Strategy Plan for American Airlines - Research Paper Example

?Term Paper Outline: American Airlines Inc. (AA Introduction American Airlines (AA), a subsidiary of AMR Corporation, is one of the world’s largest scheduled air freight carriers. AA is a major airline of the United States which dominated the domestic market with average daily flights of 3,400 in more than 40 countries. Despite of the global economic crisis, AA remained to be a leader in the airline industry by strengthening their business strategy and deliver quality service to all customers at all points. At the same time, AA takes serious steps toward their business practices responsibility that are focused on the safety and security of their customers as well as their employees, ethical governance, and environmental actions. The company’s top priority is to meet or exceed the needs and expectations of their customers by giving them the best travel experience upon boarding, on-board, and upon arrival. This could be done through route network optimization, competitive pricing, cost structuring, safety and security, and many more. The main trust of this paper is to provide a strategy plan for American Airlines Inc. This plan would incorporate competitive strategy that would help the company become the market share leader and largest air carrier in the world. 2. American Airlines, Inc. A. Business Overview i. Company history. American Airways was founded last 1930 through the consolidation of 85 subsidiaries airlines of The Aviation Corporation. American Airways was renamed to its current American Airlines Inc. under the appointment of the new CEO, C.R. Smith; the airline is headquartered in Fort Worth, Texas. For several years, AA had managed to introduce improvements in terms of technology, fliers program, quality service, etc. making AA the largest in passenger miles and passenger fleet size. AA had maintained its strong presence particularly in the U.S. domestic market, and in 2009, “about 38.85 of Americans flying were international- Latin America and Caribbean, 18.7%; Europe, 15.6%; and Pacific, 4.5%” (“AMR Corporation,” 2010). Since then, AA had been successful and considered to be one of the biggest global airlines that served one-third of the U.S. population (85.7million) and more than 300,000 tons of cargo in a year. On a daily basis, the carrier transported an approximately 275,000 passengers between nearly 250 cities in over 40 countries with average daily flights of 3,400. ii. Worldwide operator. AA is one of the largest operators worldwide with a total of 623 active aircrafts as of 2010 and the largest number of international destinations. The carrier has scheduled domestic flights throughout North America, South America, Central America, and other extensive international network in East and South Asia, and Europe. It has been more successful and gain competitive advancement after combining network fleet with AmericanConnection and American Eagle as its regional affiliates. B. Organizational Structure i. 655 Aircrafts/ 260 Destinations/ Dallas Hub AA is wholly owned subsidiary of AMR Corporation which is a publicly-traded company. The accountability and responsibility structure of AA is often disseminated in the organization through the board of directors and a chief executive officer. A large commercial airline like AA has hundreds of smaller stations to points all over the world, and hub airports that include: Chicago, Miami, New York, Los Angeles, and Dallas/Fort Worth International Airport - the largest hub. To send passengers to these hubs, AA employed various aircrafts such as Boeing, and ATR, ERJ, Bombardier for American Eagle. Currently, AA has 623 aircrafts with more than 621 fleet size and 250 destinations across 40 countries around the world. C. Business Segments i. Domestic (U.S.). The U.S. domestic market is dominated by AA with a market share of 13.7%. The regional carriers of AA, American Eagle and AmericanConnection served as an advantage to the company as the affiliation acquired 7.5% of the total domestic market (Vasigh, Fleming, & Tacker, 2008, p. 14). However, because of economic downturn, rising fuel costs, and stiff competition, U.S. carriers for the domestic market are becoming miserable and losing ground toward domestic flights. One of the cited reasons is the crushing presence of legacy carriers in the domestic market and a market share that is controlled by low-cost airlines. ii. International market. Aside from the leadership in U.S. domestic market, AA also played a significant role in the market of East Asia (China and Japan), South Asia (India), and Europe (Belgium, Finland, France, Germany, Hungary, Republic of Ireland, Italy, Spain, Switzerland, and UK). The international market of airline industry is growing; however, it is characterized as intensely competitive market. Usually, airlines in the international market are characterized by global serving routes, liberalization, and the sharing of shares and revenues. Just like the domestic market, the international market is also experiencing tremendous financial losses because of economic slowdown, over capacity, and mismanagement which consequently pushed the airline industry into a new era of competitive environment. There are 2000 air freight carriers operating in the international market, and in terms of market capitalization, AA is the number one carrier. D. Partnerships and Cooperation i. American Eagle/ AmericanConnection/ Oneworld Alliance Program. In order to be competitive and offered quality service of travel experience, AA developed new partnerships and strategic alliances with the leading carriers and railroad companies worldwide. The company had also strengthened their alliances and partnerships in order to attract more customers by satisfying their needs. First, AA had combined route network with American Eagle and AmericanConnection as its regional affiliates to gain the big market share in the U.S. domestic market. In 2009, AA under its parent company, AMR Corporation, had optimized its network realignment and international presence by becoming the founding member of the global oneworld airline alliance. The alliance is composed of 11 biggest names in the airline industry such as British Airways, Cathay Pacific Airways, Iberia, Finnair, Japan Airlines, Lan, Malev, Mexicana, Qantas, Royal Jordanian, and S& Airlines. Being a member would bring exciting benefits to AA because oneworld alliance is serving 750 destinations in nearly 150 countries with 8,750 daily departures across the world (“Oneworld Alliance,” n.d.). In connection with the oneworld alliance, a trans-Atlantic joint business agreement between AA, British Airways, and Iberia has been approved last July 2010. The three leading carriers have decided to expand their global cooperation and compete with other global alliances by combining route network of 400 destinations in 105 countries between Europe and North America. The trans-Atlantic agreement is followed by a trans-Pacific joint business agreement between AA and Japan Airlines (JAL) which would give the two airlines an approval for closer integrated networks between North America and Asia. 3. Airlines Industry A. Trends i. Global expansion 1. Increasing passengers in developing countries. The potential growth of major airlines in the global market for the 21st century is enormous. Passengers from all over the world carried by global aviation have doubled in numbers for the past 20 years and the rate is expected to grow until 2020 (Whitelegg, 2003, p. 235). The growth is driven by various forces such as global economy expansion, stability of gross domestic product (GDP) and competitive pricing in the airline industry. This global phenomenon had pushed major airlines to keep on expanding their networks globally by adapting the dominant hub network system and code-sharing. “Their vertical integration with regional airlines and code-sharing with international airlines created impressive large global network system and market dominance” (Yosef, 2005, p. 274). ii. Domestic (U.S.) recession or recovery 1. Increasing competition. Global economic downturn has badly hit the U.S. economy that results in a very weak demand for air travel primarily caused by increase of unemployment and decrease of personal income, and homesales. The recession had contributed to the very weak recovery of the airline industry and it had forced major airlines to lower their cost structures resulted in fare reductions just to meet passengers’ price sensitivity. The situation in the domestic market is becoming worst when low cost airlines have existed as a result of deregulation and liberalization. B. Channels i. Reservation channels. Reservation system is one of the introduced improvements of AA in the airline industry. This is part of the carrier’s campaign in giving their customers quality service and hassle-free air travel experience. AA tickets can be made available through online reservation (websites) or by phone, and in a paper or e-ticket format which highly depends on the passengers’ convenience. 1. Phone. Phone reservation is one of the reservation channels that AA has introduced to their customers. By dialing their worldwide airline phone number, 800-43307300, the customer can talk with the ticketing agent or ticket brokers and helped in making the booking free from complications. Airline reservation phone numbers also catered booking changes and holding-on tickets for 24 hours before the boarding passes are discharged into the customer’s cellphone. 2. Internet. Traditional reservations are often handled manually; however, the method was not efficient and could not meet the immediate processing of transactions. Through innovations, the airline industry has started to use real-time computer systems to make airline reservations automated and more efficient in accommodating the increasing reservation activity. Information technology is one of the competitive assets of AA; in fact, it is the first to introduce a computerized airline ticket reservation system called Sabre (Keen, Mougayar, Torregrossa, 1998, p. 67). This centralized reservation system is using the Internet to revolutionize the booking of flights and reservation of airline tickets that consequently made AA, a leader in yield management. 3. Internet reservation website. To personalize the computerized reservation system of AA and instead of visiting to major travel sites, customers can now directly browse to its reservation websites. Since the introduction of online reservation, AA had also offered several worldwide websites such as Americanair.com, AA.com, etc. to find out prices, flight times, and discount programs. The sites also offered customer’s flexibility by giving them a chance to change or cancel any reservation at their convenience. Today, almost all air freight carriers are having their own online reservation system because more and more passengers are using this channel for their air travel reservations. C. Competition i. Legacy carriers vs. local carriers. Competition in the airline industry either domestically or internationally is very intense. The situation had been worst in the deregulation and liberalization of the airline industry wherein instead of having a united set of carriers, the industry has been divided. Before the deregulation, carriers are having fixed flight capacity and prices but when the deregulation has been completed, low cost airlines have existed and offered low fares and point-to-point travel. Low cost airlines such as Southwest Airlines and JetBlue Airlines have the confidence to fight the legacy airlines because they are unrestricted and their services (eliminate traditional passenger services) which is point-to-point are availed at very low fares. ii. International and domestic players. The airline industry consists of several air freight carriers usually represented by different countries worldwide. The major airlines for domestic market are Delta Airlines, United Airlines, Southwest Airlines, American Airlines, and US Airways, and for international market are Air Canada, Delta Airlines, Lufthansa, and British Airways. Air carriers’ business operations are governed by established policies and regulations from the international aviation and bilateral or multilateral agreements with other carriers. Furthermore, consolidation and code sharing has been the trend to almost all of the airline players; this is to improve global competitiveness in the market. 4. American Airlines Business Strategy A. Brand Strategy i. Business level strategy. Every organization needs to adopt a certain strategy for activities/operations to gain competitive advantage from competitors in a very specific scope. In terms of the management of AA, the carrier continued to adopt the approach of diversity leadership strategy as they expand in the global presence. Among the business level strategy, AA has been successful through the use of differentiation strategy (Kleymann & Seristo, 2004, p. 105). The strategy has been used by AA through its flight scheduling, pricing, on-time services, route selection, and the most important is the introduction of frequent flyer program called the American Advantage (AAdvantage). AAdvantage is one of the world’s largest programme that successfully created a unique perception and loyalty among customers, and this differentiation is worthy of a premium price as it is followed by all airline companies. The introduction of the first computerized reservation system called Sabre is also one of the good examples of AA’s differentiation strategy. B. Value Chain Analysis Figure 1: Value Chain Analysis of American Airlines Source: Kleindl, B. (2004) The idea of a firm’s value chain is developed by Michael Porter which is intended on how a firm gain competitive advantage through the use of value-creating activities including the “primary activities of inbound logistics, operations, outbound logistics, marketing & sales, and service, and the support activities of procurement, technology development (including R&D), human resource management, and infrastructure” (Kleindl, 2004, p. 525). Under each of the nine interlinked activities are the core competencies of AA in which the carrier does best. All of those activities particularly the technology investment (Sabre & performance feedback system) provide AA an advantage over its competitors as it gives the highest value to customers. The core competencies on each of the value chains are put to assessment if it gives value to AA’s operation, cost position, and most importantly in the implementation of a chosen business-level strategy. C. Marketing Strategy For AA to survive in the very intense competition in the airline industry, it must have an effective marketing strategy. A strategy would be seen as competitive and effective once it established value for buyers or customers. AA takes advantage in terms of information technology, and used its real-time technologies such as its computerized reservation system to market its services. Aside from this online booking and flight reservation, AA also introduced its frequent flyer program called AAdvantage -- the largest flyer program in the airline industry. AAdvantage has been a successful strategy that it encouraged passengers to choose AA as their official air freight carrier. Through this program, customer’s loyalty and trust will be improved as AA continued to offer best deals of incentives and rewards. D. Employees Strategy i. Reduce labour cost. The airline industry particularly the international airlines are suffering from high operating expenses and fixed costs due to severe economic recession and growing competition in the global market. The labour expenses are one of the highest costs incurred by air carriers that is why AA is required to reduce the size of their workforce in terms of real wages and at the same time increased productivity. According to Vasigh, Fleming, and Mackay (2010), “restructuring is important to the survival of today’s airlines” (p. 48), particularly the reduction of labour costs. The Flight Plan 2020 of AA is “constantly finding ways to cut costs, operate more efficiently, and generate additional revenue for the company...[They]’ve cut more than $6 billion costs since 2003, including more than $4 billion in non-labor costs” (“Flight Plan 2020,” n.d.). ii. Salaries. “In order to combat high costs, AA drastically changed employee-compensation rates by developing a “two-tier system” (Vasigh, Fleming, & Mackay, 2010, p. 47). Under the two-tier wage system is the two different compensation systems based on the gap of employment wherein salaries of a new employee will be on a lower scale compared to the salary of old employees despite of the same work order. The implementation has been successful and helped AA to save almost $10,000 per new employee. In addition, AA is giving all their employees profit-sharing interests called an Annual Incentive Payment once the carrier experienced the 5% pre-tax earnings margin at the end of the year. iii. Motivation. AA strongly believed that their employees are being motivated once they are get involved with the carrier’s operation. Empowered employees would not only improve productivity and efficiency but also it generate cost savings as it lowered employment turnover. Aside from empowerment which is an internal motivation, AA also implemented customer experience cash awards for their employees as part of their external motivation. AA strongly believed that motivating employees through monetary terms is a good and effective strategy that is why they formulated an employee recognition programs that encouraged employees to give good suggestions and ideas in exchange of monetary benefits. iv. Union Member. In terms of labor relation, the interests of AA’s employees are guarded by three unions - the Air Line Pilots Association (ALPA), the Association of Flight Attendants (AFA), and the Transport Workers Union (TWU). These unions are important component of communications between the management and majority of employees considering that unionized workforce of AA had reached to 75%. Although these three unions have represented the different employees of AA, they come in the same plea that salaries will be increased and money automation. E. Industry Analysis - Porter’s Five Forces i. Rivalry. The rivalry in the airline industry is high. The market growth and returns of AA are becoming stationary caused by the intensity of competition among low-cost carriers. AA as a legacy carrier is using the hub-and-spoke network structure but low-cost carriers are using the point-to-point network, and the gap in terms of price and service offering is really obvious. Aside from stiff competition, the fixed cost variable ratio of AA is high and the carrier is shaken by bankruptcies. ii. Supplier power. Suppliers tend to be powerful because the switching costs are also high among airlines. The bargaining power among suppliers is also high considering that the airline industry is dominated mainly by lesser number of manufacturers. Low-cost carriers because of their lower operating costs had managed to offer very low fares that attract significant numbers of passengers. iii. Barriers to entry. There are significant barriers to entry in the airline industry and among the barriers are the intense competition, differentiation and high operating costs requirements. On the other hand, because of the recently completed deregulation and liberalization, new entrants are increasing in number particularly the low-cost airlines which made the market more saturated. Good thing that AA is strong in differentiation through its frequent fliers program and brand name recognition which often lure a customer even their prices are high. iv. Threat of substitutes. AA being a legacy carrier that used hub-and spoke network is surrounded by direct substitutes such as short haul and long haul flights and point-to-point network. Low-cost airlines are attacking the legacy carriers in terms of gaining more market share and influence the airline industry’s potential profitability. Other than these low-cost carriers are some alternative travel services such as fast trains and cruise lines. v. Buyer power. AA offered the best air travel experience to their customers at a reasonable price; however, because customers are powerful their bargaining power is also high that required AA to reduce their costs just to have a significant sales revenue. The carrier is also dependent on their customers in order to increase market share and revenue. If only the switching costs are low, the customer bargaining power will be weakened but because of low-cost carriers, there is a tendency that it would be impossible. 5. Core Competencies for AA A. Employees i. Loyalty. AA employed more than 88,000 employees worldwide and relationship with them is critical to the carrier’s success. Loyalty is hard to regain that is why they provided their employees with competitive wage and benefits, developed several training and development programs to enhance skills and careers, and most importantly is hearing their sides as part of the company. The company strongly believed that their future will be secured just by attracting and retaining diverse and talented people as well as managing labour costs. ii. Training. In respond to this fast pace of competition, AA is offering their employees a range of training and development opportunities which are unique to their competitors in addition to the mandated training requirements of the Federal Aviation Administration (FAA). Through training, employees such as pilots, flight attendants, airport agents, and other personnel will have the chance to have hands-on instruction in the usage of the latest industry technologies and maintenance facilities. AA had developed a centralized training for their flight cabin attendants called the AA Training Conference Center which is considered to be pioneering facilities. In addition, AA also recognized the importance of training activities for their pilots that is why they designed the American Airlines Flight Academy which is “recognized by the aerospace industry as one of the finest flight training facilities in the world” (“AMR Corporation,” 2010). iii. Professionalism. AA’s Training Conference Center is not only considered as the base for training flight cabin attendants because aside from learning, the center also emphasized professional growth for all employees through team-building programs, conferences, and catered events. Aside from individual career development, AA is also implementing a formal process of tracking employees’ performance regardless of positions in the company. This is part of the company’s professional development program wherein the employees will have the chance to develop his or her professional career and at the same time assists them for feedback and discussion of their individual goals. B. Communication i. Between management and managers/ between managers and employees/ and between employees and passengers. AA is giving their employees a chance to be involved in the professional growth and development of the company by hearing their ideas and perspectives. AA is giving emphasis on internal communications through employees’ empowerment that would improve productivity and efficiency. The carrier is also implementing regular sessions with all employees and together they discussed strategies both in terms of service and customer satisfaction. They also make certain that the culture of the carrier is promoted through ongoing employee communications at all levels. C. Company Culture i. Logo The logo of AA remained to be unchanged since its inception, and it has two versions that come in two colors. The first logo format is characterized by the letter ‘A’ with an eagle in between the two letters, and the second format is the named itself. The name American Airlines suggested that the carrier is an American-based and the eagle that can be found in the logo represented the national bird of the country. Their logo is viewed to be patriotic considering that AA served the country for being an official mail carrier and send some of their fleets for the country’s security. ii. Values. AA is known to be an environment oriented carrier that is deeply dedicated in supporting developments and improvements for the sake of the environment. In fact, they have managed to reduce their greenhouse gas emissions when they preferred to use fuel-efficient aircrafts in replacement to those old and inefficient ones, and implemented a Fuel Smart program as their energy-saving initiatives. Another company values is the high accountability standard among employees at every level. Originally, AA is following a top-down approach of management wherein the planning and decision making must start from the top down to the front line employees for implementation. As time goes by AA learned to become less bureaucratic and let their employees participate in managerial responsibilities. 6. Metrics A. Balanced scorecard AA had experienced intense competition, high operating expenses, severe economic recession, and many more, but all of these are exceeded by them through the emergence of strategies. AA had chosen the balanced scorecard (BSC) to be its metrics in strategic management and performance measurement. According to Baxter and MacLeod (2008), “BSC is the most popular in reviewing performance systems in the airline industry” (p. 60) as it “fundamentally changes how employees prioritize and report their work” (Cannon, 2008, p. 128). The groundwork of this strategy started with AA’s vision, to become the largest airline in the world, and this will be translated to quantifiable strategies that involved objectives, measures, targets, and initiatives. AA’s balanced scorecard: The financial objectives of AA is to increase their revenue for about 5% in domestic and 10% in international market; and lower its fixed cost variable ratio by adapting cost leadership strategy as their initiatives. For customer objectives, AA wanted to be number 1 in terms of customer ranking (lowest prices) and on-time arrival rating with an initiative of quality management and frequent flyer program (AAdvantage). The internal objectives of AA are focused on their stakeholders and on how to retain their best customers with initiatives of improving the computerized reservation system (Sabre) and more IT investments. Lastly, for learning objectives, AA wanted to have a 100% alignment among their employees and their goals that is why they are providing them with the best on-ground training such as AA Training Conference Center and Flight Academy. The BSC of AA shows that through training, all of the AA’s objectives will be met, which lead to the contentment of passengers, lower costs, and increased revenue. 7. Conclusion Finding keys is up to the performance of the company in different areas such as financial, customer, internal, and learning. A strategy would be useless in finding keys if it is not aligned with the carrier’s objectives. Cooperation should also be present in the implementation implying that the keys are amenable to all stakeholders. IT investment, higher training, customer-loyalty programs, and many more are among that will be useful to AA. A. Paper Overview Being one of the world’s largest airlines does not exempt AA from the intense competition in the airline industry and economic recession in the global market. AA greatly depends on their employees and strategy in order to survive. They went into several alliances particularly in the trans-Asia and trans-Pacific flights just to improve their market share and capacity. Success has not been easy for AA especially when the market becomes saturated with low-cost airlines produced by deregulation and liberalization. The best way for them to fight this crisis is to develop unique strategies that are difficult for competitors to imitate. B. Opinion Currently, AA is using the differentiation strategy particularly the introduction of AAdvantage and the computerized reservation system. The strategy has been successful by means of customer’s loyalty and satisfaction and charging of premium price; however, maybe AA would look into something that are considered new attractions. AA could not compete on being diversified alone as customers from all over the world are becoming more price sensitive. AA also needs to consider the reality that those airlines who are using the cost leadership strategy are the carriers that improved their market share and economies of scale. For instance, low-cost charter airline like Southwestern Airlines are just new to the industry compared to legacy carriers, but how come that this airline is experiencing a steady growth and becomes more profitable. This is because customers preferred to travel based on lower price with same or better value to customers. Therefore, in order for AA to compete with these low-cost carriers in terms of market share and profitability, it must pursue a cost leadership strategy. C. Recommendation In order for AA to become more profitable and improve its market share, it must do some restructuring by eliminating those routes that are least profitable and those old aircrafts that are not fuel-efficient, and reduce industry capacity. In order to survive, it must invest more in the trans-Atlantic and trans-Pacific route because demand in these countries is high. It should also focus on competitive pricing by shifting to cost leadership strategy and negotiate the reduction of wage rates with the unions to reduce the fixed cost variable ratio of the carrier. With this strategy, AA will have greater chances to compete with low-cost carriers in terms of market share. If American Airlines tend to continue with the differentiation strategy, then it must gain rapidity and first mover advantages such as lowering risk and lowering prices; however, AA needs to be flexible toward this idea because being a first mover among legacy carriers is risky. AA is the first airline to develop computerized reservation system known as Sabre, and it may take advantage as a first mover by investing more on IT to control the competition. Aside from IT investment, AA should also consider an improvement on its AAdvantage program by giving customers with more rewards and bonuses. AA’s financial objectives include: A reduction of its fixed cost variable ratio for about 50%. Increase earnings margin of about 10% so that employees will receive higher share of profits under the program Annual Incentive Payment. The 13% market share in the domestic market in terms of earnings per share growth will be increased for at least 30% so that reduction labour costs will not be anymore necessary. A steady growth of earnings and revenue base during the recessionary periods. Achieve a revenue growth per year: 5% for domestic and 10% for international. A more diversified employment strategy, pricing, and route network. 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