American Airline Case Study

University of Jordan Faculty of Business Strategic Management

“American Airlines ” Case Study Strategic Management

Prepared By Fathi Salem Mohammed Abdulla

2009

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Introduction American Airlines, Inc. (AA) is a major airline of the United States. It is the world's largest airline in passenger miles transported and passenger fleet size; second largest, behind FedEx Express, in aircraft operated; and second behind Air France-KLM in operating revenues. A subsidiary of the AMR Corporation, the airline is headquartered in Fort Worth, Texas, adjacent to the Dallas-Fort Worth International Airport. American operates scheduled flights throughout the United States, and flights to Canada, Latin America, the Caribbean, Europe, Japan, the People's Republic of China, and India. The Chairman, President, and CEO of AA is Gerard Arpey. In 2005, the airline flew more than 138 billion revenue passenger miles (RPM).

Vision Statement (proposed) To become the largest airline in the world.

Mission Statement (proposed) AMR Corporation is committed to providing every citizen of the world with the highest quality air travel to the widest selection of destinations possible. AMR will continue to modernize its fleet while maintaining its position as the largest air carrier in the world, with a goal of becoming the most profitable airline. AMR is the airline that treats everyone with equal care and respect, which is reflected in the way each AMR employee is respected. AMR recognizes that its employees are the key to the airlines success and invests in the futures and lives of its employees. By investing in tomorrow’s technologies and by following a strict adherence towards environmental regulations, AMR demonstrates its commitment to the world environment.

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External Audit Opportunities 1. 2. 3. 4. 5. 6. 7.

Favorable wage negotiation climate Travel increasing in general Low interest rates Government backed loans Information technology New fuel efficient engines Partnerships with Asian Airlines

Threats 1. 2. 3. 4. 5.

Increased air travel inconvenience (security related) Business travel declining Increased competition from point-to-point competitors Availability of pricing information Overcapacity in industry

Competitive Profile Matrix

Critical Success Factors

Weight

Rating

Weighted Score

Rating

Weighted Score

Rating

Weighted Score

Rating

Weighted Score

Financial Position

0.10

1.00

0.10

1.00

0.10

2.00

0.20

4.00

0.40

Cost Structure

0.30

3.00

0.90

2.00

0.60

2.00

0.60

4.00

1.20

Information Technology

0.20

3.00

0.60

3.00

0.60

3.00

0.60

4.00

0.80

Partnerships

0.25

4.00

1.00

3.00

0.75

4.00

1.00

1.00

0.25

Fleet

0.15

3.00

0.45

4.00

0.60

2.00

0.30

3.00

0.45

1.00

3.05

2.65

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2.70

3.10

EFE Matrix Key External Factors Opportunities 1. Favorable wage negotiation climate 2. Travel increasing in general 3. Low interest rates 4. Government backed loans 5. Information Technology 6. New fuel efficient engines 7. Partnerships with Asian Airlines Threats 1. Increased air travel inconvenience (security related) 2. Business travel declining 3. Increased competition from point-to-point competitors 4. Availability of pricing information 5. Overcapacity in industry

Weight

Rating

Weighted Score

.15 .05 .05 .05 .05 .05 .10

4 2 3 4 3 3 3

.60 .10 .15 .20 .15 .15 .30

.05

2

.10

.10 .15

3 3

.30 .45

.10 .10

3 2

.30 .20

1.00

Total

Internal Audit Strengths 1. 2. 3. 4. 5.

Size of fleet Number of routes Partnerships IT infrastructure Government relations

Weaknesses 1. 2. 3. 4. 5.

Financial position Cost structure Unprofitable routes Too many divisions Reliance of business fares

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3.00

Financial Ratio Analysis (March 2007) Company

Industry

Sector

S&P 500

Valuation Ratios P/E Ratio (TTM) P/E High - Last 5 Yrs P/E Low - Last 5 Yrs Beta Price to Sales (TTM) Price to Book (MRQ) Price to Tangible Book (MRQ) Price to Cash Flow (TTM) Price to Free Cash Flow (TTM) % Owned Institutions

N/A NA NA 2.77 0.10 37.67 N/A 11.86 NM 95.00

23.71 55.30 15.49 1.38 1.24 5.42 2.43 10.03 6.61 70.90

25.41 42.96 16.23 0.62 1.62 3.67 3.96 13.19 37.18 59.87

24.01 45.41 16.26 1.00 3.33 4.29 7.56 17.32 28.97 64.19

Dividends Dividend Yield Dividend Yield - 5 Yr Avg Dividend 5 Yr Growth Rate Payout Ratio (TTM)

N/A 0.00 NM 0.00

0.27 0.10 5.77 1.88

1.38 1.01 13.66 23.05

2.04 1.48 6.48 26.78

Growth Rates % Sales (MRQ) vs Qtr 1 Yr Ago Sales (TTM) vs TTM 1 Yr Ago Sales - 5 Yr Growth Rate EPS (MRQ) vs Qtr 1 Yr Ago EPS (TTM) vs TTM 1 Yr Ago EPS - 5 Yr Growth Rate Capital Spending - 5 Yr Growth Rate

3.93 0.12 -0.09 N/A NA NM -21.91

12.97 12.79 8.39 48.32 70.64 -2.27 5.49

9.04 8.27 6.94 -4.57 1.92 6.80 0.82

13.40 11.90 9.30 28.69 21.92 12.15 4.06

Financial Strength Quick Ratio (MRQ) Current Ratio (MRQ) LT Debt to Equity (MRQ) Total Debt to Equity (MRQ) Interest Coverage (TTM)

0.52 0.71 285.35 302.83 -1.20

1.20 1.43 1.09 1.19 4.86

1.18 1.42 0.51 0.59 19.24

1.26 1.76 0.68 0.85 11.86

Profitability Ratios % Gross Margin (TTM) Gross Margin - 5 Yr Avg EBITD Margin (TTM) EBITD - 5 Yr Avg Operating Margin (TTM) Operating Margin - 5 Yr Avg Pre-Tax Margin (TTM) Pre-Tax Margin - 5 Yr Avg Net Profit Margin (TTM) Net Profit Margin - 5 Yr Avg Effective Tax Rate (TTM) Effective Tax Rate - 5 Yr Avg

17.26 19.31 3.06 2.39 -4.84 -4.69 -7.50 -6.40 -7.04 -4.63 N/A 37.13

26.52 29.28 12.74 12.48 6.88 7.03 8.34 7.38 5.27 4.22 37.15 38.22

33.15 33.94 17.88 18.06 11.72 11.77 10.24 9.93 6.77 6.13 34.89 38.75

47.32 47.01 20.79 20.82 20.33 18.35 17.27 17.54 13.12 11.59 31.31 34.20

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Management Effectiveness % Return on Assets (TTM) Return on Assets - 5 Yr Avg Return on Investment (TTM) Return on Investment - 5 Yr Avg Return on Equity (TTM) Return on Equity - 5 Yr Avg Efficiency Revenue/Employee (TTM) Net Income/Employee (TTM) Receivable Turnover (TTM) Inventory Turnover (TTM) Asset Turnover (TTM www.investor.stockpoint.com

-4.15 -2.43 -5.45 -3.16 N/A -66.33

4.71 4.15 6.51 6.11 11.68 2.78

6.66 6.48 8.59 8.51 14.57 14.38

6.40 6.79 9.97 10.93 18.71 19.22

180,913 N/A 17.23 25.36 0.59 March 2004

191,714 13,861 35.21 42.78 0.83

198,139 14,032 14.58 39.40 1.10

622,866 81,707 9.76 10.46 0.92

Company Worth Analysis (year­end 2001 2002 2003 average) Stockholders Equity Net Income x 5 (Share Price/EPS) x Net Income Number of Shares Outstanding x Share Price

$2,125,000,000 ($10,835,000,000) ($2,436,937,716) $2,015,000,000

Method Average

($2,282,984,429)

IFE Matrix Weight

Rating

Weighted Score

0.10 0.10 0.15 0.10 0.05

4 4 4 3 4

0.40 0.40 0.60 0.30 0.20

0.05 0.15 0.15 0.05 0.10 1.00

1 2 2 1 2

0.05 0.30 0.30 0.05 0.20 2.80

Key Internal Factors Strengths 1. Size of fleet 2. Number of routes 3. Partnerships 4. IT infrastructure 5. Government relations Weaknesses 1. Financial position 2. Cost structure 3. Unprofitable routes 4. Too many divisions 5. Reliance of business fares TOTAL

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SWOT Matrix S-O Strategies

W-O Strategies

1. Develop new partnerships in Asia utilizing the number of routes as a key negotiating point.

1. Sell unprofitable/smaller divisions to improve financial positions. 2. Negotiate lower wage rates with unions to improve cost structure.

S-T Strategies

W-T Strategies

1. Use IT to reduce the check-in and wait times on flights. Such as more curb side check-ins and etickets.

1. Use a mixed model i.e. Some operations point-topoint to improve cost structure and reduce customer inconvenience.

2. Use market position by reducing number of unprofitable flights and reducing industry capacity.

2. Eliminate unprofitable routes to improve financial position and reduce industry capacity.

SPACE Matrix Y axis Financial strength Environmental stability

1 -5

+1 worst to + 6 best -1 best to -6 worst

Y axis: 1 + (-5) = -3

X axis Industry strength Competitive advantage

2 -5

+1 worst to +6 best -1 best to -6 worst

X axis: 2 + (-5) = -3

FS Aggressive

Conservative

C A

IS

Competitive Defensive

ES

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Grand Strategy Matrix Rapid Market Growth Quadrant II

Quadrant I

Weak Competitive Position

Strong Competitive Position Quadrant IV

Quadrant III

Slow Market Growth

The Internal-External (IE) Matrix The IFE Total Weighted Score

High 3.0 to 3.99

Strong 3.0 to 4.0 I

Average 2.0 to 2.99 II

Weak 1.0 to 1.99 III

American Airlines

Medium The EFE Total 2.0 to 2.99 Weighted Score

IV

V

VI

Low 1.0 to 1.99

VII

VIII

IX

QSPM 44

Strategic Alternatives Key Internal Factors Strengths

Weight

1. Size of fleet 2. Number of routes 3. Partnerships 4. IT infrastructure 5. Government relations Weaknesses 1. Financial position 2. Cost structure 3. Unprofitable routes 4. Too many divisions 5. Reliance of business fares SUBTOTAL

Key External Factors Opportunities 1. Favorable wage negotiation climate 2. Travel increasing in general 3. Low interest rates 4. Government backed loans 5. Information Technology 6. New fuel efficient engines 7. Partnerships with Asian Airlines Threats 1. Increased air travel inconvenience (security related) 2. Business travel declining 3. Increased competition from point-to-point competitors 4. Availability of pricing information 5. Overcapacity in industry SUBTOTAL SUM TOTAL ATTRACTIVENESS SCORE

EPS/EBIT Analysis

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International Expansion TAS AS

Domestic Expansion AS TAS

0.10 0.10 0.15 0.10 0.05

--4 1 -----

--0.18 --0.20 0.24

--1 2 -----

--0.12 --0.20 0.18

0.05 0.15 0.15 0.05 0.10 1.00

1 4 1 -----

0.28 0.12 0.08 ----1.35

3 3 4 -----

0.07 0.18 0.12 ----1.60

Weight .15 .05 .05 .05 .05 .05 .10 .05 .10 .15 .10 .10 1.00

International Expansion AS TAS --0.24 4 --4 --3 --1 --4 0.05 --0.06

Domestic Expansion AS TAS --0.24 1 --1 --1 --4 --1 0.15 --0.03

----3 3 1

----4 3 4

0.20 0.16 0.08 ----1.65 3.00

0.15 0.08 0.08 ----1.70 3.30

Amount Needed 500M Interest 5% Tax 0% Share Price $15.00 Shares Outstanding 155M Common Stock Financing Debt Financing Recession Normal Boom Recession Normal Boom EBIT (500,000,000) 0 500,000,000 (500,000,000) 0 500,000,000 Interest  0 0 0 25,000,000 25,000,000 25,000,000 EBT (500,000,000) 0 500,000,000 (525,000,000) (25,000,000) 475,000,000 Taxes 0 0 0 0 0 0 EAT (500,000,000) 0 500,000,000 (525,000,000) (25,000,000) 475,000,000 # Shares 188,333,333 188,333,333 188,333,333 155,000,000 155,000,000 155,000,000 EPS (2.65) 0.00 2.65 (3.39) (0.16) 3.06 70 Percent Stock ­ 30 Percent Debt 70 Percent Debt ­ 30 Percent Stock Recession Normal Boom Recession Normal Boom EBIT (500,000,000) 0 500,000,000 (500,000,000) 0 500,000,000 Interest  7,500,000 7,500,000 7,500,000 17,500,000 17,500,000 17,500,000 EBT (507,500,000) (7,500,000) 492,500,000 (517,500,000) (17,500,000) 482,500,000 Taxes 0 0 0 0 0 0 EAT (507,500,000) (7,500,000) 492,500,000 (517,500,000) (17,500,000) 482,500,000 # Shares 178,333,333 178,333,333 178,333,333 165,000,000 165,000,000 165,000,000 EPS (2.85) (0.04) 2.76 (3.14) (0.11) 2.92

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