Industrial Analysis

The Airline Industry

 Industrial Evolution
• Industry History and American Airlines History

• Major Industry Milestones

• Future of the Industry

 1920s
• Commercial Aviation begins with mail routes
and occasional passenger transport

• American Airlines does not exist yet.

• Many small airline companies with one to two

aircraft fleets operating in an uncoordinated
fashion.
1920s
 1930s
• First all metal airliners. Such as the DC-3, Boeing 247,
Flying Boats.
• Airlines now were able to operate regular and
somewhat safer service.
• Airlines began to fly to many of the major cities and
some overseas destinations.
• American Airlines formed in 1930, and were the first
airline to begin DC-3 operations on June 25, 1936.
• By the end of the decade American was the United
States’ number one domestic airline.
1930s
 1940s
• Many advances due to World War II
– Better Radios
– New radio navigation aids
– Faster longer range aircraft
– Many newly build airfields
• 1944 American Airlines begins a domestic cargo
service
• 1945-1950 American Airlines briefly operated
American Overseas Airlines (AOA) to provide
overseas flights. AOA merged with Pan American in
1950.
1940s
 1950s
• Major advancements in range, speed,
navigation, and airport facilities
– First jets and turboprops became operational
– Airports began to install ILS systems to allow
nearly all weather operations.
– Airlines began to schedule some of their first non-
stop trans continental flights and overseas flights.
 1950s
• American Airlines’ first scheduled coast to
coast jet service began on Jan. 25th 1959.
1950s
 1960s
• The airlines began to replace their piston airliner
fleets with the new jets.
• The new jets were able to fly much faster and in
some cases farther than the old prop liners.
• Air Traffic control was much more organized and
began to function and look much like it does today
• American Airlines expanded and modernized their
fleet thought-out the decade
– By the end of the 60s American had a nearly all turbine
fleet.
1960s
 1970s
• During this decade some of the greatest changes in
commercial aviation history occurred.
– Widebodys such as the 747, DC-10, L-1011 greatly
increased passenger volumes and lower ticket prices.
– The aircraft of this era had greatly improved ranges and
now were able to fly to many parts of the world.
– The first supersonic airliner Concorde entered service.
– Near the end of the 70s the Industry was deregulated
 1970s
• American Airlines expanded their service to
many Caribbean, and Mexican destinations.
• American initiated their super-saver fair
program.
1970s
 1980s-1990s
• Consequences of Deregulation Realized
– Less expensive airfares
– More vicious competition
– Beginning of the end for some old and seemingly
invincible airlines that did not adapt to
deregulation.
• Braniff, Eastern and Pan American by the early 1990s
 1980s-1990s
• Airlines begin to focus on greater efficiency
– Smaller Jets on domestic routes, and the beginnings of a
movement away from tri-jets
– Greater use of ETOPS (Extended Twin Operations)
• American continued to expand their operations
– June 11, 1981 American opened their Dallas Fort Word
hub.
– In 1984 American started American Eagle their commuter
airline.
– 1992 American initiated the Value Pricing program
1980-1990s
 2000s
• Sept. 11th 2001
– Higher fuel prices
• Forced early retirement of many lesser efficient aircraft
• Faster aircraft ideas scrapped in favor of more efficient
designs
• Many major airlines had to enter bankruptcy
• ETOPS use widely expanded
• End of many onboard services and amenities
• Charges for checked and overweight baggage
 2000s
• American streamlined their fleet
– Retired older less efficient aircraft
– Purchased new long range more efficient twins
like the 777 and new generation 737s
• First U.S. airline begin onboard al carte’
services
• Began charging for pillows, blankets, and for
the 1st checked bag
2000s
 Passenger Loads Progression

600

53 2
50 0

4 16
400
3 79 3 79

300 305

200 202

16 2
14 7 14 5

10 4 110
10 0 99

56
32
0
DC-3 19 3 0 DC-6 19 50 DC-7 19 55 L18 8 19 6 0 70 7-12 0 B 70 7-3 2 0 B 72 7-2 0 0 74 7-10 0 74 7-2 0 0 757 19 8 5 74 7-4 0 0 777-2 0 0 73 7- A3 8 0
19 6 0 19 6 1 19 6 4 19 6 6 19 70 19 8 5 19 9 9 800/900 2005
2000
A i rc ra f t Ty p e a nd S e rv i c e Ent ry D a t e
 Conclusions
• The Airline industry is in severe trouble.
• Even though revenues and passenger
numbers are higher than ever. Profit is barely
at breakeven.
• Reasons: Vicious Competition, and a spike in
fuel prices
 The Future
• Industry can go in two directions
1. Continuation of status quo
• Continued competition on price will drive profit potential lower
• More companies will go out of business
• Niches available for smaller airlines
• What can American do to survive?
2. Breakout of one Airline with new Strategy
• New strategy
• Improved Profitability
• Creation of a possible Blue Ocean
• Risky but Rewarding
• What can American do to be successful?
 Products

• Airlines can have general functions (carrying

passengers, cargo, and mail) or specialized functions
(medical air transport or oil platform servicing)
• Airlines can be scheduled or chartered
• Industry revenue is roughly as follows:
– 70% from scheduled flights
– 10% from cargo and express mail
– 4% from chartered flights
– 1% from U.S. mail
 Customers
• Majority of flights are within the US and
Canada
• European flights are increasing due to
deregulation
• Many airlines use the hub-and-spoke system
– Local airports fly to a central airport that offers
long distance and international flights
 Customers

• Many customers are unhappy with airlines

• Airlines have to continually improve on their
services
– Ticketless travel: reduces time waiting in line
– Interactive entertainment systems and Wi-Fi
– More comfortable seats for longer flights
– Frequent Flyer Programs offer rewards (usually
free or discounted flights) for customers that fly
often with the same airline
 Customers – American Airlines
• AA and its affiliates serve about 250 cities in
over 40 countries with at least 3,400 flights
daily
• AA’s network of flights covers North America,
Europe, Latin America, the Caribbean, and the
Pacific
 Customers – American Airlines

• AA offers different seats for different flights

– Domestic flights have first class and main cabin
• First class on most flights get complimentary meals
• Main cabin can purchase food
– Long International flights have first class (flat
beds), business class (lie-flat seats), and main
cabin
– Other International flights have business class
(some seats wider than normal, some are lie-flat)
and main cabin
 Geography
• Airline industry is world wide
• Many airlines operate hub-and-spoke systems
from large, international airports to small,
regional airports
• Many flights either arrive or depart from hubs
• Flight pattern videos show airline travel
directions
– Most in North America start in the east or travel east
• New York
• Florida
 Geography
• Flight Pattern
 Strategy
• Airline industry is growing, not consolidating
– Many are consolidating, but more growth overall
• Number of airlines in world has increased by
150% over the last 20 years
• Continues to grow 5% per year
• Over last 10 years 1,300 new airlines entered
the industry and 850 exited
 Strategy, Cont.
• Growth primarily fueled by new business
models
– Addition of low-cost carriers
– Business only airlines
– New regional carriers
• New business models create additional value
for passengers
 Strategy, Cont.
• Airlines are looking for new ways to better
compete in market since fuel prices are
fluctuating and as new competition arises
• In the future, innovative airlines will create
new business models and new ideas to create
constant and continuous growth in the airline
industry
– Growth brings new ideas, people, and technology
 Geography of American Airlines
• American Airlines, American Eagle, and American
Connection serves 250 cities in over 40 countries
• More than 3,400 daily flights
• Network points include
– North America
– The Caribbean
– Latin America
– Europe
– The Pacific
Geography of American Airlines, Cont.
• Major hubs at D/FW, Chicago O’Hare, Miami,
and St. Louis
• About 90% of flights begin or end at hubs
• Large presence in other U.S. metropolitan
areas
– New York (4 airports)
– Los Angeles (4 airports)
– Boston
Geography of American Airlines, Cont.
• In 2007, 36% of AA’s flights were international
– Caribbean (17%)
– Europe (15%)
– Pacific (4%)
 Products of American Airlines
• Frequent Flyer Program – AAdvantage
– Started in 1981
– First airline loyalty program in the world
– Offers its members the most innovative ways to
earn and redeem miles
• Passengers charged $15 for first checked-in
items of baggage on domestic flights
 Products of American Airlines, Cont.
• Classes of Service
– International long hauls
• First Class with flat beds
• Business Class with lie-flat seats
– Other International
• Business Class with wide seats and lie-flat seats
• Main Cabin
– Domestic, American Eagle, and Connection
• First Class with complementary meals
• Main Cabin with food for sale
 Major Problems - Current
• Safety
– American Airlines fined $7.1 billion for safety
violations
– Many are trying to hide safety violations from FAA
• Southwest recently got caught, fined $10.2 for cracks in
skin of airplanes
– Very costly to maintain safety of airplanes
• American and Delta cancelled flights to check wiring on
planes
– Lost profits
– Lost customers
 Major Problems - Future
• Fuel Prices
– Many airlines have set a fuel price range
• Now causing airlines to claim losses due to low fuel prices
– Fuel price fluctuation causes problems on scheduling
flights in the future and setting ticket prices
• Mergers
– Discontinuation of departure and arrival cities
– Competitive air fares are eliminated
– Customer service diminishes
 Major Problems – Future, Cont.
• Bankruptcy
– Many airlines are currently filing for bankruptcy
– Airline can continue to operate after filing for
bankruptcy
– Fares, schedules, and destinations after filing are
not determined by airline and are subject to the
approval of the bankruptcy board
– Entire industry will not go bankrupt
Powerful Suppliers and buyers
• “The airline supply business is mainly dominated
by Boeing and Airbus. For this reason, there isn't
a lot of cutthroat competition among suppliers.
Also, the likelihood of a supplier integrating
vertically isn't very likely. In other words, you
probably won't see suppliers starting to offer
flight service on top of building airlines.”
• The airline industry overwhelmingly participates
in the Supplier Diversity Program.
• Contract Agreement:
– “During 2008, the Company continued its fleet renewal strategy as it
entered into amendments to its purchase agreement with the Boeing
Company.  Giving effect to the amendments and considering the
impact of delays caused by the recent machinist strike at Boeing, the
Company is now committed to take delivery of a total of 29 737-800
aircraft in 2009, 39 737-800 aircraft in 2010 and eight 737-800
aircraft in 2011.  In addition to these aircraft, the Company has firm
commitments for eleven 737-800 aircraft and seven Boeing 777
aircraft scheduled to be delivered in 2013 - 2016. Under the Boeing
737-800 and Boeing 777-200 aircraft purchase agreements, payments
for the related aircraft purchase commitments will be approximately
$1.0 billion in 2009, $1.1 billion in 2010, $355 million in 2011, $218
million in 2012, $417 million in 2013 and $584 million for 2014 and
beyond. These amounts are net of purchase deposits currently held
by the manufacturer.  Any incremental firm aircraft orders will
increase the Company’s commitments.”
• This program is designed to support the small, minority-
owned, or woman-owned business.
• These businesses compete, or bid, to be the supplier of
various products for the airlines like seat covers,
custodial services, food and beverage services, etc…
• For a small business to qualify to be a supplier for the
airlines industry the business must be at least 51%
owned, controlled and operated by an African American,
Asian American, Hispanic American, Women, Native
American, or a small disabled individual’s business.
• The suppliers in this program are confidential since they make bids for a chance to
be a supplier. I emailed the manager of the program and this is her reply:
• “Thanks for your email….the information that we share on our Supplier Diversity
website at www.aa.com/supplierdiversity is the information we share publicly
about our Supplier Diversity Program.  Due to the confidential nature, we do not
share additional information about our suppliers.  If you would like, I will be glad
to mail you one of our Supplier Diversity brochures which shares information
about our Program and the types of products and services we procure.  If you
would like a brochure, please send me your address.   Thanks.”
 
Make it a great day!
 
Sherri Macko
American Airlines
Manager, Supplier Diversity
• In the airline industry the biggest buyer is the
frequent flyer.
• Other big buyers, or customers, are occasional
flyers, cargo transportation (if it’s a cargo
airline), big business executives, etc…
• The negotiating, or bargaining power of
buyers is very low because the switching costs
are on the average high and can potentially be
astronomically high.
• American Airlines and other airline carriers
also provide services that are not like the
traditional ones from the previous slide.
• For example, AA provides not only training for
their flight attendants, but also provides other
kinds of training for all kinds of companies.
• “Through the years, the Center’s role has
evolved dramatically. Still American’s base for
training flight attendants, the Training and
Conference Center is now also designed to
encourage learning and professional growth
without distraction for companies and
organizations of all kinds. The Center is
available for conferences, team-building
programs and catered events.”
• American Airlines’ Website. Feb. 2009.
http://www.aa.com/content/amrcorp/corporateI
nformation/facts/amr.jhtml
• American Airlines’ Website. Feb. 2009.
http://www.aa.com/aa/i18nForward.do?p=/abo
utUs/supplierDiversity/americanairlines.jsp
• Investopedia’s Website. “The Industry Handbook:
The Airline Industry”. Feb. 2009.
https://www.investopedia.com%2ffeatures%2fin
dustryhandbook%2fairline.asp