduction..................................................................................................................................... 3
Reasons for the decline ................................................................................................................... 4
Current position of the company..................................................................................................... 5
Mission statement ........................................................................................................................... 6
Analysis of American Airline ......................................................................................................... 6
Competitive analysis....................................................................................................................... 6
Porters five analysis (PR, 2014).................................................................................................. 6
Internal rivalry ......................................................................................................................... 7
Barriers to entry....................................................................................................................... 7
Buyer power............................................................................................................................. 8
Power of suppliers ................................................................................................................... 8
Power of substitutes and complements.................................................................................... 8
Pest analysis ................................................................................................................................ 9
Political.................................................................................................................................... 9
Economic ............................................................................................................................... 10
Social ..................................................................................................................................... 10
SWOT analysis.......................................................................................................................... 11
Strengths ................................................................................................................................ 11
Weakness ............................................................................................................................... 11
Opportunities ......................................................................................................................... 11
Threats ................................................................................................................................... 12
Strategic options............................................................................................................................ 12
Address labor cost ..................................................................................................................... 12
Pursue strategic alliances .......................................................................................................... 13
Evaluation of the strategies........................................................................................................... 13
Recommendations ..................................................................................................................... 14
Conclusion .................................................................................................................................... 14
References..................................................................................................................................... 15

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Executive summary
American airline (AA), a brand that has faced deregulation, fuel price crisis, world wars,
and terrorism threats still continue to face serious challenges in airline industry. Currently, the
airline is burdened with balance sheet, labor costs, and perpetual union issues. Same way as other
American legacy carriers, AA continues to face increasing competitive weight from low cost
carriers. Despite of boasting of an excellent management team, the company continues to make
tremendous losses. As such, the American airline should address high cost of labor, enter into
alliances with low-cost carriers, and seek comprehensive solutions for the threats posed by the
low-cost carriers. The author of this paper recommends the airline avoid the excessive
concessions to the attendant's union. To reduce the cost further, the AA should take the initiative
towards the greater fuel efficiency and end explores maintenance outsourcing. Inability to
compete with the foreign carriers, the company should invest in a flatbed seating in the business
class on long flights. The author also believes the company will gain by opening new routes to
Hong Kong and Seoul which link AA to the new markets and can be accessed without
expansion of the current fleet. The above strategies, together with planned additional of the fleets
and the recent alliance with JetBlue, is likely to make the company thrive in a competitive airline
industry.
Introduction
American airline is the one of the leading airline company in United States and the world.
The company contributes to the united economy of about $ 100 billion and provides job to
900,000 people worldwide (AMERICAN AIRLINES, 2002: 22). It was established in 1930 with
the earlier name of American airways; however, the name was changed officially to America
airline in 1934. It is the combination of all small airlines that adds up to 80 gathered together in

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the aviation corporation (AMERICAN AIRLINES, 2002: 32). In the year 1934, Cyrus Rowlett
smith was hired to be the president of the company, and under his leadership AA became the first
airline to fly Douglas DC-3 in commercial services. At the end of 1930s, the AA carried about 1
million passengers. Its headquarter was first located in New York City, however, in 1979 it was
relocated to Fort Worth, Texas. The company established a regional affiliate, the American
eagles in 1984. The destinations of the company are more than 160 in Canada, Mexico, United
States, and many parts of the world. According to Moran (2013), on an ordinary day, the
American airline can do about 3400 flights that are approximated to 275,000 passengers. In
September of 1998, American Airlines announced the formation of a new global alliance, one
world, which would generate code sharing agreements with multiple international airlines.
Currently, one world member serves about 700 destinations in 130 countries, and the alliance
has developed to include eleven more major carriers (Moran, 2013).
Reasons for the decline
The American airline has been on record of various challenges throughout the years. The
first cause of the decline is fuel price. The company has been faced with an occasional increase
of oil prices that has increased the production costs. According to Armen (2013), the average
cost of fuel constitutes to 20-30% of total airline operation cost. Therefore, its increase in price
is a blow to the firm that gets tough competition in the industry. Second is the financial crisis that
occurred in September 2001. PR, (2014) notes that it was not only a crisis to the American
airline, but an overall crisis to the aviation industry which was felt so much in industries that
faced stiff completion such as AA. Moreover, the terrorist attack on the American airline to
destroy the world trade center was another blow for the success of the company. As a result, the
company continued to incur losses from the year 2001 all its way to 2008. The annual financial

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reports reveal that since the year 2001, the company has posted annual losses in seven out of nine
years. According to Robinson (2009), this has accumulated to almost $11 billion in that period.
Therefore, the rising cost of fuel, economic turn down, and terrorist attacks have been a source of
performance decline in the company.
Current position of the company
Following the annual report, the company has been increasing its annual income from the
year 2011 after getting a fat loss in the same. The graph of the company has been a spontaneous
one with a real increase in gross income. The table below gives an example of the performance
of the company since the year 2009 (PR, 2014: 31). It can be realized that the company got the
increases of 2.16 billion in 2013 as compared to the year 2012.
Fiscal year 2009 2010 2011 2012 2013
Sales/Revenue 19.92B 22.17B 23.98B 24.86B 26.74B
Cost of Goods
Sold
17.1B 18.16B 20.68B 20.42B 20.14B
COGS
excluding
D&A
16B 17.06B 19.59B 19.4B 19.12B
Depreciation
&
Amortization
Expense
1.1B 1.09B 1.09B 1.02B 1.02B
Depreciation 979M 967M 954M 915M 1B
Amortization
of Intangibles
125M 126M 132M 100M 20M

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Gross Income 2.82B 4.01B 3.3B 4.44B 6.6B
Figure 1: Annual Financials for American Airlines Group Inc.
Mission statement
The main mission statement of the company is “AMR Corporation is committed to providing
every citizen of the world with the highest quality air travel to the widest selection of destination
possible. AMR will continue to modernize its fleet while maintaining its position as the largest
air carrier in the world, with the goal of becoming the most profitable airline”( 'American
Airlines Group Inc.,2014:2).
American airline promoted a good image of the company and the customers. The aircrafts
offered the comfort with advance technology and high-quality services. However, the mission
statement of the company is quite different from its performance. Currently, it holds position 11
in terms of quality services due to new entrants into the industry (AMR Corporation SWOT
Analysis, 2014). As such, being the leading quality airline company as per the mission has not
been achieved. Other companies such as JetBlue have dominated the market due to affordable
pricing strategy and quality services (AMR Corporation SWOT Analysis, 2014).
Analysis of American Airline
Competitive analysis
Porters five analysis (PR, 2014)
Force Strategic Significance
Internal Rivalry High
Supplier Power High

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Buyer Power Medium
Entry and Exit Low
Substitutes & Complements Low
Internal rivalry
American airline has been facing significant competition both domestically and
internationally. The domestic competition has led to the emergence of other small companies
which compete for the same customers and identical routes. American ranks as the world biggest
airline in terms of the passengers carried while ranks eleventh in terms of quality of the airline
industry. Low-fare companies have gathered the top position in quality rating giving the
company a major blow. Such airlines include JetBlue, Alaska, southwest, and America West
which are known as low-cost carriers. Others include US airways, north-west, continental and
united airline. “The company faces face stiff competition from point-to-point low-cost carriers
(LCCs).
Barriers to entry
Traditionally, airline industry is a capital intensive that has acted as the primary barrier to
the emergence of other companies. It has favored the existing companies from serious
competition. Moreover, there are substantial economies of scale that comes from the capacity to
spread the costs over several routes, marketing, and the capability to get involve in code sharing.
Apart from the economic difficulties, there are logistical and regulatory barriers. According to
Cannon (2014) the airline industry is highly regulated in terms of homeland security and route
scheduling. On the other hand, exit from the company has been a complicated process.

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Buyer power
The proliferation of the online ticket has given consumers the knowledge of services and
pricing in the airline industry. Additionally, sensitivity of the price that arises from the
undifferentiated nature of the industry gives a significant amount of buying power to the
consumers. In addition, because the consumers have low cost of switching, the power of buyers
is amplified in the industry of airline. The ability of the consumers to decide and act on prices
has given low-cost carrier opportunity since they can offer attractive pricing to the expensive
routes (AMR Corporation SWOT Analysis, 2014).
Power of suppliers
There are three primary inputs to operations in airline transportation: labor, aircraft, and
input. The powers of suppliers in each of these are paramount. The labor in the airline industry in
America is highly unionized, and salaries, wages, and benefits contribute to 33% of the total and
expenses of AA. While another American airline has achieved low labor cost through
bankruptcy, American airline continues to pay high wages in the industry. American airline
encounters the power of suppliers when purchasing the aircrafts. According to Cannon (2014),
the aircrafts supplies are dominated by two suppliers: Boeing and Airbus. A survey carried by
Robinson (2009) revealed that by the end of 2009, AA consisted of 610 aircrafts of which
Boeing planes consisted of 75%. Therefore, the small number of aircraft manufacturing
companies gives the suppliers a good bargaining power.
Power of substitutes and complements
The substitutes of the airline industry include other forms of transportation that can be
used instead of air travels. In United States, there are few forms substitute that can threat the air
travel. The country lacks high speed and strong rail networks. Even so, rails are slower and take

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a lot of time that cannot substitute air travel. Though there is a good network of road system
which offers low prices, they are not efficient for long distance travelling (Robinson, 2009:212).
However, over short distances, road and rail system has posed a major threat to the airline
industry which is less expensive than airline. Another substitute that has prevented the company
from getting their target consumers is the jet. Most known business people like privacy hence
will prefer jets to the public system. Another major substitute is the growth of technology that
has enhanced effective telecommunication. Moran (2013) says that the emergence of video
conferencing has cut down the rate at which business men travel since they can do that through
technology.
Pest analysis
The use of the pest analysis as an external environmental factor of the American airline takes
account into political, economic, social, and technological environment. The keen take on these
factors determines the direction at which the company is moving. It must also be remembered
that the macro environmental aspects are limitless. Hence, the author will concentrate to the
areas that are thought to have weight on the company.
Political
The stability of the United States has been good for quite long. However, it was shaken by the
effects of the terrorists in November 11, 2001. This effect led to a catastrophic decline in the
business (Cullen et. al., 2010: 32). Additionally, the following areas have contributed negatively
to the profitability of the company; pricing regulations, union requirements and wage legislation,
1978 deregulation policies, and an increase on airport and national security.

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Economic
The economic condition of the United States prior to the attack of September 11 called for the
recession where the industry was struggling with discount carriers. The pre 9-11 airline climate
predicted a trivial contraction as an outcome of the reversionary climate which was vividly
affected by the events of 9-11 and resulted in an economic aftermath: dramatic economic
slowdown, increase in the cost of fuel; balance of trade accounts; and fluctuation and inflation of
dollar against the yen and euro.
Social
The social environment factors that has contributed to the decline of the company especially after
the 2001 attack include (Cullen et. al., 2010: 21); decline in airline-related vacations, serious
decrease in middle and low class travel, decline of the safety following the 9-11 attack, decrease
in airline travel by consumers, and low fare travel attitude that makes customers go for other
options. These social factors have contributed negatively to the success of the company.
Technology
Although the emergence of technology has benefited every aspect of life, it has been the cause of
particular losses in the airline industry. Precisely, internet connection has enabled video
conferencing that has cut the rate at which business people travel. A research carried by
Bachman (2013) reveals that other areas that have affected the airline industry in terms of
technology include Orbitz , Expedia, cheap tickets, and other best price shopping services in the
airline industry.

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SWOT analysis
Strengths
• Reputation and strength of the brands-Most established and the oldest carrier in the
industry, and it is the only legacy carriers that have not filed for bankruptcy.
• The strategic location of the airport which has a strong presence in key business hubs.
The company is located in Dallas, Miami, and Chicago.
• Investor confidence: the company produces excellent operating cash flow. It is also high
rated and famous
• It also has advantages such as enrolling 50 over so million; recognized perennially as
one of the best company with customer loyalty programs; and a high proportion of the
seating level among legacy carriers
Weakness
• Incapability to compete in international flights as other foreign carriers that dominate the
industry with quality services.
• The financial position of the company is low to the extent that it cannot enter into fuel
hedging contracts. Moreover, the financial analysts still forecast future losses.
• Union and labor issues on the company are stumbling blocks for the company success.
• Overdependence resurgence in demand
Opportunities
• The flight plan 2020: the authorities have come out with a ten-year action plan, moreover,
the emphasis on a serious investment in the earning loyalty, building workplace
community., and strengthening the global networks.

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• Address of the labor cost. This should focus on negotiations of flight attendant unions
and maintaining outsourcing.
• Enhancement of international offerings through potential growth in Asian markets and
upgrade of business class on a long trip.
Threats
• Competitors have reduced the cost of traveling through consolidation and bankruptcy
• Volatility of the fuel market
• Escalating the militancy of labor unions
• The innovation and growth of travel substitutes and video conferencing that keep people
to communicate without of travelling
• ICC model is edging out legacy carriers
Strategic options
Address labor cost
American Airlines has the highest labor costs in the airline industry, as a result of a
highly unionized workforce, but also due to the seniority of their workforce. The company,
therefore, should address the labor cost to reduce the production cost and increases the profits
(Cullen et. al., 2010). Other companies have used several and unique strategies such as
bankruptcy to reduce the high cost of labor in the firm. It is for this reason that the author of the
paper suggests that the company should look for other alternatives of reducing the labor cost.

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Pursue strategic alliances
Another strategy that the company should implement is to partner with low-cost carriers
as a distinct endeavor to work and feed more international travel through other airports such as
John F. Kennedy. The merging and acquisition techniques have been as an imperative technique
in ensuring the success of performance declining companies. The company should also alliance
with other airlines such as JetBlue who are currently known as low-cost carriers.
Evaluation of the strategies
American airline just like other companies should address the labor cost in the company.
Financial analysis of the company shows that the labor cost takes almost a third of the
company’s income. Bachman (2013) says that the company cannot lower its prices due to the
high wages the company pays its employees hence cutting such significant labor cost can enable
the company reduce travelling costs to become relevant with the competitors. According to
BUTTON (2014), if the company addresses the labor costs like other companies and reduce
traveling costs, not even one of such companies can beat it due its brand and legacy.
A study carried by Bachman (2013) shows that AA alliance with another low cost- carriers will
make the company gain about eight times landing and takeoff at the JKF. Moreover, they will
attract the customers who use the JetBlue at home to connect to the American airline
international destinations. According to Armen (2013) aviation analysts estimate that such
agreements are useful to both parties since all of them will benefit economically. A study carried
by Armen (2013) shows that at least $55 million and $ 14 million will be added to service
income of JetBlue and American respectively. Following those analysis addressing operation
coat and alliance strategies, can achieve the success of the American airline.
Competitive advantage and future health of the American airline

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The economic advantage of the company is clearly identified in the porter’s model.
BUTTON (2014) says that the competitive advantages can only be gained in a company that
creates value to its consumers. It relates to the firm’s general activities in successfully protecting
competition in the industry (BUTTON, 2014: 43). As such, the company will create a compatible
advantage by lowering the prices and adding offerings in the local airline just the way they do in
international flights. In lieu to this, the customers will be attracted. As said by BUTTON (2014)
no business without the flow of customers. Additionally, the company will need to assess the
internal and external factors to determine the possibility of expansion. It will allow the company
to sustain itself in the industry and to be on the route of the leading airline company as per the
vision statement.
Recommendations
The company should try hard to gain the loyalty of the customers. This is by making a
differentiation in online and gives every consumer a value with products and services. In this
manner, the company should improve the experience of customers while traveling by creating
several developments concerning services and products. According to Armen (2013,) winning
the loyalty of the customers is the basis of business.
The company should invest wisely and achieve long-term sustainability. Massive
investments should be done on areas such as aircraft, employees, and technological
infrastructures.
Conclusion
The declining performance of the American airline has been caused by high cost of fuel,
2001 terrorist attack, and high cost of the fare within the company. This has led to the decline of

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the quality of products and services to the customers. The company has lost their loyalty to the
customers who have ranked it in position 11 in terms of quality of products and services. As
such, the mission statement of the company is far from reality. For a company to achieve its
mission it has to assess the internal, external and competitive abilities to remain relevant and
competitive in the industry. The author of this paper, therefore, advices the company to
implement recommendation and strategies acclaimed in the paper.
References
'American Airlines Group Inc. (previously known as AMR Corporation) SWOT Analysis'
2014, AMR Corporation SWOT Analysis, pp. 1-9.

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AMERICAN AIRLINES. (2002). American Airlines: a brief history. [Place of publication not
identified], American Airlines
AMR Corporation SWOT Analysis' 2014, AMR Corporation SWOT Analysis, pp. 1-9.
Armen, S 2013, 'PERFORMANCE ASSESSMENT OF MAJOR U.S. AIRLINES VIA CASH
FLOW RATIOS', Annals Of The University Of Oradea.
Bachman, J 2013, 'Do customers benefit from an American-US Airways merger?', Bloomberg
Businessweek, 4355, p. 126.
BUTTON, K 2014, 'REALLY OPENING UP THE AMERICAN SKIES', Regulation, 37, 1, pp.
40-45.
Cannon, JN 2014, 'Determinants of ''Sticky Costs'': An Analysis of Cost Behavior using United
States Air Transportation Industry Data', Accounting Review, 89, 5, pp. 1645-1672.
Cullen,J.,Yamazaki, k., & Chew, D 2010, Strategic Report for American Airlines.
Moran, M. T. (2013). American Airlines' Bankruptcy-Is American Ready for Takeoff after
Rejecting Its Collective Bargaining Agreement. J. Air L. & Com.,78, 199.
PR, N 2014, 'American Airlines Group Reports Fourth Quarter And Full Year 2013 Financial
Results', [TX-AAL-Q4-ERNS], PR Newswire US
Robinson, TR 2009, International Financial Statement Analysis, Hoboken, N.J.: John Wiley &
Sons,

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