American Airlines And New England College Course And Semeste

American Airlines Aanamenew England Collegecourse And Semesteragenda

American Airlines (AA) Name New England College Course and Semester Agenda American Airlines Details and Introduction US domestic airline market, competition and structure Economic Concepts Demand – Supply Analysis Concepts (Right/ Wrong analysis?) Law of diminishing marginal returns (Right/ Wrong analysis?) Network effect by creating hubs (Right/ Wrong analysis?) What should AA do to comeback strongly (Right/ Wrong analysis?) Conclusion References Talk through agenda * American Airlines Founded: April 15, 1926 Headquarters: Fort Worth, Texas Services offered Operations of a major network air carrier providing air transport to passengers Providing freight services Providing financial services to airline secondary services In-flight services Major competitors United Airlines Delta Airlines Southwest Airlines Market Structure – Oligopolistic market with strong barriers to entry Regulation Authority – Federal Aviation Authority (FAA) Talk through deregulation: The airline industry in the United States of America has had a major shift after the Airline Deregulation Act of 1978, and then has been subject to the full force of the market.

The airline industry dates back to 1918, when subsidies and regulation drove the Post Office to use its first airplanes to deliver mail. This changed to Post Office giving contracts to private carriers to carry mail through the Kelly act, in 1925 (Cook, 1996). A significant acquisition in Transworld Airlines in 2001 and a merger with US Airways made American Airlines Group (AAG), one of the prominent players in the airline industry today (Duignan, 2013). The market structure of the airline industry is oligopolistic which means that there are only a few major players that provide the service. AA’s competitors include other major airlines such as Southwest Airlines, Delta Airlines and United Airlines with market share of 20%, 16% and 11% respectively. * American Airlines: Market & Competition American Airlines market share at 15% in an oligopolistic nature as market structure Despite having 30% market share, American Airlines has not been the most profitable or the most cost saving airline American Airlines Group All Industry Ratios Debt Ratio 0.68 0.88 Current Ratio 0.45 1.5 Quick Ratio 0.3 0.67 Profit Margin 3.70% 5.60% Operating Margin 7.30% 10.50% Oligopoly: a state of limited competition, in which a market is shared by a small number of producers or sellers.

Ratio analysis: the analysis of different statistics on the balance sheet of the company * Economic Concepts – ( Analysis) Demand – Supply Analysis Concepts Demand Increased income and good economy effects Related goods pricing Number of buyers How customers perceive the future Supply – pricing, technology, operations Law of diminishing marginal returns Network effect by creating hub Cancellation of routes Conserving cash Cutting operational expense Creating more direct routes Improve perception Cost Analysis Concepts Covid Comeback Analysis For AA, the demand curve can be determined through three different determinants – income of the people using the service, pricing of related goods, and the number of buyers.

While the production costs incurred in the airline industry are pretty commonly discussed, I would like to talk through two new concepts that I learned in chapter 8 of this course. There are two major cost concepts that perfectly relate to the airline industry in general and AA in particular. These are namely., the law of diminishing marginal returns and the network effect. One may be able to judge from the above discussion around the pandemic, that AA will have a tough time on the demand curve for the next few years. People losing jobs in turn leading to a loss in income, the negative sentiment about travel among the people, and the volatility in fuel pricing will hurt AA’s demand.

The future also looks bleak considering the fact that there is no current vaccine available to treat the disease and people will postpone travel both for business as well as leisure which happen to be the main source of income for AA. * Demand – Supply Analysis Concepts If Peoples’ Income rises If pricing of related goods (crude oil) rise If number of buyers increase If Outlook improves Demand DETERMINANTS DETERMINANTS If fuel and the landing slots pricing increases If there are Improvements in technology If the weather is good If Outlook improves Supply This is the strategy that AA has gotten right over the years where they have been able to manage demand and supply Talk through the determinants on both demand and supply side.

From the above, we can understand that the airline pricing is highly elastic. This means that an increase in pricing reduces the demand. This can lead to either usage of substitute goods such as a competitor or even a different mode of transport. Thus AA has to be very careful to ensure constant demand to maintain a good price. * Law of diminishing marginal returns Busiest route AA Revenue $ 675 Million Delta Revenue Diminishing marginal returns is an effect of increasing input in the short run after an optimal capacity has been reached. The law states that this increase in input will result in smaller increases in output.

Nash Equilibrium: a stable state of a system involving the interaction of different participants, in which no participant can gain by a unilateral change of strategy if the strategies of the others remain unchanged. AA’s options to increase revenue from this route Total Revenue $ 464 Million $ 1 Billion + Nash equilibrium and Law of diminishing marginal returns Increase the number of flights on the routes Reduction in profitability of route by increasing flights cause customers may not increase this route's profitability. Delta could retaliate by doing the same thing Do nothing limited availability of seats keeps this route very profitable AA does not gain a unilateral advantage by change of strategy This is the strategy that AA has gotten right over the years where they have been able to avoid the diminishing returns The law of diminishing returns states that after some optimal level of capacity is reached, adding an additional factor of production will actually result in smaller increases in output (Hayes, 2019).

The Los Angeles – New York route (LAX – JFK) has turned out to be the most profitable route for AA making 675 Million USD. Delta Airlines made 464 Million USD. Together they control over a billion dollars of the traveler’s market in this route (Grant, 2019). AA could decide to increase the number of flights on this route considering demand, but it will have to face two major issues – it cannot guarantee the number of passengers will keep increasing, which would reduce the profitability of the route. Moreover, if AA increases the number of flights, Delta could do the same further reducing profitability.

If Delta decided not to increase the flights then AA might get some more market share from Delta but, the possibility of this happening is really low. Thus, the companies have maintained a Nash equilibrium by making sure the limited availability of seats keeps this route very profitable. AA does not gain a unilateral advantage by change of strategy, if Delta’s strategies remain unchanged. In other words, the market share could increase by adding a few more flights on the route but in general, the profitability could reduce. * Network effect by creating hubs Network Effect: The network effect is created when increased numbers of people improve the value of the goods or service. Hub and spoke model of the airline industry helps reduce costs.

Out of 7 hubs for AA, Charlotte is the most profitable costing 2.28$ Charlotte also shares the revenue per take off with AA The purpose serves three things Increased convenience and more choice for passengers Cheaper costs of flying for both airline and customer Cost center being converted to a revenue center This is the strategy that AA has gotten right over the years where they have been able to manage hubs The airline industry works on the hub and spoke model. The hub and spoke models allow the airliner to focus/concentrate passenger traffic and operations at a particular airport. AA has its six biggest hubs in Charlotte, Chicago, Dallas, Miami, New York JFK, and Philadelphia. The most profitable one is that at Charlotte on a per passenger basis.

It is also the hub that experiences the most connecting passenger flight traffic in the US. AA operates over 90% of the flights from the Charlotte airport. According to a 2013 study, the cost per passenger at Charlotte Airport is $2.28, while it’s $6.86 in Dallas and $19.13 in Miami (Schlappig, 2015). One can see the stark difference in being able to maintain a low cost at this hub for AA. Thus, Charlotte hub has created a network effect for AA.

The value is commonly shared by both AA and its customers. AA will be able to keep saving money on passenger cost and then eventually pass it on to the consumer by providing a cheaper ticket. The customers get the added advantage of having multiple options to choose from when selecting a flight via Charlotte Effects of Covid – 19 on airline industry Estimated traffic revival Estimated ASM Is traveling for business overrated ? Estimated traffic revival : Will take 5 years to revive Estimated Average Seat Per Mile : less than 9 cents in Q3 and Q4 Zooms rise to fame on business networking What should AA do to come back strong? (1/2) Reduction in operational costs Creation of Direct routes Improve customer trust Cancelled 19 domestic routes Asking employees to take buy outs or early retirement settlements.

Take advantage of the fall in crude oil prices by buying more upfront Leasing of landing slots in Charlotte Reduction of indirect flights to convert them to direct routes Stop using the hub spoke model until passengers are back General needs the government to provide it with interest free loans Emergency travel preferred airline wearing masks at all times on the airplane and leaving the middle seat open This is the strategy that AA has gotten wrong, the efforts should have been more directed and faster AA has cancelled over 19 routes, received government aid through the payroll protection program and has made changes to the operational costs by asking employees to take buy outs or early retirement settlements.

I think all these actions are good to stay afloat. But to get back to be a profitable airline, I would propose that firstly, AA should work on creating more direct routes for the time being. This would mean not using the most profitable hub at Charlotte for connecting flights. There are two reasons that people will travel on an airplane – emergency or any other urgent matter that is not related to health. People will look to save time and exposure on the route, and I believe by providing a direct flight will increase demand.

Secondly, the airline industry in general needs the government to provide it with interest free loans both to avoid massive job losses and keep afloat. While the pandemic will not go away unless a vaccine/remedy is created, there will be a day when man’s need to fly will * What should AA do to come back strong? (2/2) Stop any chance of merger or takeover any kind of attempt made in these regards should be thwarted by the government. Oligopoly should turn in to monopoly A worse situation for the consumer Other generic actions Utilizing passenger planes for cargo movement Selling/mortgaging aircrafts and engine parts Defer deliveries of the planes in production Reduce in-flight espenses Talk through the reasons why a merger will be bad for the passengers where the buying power of the consumer reduces.

Other plans to revive the airline Conclusion AA has not been the most profitable airliner in the last few years AA’s demand and supply curves depend on pricing of fuel, income levels, the number of buyers, technology outlook for cleaner fuels and cost efficiency, and peoples’ thinking of the future. Cost concepts can be discussed via network hubs and law of diminishing returns The Covid – 19 pandemic will see AA financially strained but a merger/take over should not be a solution Conclude with details of different points in agenda and end with thanking class for their times. References Cook, G. (1996, August 8). A Review of Hist view of History, Structure , Structure, and Competition in the U.S. Airline e, and Competition in the U.S. Airline Industry. Retrieved from Duignan, B. (2013, February 14). American Airlines. Retrieved August 01, 2020, from American Airlines. (2017, November 09). Retrieved August 01, 2020, from Hopfer, E. (2020, April 15). American Airlines to receive nearly $6B in government aid package. from Impact of COVID-19: Data Updates. (n.d.). Retrieved August 01, 2020, from FAA's major roles and responsibilities. (2019, November 06). Retrieved August 01, 2020, from Hayes, A. (2020, June 14). Law of Diminishing Marginal Returns. Retrieved August 01, 2020, from Grant, J. (2019, August 13). Billion Dollar Route - Jewels in The Network. Retrieved August 01, 2020, from Banton, C. (2020, January 29). Understanding the Network Effect. Retrieved August 01, 2020, from Schlappig, B. (2015, December 30). You'll Never Guess American's Most Profitable Hub. Retrieved August 01, 2020, from

Paper For Above instruction

Introduction

American Airlines (AA) stands as one of the most predominant players in the United States airline industry, with a rich history dating back to its founding on April 15, 1926. Headquartered in Fort Worth, Texas, AA provides a comprehensive range of services, including passenger transport, freight logistics, and ancillary financial and in-flight services. Its primary purpose is to connect people across the globe through an extensive network, characterized by its hub-and-spoke model that optimizes operational efficiency. This paper explores AA's competitive landscape, market structure, demand-supply dynamics, strategic challenges, and opportunities for recovery post-COVID-19, applying pertinent economic concepts to analyze its current Standing and future prospects.

Overview of the Company

American Airlines operates as a major network carrier serving domestic and select international routes. It offers various classes of service, including economy, business, and first class, tailored to market segments. Its revenue streams are diversified, stemming from ticket sales, cargo, loyalty programs, and additional services. The company's strategic focus has historically been on maintaining extensive hub airports to maximize connectivity and cost-efficiency, though recent disruptions have prompted reevaluation. Its primary hubs include Charlotte, Chicago, Dallas, Miami, New York JFK, and Philadelphia—each playing a crucial role in its network strategy.

Main Competitors

AA faces stiff competition from several major airlines, notably United Airlines, Delta Airlines, and Southwest Airlines, each vying for market share in an oligopolistic industry. United Airlines holds about 20%, Delta 16%, and Southwest approximately 14%, with AA possessing roughly 15%. These competitors operate in a limited competition environment characterized by high barriers to entry, regulatory oversight, and carrier alliances. Other notable competitors include JetBlue and Spirit Airlines, which compete more aggressively on budget routes but influence the broader industry landscape.

Market Structure and Regulation

The airline industry in the US is classified as an oligopoly, with a handful of large firms dominating the market. Barriers such as high capital requirements, regulatory compliance, and slot controls at major airports impede new entrants’ entry. The Federal Aviation Administration (FAA) maintains regulatory oversight, ensuring safety standards, route allocations, and industry practices adhere to national policies. Post-1978 deregulation shifted control from government authority toward competitive market forces, fostering innovation but also intense rivalry among incumbents, which influences pricing and service offerings.

Demand and Pricing Analysis

The demand for airline services is sensitive to various determinants, including income levels, prices of related goods (notably fuel), and consumer perceptions of safety and reliability. During economic expansions, increased disposable income leads to higher demand, especially for business travel. Conversely, downturns and pandemics, such as COVID-19, dramatically reduce demand as travelers postpone trips amidst health concerns and economic uncertainty.

Pricing strategies are highly elastic, showing that even small price changes can significantly influence consumer behavior. AA’s pricing policies must navigate this elasticity carefully, balancing fare competitiveness with revenue optimization. The airline also employs dynamic pricing models influenced by real-time demand, competition, and operational costs. For example, during the pandemic, AA adopted competitive discounts and flexible ticket policies to retain customers.

Strategic Mistakes and Successes

A notable strategic mistake by AA has been over-reliance on its hub-and-spoke model, especially at Charlotte, which became a vulnerability during the COVID-19 crisis. While this model enhances efficiency under normal circumstances, its rigidity hampers responsiveness during demand shocks. During the pandemic, the concentration of flights at hubs led to operational costs and underutilization when passenger volumes declined sharply.

Furthermore, over-expansion of routes without flexible contingency planning contributed to financial strain. Some routes became unprofitable, necessitating cancellations, as seen with AA’s plan to cut over 19 domestic routes. These decisions reflect a misjudgment of demand elasticity and hub dependency, emphasizing the need for flexible network strategies.

Conversely, AA's successes include effective utilization of its hub network to create a network effect that reduces operational costs per passenger, especially at Charlotte. Its focus on strategic alliances, loyalty programs, and cost management measures have helped sustain profitability during fluctuating market conditions. These efforts demonstrate prudent strategic planning, leveraging economies of scale and network effects.

Demand-Supply Dynamics

AA’s demand-supply analysis reveals a highly elastic pricing environment influenced by macroeconomic factors and industry-specific costs such as jet fuel prices. As income increases, demand typically grows, but this is tempered by external shocks like the pandemic and fuel shortages. The elasticity means that AA must optimize fares to sustain demand without diminishing revenue.

Supply-side factors include aircraft availability, fuel prices, airport slot constraints, and operational costs. Diminishing marginal returns manifest when adding flights beyond an optimal point, as marginal increases in revenue become smaller with each additional flight. The strategic management of this balance, especially on high-traffic routes like LAX-JFK, is critical for profitability.

Nash Equilibrium and Route Optimization

The Los Angeles to New York (LAX-JFK) route exemplifies a Nash equilibrium—where AA and Delta Airlines have matched strategies, limiting each other's market share expansion by keeping capacity and ticket prices stable. Increasing flights beyond the equilibrium point risks diminishing returns, as increased competition leads to price wars and reduced profitability. Both airlines' mutual recognition of this equilibrium maintains route profitability but restrains aggressive capacity expansion.

Network Effect through Hub Creation

AA’s creation of hubs exemplifies the network effect—where increasing passenger volumes at key airports enhances the overall value of the airline's network. Charlotte emerges as the most profitable hub due to its low operating costs and high connecting passenger volume (Schlappig, 2015). Such hubs generate cost efficiencies via economies of scale, allowing AA to pass savings onto customers, bolstering competitive advantage.

The hub-and-spoke model centralizes operations, improves connectivity, and reduces costs, providing a strategic advantage in managing demand and supply fluctuations. The network effect enhances the airline’s market presence, making it more attractive for travelers seeking multiple destination options.

Impact of COVID-19 and Recovery Strategies

The pandemic severely disrupted AA’s operations, reducing traffic volumes exponentially. It is projected that it will take approximately five years for traffic levels to fully revive (Hopfer, 2020). Essential responses included cancelling routes, seeking government aid, and reducing operational costs through workforce adjustments. However, these measures alone are insufficient for robust recovery.

Proposed strategic steps include expanding direct routes to meet customer demand for faster, less contact-intensive travel, leveraging lower fuel prices through upfront purchases