Turning Around American Airlines

Turning Around American Airlines

Financial Analysis

The impact of COVID 19 on the airline industry has been massive, only comparable to the 9 -11 terrorist strike (Baggaley, 2020). It has occasioned the grounding of planes with a dramatic effect on the industry now and in the foreseeable future. The 50 billion dollar March bailout by the United States Congress was expected to stem the tide for a while but it appears to not have had a major impact. This is evidenced by actions taken by American Airlines and United Airlines to follow over 32000 workers. Covid 19 effectively led to a slump in air travel leading to 3 consecutive losses by American Airlines in 2020.

The company’s third-quarter burn rate was reported to be about $44 billion daily (American Airlines Group Inc., 2020). This was somewhat of an improvement considering the second-quarter report recorded it at $58 billion. Efforts by stakeholders in the airline industry to secure an additional 25 billion bailout have failed to lead to difficulties in covering payroll costs. The company’s third-quarter report also indicated a net loss of $2.40 billion, in stark contrast to a year ago when the profits stood at $425 million. American Airlines revenue fell from $11.91 billion the previous year to $3.17 billion and liquidity of $13.6 billion in the third quarter.

The company’s financials were concerning even before the pandemic with the stock declining -45% from 2017 to 2019. It went on drop even further to -60% this year but that was due to the halting of operations after the pandemic struck. Revenue growth slightly increased by 7.4% from $42 billion in 2017 to $45 $45 billion in 2019. Historically the company’s net margins have typically 3 – 4%, which of course plummeted to -25.6% in the past year.

Strategies for Sustainable Competitive Advantage

American Airlines may not be out of the woodworks yet but there’s potential for a turnaround with the right strategic management. The company still has sufficient liquidity of over $13 billion which is a positive. A Price–Sales-Ratio of 0.2 (up from 0.12 at the beginning of the year) is good news for the company’s stock as it indicates a recovery. Figures 1 and 2 in the appendix show American Airlines stock price chart and financial performance.  The airline can improve its profit margins by rejuvenating its stock prices through a multi-pronged strategy that addresses factors such as labor costs, fuel efficiency, and maintenance costs. The below strategies are fundamental to improving the airline’s competitive advantage and turning around its financial fortunes.

Labor Costs

The structure of the company’s workforce with high unionization and security of tenure leads to high labor costs. The company will have to explore avenues of slashing union commitments through renegotiation of collective bargaining agreements (Chaison, 2007). Management can also consider offering employees buyouts and voluntary leave as a means of reducing labor costs. These efforts are necessary to reduce the company’s obligations relating to benefits and compensation. With Congress delaying in providing additional relief, this will be a painful but inevitable cause of action.

Lowering the Cost of Maintenance

Reducing maintenance is an important aspect of steering the airline toward profitability. This means putting fleet simplification at the center of the company’s cost-cutting agenda. This should begin by reducing the number of aircraft in operation, especially sub fleets of single models. This will have the effect of lowering maintenance costs, limiting disruptions when there’s a need to make switches, and bolstering pilot productivity. The management should put in place a plan to systematically face out old high maintenance fleets like the EMBRAER E190s, Boeing 767s, Airbus A330-300, and Boeing 757s in the next 2 to 3 years.

The company should replace the retired air crafts with new jets with lower maintenance and complexity costs per unit. Cost per unit can also be improved by reconfiguration of sitting in the remaining fleets. Ideal configurations include 172 seat capacity for the 737 MAX 8 and 737-800s. A321s can be reconfigured to seat 190 passengers. All these efforts to increase seating capacity will serve to reduce unit costs of maintenance and operation.  The reconfiguration can be done in a manner, for instance, increases the number of first-class seats in the A321s thereby leading to increased revenues for the airlines. American Airlines can also lower the cost of maintenance by outsourcing maintenance services. The company should reconsider in-house maintenance and procure the services of cheaper aircraft maintenance providers abroad. This model is used by competing airlines such as United Airlines, JetBlue, US Air, and Continental whose 777s are maintained in Hong Kong by HAECO.

Fuel Efficiency

Fuel consumption is a vital component of cost efficiency and accounts for over 30% of an airline’s cost of operation. Fuel efficiency concerns play into other fundamental issues such as carbon emissions and fuel prices. Energy efficiency can be achieved through the redesigning of airplane wings to be almost vertical. These ‘winglets’ are said to cut cost consumption by up to 9%. American airlines have to consider the incorporation of such technologies in their fleets to facilitate fuel economy and reduce operating costs (Eppler, 1997). The airline also has to invest in airplanes with aerodynamic frames like Boeing Dreamliner 787, better engines, and lighter components. The choice of air-fuel is also key to keeping costs low. To this end, the airline can consider the viability of sustainable fuels such as biofuels.

The company has to escalate its fuel-efficient practices to keep up with escalating fuel prices. Measures such as reducing the load on planes, redesigning wings can save the airline millions of gallons of fuel. The airline can also achieve fuel efficiency in the long term by investing in narrow-bodied jets such as the Boeing 737 MAX, and the 787-8 Dreamliner. Retrofitting efforts the A321 and 737-800 will also contribute to fuel efficiency by significant percentage points.

Strategic Partnerships

The airline should consider partnerships with other low-cost carriers to cater to more international travelers (Pitt et al., 2011). These partnerships can take the form of existing alliances like the one with JetBlue, which has the benefit of expanding the airline’s landing and takeoff slots and allows JetBlue international clients to connect to American Airlines seamlessly. American airlines can further grow its global network through such partnerships as they add new travel destinations and strengthen its presence in new areas such as Asia. They can incentivize customers using reciprocal benefits and a variety of travel destinations to choose from.

Leverage on its Big Hubs

American’s Fort Worth and Charlotte hubs are some of the largest in the world. This means more traffic for the company as well as expeditious restoration of capacity and connecting opportunities will contribute to its recovery. They can also boost traffic by offering lower-priced tickets as airline travel gradually opens ups. Culture and politics will also play a large part in the recovery.  Given that these hubs are located in Republican States where people are more willing to travel, the company has to make strategic market promotion with this in mind.  Offers on destinations with outdoor activities and social distancing measures in terms of seating arrangement can be used to entice such customers.

The Power of Being a Legacy Carriers

American Airlines together with United and Delta Airlines have a long history of continuous operations coupled with expansive flight routes and extensive fleets. The airline can leverage the political clout that comes with this status to make the case a favorable market environment. The airline can add its voice to the calls for the 25 billion dollars additional bailout to the airline industry as well as other incentives that are essential to its viability and profitability going forward. They can lobby for tax credits to give them an edge over low-cost carriers.

Conclusion

American Airlines has the capacity to return to its long and solid reputation. Its path to success lies in mitigating challenges such as increasing fuel costs, renegotiating labor contracts, improving organizational culture, and developing a competitive advantage over its competitors. Efforts such as strategic partnerships like with JetBlue among others, modernizing its fleets, and expanding flight routes are a step in the right direction in turning around the airline to profitability.

References

American Airlines Group Inc. (2020, October 22). American Airlines Reports Third-Quarter 2020 Financial Results. American Airlines Newsroom. https://news.aa.com/news/news-details/2020/American-Airlines-Reports-Third-Quarter-2020-Financial-Results-CORP-FI-10

Baggaley, P. (2020, August 25). The pandemic’s financial impact on airlines will be worse than the 9/11 attacks. CNN Business. Retrieved November 19, 2020, from https://edition.cnn.com/2020/08/25/perspectives/airlines-pandemic-9-11/index.html

Chaison, G. (2007). Airline negotiations and the new concessionary bargaining. Journal of Labor Research28(4), 642-657. https://doi.org/10.1007/s12122-007-9011-4

Eppler, R. (1997). Induced drag and winglets. Aerospace Science and Technology1(1), 3-15. https://doi.org/10.1016/s1270-9638(97)90019-5

Pitt, M., Van Werven, M., & Price, S. (2011). The developing use of strategic alliances in facilities management. Journal of Retail & Leisure Property9(5), 380-390. https://doi.org/10.1057/rlp.2011.2

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