American airlines case study

Strategy formulation
Submitted by

Archi Gupta
Aastha Kapoor
Megha Maurya
Nivedita Daga
Praveenkumar
Sujit Pallithara
Vishaka Dhiman
Topics covered under Strategy-Formulation
Analytical Framework

I nput stage
Internal Factor Evaluation
Matrix (IFE)
External Factor Evaluation
Matrix (EFE)
Competitive Profile Matrix
(CPM)
Matching stage
SWOT Matrix
SPACE Matrix
BCG Matrix

VISION
To be the number one destination carrier
in the world.

Mission
AMR Corporation is committed at providing every
citizen of the world with the highest quality air travel to
the widest selection of destinations possible. AMR will
continue to modernize its fleet while maintaining its
position as the largest air carrier in the world, with a goal
of becoming the most profitable airline. AMR is the
airline that treats every employee with equal care and
respect and believes that its employees are the key to the
airlines success By investing in newer technologies and by
following a strict adherence towards environmental
regulations, AMR demonstrates its commitment to the
world environment.



Internal Factor Evaluation Matrix
S.
No.
Key Internal Factors - Strengths Weight Rating Weighted
score
1 The largest airline in the world 0.08 4 0.32
2 Employee support (the BODs & CEO volunteered to
work without pay)
0.07 4 0.28
3 Global Alliances ( with other airlines, hotels, car
rental companies, banks, etc.)
0.07 4 0.28
4 Govt. assistance 0.04 3 0.12
5 Services to customers (planning & booking of tickets
online, flight status information, online travel
resources , travel info centre, etc.)
0.05 4 0.2
6 Marketing techniques 0.03 3 0.09
7 Recipient of awards & recognition 0.01 3 0.03
8 Fuel hedging program (reduced firms fuel expenses
by approx. $ 29 million & $ 545 million in 2001 &
2000 respectively)
0.07 4 0.28
9 Collaboration with Orbitz (lower fares than other
airline agents)
0.04 3 0.12
10 Strong online presence ( 10 million site visits each
month in 2001)
0.02 3 0.06
S.
No.
Key Internal Factors - Weaknesses Weight Rating Wt.
Score
1 Unable to compete with Delta in regional Jet
market due to scope clause
0.06 2 0.12
2 Unable to match the standards of Southwest in
terms of low cost operating structure &
profitability route schedule)
0.06 2 0.12
3 Average aircraft age went down to 9.9 years in
2002 from 10.8 years in 2001
0.03 2 0.06
4 Weak financial position (decline in revenue led to
negative income & increase in debt agreements &
secured mortgage)
0.08 1 0.08
5 Inadequate strategic plans 0.07 1 0.07
6 Closure of 105 travel centres, 8 Admirals clubs &
5 platinum centres)
0.04 2 0.08
7 Cut in flight food & beverages 0.07 1 0.07
8 Sale of aircrafts 0.03 2 0.06
9 Lay off of 20,000 employees 0.05 1 0.05
10 Unprofitable routes 0.03 2 0.06
TOTAL 1 2.55
External Factor Evaluation Matrix
S.
No
Key External factors opportunities Weight
In %
Rating Wt.
score
1 Online ticket booking, electronic ticket system (online
booking charges $1 per ticket, whereas it takes $8 for agent
booking)
.08 2 .16
2 Mail and cargo transport (38% of overall revenue comes from
this )
.02 2 .04
3 Venturing into regional jets ( delta ) .07 1 .07
4 Unrestricted code sharing between international carriers .06 3 .18
5 Sale of in-flight alcoholic beverages , various amenities and
services
.03 1 .03
6 Furloughing employees .04 4 .16
7 Reducing advertising expenses/ changing the face of
campaigns
.03 1 .03
8 Fuel hedging program (increase in fuel price doesnt affect the
company)
.06 4 .24
9 Changing the operating structure, profitable route schedule
and high efficiency system (south west )
.09 2 .18
10 Mandatory retirement / international and leisure travel .02 3 .06
S.
No
Key External factors Threats Weight
In %
Rating Wt.
score
1 Terrorism / safety concerns decline in business .07 2 .14
2 Increased airfare price competition (airlines loosing $ 10-15
million per day) reduced price because of deregulation
.08 3 .24
3 Weak economy (decline in both business and vacation air
travel)
.06 2 .12
4 Foreign government restricting a slot allotment .04 3 .12
5 Airlines being identified as Potentially responsible party .03 1 .03
6 Cancelling of new orders/ selling current aircrafts .05 1 .05
7 Rising labor cost (34.9 of overall expenses in 2000, 48% in
2001)
.05 2 .10
8 Maximum fixed cost in operation .06 2 .12
9 Competition from automobile, buses and Amtrak rail system .04 3 .12
10 Enhanced security measures results in increased operating
cost
.02 3 .06
TOTAL 1 2.25
S W
T O
SO
1. S10,O7- ONLINE ADVERTISEMENT.
2. S1,S5,O1- INCREASE THE E-TICKETING TO
80%
3. S6,S10,O2


WO
1. NEGOTIATE LOWER WAGE RATE S WITH
UNIONS TO IMPROVE COST STRUCTURE.
ST

1. ENCOURAGE ONLINE BOOKING TO
REDUCE THE TICKET FARE.
WT
1. AVOID UNPROFITABLE ROUTES TO IMPROVE
THE FINANCIAL POSITION
Industry Analysis: Competitive Profile
Matrix (CPM)

Identifies firms major competitors and their
strengths & weaknesses in relation to a sample
firms strategic positions.

American Airlines had 2 major competitors
Delta Air Line
United

Critical Success Factors
Financial Position
Cost Structure
Information Technology
Partnerships
Fleet

American
Airlines
Delta
Airlines

United
Critical Success
Factors Wt Rating
Wt
Score Rating
Wt
Score

Rating
Wt
Score

Rating
Wt
Score
Financial Position 0.1 1 0.1 1 0.1 2 0.2 4 0.4
Information
Technology 0.2 3 0.6 3 0.6 3 0.6 4 0.8
Partnerships 0.25 4 1 3 0.75 4 1 1 0.25
Fleet 0.15 3 0.45 4 0.6 2 0.3 3 0.45
E-Commerce 0.3 3 0.9 4 0.6 3 0.6 4 1
Total 1 3.05 2.65 2.7 3.1
Total
1 3.05 2.65 2.7 3.1
Competitive Profile Matrix
Industry Analysis CPM

Just because one firm receives a 3.05 rating
and another receives a 2.65 rating, it does not
follow that the first firm is 20 percent better
than the second.

AMR Corp.- Business Divisions
AMR Investments
American Cargo
AMR Training Group
American Airlines
American Eagle

Mainline Jet Service Industry in early 2000s-
Decline
Combating SARS, 9/11 terrorist attacks, wars, rising oil prices

There was a decline in both business and international travel

The industry faced losses of $22 billion (6%) between 2001-2002

On September 10, 2001, US airports handled 38,047 flights. On September
12, they handled 252 commercial flights.

US passenger traffic, measured by revenue passenger kilometres
(RPM) declined 5.9% in 2001 (compared to 2000) and a further 1.4%
in 2002.

Most US airlines faced a liquidity crisis and applied for bankruptcy
reorganisation



Source: http://www.iata.org/pressroom/documents/impact-9-11-aviation.pdf
American Airlines (AMR)
Market share (Revenue)

Carrier revenue (in $billion)
American
Airlines
United
Airlines
Delta
Airlines Inc.
Carrier revenue (in %)
Anerican
Airlines
United
Airlines
Delta
Airlines
Inc.
16
58
12
14
19
13.9
16.1
American Airlines (contd.)
Market share (Passenger Traffic RPM)







Relative market share position for AMR = 0.93:1
RPM (in $bn)
United Airlines
American
Airlines
Delta Airlines
Inc.
97.3
116.6
108.4
Regional Jet Service Industry in early 2000s -
Growth
By the end of 2001, some 800 regional jets were operational in US, an up
by 83% since less than a decade back

946 regional jets were on firm or conditional order while 1193 jets were
under option (RASI reports)

Regional jets have supplemented regional service (44%), create new
nonstop regional air service (33%), replace mainline jet service (15%),
replace turboprop service (8%)

Advantages: Low purchase and operating costs, comfortable, meets off-
peak demand, 50% load factor, boon for business travellers
American Eagle
Market share

Delta (market leader) In 2000, it acquired regional airline company
Comair and Atlantic Southeast Airlines (ASA)

American Eagle (close competitor) owns the largest carrier and is a
holding company for Executive Airlines, Flagship Airlines, Simmons
Airlines & Wings West Airlines (regional players)

Scope clauses Delta must limit its seating capacity to 70 in all its jets,
while the limit for American Eagle is 45
AMERICAN
AIRLINES (AMR)
AMERICAN
EAGLE
Copyright 2007 Prentice Hall Ch 6 -25
SPACE Matrix
FS
+6
+1
+5
+4
+3
+2
-6
-5
-4
-3
-2
-1
-6 -5 -4 -3 -2 -1 +1 +2 +3 +4 +5 +6
ES
CA IS
Conservative Aggressive
Defensive Competitive