American

Airlines
By,
Group 6
Laurent Deconinck
April Vassau
Brock Vestrum
John Vilendrer
Meggan Wier

Agenda

Company History - Brock

Market Structure Meggan
Competitive Advantage John
Game Theory/Pricing Laurent
Industry Update & Conclusion April
Quiz
Q&A

American Airlines Timeline

The Beginning: 1930s-40s
Formed from
conglomerati
on of 82
airlines;
Aviation Corp
created

First to fly
the Douglas
DC-3. By
years end
was the
nations #1
domestic air
carrier

1929

1936

1930
Aviation
Corp
subsidiaries
incorporated
into
American
Airways,
eventually
American
Airlines in
1934

Began
providing
catering
with
SkyChefs
1942

1939
Begins
trading on
the NYSE

American Airlines Timeline

Building an Empire: 1940s-50s
Introduced
first
domestic
US Freight
service
1944

Built
worlds 1st
special
facility for
flight
attendant
training
1957

Merged
with Pan
American
World
Airways
1950

1945
Americas
first European
Service under
the AOA,
transatlantic
division
under merger
with
American
Export
Airlines

1952
Introduced
the
Magnetic
Reservisor
, seat
tracker

1958
1st U.S.
designed
turboprop
plane and
turbofan
engine

American Airlines Timeline

Industry Innovators: 1960s
SABRE extends
from coast-tocoast and from
Canada to
Mexico, 2nd
largest real-time
data processing
system
1964

1st airline to offer

coast-to-coast jet
service with
introduction of
the Boeing 757
1959

1960
Created SemiAutomatic
Business
Research
Environment,
better known as
SABRE

1967
Massimo Vignelli
designs the
famous AA Logo.

American Airlines Timeline

Modernism & Regulation: 1970s
Merged with
Trans
Caribbean
Airways for
1st Caribbean
routes

Began
marketing
SABRE to
U.S. travel
agencies

AA Flight 191
crashes at
OHare. 273
fatalities,
deadliest
single airliner
accident on
US soil

1970

1975

1979

1974
Introduced
One-StopAutomated
Check-in and
1st Boeing
747 Freighter

1978
Airline deregulation
takes place
as AA
launches
major route
expansion in
US and
Caribbean

American Airlines Timeline

Progression: early 1980s
Stockholders
approved a new
holding
company, AMR
Corporation, the
parent company
of AA
1983

First Airline to
offer a Frequent
Flyer program
with
AADVANTAGE
travel awards
1980

1982
Established the
Hub & Spoke
operation with its
first hub in Dallas

1984
Created the
American Eagle
System, a
network of
regional airlines

American Airlines Timeline

Continued Expansion: late 1980s
Acquired
AirCal;
employment
topped
50,000 for 1st
time

Offers sameday freight

service via
passenger
aircraft
1988

1986

1985
More than
10,000 Travel
Agency
offices using
SABRE,
available on
PC in 87

1987
Expansion
includes
acquiring
Airbus 300
and 1st airline
to fly Boeing
757

American Airlines Timeline

A New Era: early 1990s
Opened stateof-the-art
Maintenance
facility at DFW
1991

Opens System
Operation
Control Center
1990

1991
Flew its 1
billionth
customer

1992
Introduced
VALUE PRICING
:
a plan
designed to
make fares
simple,
sensible, and
fair.

Market Structure
Deregulation of 1978
Civil Aeronautics Board
Free market

Some countries and still regulated

to some extent
Europe
Asia

Market Structure

Oligopoly - Concentration
ratio of 50%

Characteristics of an
Oligopoly
Interdependence
Bags fly free

Price setters
Few firms
High barriers to entry

Competitive Advantage
Innovation
SABRE
Computerized Reservation System(CRS)
American was the first airline to
implement such a system.
By 1990, SABRE was the largest
reservation system in the world and had
a market share of 40%.
Screen Bias

Competitive Advantage
Innovation
Advantage Frequent Flier Program
In 1980, AA introduced the first frequent
flier program.
Many other airlines followed due to the
huge success of this program.
Originally the only reward available for
AFF members was free tickets. This
evolved into a point system that also
offered a variety of products that were
presented in a catalog.

Competitive Advantage
Innovation
Two Tier Wage System
Starting wages would be on the lower
tier.
Existing employees would be on the
higher tier.
In response to the high wage
requirement stated by union contracts.
Starting salaries could be up to 50% less
Necessary to compete against the newly
formed companies that were non-union.

Competitive Advantage
Innovation
Airline of the Year 1988 & 1989
Mostly due its focus on service
On Time arrivals in Sept 1989 - 84.6%
Better than Delta or United

Customer Service Complaints 1989 132,000

Better than United

Baggage Service Complaints 1989 5,999

Better than Delta and United

Competitive Advantage
Innovation
Robert Crandall
Became CEO in July of 1980
The physical aspects of our
company are very much like our
competitors. After all, we all use
the same airports, the same
planes; we buy food from the same
caterers, we use the same
computers, and so on. Its pretty
clear that the only difference
between us and them is our
ability the ability of all of
Americans people to provide
superior service.

Video

Video AA

Example of Pricing

66 different
pricing for one
flight.

What is the
customer willing to
pay.
Overbooking
practice to make
sure the flight is
full.
Adjust pricing based
on passenger load
factor
Sophisticate
computer system to
maximize profits
based on demand
and supply.

Game Theory

Thus, both airlines will set their fares

to $200, a similar analysis was carried
out in court to prove that there was
price fixing among airlines and in
October 1994 some airlines settled for
$40 M.

American
Airline $500

American
Airline $200

Competitors
$500

AA Profits=$50
Competitor=$100

AA Profits=-$100
Competitor=$200

Competitors
$200

AA Profits=-$150 AA Profits=-$10
Competitor=-$200 Competitor=-$10

AA uses Yield Management

Maximize Profits
Maximize Assets Utilization

Milestones to Modern Day

SABRE spins off into its own company.
Subsidiaries include: Travelocity, Sabre
Travel Network, Sabre Airline Solutions
and Sabre Hospitality Solutions.

 American partners with Travel Agents to provide

consumers with better pricing, while reducing
distribution costs.

American celebrated the 25 th anniversary of its

AAdvantage program the worlds first frequent flyer
program that revolutionized the airline industry and set
the standard for similar initiatives in many other
businesses. AAdvantage began with 300,000 members.
Today, it has more than 50 million members.

Change in Stock Price

Industry Leaders Thenand

Now
1990s
1. Aeroflot
2. American
3. United
4. Delta
5. Northwest
6. British Airways
7. Continental
8. US Airways
9. TWA
10.Japan Airlines

2000s
1. Delta
2. Southwest
3. American
4. United
5. Lufthansa
6. Air France
7. China Southern
8. Ryanair
9. Continental
10.US Airways

Low-Cost Airline Impact

Locally: Southwest entrance into MSP
Southwest's entry into Minneapolis has been closely watched because it is an assault on a so
called fortress hub of Northwest Airlines, which is now a part of Delta Air Lines Inc.
Northwest has a reputation for matching competitor prices and adding extra flights when its hubs
are threatened. Last month Northwest executives said they would do both of those things on the
Chicago route once Southwest's service starts. USA Today

"We are likely to be in for some serious fireworks on prices out of Minneapolis in the coming
days for spring travel" FareCompare.com CEO Rick Seaney. Adding that the cheapest fare on
that
route for Northwest, American and United is round trips for $376, which works out to $188 each
way. The cheapest one-way fare is $426, Seaney wrote.
"The legacy airlines will quickly have to restructure their airfares, by offering one-way fares
instead of the two-night minimum stay roundtrip fares they currently file likely matching
Southwest's new price points," Seaney wrote.

Low-Cost Airline Impact

Globally:
The CAA (Civil Aviation Authority) calculates that growth in short-haul traffic
between 1996 and 2006 averaged five per cent a year no greater than in the
years before the arrival of no-frills airlines. The only years when growth
exceeded 10 per cent in the past 20 years was in 1987 and 1994.
Although nearly half of all British passengers on short-haul routes now opt for
no-frills airlines, this growth seems to have been at the expense of other
carriers both scheduled and charter airlines which have been forced to
close down unprofitable routes.
The CAA report shows that since the advent of low-cost flights in 1996 there has been
no marked change in the socio-economic profile of air passengers. "The main effect of
no-frills flights is to provide further opportunities to those in middle- and higher
income groups to fly more often. Dr. Harry Bush, CAA Director of Economic
Regulation.

Quiz
When did AA start the frequent fly
program?
1980

When did AA begin trading on the NYSE?

1939

When did deregulation take place in the

US?
1978

When did AA fly its 1 billionth customer?

1991

Who has the highest market share in the

Domestic Airline Market?
AA

Quiz
Name 2 characteristics of an oligopoly?

Interdependence
Price setters
Few firms
High barriers to entry

Who introduced the first frequent flyer program?

AA

Who is the current CEO of AA?

Robert Crandall

How many members are a part of the frequent

flyer program?
Over 50 million

Bibliography
Wikipedia, Oligopoly, 2010
Wikipedia, Airline, 2010
Wikipedia, Airline Deregulation Act,
2010
Research and Innovative Technology
Administration, Airline Domestic
Market Share Dec 2008 Nov 2009
www.AA.com (American Airlines)