Air transportation has become one of the most dynamically developing branches. The popularity of traveling by plane leads to the high competitiveness of the companies providing the air carriage service. An airline should have a reputation of the reliable air carrier and the indisputable authority to be competitive.
American Airlines is one of the most influential and well-known major US air carriers. Though its history is full of both ups and downs, the company managed to establish a reputation of one of the best airlines by employing effective techniques aimed at reducing costs and constantly investing in the successful development of its unique high-quality services.
The history of the company’s success
The history of the company dates back to 1926 when the name “American Airways” was used as a collective name of different air carriers. Several years later, the company was organized as a united structure. In 1934, “E.L. Cord” bought the company and renamed it to “American Air Lines”.
In 1936, the company started using DC-3 airplanes and creating its brand based on marine terminology. In one year, the number of passengers carried by American Airlines reached one million. The quick economic growth of the business let it support the building of LaGuardia Airport and become an owner of the lounge, later known as “Admirals Club”. As the company grew, DC-4, DC-6A and DC-7 freighters were put into service (History of American Airlines, 2015, par. 7).
During the Second World War, half of the fleet was used for the military purposes. After the end of the war, the company put much effort in improving its services. It introduced such innovations as Family Fare Plan, the Magnetronic Reservisor to check the availability of seats, coast-to-coast jet service, the Lockheed Electra, etc. In 1959, the company’s cooperation with IBM resulted in the creation of Semi-Automated Business Research Environment (History of American Airlines, 2015, par. 15).
In 1977, American Airlines introduced the Super Saver, which became the most popular fare in the history of the company (History of American Airlines, 2015, par. 19). Until the end of the seventieth, the company managed to achieve a significant economic capacity and develop a well-organized structure of services. American Airlines developed a strong competitive ability in the market of air carriage and became the most modernized airline in the USA.
The process of Airline Deregulation in 1978 resulted in the growth of competitiveness on the market. The company had to use new marketing techniques to stimulate the interest of the patrons. The “loyalty fare” program was extended, but other airlines introduced similar programs. American Airlines had to offer a number of new advantages in the program and signed contracts with hotels and car rent services.
Later, «AAdvantage» became the first program offering cooperation with foreign airlines. After the deregulation, the company started opening hubs and buying new international routes. It bought central- and south-American routes from “Eastern Air Lines” and a part of “TWA’s” routes in Heathrow. After the scandals connected with the merger with TWA and the events of September 11, the company started losing its economic strength and popularity.
In 2003, the company was on the verge of becoming a bankrupt. However, Edward Brenan managed to lead American Airlines out of the crisis. During the next decade, the company introduced various innovations and established good cooperation with numerous foreign airlines.
However, in 2011 AMR Corporation became bankrupt. In the search for a solution, the corporation decided to merge with US Airways Group. Though numerous attempts to block the merger were taken, it was officially recognized in 2015. The company experienced both economic and competitive success followed by bankruptcy and loss of gained reputation during the post-deregulation period. While searching for effective solutions, the company had to implement new ideas to change its structure.
Route structure and product alternatives
American Airlines flies to cities on four continents. Company’s network is specially developed in the United States, where it serves more routes than any other air carrier is. At the beginning of the 21st century, the company started broadening its presence in Asian countries. During the next ten years, it launched flights to Osaka, Deli, and Peking.
In 2008, the first direct flight from Moscow (Domodedovo) to Chicago (O’Hara) was launched. Later, the company started providing flights from Miami to Brazilian cities Belo Horizonte, Recife, and Salvador.
In 1999, American Airlines became one of the founders of “Oneworld” alliance. The membership in the alliance lets the company offer the network of routes covering the whole world and a range of services impossible to be presented by one separate airline. It makes air carriages more convenient and advantageous for passengers. At the present time, the global network of the Alliance covers nearly 1000 destinations in more than 150 countries of the world.
American Airlines offers a wide range of products and services. They include Allianz Global Assistance travel insurance for U.S. residents, the Business Extra program, group fares and amenities for 10 or more people, Low Price Guarantee program, etc.
The company offers American Airlines credit cards, which give numerous bonuses and help to reduce the costs of purchases, and travel gift cards. Passengers traveling in first or business class can use Five Star Service. It includes departure, connection, and arrival assistance. Besides, access to the Admirals Club lounge is provided.
The company offers world-class products, including an extensive global network, the most advanced aircraft fleets in the world, products for cargo customers, AAdvantage Loyalty Program. Besides, American Airlines introduced exceptional in-flight offerings, such as in-flight wi-fi, entertainment on demand, industry-leading premium cabin entertainment, and new and refreshed in-flight amenities. Each of these products provides numerous benefits for people eager to enjoy exceptional flight experience for acceptable prices.
The company continues to focus on developing products “that are adaptable to meet the specific needs and individual preferences” of customers (Customers. World class products, n.d., par. 14). Highly personalized offers include Your Choice SM (personalized flight options), DealFinder SM (automated fare-search application), Mobile Apps, etc.
These products’ main benefits are various bonuses providing maximum convenience in adjusting the flight options to the needs of the passenger. The company tends to reduce costs for such programs in order to attract more clients. Patrons are provided with a wider range of possibilities to use the beneficial offerings.
The company achieves product differentiation by promoting its unique brand design and new functional features of the products. It is constantly launching modern, up-to-date services and products aimed at creating the unique flight experience for its passengers. Besides, American Airlines invests much money in proper advertising. Constant improvement of existing well-accepted products and creation of new products with unique qualities create a competitive advantage for the company.
Different American Airlines departments play an essential role in planning, development and execution of flight operations. Line personnel consist of the departments that include employees involved in providing airline’s services. In American Airlines, the line personnel department is formed by such sub-departments as Engineering, Flight Attendant, Marketing/Planning/Sales, Operations/Maintenance/Mechanics, Pilot, Cargo, Customer Service, etc.
These departments are the heart of the airline. Each of them is responsible for providing appropriate support for different operations related to flights operations. Engineering department works on creating and modernizing safe and convenient jets for the successful execution of flight operations.
Flight Attendant and Pilot departments are responsible for providing the services during the flight. Marketing/Planning/Sales department works on the development of the effective sales system that satisfies all the needs of passengers. Operations/Maintenance/Mechanics department works on efficient examination of airplanes and providing maximum safety during execution of flight operations. Customer Service department’s work is aimed at planning efficient service and quick response to the clients’ needs.
Besides the above-mentioned main departments that provide the most important support for efficacious flight execution, there are also the departments that work on providing additional services. Information Technology departments develop the management software and mobile device applications to find effective solutions for everyday operations issues. Human Resources department provides hiring and managing personnel and ensuring the professionalism of all the employees involved in planning, development, and execution of flight operations.
All departments contribute to successful functioning of the company and ensure the proper quality of the services provided by it.
Airline cost structure and methods to obtain competitive cost advantages
Cost structure can be defined as a ratio of fixed costs to variable costs. It consists of the activities of the fixed and variable costs that a company must be prepared to pay when providing a service.
The cost structure of American Airlines can be analyzed in relation to a cost object and divided into product cost structure, service cost structure, and customer cost structure. The company’s product cost structure consists of fixed and variable costs. Fixed costs refer to direct labor and manufacturing overhead involved in producing flying jets and maintaining them in good condition.
Variable costs refer to material and production supplies, commissions related to engineering, repairing flight jets, and providing the maximum quality of characteristics essential for the safety of engines. The company’s service cost structure also consists of fixed and variable costs.
Fixed costs refer to administrative overhead while variable costs are related to staff wages, bonus programs, entertainment and health programs. The company’s customer cost structure reflects the costs spent for maintaining appropriate customer service. Fixed costs include the administrative overhead for customer service. Variable costs include money paid for products and services, which are sold to customers, product returns, credits, and discounts, etc.
Controllable costs are the costs over which manager has “direct and complete decision authority” (Lal, 2009, p. 41). Controllable costs in American Airlines cost structure are those costs that can be controlled or reduced by a manager at the certain organizational level.
The company’s controllable costs include tools, the power used while manufacturing and repairing airplanes, and costs for unique services provided by the company. In fact, all costs can be regarded as controllable by certain managers in the company, and the responsibility of controlling costs is delegated to different departments (Lal, 2009, p. 41).
Competitive advantage can be defined as a position the company occupies against it competitors (Goel, 2009, p. 251). American Airlines employs cost leadership method to obtain sustainable competitive cost advantages over other carriers. The company is well known for the combination of low prices and high-quality services. As the company occupies a leading position among US air carriers in providing air carriages in the country, it has an opportunity to offer the prices that appear to be attractive to customers.
The company strives to attain the same cost compatibility in international flights, but recent problems connected with bankruptcy and the crisis inside the company forced it to eliminate many unprofitable routes. However, the merge with US Airways Group allows American Airlines to gain the competitive cost advantages it has lost during the recent decade.
Besides, the company employs differentiation advantage method, as it continuously invests in developing the unique modern services for customers. The wide range of different loyalty programs for passengers helps American Airlines to deliver greater services for the same price of its competitors.
The methods of Revenue Management used by American Airlines
Revenue Management deals with differential pricing and other techniques aimed at increasing customers’ demand for a company’s services (Huefner, 2011, p. 1). The emergence of Revenue Management began in the airline industry “strictly as differential pricing” (Huefner, 2011, p. 1).
American Airlines is known for introducing Revenue Management (later known as yield management) in 1985. After the Airline Deregulation Act in 1978, the first major low-fare airlines were created, presenting a threat to the established airlines (Huefner, 2011, p. 9). American Airlines quickly reacted to the changes in the market by implementing new techniques. The company launched a new pricing scheme with American Super-Saver fares (Jerenz & Tushaus, 2008, p. 8).
In such a way, the company revised the program based on variable demand for “different flights on different day, requiring a different allocation of discount fares” (Jerenz & Tushaus, 2008, p. 8). The SABRE system helped to explore the real rates of booking in different fare groups.
They were analyzed in comparison with the predicted rate. Then the inventory of variously priced seats was adjusted based on the gained results. Later, this strategy was named “yield management”. In seven years, the company launched its Ultimate Super-Saver fares program. The strategy used by American Airlines appeared to be successful, as low-fare airlines went bankrupt soon. The company continues to use differential pricing method successfully, even though it has experienced tough times recently.
Nowadays Revenue Management is used by different industries. Though its development was connected with air carriage, later it was employed by travel and tourism industries. The example of American Airlines’ success gave popularity to the techniques of Revenue Management. The methods of Revenue Management have developed a wide range of techniques and are now used by various organizations. It refers to car rentals, cruising service, railways services, internet providers, etc. (Jerenz & Tushaus, 2008, p. 9).
The analysis of techniques used by American Airlines to gain the reputation of one of the most respected air carriers helps to understand the key to its success. Though the company has experienced some difficulties recently, its overall strategy appeared to be efficacious and resulted in the company’s formation as one of the leaders in the airline industry.
Customers. World class products. (n.d.)
Goel, S. (2009). Crisis management: Master the skills to prevent disasters. Singapore: Global India Publications.
History of American Airlines. (2015).
Huefner, R. (2011). Revenue management: A path to increased profits. New York: Business Expert Press.
Jerenz, A., & Tushaus, U. (2008). Revenue management and survival analysis in the automobile industry. New York, Philadelphia: Springer Science & Business Media.
Lal, J. (2009). Cost accounting (4th ed.). Noida, India: Tata McGraw-Hill Education.