American AirlinesBy,

Group 6Laurent Deconinck

April VassauBrock VestrumJohn VilendrerMeggan Wier

Agenda

• Company History - Brock• Market Structure – Meggan• Competitive Advantage – John• Game Theory/Pricing – Laurent• Industry Update & Conclusion – April• Quiz• Q & A

American Airlines TimelineThe Beginning: 1930’s-40’s

Formed from conglomeration

of 82 airlines; Aviation Corp

created1929

1930Aviation Corp subsidiaries

incorporated into American

Airways, eventually American

Airlines in 1934

First to fly the Douglas DC-3. By year’s end

was the nation’s #1 domestic air

carrier1936

1939Begins trading on the NYSE

Began providing

catering with SkyChefs

1942

American Airlines TimelineBuilding an Empire: 1940’s-50’s

Introduced first domestic

US Freight service1944

1945America’s first

European Service under

the AOA, transatlantic

division under merger with

American Export Airlines

Merged with Pan American

World Airways

1950

1952Introduced

the Magnetic Reservisor, seat tracker

Built world’s 1st special facility for

flight attendant training

1957

19581st U.S.

designed turboprop plane and turbofan engine

American Airlines TimelineIndustry Innovators: 1960’s

1st airline to offer coast-to-coast jet

service with introduction of the

Boeing 7571959

1960Created Semi-

Automatic Business Research

Environment, better known as SABRE

SABRE extends from coast-to-coast and

from Canada to Mexico, 2nd largest

real-time data processing system

1964

1967Massimo Vignelli

designs the famous AA Logo.

American Airlines TimelineModernism & Regulation: 1970’s

Merged with Trans Caribbean Airways for 1st

Caribbean routes1970

1974Introduced One-Stop-Automated Check-in and 1st

Boeing 747 Freighter

Began marketing SABRE to U.S.

travel agencies1975

1978Airline de-

regulation takes place as AA

launches major route expansion

in US and Caribbean

AA Flight 191 crashes at

O’Hare. 273 fatalities,

deadliest single airliner accident

on US soil1979

American Airlines TimelineProgression: early 1980’s

First Airline to offer a Frequent Flyer program with

AADVANTAGE travel awards

1980

1982Established the Hub & Spoke operation with its first hub in

Dallas

Stockholders approved a new

holding company, AMR Corporation,

the parent company of AA1983

1984Created the American

Eagle System, a network of regional

airlines

American Airlines TimelineContinued Expansion: late 1980’s

1985More than

10,000 Travel Agency offices using SABRE,

available on PC in ‘87

Acquired AirCal; employment

topped 50,000 for 1st time

1986

1987Expansion includes

acquiring Airbus 300 and 1st airline to fly Boeing 757

Offers same-day freight service via passenger

aircraft1988

American Airlines TimelineA New Era: early 1990’s

Opens System Operation Control Center1990

Opened state-of-the-art Maintenance facility at DFW

1991

Market Structure

– Deregulation of 1978• Civil Aeronautics Board• Free market

– Some countries and still regulated to some extent• Europe• Asia

Market Structure• Oligopoly - Concentration ratio of 50%

Characteristics of an Oligopoly

– Interdependence • “Bags fly free”

– Price setters– Few firms– High barriers to entry

Competitive Advantage“Innovation”

• SABRE– Computerized Reservation System(CRS)– American was the first airline to implement such a

system. – By 1990, SABRE was the largest reservation system

in the world and had a market share of 40%. – Screen Bias

Competitive Advantage“Innovation”

• Advantage Frequent Flier Program– In 1980, AA introduced the first frequent flier

program. – Many other airlines followed due to the huge

success of this program.– Originally the only reward available for AFF

members was free tickets. This evolved into a point system that also offered a variety of products that were presented in a catalog.

Competitive Advantage“Innovation”

• Two Tier Wage System– Starting wages would be on the lower tier.– Existing employees would be on the higher tier. – In response to the high wage requirement stated

by union contracts. – Starting salaries could be up to 50% less– Necessary to compete against the newly formed

companies that were non-union.

Competitive Advantage“Innovation”

• Airline of the Year 1988 & 1989– Mostly due its focus on service

• On Time arrivals in Sept 1989 - 84.6%– Better than Delta or United

• Customer Service Complaints 1989 – 132,000– Better than United

• Baggage Service Complaints 1989 – 5,999– Better than Delta and United

Competitive Advantage“Innovation”

• Robert Crandall– Became CEO in July of 1980– “ The physical aspects of our company

are very much like our competitors. After all, we all use the same airports, the same planes; we buy food from the same caterers, we use the same computers, and so on. Its pretty clear that the only difference between “us” and “them” is our ability… the ability of all of American’s people to provide superior service.”

Video

Video AA

Example of Pricing• What is the customer

willing to pay.• Overbooking practice to

make sure the flight is full.

• Adjust pricing based on passenger load factor

• Sophisticate computer system to maximize profits based on demand and supply.

66 different pricing for one flight.

Game Theory

American Airline $500

American Airline $200

Competitors $500

AA Profits=$50Competitor=$100

AA Profits=-$100Competitor=$200

Competitors $200

AA Profits=-$150Competitor=-$200

AA Profits=-$10Competitor=-$10

Thus, both airlines will set their fares to $200, a similar analysis was carried out in court to prove that there was price fixing among airlines and in October 1994 some airlines settled for $40 M.

AA uses Yield Management

• Maximize Profits• Maximize Assets Utilization

Milestones to Modern Day

• SABRE spins off into its own company. – Subsidiaries include: Travelocity, Sabre Travel

Network, Sabre Airline Solutions and Sabre Hospitality Solutions.

• American partners with Travel Agents to provide consumers with better pricing, while reducing distribution costs.

• American celebrated the 25 th anniversary of its AAdvantage program – the world’s first frequent flyer program that revolutionized the airline industry and set the standard for similar initiatives in many other businesses. AAdvantage began with 300,000 members. Today, it has more than 50 million members.

Change in Stock Price

Industry Leaders Then…and Now

1990’s1. Aeroflot2. American3. United4. Delta5. Northwest6. British Airways7. Continental8. US Airways9. TWA10. Japan Airlines

2000’s1. Delta2. Southwest 3. American4. United5. Lufthansa6. Air France7. China Southern8. Ryanair9. Continental10. US Airways

Low-Cost Airline Impact

Locally: Southwest entrance into MSPSouthwest's entry into Minneapolis has been closely watched because it is an assault on a so called fortress hub of Northwest Airlines, which is now a part of Delta Air Lines Inc.Northwest has a reputation for matching competitor prices and adding extra flights when its hubs are threatened. Last month Northwest executives said they would do both of those things on the Chicago route once Southwest's service starts. – USA Today

• "We are likely to be in for some serious fireworks on prices out of Minneapolis in the coming days for spring travel" FareCompare.com CEO Rick Seaney. Adding “that the cheapest fare on that route for Northwest, American and United is round trips for $376, which works out to $188 eachway. The cheapest one-way fare is $426, Seaney wrote.

• "The legacy airlines will quickly have to restructure their airfares, by offering one-way faresinstead of the two-night minimum stay roundtrip fares they currently file — likely matchingSouthwest's new price points," Seaney wrote.

Low-Cost Airline Impact

Globally: The CAA (Civil Aviation Authority) calculates that growth in short-haul trafficbetween 1996 and 2006 averaged five per cent a year – no greater than in theyears before the arrival of no-frills airlines. The only years when growthexceeded 10 per cent in the past 20 years was in 1987 and 1994.

Although nearly half of all British passengers on short-haul routes now opt forno-frills airlines, this growth seems to have been at the expense of other carriers – both scheduled and charter airlines – which have been forced toclose down unprofitable routes.

The CAA report shows that since the advent of low-cost flights in 1996 there has beenno marked change in the socio-economic profile of air passengers. "The main effect ofno-frills flights is to provide further opportunities to those in middle- and higherincome groups to fly more often.” – Dr. Harry Bush, CAA Director of EconomicRegulation.

Quiz• When did AA start the frequent fly program?

– 1980• When did AA begin trading on the NYSE?

– 1939• When did deregulation take place in the US?

– 1978• When did AA fly its 1 billionth customer?

– 1991• Who has the highest market share in the Domestic

Airline Market?– AA

Quiz• Name 2 characteristics of an oligopoly?

– Interdependence – Price setters– Few firms– High barriers to entry

• Who introduced the first frequent flyer program?– AA

• Who is the current CEO of AA?– Robert Crandall

• How many members are a part of the frequent flyer program?– Over 50 million

Bibliography

• Wikipedia, Oligopoly, 2010• Wikipedia, Airline, 2010• Wikipedia, Airline Deregulation Act, 2010• Research and Innovative Technology

Administration, Airline Domestic Market Share Dec 2008 – Nov 2009

• www.AA.com (American Airlines)