University of Jordan Faculty of Business Strategic Management
“American Airlines ” Case Study Strategic Management
Prepared By Fathi Salem Mohammed Abdulla Abdulla
2009
37
Introduction American Airlines, Inc. (AA) is a major airline of the United States. It is the world's largest airline in passenger miles transported and passenger fleet size; second largest, behind FedEx Express, in aircraft operated; and second behind Air France-KLM in operating revenues. A subsidiary subsidiary of the AMR Corporation, the airline is headquartered in Fort Worth, Texas, adjacent to the Dallas-Fort Worth International Airport. American operates scheduled flights throughout the United States, and flights to Canada, Latin America, America, the Caribbean, Europe, Japan, the People's Republic of China, and India. The Chairman, President, and CEO of AA is Gerard Arpey. In 2005, the airline flew more than 138 billion revenue passenger miles (RPM).
Vision Statement (proposed) To become the largest airline in the world.
Mission Statement (proposed) AMR Corporation is committed to providing every citizen of th e world with the highest quality air travel to the widest selection 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 everyone with equal care and respect, which is reflected in the way each AMR employee employee is respected. AMR recognizes that its employees are the key to the airlines success and invests in the futures and lives of its employees. By investing in tomorrow’s tomorrow’s technologies and by following a strict strict adherence towards environmental regulations, r egulations, AMR demonstrates its commitment to the world environment.
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External Audit Opportunities
1. 2. 3. 4. 5. 6. 7.
Favorab Favorable le wage wage negot negotia iatio tion n climat climatee Travel Travel increa increasi sing ng in general general Low Lo w inte intere rest st rate ratess Gover Governm nmen entt bac backed ked loan loanss Info Inform rmat atio ion n tech technol nology ogy New fuel fuel effi effici cien entt engi engine ness Partne Partnersh rships ips with with Asian Asian Airlin Airlines es
Threats
1. 2. 3. 4. 5.
Increased Increased air travel travel inconvenience inconvenience (security (security related) related) Business Business travel declining declining Increased Increased competition competition from point-to-p point-to-point oint competitors competitors Availability vailability of pricing pricing informati information on Overcapa Overcapacit city y in industry industry
Competitive Profile Matrix
Critical Success Factors
Weight
Rating
Weighted Score
Rating
Weighted Score
Rating
Weighted Score
Rating
Weighted Score
Financial Position
0.10
1.00
0.10
1.00
0.10
2.00
0.20
4.00
0.40
Cost Structure
0.30
3.00
0.90
2.00
0.60
2.00
0.60
4.00
1.20
Information Technology
0.20
3.00
0.60
3.00
0.60
3.00
0.60
4.00
0.80
Partnerships
0.25
4.00
1.00
3.00
0.75
4.00
1.00
1.00
0.25
Fleet
0.15
3.00
0.45
4.00
0.60
2.00
0.30
3.00
0.45
1.00
3.05
2.65
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2.70
3.10
EFE Matrix
Key External Factors
Weight
Rating
Weighted Score
.1 5 .05 .05 .05 .05 .05 .10
4 2 3 4 3 3 3
. 60 . 10 . 15 . 20 . 15 . 15 . 30
.05
2
. 10
Opportunities 1. Favorable wage negotiation climate 2. Travel increasing in general 3. Low interest rates 4. Government backed loans 5. Information Technology 6. New fuel efficient engines 7. Partnerships with Asian Airlines Threats 1. Increased air travel inconvenience (security related) 2. Business travel declining 3. Increased competition from point-to-point competitors 4. Availability of pricing information 5. Overcapacity in industry
.10 .1 5
3 3
. 30 . 45
.10 .10
3 2
. 30 . 20
Total
1.00
Internal Audit Strengths
1. 2. 3. 4. 5.
Size Size of flee fleett Numb Number er of rou routes tes Partne Partners rshi hips ps IT infr infrast astruc ructur turee Governm Government ent rela relatio tions ns
Weaknesses
1. 2. 3. 4. 5.
Financi Financial al posi positio tion n Cost Cost struct structure ure Unprof Unprofita itable ble rout routes es Too many many divis division ionss Relian Reliance ce of busine business ss fares fares
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3.00
Financial Ratio Analysis (March 2007) Company
Industry
Sector
S&P 500
N/A NA NA 2.77 0.10 37.67 N/ A 11.86 NM 95.00
23.71 55.30 15.49 1.38 1.24 5.42 2.43 10.03 6.61 70.90
25.41 42.96 16.23 0.62 1.62 3.67 3.96 13.19 37.18 59.87
24.01 45.41 16.26 1.00 3.33 4.29 7.56 17.32 28.97 64.19
N/ A 0.00 NM 0.00
0.27 0.10 5.77 1.88
1.38 1.01 13.66 23.05
2.04 1.48 6.48 26.78
3.93 0.12 -0.09 N/ A NA NM -21.91
12.97 12.79 8.39 48.32 70.64 -2.27 5.49
9.04 8.27 6.94 -4.57 1.92 6.80 0.82
13.40 11.90 9.30 28.69 21.92 12.15 4.06
0.52 0.71 285.35 302.83 -1.20
1.20 1.43 1.09 1.19 4.86
1.18 1.42 0.51 0.59 19.24
1.26 1.76 0.68 0.85 11.86
17.26 19.31 3.06 2.39 -4.84 -4.69 -7.50 -6.40 -7.04 -4.63 N/ A 37.13
26.52 29.28 12.74 12.48 6.88 7.03 8.34 7.38 5.27 4.22 37.15 38.22
33.15 33.94 17.88 18.06 11.72 11.77 10.24 9.93 6.77 6.13 34.89 38.75
47.32 47.01 20.79 20.82 20.33 18.35 17.27 17.54 13.12 11.59 31.31 34.20
Valuation Ratios
P/E Ratio (TTM) P/E High - Last 5 Yrs P/E Low - Last 5 Yrs Beta Price to Sales (TTM) Price to Book (MRQ) Price to Tangible Book (MRQ) Price to Cash Flow (TTM) Price to Free Cash Flow (TTM) % Owned Institutions Dividends
Dividend Yield Dividend Yield - 5 Yr Avg Dividend 5 Yr Growth Rate Payout Ratio (TTM)
Growth Rates %
Sales (MRQ) vs Qtr 1 Yr Ago Sales (TTM) vs TTM 1 Yr Ago Sales - 5 Yr Growth Rate EPS (MRQ) vs Qtr 1 Yr Ago EPS (TTM) vs TTM 1 Yr Ago EPS - 5 Yr Growth Rate Capital Spending - 5 Yr Growth Rate
Financial Strength
Quick Ratio (MRQ) Current Ratio (MRQ) LT Debt to Equity (MRQ) Total Debt to Equity (MRQ) Interest Coverage (TTM)
Profitability Ratios %
Gross Margin (TTM) Gross Margin - 5 Yr Avg EBITD Margin (TTM) EBITD - 5 Yr Avg Operating Margin (TTM) Operating Margin - 5 Yr Avg Pre-Tax Margin (TTM) Pre-Tax Margin - 5 Yr Avg Net Profit Margin (TTM) Net Profit Margin - 5 Yr Avg Effective Tax Rate (TTM) Effective Tax Rate - 5 Yr Avg
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Management Effectiveness %
Return on Assets (TTM) Return on Assets - 5 Yr Avg Return on Investment (TTM) Return on Investment - 5 Yr Avg Return on Equity (TTM) Return on Equity - 5 Yr Avg Efficiency Revenue/Employee (TTM) Net Income/Employee (TTM) Receivable Turnover (TTM) Inventory Turnover (TTM) Asset Turnover (TTM www.investor.stockpoint.com
-4.15 -2.43 -5.45 -3.16 N/ A -66.33
180,913 N/A 17.23 25.36 0.59 March 2004
4.71 4.15 6.51 6.11 11.68 2.78
6.66 6.48 8.59 8.51 14.57 14.38
191,714 13,861 35.21 42.78 0.83
198,139 14,032 14.58 39.40 1.10
6.40 6.79 9.97 10.93 18.71 19.22
622,866 81,707 9.76 10.46 0.92
Company Worth Analysis (year-end 2001 2002 2003 average) Stockholders Equity Net Income x 5 (Share Price/EPS) x Net Income Number of Shares Outstanding x Share Price
$2,125,000,000 ($10,835,000,000) ($2,436,937,716) $2,015,000,000
Method Average
($2,282,984,429)
IFE Matrix Weight
Rating
Weighted Score
0.10 0.10 0.15 0.10 0.05
4 4 4 3 4
0.40 0.40 0.60 0.30 0.20
0.05 0.15 0.15 0.05 0.10 1.00
1 2 2 1 2
0.05 0.30 0.30 0.05 0.20 2.80
Key Internal Factors Strengths 1. Size of fleet 2. Number of routes 3. Partnerships 4. IT infrastructure 5. Government relations Weaknesses 1. Financial position 2. Cost structure 3. Unprofitable routes 4. Too many divisions 5. Reliance of business fares TOTAL
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SWOT Matrix S-O Strategies
W -O Strategies
1. Develop new partnerships partnerships in A sia utilizing utilizing the number of routes as a key nego tiating tiating point.
1. Sell unprofitable/smaller divisions to improve financial financial po sitions. 2. Negotiate lower wage rates with unions to improve cost s tructure. tructure.
S-T Strategies
W -T Strategies
1. Use IT to reduce the check-in and and wait times on flights. Such as as more curb side check-ins and and etickets.
1. Use a mixed model i.e. So me operations point-topoint to improve cost s tructure tructure and reduce customer inconvenience.
2. Use market position by red ucing number number of unprofitable flights and red ucing industry capacity.
2. Eliminate unprofitable routes to improve financial financial position and reduce industry capacity. capacity.
SPACE SPACE Matrix Mat rix Y axis Financial strength Environmental stability
1 -5
+1 worst to + 6 best -1 best to -6 worst
Y axis: 1 + (-5) = -3
X axis Industry strength Competitive advantage
2 -5
+1 worst to +6 best -1 best to -6 worst
X axis: 2 + (-5) = -3
FS Aggressive
Conservative
C
IS
Competitive Defensive
ES
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Grand Strategy Matrix Rapid Market Growth Quadrant II
Quadrant I
Weak Competitive Position
Strong Competitive Position Quadrant IV
Quadrant III
Slow Market Growth
The Internal-External (IE) Matrix The IFE Total Weighted Score
High
Strong 3.0 to 4.0
Average 2.0 to 2.99
Weak 1.0 to 1.99
I
II
III
3.0 to 3.99 American Airlines
Medium
IV
V
VI
VII
VIII
IX
The EFE Total 2.0 to 2.99 Weighted Score
Low 1.0 to 1.99
QSPM 44
Strategic Alternatives Key Internal Factors Strengths
International Expansion TAS AS
Domestic Expansion AS TAS
0.10 0.10 0.15 0.10 0.05
--4 1 -----
--0.18 --0.20 0.24
--1 2 -----
--0.12 --0.20 0.18
0.05 0.15 0.15 0.05 0.10 1.00
1 4 1 -----
0.28 0.12 0.08 ----1.35
3 3 4 -----
0.07 0.18 0.12 ----1.60
Weight
1. Size of fleet 2. Number of routes 3. Partnerships 4. IT infrastructure 5. Government relations Weaknesses 1. Financial position 2. Cost structure 3. Unprofitable routes 4. Too many divisions 5. Reliance of business fares SUBTOTAL
Key External Factors Opportunities 1. Favorable wage negotiation climate 2. Travel increasing in general 3. Low interest rates 4. Government backed loans 5. Information Technology 6. New fuel efficient engines 7. Partnerships with Asian Airlines Threats 1. Increased air travel inconvenience (security related) 2. Business travel declining 3. Increased competition from point-to-point competitors 4. Availability of pricing information 5. Overcapacity in industry SUBTOTAL SUM TOTAL ATTRACTIVENESS SCORE
EPS/EBIT Analysis
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Weight
.15 .05 .05 .05 .05 .05 .10 .05 .10 .15 .10 .10 1.00
International Expansion AS TAS --0.24 4 --4 --3 --1 --4 0.05 --0.06
Domestic Expansion AS TAS --0.24 1 --1 --1 --4 --1 0.15 --0.03
----3 3 1
----4 3 4
0.20 0.16 0.08 ----1.65 3.00
0.15 0.08 0.08 ----1.70 3.30
Amount Needed 500M Interest 5% Tax 0% Share Price $15.00 Shares Outstanding 155M Common Stock Financing Recession
EBIT
Norm al
Debt Financing Boom
Recession
Norm al
Boom
(500,000,000)
0
500,000,000
(500,000, 000)
0
500,000,000
0
0
0
25,000, 000
25,000,000
25,000,000
EBT
(500, 00,000 000,000 ,000))
0
500,000 000,000 ,000
Taxes
0
0
0
EAT
(500, 00,000 000,000 ,000))
0
500,000 000,000 ,000
(525,0 25,00 00,00 ,000) (25,0 5,000,0 00,00 00) 475,0 75,00 00,00 ,000
188, 188,333 333,3 ,333 33
188, 188,333 333,3 ,333 33
155, 155,000 000,0 ,000 00
0.00
2.65
(3.39)
Interest
# Shar Shares es 188,33 188,333,3 3,333 33 EPS
(2.65)
0
70 Percent Stock - 30 Percent Debt Recession
EBIT
Norm al
(525,0 25,00 00,00 ,000) (25,0 5,000,0 00,00 00) 475,0 75,00 00,00 ,000 0 155,00 155,000,0 0,000 00
(0.16)
0 155,00 155,000,0 0,000 00
3.06
70 Percent Debt - 30 Percent Stock
Boom
Recession
Norm al
Boom
(500,000,000)
0
500,000,000
(500,000, 000)
0
500,000,000
7,50 7,500, 0,0 000
7,5 7,500,0 00,000 00
7,50 7,500, 0,00 000 0
17,5 17,50 00,0 0,000
17,5 17,500 00,0 ,000 00
17,5 17,500 00,0 ,00 00
EBT EBT
(507, (507,500 500,0 ,000) 00)
(7,5 (7,500 00,00 ,000) 0)
492, 492,500 500,0 ,000 00
Taxes
0
0
0
EAT EA T
(507, (507,500 500,0 ,000) 00)
(7,5 (7,500 00,00 ,000) 0)
492, 492,500 500,0 ,000 00
(517 (517,50 ,500,0 0,000) 00) (17,5 (17,500 00,00 ,000) 0) 482,50 482,500,0 0,000 00
178, 178,333 333,3 ,333 33
178, 178,333 333,3 ,333 33
165, 165,000 000,0 ,000 00
(0.04)
2.76
(3.14)
Inter nteres estt
# Shar Shares es 178,33 178,333,3 3,333 33 EPS
(2.85)
(517 (517,50 ,500,0 0,000) 00) (17,5 (17,500 00,00 ,000) 0) 482,50 482,500,0 0,000 00 0
46
0 165,00 165,000,0 0,000 00
(0.11)
0 165,00 165,000,0 0,000 00
2.92
