American Airlines (AA) is a corporation known for its operation as a network air carrier. The company specializes in the provision of scheduled transportation services for cargo as well as passengers. The company is also involved in the offering of freight and mail services. The company has its headquarters in Fort Worth, Texas. Since it was launched in 1934, AA operates to over 350 destinations, both globally and internationally. Under the leadership of the Cyrus Rowlett Smith, the firm experienced significant success in the industry by becoming the maiden airline to fly Douglas DC-3 commercial services (American Airlines, 2017). For decades, AA has implemented different operational strategies, ultimately influencing the companys fortunes in the global airline market. Pestle analysis and Porters Five Forces will be utilized in this article to facilitate the analysis of AAs current business situation and strategy.
The Present Position of the Company
The airline industry has experienced significant growth in its traffic in the past three years. For over three years, AA has gained a substantial market share as compared to some of the key players such as Southwest and JetBlue airlines.
AAs profitability is increasing as depicted by its strong unit revenue growth. In 2016, AA became the first of the three key corporations operating as carriers to return to unit revenue growth (Levine-Weinberg, 2017). In the last quarter, AA recorded a robust growth in the passenger revenue per available seat mile (PRASM). The company also posted a substantial increase in its increment in its total revenue per available seat mile (TRASM) which was not the case with other airlines (Delta Air Lines and United Continental) whose unit revenue was flat throughout the same period. AA is also outperforming its close rivals.
For instance, in the last financial quarter, AAs domestic PRASM increased by 2.3% as compared to the two legacy carriers: Delta and United which posted a decline 1.4% and 0.1% respectively (American Airlines, 2017). AA has also gained an operational advantage over its competitors, having developed its largest International Airport in Dallas-Fort Worth. The region has witnessed a significant population growth. The economy of Texas (Dallas Fort Worth) has is also growing faster than the national average, which can be attributed to the relocation of various corporations in the area. These factors have stimulated AAs performances in recent years. The company is also experiencing a rebound in passengers who are linked from different Latin America countries to domestic flights in Miami. AA is currently profiting its pole position in the expanding regional markets. The companys recent retooling of its schedules has increased its flight connections, thus increasing its unit revenue.
Porters Five Forces.
American Airline has been experiencing a stiff competition both locally and international. The domestic competition is attributed to the emergence of the small firms, competing for the same customers and similar routes. AA is the leading airline in the number of the passengers ferried. AA is also known for the provision of quality services to the global airline industry. The inception of companies operating under a low-fare strategy has led to the escalation of competition levels within the market thus threatening AAs dominance in the industry.
Barriers to Entry
The capital intensive nature of the airline industry acts as a bottleneck to entry of other firms, thus favoring the already established corporations. The capacity of AA to spread expenses over multiple flight routes, marketing and code sharing enable it to enjoy significant economies of scale. Economic struggles have hindered the entry of small firms with limited financial capabilities. The airline industry is characterized with many regulations especially when it comes to the homeland security demands and route scheduling, thus creating logistical and regulatory obstacles.
The introduction of the online tickets has increased the customers knowledge on services and prices offered by the company. The price sensitivity which is attributed to the undifferentiated state of the airline industry has also given consumers a substantial amount of buying power. The customers also have a strong will on deciding and acting on the prices, ultimately giving them a low-cost opportunity.
Power of Suppliers
Labor, aircraft, and input are critical, components of operations in airline transportation. The power suppliers in each of these elements are vital. Labor in Americas airline segment is highly unionized. Salaries, remunerations, and benefits add, up to 33% of the overheads recorded in AA (American Airlines, 2017). AA usually battle with the power of suppliers when buying the aircraft; with Boeing and Airbus being the key suppliers. A limited number of companies manufacturing aircraft has led to an in an increase in bargaining power of the suppliers.
Power of Substitutes and complements.
Other means of transportation that can be used as alternatives to air travels constitutes the substitutes of the airline sector. Modern railways and upgraded road systems in United States, which provide cheaper forms of transportation and effective for long distance are a threat to the thriving of airline industry. Jets are increasingly becoming key substitutes to the airlines since jets guarantee high levels of privacy as compared to other public systems of transportation. Advanced technology is also another substitute: businessmen can opt for videoconferencing as opposed to travelling.
PEST analytical model is crucial when it comes to exploring the external environment of AA which comprises of political, economic, social and economic factors influencing the functioning of the company.
United States has experienced a continued political stability. September 11, 2001 terror attacks on US led to a decrease in airline businesses. The pricing regulations, union demands and remuneration/wage legislation has adversely impacted on AAs profitability.
Before terror events of September 11, 2001, the economic climate of United States was depicting mild economic decline, with airline industry struggling with discount carriers. The post-9-11 economy was characterized with operational difficulties in the airline market segment, significantly reducing the profitability of airline businesses. Other economic factors include balance of trade accounts, soaring fuel costs and dollar instabilities against major currencies such as Euro and Yen.
AA endured a significant decline in post-9-11. After the terror attacks on US, there were travelling advisories in particular countries which lowered airline associated vacations and a decline in the general volume of passengers and flights. This led to an increase in layoffs and retrenchment that affected various income groups.
Advancement in technology has brought critical changes in the business strategy and consumer purchasing behaviors. For instance, the inception of the online ticket has changed the ways in which customers interact with the company. Some of the changes in the airline industry include introduction of the SABRE system, and a decline in the airline travel agencies.
Addressing labor costs and seeking strategic alliances will play a significant role in the reviving of the AAs fortunes in the airline market. The profitability of AA has been hampered by the companys highest labor expenses in the airline industry. It follows that a reduction in the labor overheads will critically lower production costs thus improving the companys profitability. Partnering low-cost carriers will help AA to expand its operations by traveling via other airports such as JetBlue. AA should also consider adopting intensive marketing strategies that will enable the firm to broaden the base of loyal customer. All these practices will boost AAs position in the airline market.
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Chartered Global Management Accountant. (2015). Porter's Five Forces. Chartered Global Management Accountant, 2-6. Retrieved from https://www.cgma.org/resources/tools/essential-tools/porters-five-forces.html
Consumer Insight. (2016). Breaking Down the Market Share of the Top 10 US Airlines. Consumer Insight, 1-6. Retrieved from http://www.hitwise.com/blog/2017/04/market-share-us-airlines/
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