Currently the airline industry as a whole seems to be on the road of recovery. We, American Airlines, the fourth largest carrier recently avoided bankruptcy, but had a summer full of pressure due to ongoing union struggles and questionable executive compensation packages. After having incurred such big losses, this recovery has come about because of the government bailout and many of our large competitors’ abilities to survive the turbulence in the industry. So far, the prospects look promising. Revenue has improved across all regions of the business.
Domestic unit revenue was up almost 10 percent and Latin American revenue has increased by close to 11 percent in the last quarter of 2012 compared to the same period the prior year. We are performing better than other airlines that have filed for protection and have done so without slashing capacity.
In short, American is doing the right things to return to business efficiency and customer effectiveness. In order to establish a sustainable position for the future, American Airlines must adopt a three-pronged strategy moving forward.
First, we should focus on low priced operations and increased marketing strategies to improve customer demand. We have to enhance customer experience and our volume of loyal customers to build a stronger presence in Airline Industry. Second, we must focus on increasing and improving the routes to cater to large customer base. Lastly, we must address the difficulties our company might face in integrating with the culture of US Airlines. Our future success is highly dependent on these two entities efficiently operating as a single organization.
US Airline industry today is dominated by five major domestic carriers. United, Delta and Southwest each has more than 15 percent market share. American is fourth, with around 12 percent and US Airways is fifth with around 10 percent. Four of these five are profitable — all but American. We lost $2 billion in 2011 and $1.7 billion in the first quarter of 2012.
Our emphasis in 2013 is on operational flexibility, international growth through alliance and selective network expansion, and domestic partnerships to reduce operational and balance sheet risks. American’s market differentiation is based on emphasizing and meeting the needs and expectations of high value customers (particularly large global corporates) and better alignment with the one world airline network and value proposition. Also, being the lead carrier between not only the United States and Latin America but, increasingly, the world and Latin America—connecting through Dallas, Los Angeles, or Miami. This strategy makes sense; if they can get all labor work groups on board, they should be able to make it happen. That is still the main challenge, as is competitor contestation, particularly from larger traditional rivals like Delta and United.
Improve Customer Demand
Lower Operational Costs
American passenger division which already has 57 fewer planes in service than an year ago, should further shrink by another 57 planes this summer. This would improve operational efficiency. Current service levels include 275 cities with a fleet of over 1000 aircraft. American carries about 80 million passengers daily and receives more than 329,000 reservation calls, handles more than 293,000 pieces of luggage and flies more than 4300 flights in one typical day. In order to reduce costs further over 27000 jobs will have to be eliminated. Because of high competition in the industry, substantial price fluctuations occur related to fares.
Enhance Customer Base
Increase value added services offered through our interactive website, AA.com. Any differentiation that convenience added capabilities offer is the center of focus. Busy hiub systems and schedule patterns need to be looked at to improve efficiency and routing effectiveness, thereby enhancing customer experience. We need to do rigorous marketing to attract more customers. Our marketing is currently focused on seasonal and business travelers and much analysis is taken in order to optimize peak travel seasons as well as frequent flier miles programs and pints systems. The Making More Room in coach program is the original marketing ploy of American to project a perception of higher passenger comfort levels. As increased advertising and intense market share is gained, we will continue to remain a key player assuming passenger demand goes up as projected. We will focus on upgraded in-flight entertainment systems, football game special fares, and buy-on board meal options to further enhance customer experience.
American Airlines’ new network strategy is designed to improve profitability by offering the routes and schedules that attract and retain not only their own high value customers but also those of alliance partners, an important source of revenue through codeshare agreements and closely aligned loyalty programs. The network is the core product that works in concert with lie-flat seats, onboard amenities, and customer service. Latin America is a prominent focus, due in part to our strong presence in key hubs to Latin America such as Dallas and Miami. This is where the profits are. Passenger growth forecasts for Latin America for 2013-17 are 6 percent for Latin America North (Central America and the northern rim of South America) and 8 percent for Latin America South (southern cone countries such as Brazil and Argentina). This compares with 3.6 percent for Europe and 4.4 percent for Asia.
Increase International Routes
To follow the growth markets, we must change our portfolio mix to focus more on international rather than domestic routes. This is a gradual process, moving from 38 percent international and 62 percent domestic capacity in 2013 towards a 44/56 percent balance by 2017. As we refocus more of our flying towards international opportunities, it is likely to look towards increased code-sharing with domestic carriers like Alaska Airlines, jetBlue, and others to further enhance our network in places like Los Angeles and New York City. This is likely to have initial teething problems, due to terminal colocation and product disparity issues. For instance, the business passengers that we are pursuing may be disgruntled by jetBlue’s more restrictive carry-on baggage policies or by extra time and added security checks if they are required to change terminals.
Refurbish domestic feed
Our plan is also to diversify our domestic feed by increasing the number of regional carriers with which we do business to reduce operational and balance sheet risk. Today, we primarily get a feed from our wholly-owned subsidiary, American Eagle, which has higher costs than some other regional carriers. American Eagle is going through its own restructuring to lower its costs, and it may ultimately be spun off.
Synergies with US Airlines
Merger with US Airways will result in the largest carrier in US. It would create roughly $1.2 billion in financial benefits.