University of Jordan Faculty of Business Strategic Management

“American Airlines ”
Case Study Strategic Management

Prepared By
Fathi Salem Mohammed Abdulla

2009

37

American operates scheduled flights throughout the United States. President. and second behind Air France-KLM in operating revenues. behind FedEx Express. 38 . and flights to Canada. AMR is the airline that treats everyone with equal care and respect. Europe. Texas. The Chairman. AMR will continue to modernize its fleet while maintaining its position as the largest air carrier in the world. Japan. It is the world's largest airline in passenger miles transported and passenger fleet size. By investing in tomorrow’s technologies and by following a strict adherence towards environmental regulations. AMR recognizes that its employees are the key to the airlines success and invests in the futures and lives of its employees. AMR demonstrates its commitment to the world environment. which is reflected in the way each AMR employee is respected. the airline is headquartered in Fort Worth. the People's Republic of China. with a goal of becoming the most profitable airline. adjacent to the Dallas-Fort Worth International Airport. and CEO of AA is Gerard Arpey. the airline flew more than 138 billion revenue passenger miles (RPM). In 2005. Vision Statement (proposed) To become the largest airline in the world. in aircraft operated. second largest. Mission Statement (proposed) AMR Corporation is committed to providing every citizen of the world with the highest quality air travel to the widest selection of destinations possible. and India. Inc. Latin America. A subsidiary of the AMR Corporation. the Caribbean. (AA) is a major airline of the United States.Introduction American Airlines.

45 3.00 3.00 3.15 1.00 Weighted Score 0.10 0.00 Weighted Score 0. 5. 4.30 2. 6.80 0.00 3.60 0.05 Rating 1.20 0.60 2.00 3. 3.60 1.70 Rating 4.60 0.00 Weighted Score 0.00 Weighted Score 0. 4.00 4.75 0.30 0.20 0.00 3.00 2. 2.00 3. 3.60 1. 5. 2.00 Rating 1.60 0.65 Rating 2.45 3.40 1.00 0.00 3.00 4.00 2.00 1.10 39 .90 0.00 0. 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. 7.00 4.25 0.20 0. Increased air travel inconvenience (security related) Business travel declining Increased competition from point-to-point competitors Availability of pricing information Overcapacity in industry Competitive Profile Matrix Critical Success Factors Financial Position Cost Structure Information Technology Partnerships Fleet Weight 0.00 2.10 0.External Audit Opportunities 1.00 4.00 4.10 0.25 0.

10 .05 .10 . 4.15 . 4. Low interest rates 4. 5.00 Internal Audit Strengths 1.10 . Business travel declining 3.30 . Increased air travel inconvenience (security related) 2. 2.10 .05 . Size of fleet Number of routes Partnerships IT infrastructure Government relations Weaknesses 1.05 . Information Technology 6. Government backed loans 5. 3.00 Rating 4 2 3 4 3 3 3 2 3 3 3 2 Weighted Score .05 .10 1. Availability of pricing information 5.EFE Matrix Key External Factors Opportunities 1.10 .30 .05 . Overcapacity in industry Total Weight . Partnerships with Asian Airlines Threats 1. 5.05 . Favorable wage negotiation climate 2.45 .15 .15 .15 .20 . 3.15 .30 . 2.60 .20 3. New fuel efficient engines 7. Increased competition from point-to-point competitors 4. Travel increasing in general 3. Financial position Cost structure Unprofitable routes Too many divisions Reliance of business fares 40 .

06 0.83 -1.74 12.22 37.54 13.04 -4.93 6.39 -4.82 13.67 3.88 1.01 45.20 1.30 28.31 3.19 37.27 6.62 1.19 N/A 0.22 33.67 N/A 11.40 11.26 1.Financial Ratio Analysis (March 2007) Company Valuation Ratios P/E Ratio (TTM) P/E High .94 -4.79 8.41 42.56 17.71 55.71 285.88 7.35 302.20 41 .18 59.77 0.90 9.09 N/A NA NM -21.5 Yr Avg Net Profit Margin (TTM) Net Profit Margin .24 5.00 NM 0.50 -6.01 20.33 4.28 12.5 Yr Avg Dividend 5 Yr Growth Rate Payout Ratio (TTM) Growth Rates % Sales (MRQ) vs Qtr 1 Yr Ago Sales (TTM) vs TTM 1 Yr Ago Sales .90 25.48 6.51 0.5 Yr Growth Rate EPS (MRQ) vs Qtr 1 Yr Ago EPS (TTM) vs TTM 1 Yr Ago EPS .04 1.09 1.32 70.05 2.5 Yr Avg Effective Tax Rate (TTM) Effective Tax Rate .01 13.5 Yr Growth Rate Capital Spending .86 NM 95.40 -7.32 47.78 3.03 6.49 1.24 1.15 38.80 0.97 64.52 29.79 20.27 17.61 70.52 0.43 10.69 21.15 4.5 Yr Growth Rate Financial Strength Quick Ratio (MRQ) Current Ratio (MRQ) LT Debt to Equity (MRQ) Total Debt to Equity (MRQ) Interest Coverage (TTM) Profitability Ratios % Gross Margin (TTM) Gross Margin .59 31.42 2.75 47.94 17.32 28.5 Yr Avg Operating Margin (TTM) Operating Margin .13 26.96 13.41 16.06 2.23 0.68 0.88 18.00 23.33 18.35 17.85 11.5 Yr Avg Industry Sector S&P 500 N/A NA NA 2.Last 5 Yrs Beta Price to Sales (TTM) Price to Book (MRQ) Price to Tangible Book (MRQ) Price to Cash Flow (TTM) Price to Free Cash Flow (TTM) % Owned Institutions Dividends Dividend Yield Dividend Yield .26 1.57 1.77 1.26 19.59 19.34 7.31 34.42 0.24 9.77 6.49 9.27 4.87 24.38 1.03 8.10 5.00 3.76 0.84 -4.27 0.00 0.93 0.39 48.62 3.69 -7.19 4.48 26.82 20.38 5.86 1.97 12.5 Yr Avg EBITD Margin (TTM) EBITD .92 12.15 33.43 1.48 6.63 N/A 37.86 17.92 6.27 5.72 11.04 8.77 10.89 38.12 11.13 34.12 -0.Last 5 Yrs P/E Low .18 1.91 12.38 1.10 37.5 Yr Avg Pre-Tax Margin (TTM) Pre-Tax Margin .66 23.20 1.96 16.30 15.06 11.64 -2.29 7.

30 0.80 42 .57 14.05 0.16 N/A -66.46 0.92 Company Worth Analysis (year­end 2001 2002 2003 average) Stockholders Equity Net Income x 5 (Share Price/EPS) x Net Income Number of Shares Outstanding x Share Price $2.30 0.15 0.000. Too many divisions 5. Partnerships 4.000.000 ($10.913 N/A 17. Number of routes 3. Size of fleet 2.78 0.5 Yr Avg Return on Investment (TTM) Return on Investment .76 10.5 Yr Avg Efficiency Revenue/Employee (TTM) Net Income/Employee (TTM) Receivable Turnover (TTM) Inventory Turnover (TTM) Asset Turnover (TTM www.68 2.716) $2.59 March 2004 4.15 -2.40 6.59 8.21 42.000. Government relations Weaknesses 1.48 8.15 0.22 622.15 0.937.15 6.282. IT infrastructure 5.60 0.com -4.10 0.05 0.05 0.40 0.10 0.125.79 9.58 39.51 14.835. Reliance of business fares TOTAL 0.032 14.00 4 4 4 3 4 1 2 2 1 2 Rating Weighted Score 0.714 13.5 Yr Avg Return on Equity (TTM) Return on Equity .78 191.66 6.40 0.05 0.861 35.97 10.984.40 1.015.23 25.71 19.05 0.33 180.38 198.10 1.139 14.36 0.000) ($2.71 4.30 0.stockpoint.20 2. Cost structure 3. Unprofitable routes 4.Management Effectiveness % Return on Assets (TTM) Return on Assets .10 0.83 6.20 0.707 9.93 18.investor.429) Method Average IFE Matrix Weight Key Internal Factors Strengths 1.10 6. Financial position 2.45 -3.51 6.43 -5.866 81.11 11.000 ($2.436.

Develop new partnerships in Asia utilizing the number of routes as a key negotiating point. 2. W-O Strategies 1. Such as more curb side check-ins and etickets. 2. W-T Strategies 1. Eliminate unprofitable routes to improve financial position and reduce industry capacity. Sell unprofitable/smaller divisions to improve financial positions. Some operations point-topoint to improve cost structure and reduce customer inconvenience. S-T Strategies 1. Negotiate lower wage rates with unions to improve cost structure. 2.e. 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 43 . Use IT to reduce the check-in and wait times on flights. Use a mixed model i.SWOT Matrix S-O Strategies 1. Use market position by reducing number of unprofitable flights and reducing industry capacity.

99 IV V VI VII VIII IX QSPM 44 .99 III High 3.0 to 1.99 Weighted Score Low 1.0 to 4.0 to 2.Grand Strategy Matrix Rapid Market Growth Quadrant II Quadrant I Weak Competitive Position Quadrant IV Quadrant III Slow Market Growth Strong Competitive Position The Internal-External (IE) Matrix The IFE Total Weighted Score Strong 3.0 to 2.0 I Average 2.99 Medium The EFE Total 2.0 to 3.99 II American Airlines Weak 1.0 to 1.

Low interest rates 4.05 . Financial position 2. Increased air travel inconvenience (security related) 2.35 Domestic Expansion AS TAS --1 2 ----3 3 4 ------0.24 0.20 0.15 0.00 Domestic Expansion AS TAS --0.08 0.08 ----1.15 .18 --0.24 4 --4 --3 --1 --4 0. Unprofitable routes 4.65 3.10 .28 0. Too many divisions 5.10 .07 0.05 .18 0. Partnerships 4. Favorable wage negotiation climate 2.10 0.12 --0.08 ----1.16 0.00 International Expansion AS TAS --0. Partnerships with Asian Airlines Threats 1.10 0.03 ----4 3 4 0.05 0. Travel increasing in general 3. Overcapacity in industry SUBTOTAL SUM TOTAL ATTRACTIVENESS SCORE Weight .15 --0. Number of routes 3.05 .10 1.12 ----1.00 Key External Factors Opportunities 1. Government backed loans 5.Strategic Alternatives Key Internal Factors Strengths 1.20 0.15 0.05 . Business travel declining 3. Size of fleet 2. Cost structure 3.05 0.15 0. IT infrastructure 5. Increased competition from point-to-point competitors 4. Information Technology 6.12 0.15 0.70 3.10 1.05 --0. New fuel efficient engines 7. Government relations Weaknesses 1.05 0.60 0.15 .05 .10 0.10 . Availability of pricing information 5. Reliance of business fares SUBTOTAL Weight International Expansion TAS AS --4 1 ----1 4 1 ------0.30 EPS/EBIT Analysis 45 .05 .08 ----1.18 0.20 0.06 ----3 3 1 0.24 1 --1 --1 --4 --1 0.

000 7.04) 2.00 Shares Outstanding 155M Common Stock Financing Debt Financing Recession Normal Boom Recession Normal Boom EBIT (500.000) (25.00 2.500.000.000 165.000) (17.000.000.000) 492.500.000.333.000.000 155.000) (25.000) (17.333.000 Taxes 0 0 0 0 0 0 EAT (500.000 (500.000 EPS (2.333 155.000 (525.500.000) 0 500.000) 0 500.000 (517.000.000) 475.000.000) 0 500.000.500.500.500.000 # Shares 178.65) 0.500.000 EBT (500.500.333 188.39) (0.14) (0.000 Taxes 0 0 0 0 0 0 EAT (507.333.000 17.000.500.000 17.500.000.333.000.85) (0.000.333 188.65 (3.000) 482.000.000) 0 500.500.000.000 Interest  7.000 17.000.000 EBT (507.000 25.000) 475.500.000.000.76 (3.16) 3.000.06 70 Percent Stock ­ 30 Percent Debt 70 Percent Debt ­ 30 Percent Stock Recession Normal Boom Recession Normal Boom EBIT (500.500.000) 492.000.000.500.000.000 EPS (2.333 178.11) 2.333 178.000) 0 500.000 (517.000) (7.000 Interest  0 0 0 25.000.000.000 # Shares 188.333 165.000 (500.000 7.333.000 155.000) 482.500.000 165.92 46 .000.500.000) 0 500.500.000 (525.333.000.000 25.Amount Needed 500M Interest 5% Tax 0% Share Price $15.000) (7.000.500.000.