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American Airlines Merger (Management In Action Case Study)



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American Airlines Merger (Management In Action Case Study)

  2. 2. 2 INTRODUCTION On December 9, 2013 The American Airlines Group was formed. + = A merger between AMR Corporation, the parent company of American Airlines, and the US Airways Group, the parent company of US Airways. Valued at $11 billion, this is the world’s largest airline group operating more than 6,700 daily flights to more than 300 locations in more than 50 countries worldwide.
  3. 3. 3 INTRODUCTION US Airways Group (US Airways) expressed interest in taking over AMR Corporation (American Airlines) US Airways (US) told some American Airlines (AA) creditors that merging the two carriers could yield more than $1.5 billion a year in added revenue and cost savings American Airlines' three unions said they supported a proposed merger between the two airlines. Under Chapter 11 bankruptcy protection, American Airlines had been looking to merge with another airline. A bankruptcy court filing stated that US Airways was an American Airlines creditor and "prospective merger partner” JAN 2012 MAR 2012 APR 2012 JUL 2012
  4. 4. 4 INTRODUCTION American Airlines and US Airways announced plans to merge, creating, by some measurements, the largest airline in the world. The United States Department of Justice along with attorneys general from different states filed a lawsuit seeking to block the merger, arguing that the group would become a monopoly. The Department of Justice reached a settlement of its lawsuit The American Airlines Group was formed. FEB 2013 AUG 2013 NOV 2013 DEC 2013
  5. 5. 5 INTRODUCTION The group aimed to yield in excess of $1.5 billion in terms of added revenue and cost savings each year. Since the merger, the combined fleet of the American Airlines Group consists of 968 aircrafts out of which 627 are owned by American Airlines and 341 are owned by US Airways.
  6. 6. 6 INTRODUCTION The deal states: 1. The AMR Corporation stakeholders will own 72% of the company and the remaining 28% will be owned by the US Airways Group stakeholders. 2. The group will carry the name of American Airlines and hence the group was named as the American Airlines Group. 3. US Airways will exit the Star Alliance and will join American Airlines in the Oneworld Alliance. 4. The US Airways management team will retain most of the group’s management positions with Doug Parker being the CEO of the group.
  7. 7. 7 BENEFITS OF THE MERGER 1. As US Airways has now joined OneWorld Alliance alongside American Airlines, both the airlines are now allowed to access the other’s network i.e. this leads to a network expansion for both the airlines. 2. Global access to a stronger OneWorld Alliance, which is spread across the world, hence providing more options for travel along with domestic and international benefits as the alliance serves nearly 1000 destinations around the world with more than 14000 flights operating in more than 150 countries.
  8. 8. 8 BENEFITS OF THE MERGER 3. The existing US Airways passengers will gain access to American Airlines’ international destinations and in turn American Airlines’ passengers will have better access to smaller U.S cities which the US Airways serves. 4. Higher connectivity with 9 hub airports across U.S.A. 5. With more than 600 orders for aircrafts, the group will have one of the most efficient and modern fleet of aircrafts in the industry. 6. The American Airlines’ AAdvantage and US Airways dividend Miles Program will allow the customers to enjoy the benefit of earning and redeeming miles on either of the airlines and also will provide benefits on flight upgrades, vacation packages, car rentals, hotel stays etc.
  9. 9. 9 HUB AND SPOKE MODEL A Point to Point network is a typical route network where an airline focuses mainly on its Origin and Destination ( O&D ) traffic.
  10. 10. 10 HUB AND SPOKE MODEL The Hub and Spoke Network is a route network where an airline will not only plan on transporting passengers between two points, but also to connect passengers between two distant cities via its hub. The Hub and Spoke model originated with American Airlines.
  11. 11. 11 HUB AND SPOKE MODEL This model allowed the American Airlines group to 1. serve a vast network of airports with a smaller fleet size (operational efficiency) 2. Provide higher connectivity (even in remote locations) 3. Fill a flight more than O&D traffic 4. Attract highly profitable transit traffic The American Airlines Group has its hubs in Charlotte, Chicago, Dallas/Fort Worth, Los Angeles, Miami, New York, Philadelphia, Phoenix and Washington.
  12. 12. 12 THE ANTITRUST REGULATION On August 13, 2013, the United States Department of Justice (along with attorneys general from the District of Columbia, Arizona, Florida, Pennsylvania, Tennessee, Texas and Virginia) filed a lawsuit seeking to block the merger They argued that it would mean less competition and higher prices as this would lead to a monopoly. American Airlines and US Airways both said that they would fight against the lawsuit and defend their merger.
  13. 13. 13 THE ANTITRUST REGULATION A settlement was made wherein the group has to give up landing slots at 7 major airports. Under the deal: • The new American Airlines is required to sell 134 slots at Ronald Reagan Washington National Airport and at LaGuardia Airport. • An additional requirement is that American sells two gates at O'Hare International Airport, Los Angeles International Airport, Logan International Airport, Dallas Love Field and Miami International Airport. • Some of the slots will be sold to low-cost carriers such as JetBlue and Southwest Airlines. As the settlement agreement reveals, the Justice Department’s real aim was not to protect consumers, but to boost the fortunes of “low-cost” competitors Southwest and JetBlue by divesting their gates and takeoff and landing slots at a handful of airports (where the group had little dominance).
  15. 15. 15 PORTER’S 5 FORCE ANALYSIS The American Airlines Group faces high domestic competition as there are multiple carriers which are competing for the same customer base. On the other hand, the group also faces stiff competition from the direct point-to point carriers as the point-to-point carriers provide the service to the customers at lower costs as comparable to the group’s airlines due to lower operating costs. The group is also facing competition from carriers like Southwest Airlines which have added flights to the cities ignored by the larger carriers like the group. INTERNAL RIVALRY SUPPLIER POWER BUYER POWER THREAT OF NEW ENTRANTS THREAT OF SUBSTITUTES
  16. 16. 16 PORTER’S 5 FORCE ANALYSIS 1. Labour: Labor expenses (wages, salaries etc.) constitute about 1/3 of the total operating expenses which is very high. 2. Aircraft: Boeing and Airbus are the companies which virtually enjoy duopoly in the market for large aircrafts and hence this leads to high bargaining power of supplier. 3. Fuel: Like other airlines, the American Airlines Group is highly sensitive to price fluctuations of aviation fuel. American Airlines has among the highest fuel costs per seat per mile which leads to higher fares. INTERNAL RIVALRY SUPPLIER POWER BUYER POWER THREAT OF NEW ENTRANTS THREAT OF SUBSTITUTES
  17. 17. 17 PORTER’S 5 FORCE ANALYSIS The customers of today have high knowledge about the pricing in the airline industry due to the proliferation of online ticketing. Online ticketing helps the customers to choose the best and the most cost effective deal. Low amounts of switching costs make it easy for the customers to switch between the airlines in response to price changes, better discounts etc. Due to this, the buying power of the customer is high. INTERNAL RIVALRY SUPPLIER POWER BUYER POWER THREAT OF NEW ENTRANTS THREAT OF SUBSTITUTES
  18. 18. 18 PORTER’S 5 FORCE ANALYSIS The aviation has high barriers to entry because of higher fixed costs due to high capital investments like acquiring a fleet of planes etc. It also has high variable costs are faced for fuel, labor etc. The operational cost is significantly high in the aviation industry. Along with this, there are many regulatory and logistical barriers. In addition the “slots” at the airports are acquired through long term contracts. Due to such entry barriers the threat due to new entrants in the industry is low. INTERNAL RIVALRY SUPPLIER POWER BUYER POWER THREAT OF NEW ENTRANTS THREAT OF SUBSTITUTES
  19. 19. 19 PORTER’S 5 FORCE ANALYSIS The substitutes for air travel constitute other forms of transportation like cars, buses, trains etc. The railway infrastructure is limited and travelling by trains is highly time consuming and is costly. The United States does not have an extensive long distance bus system along with lower fares and the journey time is too long. Due to the size of the United States, most long-distance travel is practical only through airplane. Hence the threat due to substitutes is low. INTERNAL RIVALRY SUPPLIER POWER BUYER POWER THREAT OF NEW ENTRANTS THREAT OF SUBSTITUTES
  21. 21. 21 SWOT ANALYSIS
  22. 22. 22 SWOT ANALYSIS • Higher connectivity to more than 300 destinations around the world in more than 50 countries • American Airlines is reputed for being one of the oldest, most established carriers in the industry. • The group has 9 strategic airport hubs in Charlotte, Chicago, Dallas/Fort Worth, Los Angeles, Miami, New York, Philadelphia, Phoenix and Washington. • The group has a strong operational network. • American Airlines and US Airways are a part of the OneWorld Alliance hence both the airlines are now allowed to access the other’s network i.e. this leads to a network expansion for both the airlines. STRENGTHS WEAKNESSES OPPORTUNITIES THREATS
  23. 23. 23 SWOT ANALYSIS • American Airlines faces significantly high competition on international flights as foreign carriers like Lufthansa, Qatar Airways etc. dominate the market and offer higher quality services. • American Airlines has lower connectivity to reach Asian markets. • Both US Airways and American Airlines have faced losses since the 2008-09 economic crises. • As the group has a unionized workforce, hence the group is susceptible to attrition. • Poor customer service record for US Airways. STRENGTHS WEAKNESSES OPPORTUNITIES THREATS
  24. 24. 24 SWOT ANALYSIS • With the merger completed, US Airways has strong opportunities for international expansion by tapping the untapped markets. • Address union negotiations for effective operations. • The group has a strong potential for growth in Asian markets. • Upgrade business class on long-haul flights. STRENGTHS WEAKNESSES OPPORTUNITIES THREATS
  25. 25. 25 SWOT ANALYSIS • Volatility of fuel prices makes cost containment difficult and higher fuel prices have been decreasing the profit margins. • The global economic downturn has severely affected the aviation industry. • Stiff competition from low-cost-carriers. • Escalating union grievances STRENGTHS WEAKNESSES OPPORTUNITIES THREATS
  26. 26. 26 STRATEGIC RECOMMENDATIONS 1. Undertake Fuel Efficiency Initiatives: • The group, like other airlines has been facing higher costs due to higher fuel price volatility and increasing fuel prices. • The group has already placed orders for more than 600 aircrafts after the merger for more fuel efficient operations and hence to incur lower fuel costs.
  27. 27. 27 STRATEGIC RECOMMENDATIONS 2. Address labour costs: • The American Airlines Group has some of the highest labour costs in the industry. This is due to • highly unionized workforce and • tenure and seniority of the workforce. • The group should maintain its managerial discipline through effective flight attendant contract negotiation. • The group’s management has lower levels of executive compensation and hence this leads to tensions within the company. • It is expected that the merger will lead to better career opportunities for its employees due to a strong financial foundation.
  28. 28. 28 STRATEGIC RECOMMENDATIONS 3. Invest in employee training • US Airways has been facing with operational inefficiency over the years and as a result the numbers of customer complaints have been the highest among the carriers. • Most of the complaints have been related to reservations, ticketing, unhelpful employees etc. These complaints reflect poor training of the organization’s employees. • Hence the group should conduct a comprehensive operations audit to assess its current operations and should invest in employee training to increase the quality of customer service offered.
  29. 29. 29 STRATEGIC RECOMMENDATIONS 4. Enhance International Offerings: • The group faces stiff competition from its competitors at the international level as companies like Lufthansa have dominated the world market due to higher connectivity especially across the Asian countries, where the group’s connectivity is very low. • The American Airlines should begin building its Asian presence with its expanding fleet and also should tap the untapped locations across the world.
  30. 30. 30 CONCLUSION • It can be concluded that the merger surely has improved the strengths of both American Airlines and US Airways. • It has opened up a lot of opportunities for the group as a whole but also has increased the amounts of threats for the group. • The group should address labour costs, undertake fuel efficiency initiatives, enhance international offerings especially in Asia and should invest in employee training to overcome its weaknesses for better customer service and satisfaction. • The merger has surely provided the customers with added benefits on frequent flier miles and also by being a part of OneWorld Alliance which helps the group to expand its network.
  31. 31. 31 QUESTIONS Q1.What are the advantages of using Hub-and- Spoke model in the aviation industry? Q2.What are the benefits the customers will get out of the merger? Q3.Do a competitive analysis for the American Airlines Group. Q4.How do you analyze the threat of new entrants as a factor being key to the group’s growth? Q5.Analyze the implications of the merger and how it has impacted the overall profitability for the American Airlines group? Q6.What are the other strategic recommendations according to you for the group to enhance its services?