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.

3
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

5
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.

6
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.

7
BENEFITS OF THE MERGER
1. As US Airways has now joined OneWorld Alliance alongside American Airlines, both
the airlines are now allowed to access the other’s network i.e. this leads to a
network 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 international
benefits as the alliance serves nearly 1000 destinations around the world with more
than 14000 flights operating in more than 150 countries.

8
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.

9
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.

10
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.

11
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.

12
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.

13
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).

14
PORTER’S 5 FORCE ANALYSIS

15
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

16
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

17
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

18
The aviation has high barriers to entry
because of higher fixed costs due to
high capital investments like acquiring a
fleet of planes etc.
It also has high variable costs are
faced for fuel, labor etc. The operational
cost is significantly high in the aviation
industry.
Along with this, there are many
regulatory and logistical barriers. In
addition the “slots” at the airports are
acquired through long term contracts.
Due to such entry barriers the threat due
to new entrants in the industry is low.
INTERNAL RIVALRY
SUPPLIER POWER
BUYER POWER

19
The substitutes for air travel constitute
other forms of transportation like cars,
buses, trains etc.
The railway infrastructure is limited and
travelling by trains is highly time
consuming and is costly.
The United States does not have an
extensive long distance bus system along
with lower fares and the journey time is too
long.
Due to the size of the United States, most
long-distance travel is practical only
through airplane. Hence the threat due to
substitutes is low.
INTERNAL RIVALRY
SUPPLIER POWER
BUYER POWER

20
FORCE STRATEGIC SIGNIFICANCE
INTERNAL RIVALRY HIGH
SUPPLIER POWER HIGH
BUYER POWER HIGH
THREAT OF NEW ENTRANTS LOW
THREAT OF SUBSTITUTES LOW

22
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

23
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.

24
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.

25
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

26
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.

27
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.

28
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.

29
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.

30
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.

31
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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