American Airlines Merger (Management In Action Case Study)

MANAGEMENT IN ACTION - CASE STUDY

AMERICAN AIRLINES – US AIRWAYS IS THE MERGER WORKING?

NEIL MATHEW

NG RAIBILA GRACE

RITESH SINGH TAJTA

SHIKHAR AGNIHOTRI

SUVESHI SHARMA

2

INTRODUCTION

On December 9, 2013 The American Airlines Group was formed.

+ =

A merger between AMR Corporation, the parent company of

American Airlines, and the US Airways Group, the parent company of

US Airways.

Valued at $11 billion, this is the world’s largest airline group

operating more than 6,700 daily flights to more than 300 locations in

more than 50 countries worldwide.

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INTRODUCTION

US Airways Group (US Airways) expressed interest in taking over AMR Corporation (American Airlines)

US Airways (US) told some American Airlines (AA) creditors that merging the two carriers could yield more than $1.5 billion a year in added revenue and cost savings

American Airlines' three unions said they supported a proposed merger between the two airlines.

Under Chapter 11 bankruptcy protection, American Airlines had been looking to merge with another airline. A bankruptcy court filing stated that US Airways was an American Airlines creditor and "prospective merger partner”

JAN

2012

MAR

2012

APR

2012

JUL

2012

4

INTRODUCTION

American Airlines and US Airways announced plans to merge, creating, by some measurements, the largest airline in the world.

The United States Department of Justice along with attorneys general from different states filed a lawsuit seeking to block the merger, arguing that the group would become a monopoly.

The Department of Justice reached a settlement of its lawsuit

The American Airlines Group was formed.

FEB

2013

AUG

2013

NOV

2013

DEC

2013

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INTRODUCTION

The group aimed to yield in excess of $1.5 billion in terms of added

revenue and cost savings each year.

Since the merger, the combined fleet of the American Airlines Group

consists of 968 aircrafts out of which 627 are owned by American

Airlines and 341 are owned by US Airways.

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INTRODUCTION

The deal states:

1. The AMR Corporation stakeholders will own 72% of the

company and the remaining 28% will be owned by the US

Airways Group stakeholders.

2. The group will carry the name of American Airlines and hence the

group was named as the American Airlines Group.

3. US Airways will exit the Star Alliance and will join American

Airlines in the Oneworld Alliance.

4. The US Airways management team will retain most of the

group’s management positions with Doug Parker being the CEO

of the group.

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BENEFITS OF THE MERGER

1. As US Airways has now joined OneWorld Alliance alongside American Airlines, boththe airlines are now allowed to access the other’s network i.e. this leads to anetwork expansion for both the airlines.

2. Global access to a stronger OneWorld Alliance, which is spread across the world,hence providing more options for travel along with domestic and internationalbenefits as the alliance serves nearly 1000 destinations around the world with morethan 14000 flights operating in more than 150 countries.

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BENEFITS OF THE MERGER

3. The existing US Airways passengers will gain access to American

Airlines’ international destinations and in turn American Airlines’

passengers will have better access to smaller U.S cities which the US

Airways serves.

4. Higher connectivity with 9 hub airports across U.S.A.

5. With more than 600 orders for aircrafts, the group will have one of the

most efficient and modern fleet of aircrafts in the industry.

6. The American Airlines’ AAdvantage and US Airways dividend Miles

Program will allow the customers to enjoy the benefit of earning and

redeeming miles on either of the airlines and also will provide benefits

on flight upgrades, vacation packages, car rentals, hotel stays etc.

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HUB AND SPOKE MODEL

A Point to Point network is a typical route network where an airline focuses

mainly on its Origin and Destination ( O&D ) traffic.

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HUB AND SPOKE MODEL

The Hub and Spoke Network is a route network where an airline will not only

plan on transporting passengers between two points, but also to connect

passengers between two distant cities via its hub.

The Hub and Spoke model originated with American Airlines.

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HUB AND SPOKE MODEL

This model allowed the American Airlines group to

1. serve a vast network of airports with a smaller fleet size

(operational efficiency)

2. Provide higher connectivity (even in remote locations)

3. Fill a flight more than O&D traffic

4. Attract highly profitable transit traffic

The American Airlines Group has its hubs in Charlotte, Chicago, Dallas/Fort

Worth, Los Angeles, Miami, New

York, Philadelphia, Phoenix and Washington.

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THE ANTITRUST REGULATION

On August 13, 2013, the United States

Department of Justice (along with

attorneys general from the District of

Columbia, Arizona, Florida, Pennsylvania,

Tennessee, Texas and Virginia) filed a

lawsuit seeking to block the merger

They argued that it would mean less

competition and higher prices as this would

lead to a monopoly.

American Airlines and US Airways both

said that they would fight against the

lawsuit and defend their merger.

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THE ANTITRUST REGULATION

A settlement was made wherein the group has to give up landing slots at 7

major airports. Under the deal:

• The new American Airlines is required to sell 134 slots at Ronald Reagan

Washington National Airport and at LaGuardia Airport.

• An additional requirement is that American sells two gates at O'Hare

International Airport, Los Angeles International Airport, Logan International

Airport, Dallas Love Field and Miami International Airport.

• Some of the slots will be sold to low-cost carriers such

as JetBlue and Southwest Airlines.

As the settlement agreement reveals, the Justice Department’s real aim was not

to protect consumers, but to boost the fortunes of “low-cost” competitors

Southwest and JetBlue by divesting their gates and takeoff and landing slots at

a handful of airports (where the group had little dominance).

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PORTER’S 5 FORCE ANALYSIS

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The American Airlines Group faces high

domestic competition as there are multiple

carriers which are competing for the same

customer base.

On the other hand, the group also faces stiff

competition from the direct point-to point

carriers as the point-to-point carriers

provide the service to the customers at

lower costs as comparable to the group’s

airlines due to lower operating costs.

The group is also facing competition from

carriers like Southwest Airlines which have

added flights to the cities ignored by the

larger carriers like the group.

INTERNAL RIVALRY

SUPPLIER POWER

BUYER POWER

THREAT OF NEW ENTRANTS

THREAT OF SUBSTITUTES

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1. Labour: Labor expenses (wages,

salaries etc.) constitute about 1/3 of

the total operating expenses which is

very high.

2. Aircraft: Boeing and Airbus are the

companies which virtually enjoy

duopoly in the market for large

aircrafts and hence this leads to high

bargaining power of supplier.

3. Fuel: Like other airlines, the American

Airlines Group is highly sensitive to

price fluctuations of aviation fuel.

American Airlines has among the

highest fuel costs per seat per mile

which leads to higher fares.

INTERNAL RIVALRY

SUPPLIER POWER

BUYER POWER



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The customers of today have high

knowledge about the pricing in the

airline industry due to the proliferation of

online ticketing. Online ticketing helps

the customers to choose the best and

the most cost effective deal.

Low amounts of switching costs make

it easy for the customers to switch

between the airlines in response to price

changes, better discounts etc.

Due to this, the buying power of the

customer is high.

INTERNAL RIVALRY

SUPPLIER POWER

BUYER POWER



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The aviation has high barriers to entrybecause of higher fixed costs due tohigh capital investments like acquiring afleet of planes etc.

It also has high variable costs arefaced for fuel, labor etc. The operationalcost is significantly high in the aviationindustry.

Along with this, there are manyregulatory and logistical barriers. Inaddition the “slots” at the airports areacquired through long term contracts.Due to such entry barriers the threat dueto new entrants in the industry is low.

INTERNAL RIVALRY

SUPPLIER POWER

BUYER POWER



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The substitutes for air travel constituteother forms of transportation like cars,buses, trains etc.

The railway infrastructure is limited andtravelling by trains is highly timeconsuming and is costly.

The United States does not have anextensive long distance bus system alongwith lower fares and the journey time is toolong.

Due to the size of the United States, mostlong-distance travel is practical onlythrough airplane. Hence the threat due tosubstitutes is low.

INTERNAL RIVALRY

SUPPLIER POWER

BUYER POWER



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FORCE STRATEGIC SIGNIFICANCE

INTERNAL RIVALRY HIGH

SUPPLIER POWER HIGH

BUYER POWER HIGH

THREAT OF NEW ENTRANTS LOW

THREAT OF SUBSTITUTES LOW

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SWOT ANALYSIS

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SWOT ANALYSIS

• Higher connectivity to more than 300 destinations around the

world in more than 50 countries

• American Airlines is reputed for being one of the oldest, most

established carriers in the industry.

• The group has 9 strategic airport hubs in Charlotte, Chicago,

Dallas/Fort Worth, Los Angeles, Miami, New York, Philadelphia,

Phoenix and Washington.

• The group has a strong operational network.

• American Airlines and US Airways are a part of the OneWorld

Alliance hence both the airlines are now allowed to access the

other’s network i.e. this leads to a network expansion for both

the airlines.

STRENGTHS WEAKNESSES OPPORTUNITIES THREATS

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SWOT ANALYSIS

• American Airlines faces significantly high competition on

international flights as foreign carriers like Lufthansa, Qatar

Airways etc. dominate the market and offer higher quality

services.

• American Airlines has lower connectivity to reach Asian

markets.

• Both US Airways and American Airlines have faced losses

since the 2008-09 economic crises.

• As the group has a unionized workforce, hence the group is

susceptible to attrition.

• Poor customer service record for US Airways.


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SWOT ANALYSIS

• With the merger completed, US Airways has strong

opportunities for international expansion by tapping the

untapped markets.

• Address union negotiations for effective operations.

• The group has a strong potential for growth in Asian

markets.

• Upgrade business class on long-haul flights.


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SWOT ANALYSIS

• Volatility of fuel prices makes cost containment difficult and

higher fuel prices have been decreasing the profit margins.

• The global economic downturn has severely affected the

aviation industry.

• Stiff competition from low-cost-carriers.

• Escalating union grievances


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STRATEGIC RECOMMENDATIONS

1. Undertake Fuel Efficiency Initiatives:

• The group, like other airlines has been facing higher costs due to

higher fuel price volatility and increasing fuel prices.

• The group has already placed orders for more than 600 aircrafts

after the merger for more fuel efficient operations and hence

to incur lower fuel costs.

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2. Address labour costs:

• The American Airlines Group has some of the highest labour costs

in the industry. This is due to

• highly unionized workforce and

• tenure and seniority of the workforce.

• The group should maintain its managerial discipline through

effective flight attendant contract negotiation.

• The group’s management has lower levels of executive

compensation and hence this leads to tensions within the

company.

• It is expected that the merger will lead to better career

opportunities for its employees due to a strong financial

foundation.

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3. Invest in employee training

• US Airways has been facing with operational inefficiency over

the years and as a result the numbers of customer complaints

have been the highest among the carriers.

• Most of the complaints have been related to reservations,

ticketing, unhelpful employees etc. These complaints reflect poor

training of the organization’s employees.

• Hence the group should conduct a comprehensive operations

audit to assess its current operations and should invest in

employee training to increase the quality of customer service

offered.

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4. Enhance International Offerings:

• The group faces stiff competition from its competitors at the

international level as companies like Lufthansa have dominated

the world market due to higher connectivity especially across the

Asian countries, where the group’s connectivity is very low.

• The American Airlines should begin building its Asian presence

with its expanding fleet and also should tap the untapped

locations across the world.

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CONCLUSION

• It can be concluded that the merger surely has improved the

strengths of both American Airlines and US Airways.

• It has opened up a lot of opportunities for the group as a whole but

also has increased the amounts of threats for the group.

• The group should address labour costs, undertake fuel efficiency

initiatives, enhance international offerings especially in Asia and

should invest in employee training to overcome its weaknesses for

better customer service and satisfaction.

• The merger has surely provided the customers with added benefits

on frequent flier miles and also by being a part of OneWorld Alliance

which helps the group to expand its network.

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QUESTIONS

Q1.What are the advantages of using Hub-and-

Spoke model in the aviation industry?

Q2.What are the benefits the customers will get

out of the merger?

Q3.Do a competitive analysis for the American

Airlines Group.

Q4.How do you analyze the threat of new

entrants as a factor being key to the group’s

growth?

Q5.Analyze the implications of the merger and

how it has impacted the overall profitability

for the American Airlines group?

Q6.What are the other strategic

recommendations according to you for the

group to enhance its services?

American Airlines Merger (Management In Action Case Study)

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