American Airlines Group Inc: External Assessment

Introduction

An external assessment of American Airlines identifies threats and opportunities that would impact the organization. The assessment will also act as the evaluation process for the company’s external environment. The external assessment of the company will identify the current position of the company in the airline industry and provide important data that can help the company shape its performance and growth. In addition, the external assessment explores American Airlines’ performance by identifying key factors threats and opportunities in the industry. The external assessment utilizes recent data from local, national, and international trends in the industry for each of the five key elements (economic; social, cultural, demographic, and environmental; political, governmental, and legal; technological; and competitive forces) for external assessment.

History of American Airlines

Headquartered in Fort Worth, Texas, American Airlines is the largest world’s airline in terms of fleet size, revenue, passengers served, kilometres flown, and the destinations covered. The company has an average of 6,700 flights per day covering more than 50 countries and about 350 destinations. It is the founding member of Oneworld alliance which is a third largest global alliance of airline industry that coordinates fares, scheduling, and services.

American Airlines originated from two companies namely Colonial Air Transport and Robertson Aircraft Corporation which merged in 1929 forming The Aviation Corporation. In 1930, it was rebranded to American Airways and made an operating company. However, the new laws and attrition of mail contracts in 1934 disrupted the airline industry, forcing them to reorganize their business. Hence, American Airways was renamed American Airlines and redid its routes into a connected system.

The company experienced exponential growth between 1970 and 2000, becoming an international carrier and subsequently purchased the Trans World in 2001. The company was affected by airline industry downturn in 2011 which prompted AMR Corporation, the parent company, to file for bankruptcy protection. Additionally, the company merged with US Airways in 2013 but retained its name due to the international brand recognition aspect. The new merge made the company the largest airline in the World with ten hubs in the United States.

Despite the challenges, American Airlines has managed to rebrand and expand globally, becoming one of the most dominant airlines in the world. The adoption of technology, coupled with its popular international brand, has made the company remain competitive in the highly regulated industry. The company continues to experience growth with the decision to partner with Trans-Atlantic under review (Wall & Clark, 2018). The focus now is on joint ventures with the aim of moving closer to other global competitors to increases its international presence.

Business Summary

American Airlines Group Inc. is the American Airlines’ holding company established in 2013 as a result of the partnership between American Airlines and US Airways Group Inc. The American Airline Group Inc. operates four subsidiaries namely American Airlines, Envoy Air Inc., PSA Airlines Inc. and Piedmont Airlines Inc. This paper focuses on American Airlines which flies to 350 destinations, offering over 6,700 services in 55 countries located in North America, South America, Central America, Europe, and the Asia Pacific. American Airlines owns 72 per cent of the American Airlines Group Inc. while the US Airways own the remaining percentage. Being a global leader in the airline industry, American Airlines itself has over ten subsidiaries that include real estates, aviation supply, vacations, marketing, among other subsidiaries. With the continuous innovation, partnerships, and advancement in technology, American Airlines remains an established organization defying all odds to be the global leader in the aviation industry.

External Assessment

Economic Forces

The United States economy is revving up just like other leading world economies such as Europe and other major economies lose steam. In the second quarter of 2018, the US GDP increased at the rate of 4.2 %. In the first quarter, the GDP had increased by 2.2 % while the growth rate in the US averaged 3.22% from 1947 to 2018 (Trading Economics, 2018). Since American Airlines has a huge customer base and headquarters in the US, the company could take advantage of the country’s economic growth, which can have a significant positive effect on its business in 2018 and beyond.

Jet fuel costs account for more than a third of Airline total costs of operation. In 2018, Jet fuel prices have been soaring higher, recording a 30% increase due to the global economic growth and surging fuel demand (Neuhauser, 2018). This works at the disadvantage of American Airlines. However, Crude oil prices have shown considerable signs of recovery, but no significant change is expected in the next one year. Thus, American Airline can take advantage of the expected Jet fuel stability to strategize on how to reduce the cost of operation and maximize on profit. The common trend it is to increase ticket prices to help the company stay in business.

Exchange rates also affect pricing in the airline industry. American Airlines has been significantly affected by fluctuation in the exchange rates of different territories where they operate in. This has affected pricing and cost management in the company ultimately affecting operational cost. However, the strong appreciation of the United States dollar over the last one decade has been felt widely. This has led to rise in costs of US dollar-dominated airlines by an average of 10 to 15 % in terms of local currency, which affects operating costs of American Airline subsidiaries in Mexico and other parts of the world. Nevertheless, the International Monetary Fund has predicted global economic stability in 2019 due to tax reforms in the US which have generated spillover to its trading partners (Coppola, 2018). This will impact American Airlines positively particularly in countries that have partnered with the US in trade agreements.

Social, Cultural, Demographic, and Environmental Forces

According to Statistica data, the annual global travel demand increased by 8.1 % in 2017 compared to previous years, while the demand is expected to increase by 7 % in 2018. The trend is expected to remain positive up to 2030 despite the economic challenges such as jet fuel prices increase. For American Airlines, there has been a robust demand for air travel which rose by 5.9 % for the first quarter of 2018, recording a revenue stream of $10.4 billion (Statistica, 2018).

There was also growth in passenger revenue per available seat mile (PRASM) in all regions where the company operates. However, the notable strength has been registered in Latin America which accounts for more than 30 % of the Airlines’ operations due to increased tourism demands in the countries. This has boosted the company’s revenue by 6% between 2017 and 2018. Similarly, Cargo revenue from international destinations rose by 18.8 %. While passenger demand in the Asia Pacific is not quite promising, the company has maintained more than 3.5 % revenue growth in the market (Worth, 2018). This can be attributed to strict immigration rules enforced by the current administration which has affected Asian countries. Nevertheless, the company has set measures such as the introduction of new premium meals to reduce the chances of imminent decline in passage demand in the Pacific demands.

Furthermore, terror attacks have impacted American Airlines negatively but have short-term effects. For example, the attack at Pulse nightclub in Orlando in 2016, a popular tourist destination, led to a 31% decline in stocks for American Airline (Monica, 2016). Similarly, a series of attacks in Europe, particularly Paris have affected the airline industry due to fear of travels. Environmental regulations have also put American Airline on the spotlight due to the increased Sulphur emission. The company has to put austerity measures to eliminate the negative impact that could result due to such restrictions.

Political and Governmental Forces

The United States has imposed high taxes and fees on American Airlines and other companies in the industry which has undermined the positive economic impact of the aviation industry. The US federal taxes on aviation has increased from 6 % in 1990 to 17 % in 2016. However, the new tax reforms have worked in favor of the company prompting increased revenue by 3% in the first quarter of 2018 (Ajmera, & Rucinski, 2018). On the other hand, the uncertainty in the taxation rules have led to reduction investors due to fear of a decline in stocks prices in 2019, leading to anticipated dismal growth in the final quarter of 2018 (Ajmera, & Rucinski, 2018). The company also benefits from the Fly America Act which requires federal agencies to use the US carriers for passenger and cargo transport. In addition, there has been federal bailouts established that can cushion imminent loss, which is an important measure by the government under the Air Transportation Safety and Stabilization Act. Other favorable government policies include the Chapter 11 bankruptcy protection which the company benefited in the past to shield itself against laws. However, the company has to comply with the Federal Aviation Administration licenses and certificates for pilots and aircraft which increases operating cost. The increased productivity in the US labor at the rate of 2.9 % and stable labor costs at 59.47 index pints has helped the company to strategize on performance and forecast growth (McDermott, 2017).

Technological Forces

American Airline has embraced technology in diverse ways. The technology has allowed the company to grow exponentially in the recent past. Over the last one decade, the company has registered 5.6 % growth in revenue from online retail stores. The company also benefits from advertisements on social media and other online platforms, which has enabled it to reach a wider audience. In addition, the company should explore emerging technologies that can boost sales in its supply chain and vacation subsidiaries (Ajmera & Rucinski, 2018). Partnership with Airbnb, Home Away, and other largest vacation booking sites can help boost sales in the company.

Furthermore, emerging technologies offer opportunities for the company to increase innovation. The company has a set of technologies that it is considering to adopt that will reduce operating cost, streamline processes, and improve security. So far, biometric technology has been useful in the baggage drop process, increasing the speed of check-in. In addition, Blockchain technology will revolutionize various operations such as ID checks and security system. Robotics is also being tested in their efficiency to facilitate customer management and baggage handling. Use of beacons technology also can help the company in its retail business to identify travellers in different terminals (Hau, 2018).

Competitive Forces

American Airlines experiences local, national, and global competition from companies such as Delta Airlines Inc., JetBlue Airways, China Eastern Airlines, Copa Holdings, United Continental Holdings, among others. Most of these carriers fly on the same routes which intensify both local and international competition. In 2017 and 2018, American Airlines has been utilizing pricing strategies and brand loyalty to deter competition. Compared to its competitors, the company has reported a 4.84 % revenue increase in the second quarter of 2018. However, the company has reported lower 2% profitability compared to its competitors such as the United Continental Holdings and other airlines operating in Asia and Europe (Nasdq, 2018). The airline’s stocks have also registered 8% drop in its stocks in July 2018 due to the trimming of the US revenue outlook affecting the financial decision of the investors. The intense completion from European and Pacific companies has also intensified affecting its revenue from international operations (Josephs, 2018).

External Factor Evaluation Matrix

Opportunities  Weight Rating Weighted Cost
  1. Increase in the US GDP at an average of 3.22% which enables American Airlines to take advantage of the growth to boost its revenue (Trading Economics, 2018).
0.07 2 0.14
  1. Increased travel demand in Latin America due to increased tourism demands in the countries has boosted company revenue by 6 % (Worth, 2018).
0.09 3 0.27
  1. Favorable government policies such as tax reforms have boosted revenue by 3 % in the first quarter of 2018 and more increase in revenue predicted in the next 12-18 months (Ajmera & Rucinski, 2018).
0.12 4 0.48
  1. Online retail stores have led to increased sales by 5.6 % in the last one decade and a reduction in operating costs by 2.3% due to the migration of services to online platforms (Hau, 2018).
0.08 2 0.16
  1. American Airlines has a competitive pricing strategy and brand loyalty that enables it to remain on top of its competitors, registering a revenue increase by 4.84 in 2018 (Stiving, 2018).
0.07 2 0.14
Threats      
  1. Increase in fuel costs by 30% has affected American Airlines since fuel accounts for over a third of the operating costs ((Neuhauser, 2018)
0.13 1 0.13
  1. Exchange rate risks affected operations leading to 10-15% increase in cost in American Airline international subsidiaries (Coppola, 2018).
0.12 4 0.48
  1. The decline in flights demands in Orlando, Pacific and Europe due to social threats of terror attacks which affected revenue and decline in stocks by 31 % in 2016 (Monica, 2016).
0.10 3 0.30
  1. Unstable federal taxations have put uncertainty on the investors leading to 8% drop in its stocks in July 2018 (Ajmera, & Rucinski, 2018).
0.09 3 0.27
  1. American Airlines flies the same routes with established competitors leading to reduced profit by 2% in Asia and Europe where competition is very stiff (Nasdq, 2018).
0.13 4 0.52
Total 1   2.89

An external assessment of American Airlines Inc. shows that the company has a score of 2.89, considerably higher than the average weighted score of 2.15. The company can take advantage of the imminent opportunities such as increased demand travel demands in Latin America, favorable government policies and tax reforms, and adoption of technology for advertising, boosting sales, and innovation. Competition from other international companies has intensified in Asia and Europe, and that is a major threat to the company. However, there are many ways the company can improve business such as adoption of emerging technology to improve security and operating cost.

References

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