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American Airline Case Study
American Airline Case Study
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).
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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
Critical Success Factors Financial Position Cost Structure Information Technology Partnerships Fleet
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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 Total Weight .15 .05 .05 .05 .05 .05 .10 .05 .10 .15 .10 .10 1.00 Rating 4 2 3 4 3 3 3 2 3 3 3 2 Weighted Score .60 .10 .15 .20 .15 .15 .30 .10 .30 .45 .30 .20 3.00
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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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
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 -66.33 180,913 N/A 17.23 25.36 0.59 March 2004
4.71 4.15 6.51 6.11 11.68 2.78 191,714 13,861 35.21 42.78 0.83
6.66 6.48 8.59 8.51 14.57 14.38 198,139 14,032 14.58 39.40 1.10
6.40 6.79 9.97 10.93 18.71 19.22 622,866 81,707 9.76 10.46 0.92
CompanyWorthAnalysis(yearend200120022003average)
StockholdersEquity NetIncomex5 (SharePrice/EPS)xNetIncome NumberofSharesOutstandingxSharePrice $2,125,000,000 ($10,835,000,000) ($2,436,937,716) $2,015,000,000 ($2,282,984,429)
MethodAverage
IFE Matrix
Weight 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 0.10 0.10 0.15 0.10 0.05 0.05 0.15 0.15 0.05 0.10 1.00 4 4 4 3 4 1 2 2 1 2 Rating Weighted Score 0.40 0.40 0.60 0.30 0.20 0.05 0.30 0.30 0.05 0.20 2.80
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SWOT Matrix
S-O Strategies
1. Develop new partnerships in Asia utilizing the number of routes as a key negotiating point.
W-O Strategies
1. Sell unprofitable/smaller divisions to improve financial positions. 2. Negotiate lower wage rates with unions to improve cost structure.
S-T Strategies
1. Use IT to reduce the check-in and wait times on flights. Such as more curb side check-ins and etickets. 2. Use market position by reducing number of unprofitable flights and reducing industry capacity.
W-T Strategies
1. Use a mixed model i.e. Some operations point-topoint to improve cost structure and reduce customer inconvenience. 2. Eliminate unprofitable routes to improve financial position and reduce industry capacity.
SPACE Matrix
Y axis Financial strength Environmental stability X axis Industry strength Competitive advantage 1 -5 2 -5 +1 worst to + 6 best -1 best to -6 worst +1 worst to +6 best -1 best to -6 worst Y axis: 1 + (-5) = -3
X axis: 2 + (-5) = -3
FS Conservative Aggressive
C A Competitive Defensive ES
IS
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Medium The EFE Total 2.0 to 2.99 Weighted Score Low 1.0 to 1.99
IV
VI
VII
VIII
IX
QSPM
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Strategic Alternatives 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 SUBTOTAL Weight International Expansion TAS AS --4 1 ----1 4 1 ------0.18 --0.20 0.24 0.28 0.12 0.08 ----1.35 Domestic Expansion AS TAS --1 2 ----3 3 4 ------0.12 --0.20 0.18 0.07 0.18 0.12 ----1.60
0.10 0.10 0.15 0.10 0.05 0.05 0.15 0.15 0.05 0.10 1.00
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
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 ----3 3 1 0.20 0.16 0.08 ----1.65 3.00
Domestic Expansion AS TAS --0.24 1 --1 --1 --4 --1 0.15 --0.03 ----4 3 4 0.15 0.08 0.08 ----1.70 3.30
EPS/EBIT Analysis
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Amount Needed 500M Interest 5% Tax 0% Share Price $15.00 Shares Outstanding 155M
CommonStockFinancing DebtFinancing 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 70PercentStock30PercentDebt 70PercentDebt30PercentStock 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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