AMR Corporation Overview

An overview of AMR corporation's past and future finances

AMRCorporation

By: Team 1EPatrick AyersMaggie BihnJulie BruntonAdam DeBellisKabir Uppal

Professors:Jeff AndersonJamie CarterMike MartelScott Wright

Outcome

Appendices

Introduction

Analysis

Recommendations & Conclusions

Introduction Letter of Transmittal……………………………………………….……….4 Executive Summary………………………………………………….………5 Mission Statement……………………………………………………………6 Corporate Responsibility………………………………………....………..7 Key Strategic Issues Facing AMR……………………………………….8Analysis Corporation Overview………………………………………………………9 Industry overview…………………………………………………..………11 Current Competition……………………………………………..………...12 Porter’s 5 Forces…………………………………………………..…………13 SWOT Analysis……………………………………………………..…………14 Strategic Direction………………………………………………..…………15 Financial Analysis………………………………………………..………….16 Fuel Analysis…………………………………………………......……………18 Stock Analysis…………………………………………………..……………..20 Debt Analysis…………………………………………………..………………22 Employee Analysis…………………………………………..………………23

Table of Contents

Outcome

Appendices

Introduction

Analysis


Recommendations……………………………………………………………23 #1: International Growth Recommendation………………….24 Foreign Student Growth Plan……………………………………26 Study Abroad Market……………………………………………….27 The Contract…………………………………………………....………30 Incoming Foreign Students…………………………….…………31 Recommendation for Incoming Foreign Students….…..33 Benefits & Limitations………………………………………..…….35 Conclusion: International Growth Plan……………..………36 #2: oneworld & Open Skies Recommendation……..………..37 oneworld not Revolving………………………………..…………38 Global Sporting Events………………………………..……………39 Olympic Games…………………………………………...……………40 Men’s FIFA World Cup……………………………………………….41 Conclusion: oneworld & Global Sporting events……..…42 Low-Cost Carriers Analysis……………………………………….44 #3: American Eagle Recommendation……………………………45 Cost Comparison (Fleet)…………………………………………...48 Benefits & Limitations………………………………………………49 Conclusion………………………………………………………………..50Outcome and Effects of Forecasting…………………………………….51Appendices………………………………………………………………………..52References…………………………………………………………………………62

Table of Contents

Letter of Transmittal

October 11, 2009 AMR Corp. Board of Directors4333 Amon Carter BlvdFort Worth, TX 76155 Dear Board of Directors: As requested by AMR Corp., our consulting firm prepared a report of recommendations to improve your corporation’s revenues during this period of economic turbulence and thereafter. Our recommendations to increase international travel, manage fleet efficiently, and capitalize on global opportunities through oneworld were based on the following criteria: Internal/External ForcesPorter’s Five Forces modelCurrent position and market share within the industryBenchmark against competitorsFinancial data and trends of revenue International travel is steadily increasing and it is essential for American Airlines to market themselves for opportune global customers. Currently American Eagle is showing weakness within the company. Investing in more efficient aircrafts to increase the load factor would generate more revenue. Our recommendation for oneworld is based upon the fact that it has low market share compared to other trans-Atlantic alliances. Capitalizing on global opportunities through strategic marketing can improve oneworld’s situation. These recommendations are beneficial to the corporation because they entail a positive outlook for the future and better times to come for the company. Thank you for the opportunity to analyze AMR Corp. current business strategies and recommend improvements for the future success of the company. If there is anything more you may need assistance with, please feel free to contact us. Sincerely,Group 1EPatrick Ayers, Maggie Bihn,Julie Brunton, Adam DeBellisKabir Uppal

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This report presents a comprehensive assessment of AMR Corporation’s current economic and financial position in relation to it’s competitors and industry.

Executive Summary

AMR’S major business segments will be analyzed and evaluated. We provide recommendations in which its affects will be outlined and rationalized in addition to a five year financial forecast

Current Problems facing the AMR Corporation1. Global and domestic recessions have led to a decline in air traffic.2. Regional airline American Eagle is in a struggle to earn profits3. oneworld Alliance is losing global market shares.

Solutions4. Strengthen global market position of AA5. Optimize American Eagles fleet6. Increase oneworld’s market shares though capitalizing on opportunities

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Analysis


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AMR’SMission Statement

Team 1E’s Mission Statement

“American Airlines and American Eagle are in business to provide safe, dependable and friendly air transportation to our customers, along with numerous related services. We are dedicated to making every flight you take with us something special. Your safety, comfort and convenience are our most important concerns.”

“The purpose of our team is to analyze the AMR Corporation and the current industry climate to make recommendations that will help AMR successfully adapt their company to be more profitable in the Airline Travel and Cargo industry.”

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Corporate Responsibility

As a global airline carrying more than 100 million passengers and more than 500,000 tons of cargo a year, AMR promotes commerce, trade, and economic prosperity, as well as a sense of global community and citizenship. Our business also affects the environment around us, and we are committed to being good stewards by minimizing our environmental footprint…Our commitment to corporate responsibility is more than a business decision. It’s an important part of our culture— part of who we are. At AMR, operating in a responsible manner is not just an aspiration; it’s the way we do business.

Source: 2008 AA Corporate Responsibility Report

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8

Key Strategic Issues Facing AMR

• American has aggressively cut capacity where possible in the domestic market.• In multiple flight markets, American has tried to cut flights where possible, or at

least gauge capacity.

Capacity Cuts

• Global and domestic recessions have led to a decline in air traffic.• U.S air traffic is down approximately 10% for 2009

Economic Demand

• American Airlines is experiencing severe revenue decline due to sinking demand for premium-cabin seats.

• Business & First Class account for 7%-10% of a major carriers passengers, but 25%-30% of its revenue.

• Trans-Atlantic premium passenger traffic is down over 27% since 2008.• Premium Passengers mostly consist of business related travel.

Decline in Premium Passenger Traffic

• Accounts for about 11% of American Airlines' revenues but is losing more than that

• The scarce availability of resources and ineffective fleet management are resulting in losses for the regional airline

The Burden Of American Eagle

• Oneworld has a strong market share at Heathrow in London but are losing out to its other global alliance competitors.

• Openskies agreement has enabled more competition to enter the European market from US based airlines

Alliances & Global Consolidation

• Helps airlines reduce the impact of unpredictable fuel prices by signing contracts to pay a set price for future fuel costs.

• American airlines has been particularly successful by fuel hedging their costs of fuel in recent years.

• In 2008, American saved $380 million by fuel hedging.

Fuel Hedging

• American Airlines has recently cut about 5,000 employees.• American Airlines total revenue per employee was $282,592 in 2008

Employee Optimization

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9

Corporation Overview

AMR Corporation operates in the airline service industry. They provide domestic and long haul flight services through its different subsidiaries. The corporation’s main subsidiary is American Airlines. AMR’s other subsidiary is the AMR Eagle Holding Corporation, which consists of 2 regional airlines (known as the American Connection): American Eagle Airlines and Executive Airlines. American, AMR Eagle and the American Connection airlines serve 250 cities in 40 countries with, on average, 3,400 daily flights. The corporation’s network fleet numbers are about 900 aircraft.

American Airlines

• Worlds Largest Airline

• Founder of OneWorld Alliance

• 3rd Largest Fleet in the World

• Only Airline that hasn’t declared bankruptcy

• Total revenue for 08 was 23.8 Billion• $18.2 B from Mainline division• $2.49B from Regional• $874 M from Cargo

American Eagle

• Regional Partner of American Airlines

• Operates fleet of 305 aircrafts

• Hubs in Boston, Chicago O’Hare, Dallas/Fort Worth, Los Angeles, Miami,

New York LaGuardia and San Juan

• Employs more than 13,000

• Serves 159 cities with more than 1800 daily flights and 1400 daily jet flights

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Corporation Overview

20022003

20042005

20062007

2008

$-

$5,000

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$15,000

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American Airlines Revenue Trend

Outsourced Mainline

$ In

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lion

s

AA CO DL UA US0

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Cash Days in 2Q 2009

AA CO DL UA US $-

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Cash Position in 2Q 2009

$ In

Mil

lion

s

Domestic Atlantic Latin Amer-ica

Pacific

2005 0.664000000000002

0.142 0.155 0.039

2006 0.653000000000001

0.143 0.158 0.046

2007 0.649000000000001

0.145 0.166 0.04

2008 0.632000000000001

0.147 0.179 0.042

5.00%

25.00%

45.00%

65.00%

AA Mainline RPM Distribution

•Cash position stands at a solid competitive average at $2,840•AA could last 52 days on its current cash, which is significantly lower then it’s other competitors•AA outsources around 11% of profits to its regional partner.

•International travel is steadily increasing, thus AA should continue to promote “going global”. •Domestic travel soaks up the majority of profits, but its decline in traffic has lead to a focus in the Latin American markets as well as the pacific.

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Industry Overview

2005 2006 2007 2008

-5-4-3-2-1012345

Profit (Loss)$ Billion

2005 2006 2007 2008100

105

110

115

120

125

130

135

Revenue $ Billion

•International travel continues to grow, presenting airlines with a variety of customers each with different needs.

•Major carriers in the industry dominate hubs domestically and globally, defining themselves as key players in the market.

•Regional carriers substantiate the

domestic markets.

•Substitutes for airline travel have increased due to the effects of volatile fuel prices.

•Lost profits continually threaten labor, as capacity cuts are the easiest way to relieve expenses and other costs.

•Decreased amounts of discretionary income has led to a decline in leisurely travel.

Airlines that establish credibility through effective customer loyalty programs place themselves at a greater advantage than other carriers within the industry.

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Intro AnalysisLong Term

Rec’sOutcome Conclusion

Current Condition

AMR’S Major Competitors:• Delta Airlines • Southwest Airlines• United Airlines• U.S Airways

• America West Airlines• Northwest Airlines• Continental Airlines• Alaska Airlines

COM∙PE∙TI∙TION - THE EFFORT OF TWO OR MORE PARTIES

ACTING INDEPENDENTLY TO SECURE THE BUSINESS OF A THIRD PARTY BY OFFERING

THE MOST FAVORABLE TERMS

Current Competition

The recession and impact of oil prices has resulted in a decline in the majority of the industries stock prices.•AMR : 08’ Revenues of $23.8 Billion, will lose $1.01 per share in 09’•Delta: 08’ Revenues of $22.7 Billion, will earn $.54 per share in 09’•United: 08’ Revenues of $20.2 Billion, will lose $4.97per share in 09’•Continental: 08’ Revenues of $15.2 Billion, will lose $.33 per share in 09’.•U.S Airways: 08’ Revenues of $12.1 Billion, will lose $1.16 per share in 09’.•SouthWest: 08’ Revenues of $11 Billion, will earn $.33 per share in 09’.

22%

21%

17%13%

17%

12%

Market Share (June 2009)AmericanSouthwestDeltaU.SUnitedContinental

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Porter’s 5 Forces

Competitive Rivalry: The airline industry contains a large number

of firms, which increases rivalry because more airlines must compete for the same customers and resources. This results in

airlines striving for a competitive advantage. Flying incentives have been successful in

attracting travelers to fly with certain airlines. Frequent flyer incentives and the lack of extra fees can be strong enough to

cause a customer to choose a certain airline.

Threat of New Entry: In the airline industry there is an ease of

access to capital, and because it is easy for weaker airlines to obtain credit, the industry has become saturated. Larger airlines benefit

from a strong brand identity, and major airlines allocate substantial resources to

marketing efforts.

Bargaining Power of Buyers: In economic recessions customers will always search for the best deals. Airline

travel is expensive, and the demand is very elastic. American Airlines strives to provide

safe, dependable and friendly air transportation to our customers, along with

numerous related services. These are reasons one customer may pick American

Airlines over another airline.

Bargaining Power of Sellers: The airline supply business is predominantly dominated by Airbus and Boeing. The result

of the concentration of suppliers is that airlines cannot implement leverage over the supplier to obtain lower prices or play one

supplier against another.

Availability of Substitutes: To truly consider all substitutes one must consider personal preferences, time, and

money. Trains, buses, and other automobiles can only substitute for a regional airline. The most potentially serious threat to the airline

industry is the development of electronic methods of communication and its effect on

business travel. The virtual reality and its new real-time video conferencing will have a

chance to start satisfying businesses need for effective and cheap communication. This is a

existing threat for American Airlines.

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SWOT Analysis

External Forces

Strengths & Opportunities

Threats & Weaknesses

• Declining Operating Efficiency

• Declining Premium Cabin sales in

Long-Haul Flights

• Fleet Management

• Inefficient Use of Employees

• Global Economic Slowdown

• Competition for Market Share

• Price Competition

• Fuel Prices

• Global Network

• Strong Alliances & Marketing Tie-Ups

• New Financing

• Solid Capital Structure

• Frequent Flyer Program

• Growth of Global Airline Market

• Growing Domestic

• Freight Market

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Strategic Direction

One plan, one direction. AMR has decided to allocate additional resources to more profitable flight areas. Their strategy is to increase flight activity in their most profitable hubs, while decreasing activity in their least profitable ones. The company’s plan also includes placing a larger emphasis on international travel. AMR has raised external cash to prepare themselves for investments in new fleets for the growth of international travel.

A positive outlook:

•$2.9 Billion in new financing.

•Sold $1 billion in frequent flier miles to Citigroup.

•Borrowed approx. $300 million from General Electric Capital Aviation Services (GECAS), using their aircrafts as collateral.

•Initiated financing agreement with GECAS worth $1.6 billion to buy new Boeing 737 aircrafts

•737’s will help to conserve cash and replace the less-efficient MD-80s

•GECAS granted a exclusive agreement to purchase AMRs NextGen engines to power the newly ordered 787’s.

AA identifies New York, Dallas/Fort Worth, Chicago, Miami, and Los Angles as its most profitable hubs. 57 new flights are being added to the Chicago O’ Hare Hub, which includes 12 domestic cities and 3 international ones, including Beijing and Vancouver. The Dallas-Ft. Worth hub is adding 19 new flights, Miami is adding 23, Los Angeles 3, while JFK seeks 6 new destinations, including Madrid, Manchester, UK, and Costa Rica. These additional profitable routes are made possible by replacing 46 flights from St. Louis and service to 20 cities. In addition, Raleigh-Durham is scheduled to lose 9 flights and cutback on 3 destinations.

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Table of Contents

Liquidity

Leverage

Equity

• The current ratio, 0.63, is greater than the industry average of 0.61, but lower than its top competitors average of 0.82

•The quick ratio, 0.53, is greater than the industry average of 0.4, but lower than its top competitors average of 0.76

•Inventory turnover and DSO ratios are at a significant disadvantage to both the industry and top competitors, meaning the company has too much inventory or simply ineffectively managing it

•The asset turnover, 0.94, is similar to the industry and its competitors; a constant trend seen throughout the fiscal years of ‘06 and ‘07

•The total debt has fluctuated between 91-112% within the past three fiscal years

•The debt to equity ratio is at a disadvantage compared to its competitors, this can be attributed to the company’s resistance of bankruptcy

2008 Financials

IndustryComparison

IndustryComparison

IndustryComparison

•The total debt has fluctuated between 91-112% within the past three fiscal years

•The debt to equity ratio is at a disadvantage compared to its competitors, this can be attributed to the company’s resistance of bankruptcy

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Financial Analysis

2006 2007 20080.0%

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100.0%

Gross Profit Margin

AMR Corp.

Delta Air Lines

UAL Corp.

Continental Air-lines

•AMR Corp. gross profit margin has decreased 9.3% since 2007

•It has the highest GPM in 2008 compared to its competitors

2006 2007 2008-40.0%

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Operating Profit Margin

AMR Corp.

Delta Air Lines

UAL Corp.

Continental Air-lines

•Revenue began to increase due to capacity cuts

•Volatile fuel prices hiked up expenses, offsetting revenue

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1818

Fuel Analysis

% of 09' Fuel Hedged Avg. Price Avg. FloorAmerican 35% $2.59 $1.94Continental 27% $2.98 $2.43Delta 63% $2.31 $2.20United 36% $2.81 $2.80U.S 19% $3.66 $3.46

American works with financial institutions and trading counterparties to buy contracts for future oil (AA Inc.) If the market price for fuel at the time of purchase is above the capped price in the hedge contract, AMR receives a financial gain. However if the market price at the time of AMR’s purchase falls below the minimum price specified in the fuel hedge, the hedge contract results in a cost to American. Even if fuel falls below the capped price, AMR benefits because they buy the majority of their fuel at current market prices.

In 1 Gallon of Fuel

$28 Million in costs

1¢

The United States Airline Industry spent around $60 Billion on fuel in 2008. According to a collection of statistics by Standard & Poor’s, fuel costs absorbed about 36% of total airline revenues in 2008. Fuel hedging is a common practice in the airline industry that helps reduce the impact of unpredictable fuel prices. Fuel hedging is a contract an airline makes to pay a set price for future fuel purchases. Factors that influence an airline's ability to hedge fuel include: cash position, credit strength and overall financial state. Individual airlines evaluate the same market conditions and factors, but make different choices on how to deal with the risk and improbability related with fuel expenses.

American's hedging strategy is not about making a bet on oil prices going up or down, but finding a way to systematically dampen the price unpredictability of a significant operating cost (AA Inc). This strategy compares very favorably to its competitors and in recent years has helped reduce fuel expenses by hundreds of millions of dollars. In 2008, American saved $380 million.

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19

Fuel Analysis (continued)

American Southwest United U.S Continental Delta

CASM Exclud-ing Fuel

10 5.23 10.22 8.36000000000001

10.45 8.33

CASM Fuel @ $1.85

13.07 7.93 13.06 11.3 13.09 11.27

¢1.00

¢3.00

¢5.00

¢7.00

¢9.00

¢11.00

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Cost Per Avail. Seat Mile

American South-west

United U.S Continen-tal

Delta

Profit Excluding Fuel

6924 4034 5474 1348 4024 5821

Fuel Expense 8158 3713 7725 3600 4726 6327

$500$1,500$2,500$3,500$4,500$5,500$6,500$7,500$8,500

Pre-Fuel Cost Results- 2008$

In M

illi

ons

This graph shows the major airlines profit excluding fuel, compared to its fuel expense. American is doing very well in comparison to its competition

This graph shows the major airlines total system ASM costs withfuel and without, compared to its competition. The most important factor is the CASM ex-fuel, which reflects the actual cost of running the airline. Only United and Continental have higher costs then American. (Delta and U.S Airways numbers are skewed because of their bankruptcy)

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Stock Analysis

Dec-99'

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This graph represents the high, low, and closing stock prices for AMR from years 1999 to 2008.

AMR stock is considered a moderate buy by many financial analysts because of its large cash position, good free cash flow generation, hidden assets, and a focused, financially oriented management team.(Forbes)

AMR Corporation reported annual 2008 losses of $4.57 per share on 01/21/2009. (BuisnessWeekly)

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Dec-08

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Stock Analysis

•AMR is considered a buy stock in the current market. Analysts believe that AMR is taking care of current issues while investing for a greater future. The book value and price earnings ratio are skewed due to AMR never having to file for bankruptcy

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Debt Analysis

American

SouthWest

United

U.S

Continental

Delta

$1,000 $3,000 $5,000 $7,000 $9,000 $11,000American SouthWest United U.S Continental Delta

Long-Term Debt 8292 3278 6971 3734 5360 8338

Current Debt 1124 105 1454 423 578 1769

Debt (In $Millions)

•Only major U.S airline to have never declared bankruptcy

•Around $9 Billion in debt

•Will pay $1.8 Billion of principal payments on long-term debt alone in 09’

•This debt leaves American vulnerable if the economy further suffers.

•The debt takes a significant amount of cash flow in the form of interest expenses, which may affect operations and future investments

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In 2008:

•AA had 71,800 employees. But cut down to 67,000 in the 1st quarter of 2009.

•AA ASM Per Employee was $2,277,563

•AA Labor Cost Per Employee was $88,251

•AA Employees per Aircraft was 117

•American Airlines total revenue per employee was $282,592 in 2008. (table)

AMR Delta Continental United$0

$50,000 $100,000 $150,000 $200,000 $250,000 $300,000 $350,000 $400,000 $450,000

Revenue Per Employee in 2008

New Incentive Program:

•Pay for performance method which gives employees concrete goals with they can see and achieve

•Stripped weather and air-traffic issues from its employee-specific performance metric

•Bonuses vary depending on the marks the team receives in customer-satisfaction surveys

Employee Analysis

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Cutting costs on routes losing money and creating new profitable routes

Recommendation:•Redesigning fleet and reinvesting it for new routes

o Replacing current fleet not operating profitably on certain routes with more efficient aircrafts.

o Using replaced fleet to rescue member airline and create more routes and scheduled capacities for Oneworld.

Identifying strategies to create a strong market position for AA in the crucial global market.

Recommendation:•Global market growth plan

o Study Abroad studentso Foreign Students

Strengthen Oneworld Alliance by identifying new global markets

Recommendation:•Plan for service to teams, staff and fans for upcoming international sporting events.

o Olympicso Fifa World Cup

•Using new and old members efficiently to increase load factor and feed for the alliance.

Goal #1

Goal #2

Goal #3

Recommendations

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ProblemAmerican Airlines is experiencing declines in

per-passenger revenues in long-haul international markets.

25

Recommendation #1: International Growth

SolutionIdentify long-term international markets for passengers, and create a marketing + sales promotion to increase the total amount of

international passengers

Strategies:Increase Travel in international market by

Looking at the students who travel to the U.S to

study as well as the students who leave the U.S

to study

Looking at the high attending audience of global sporting events

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Foreign Student Growth Plan

Incoming Foreign students

• Number of students increasing every year

• Can generate greater global market share

• Strategic partnership with airlines from top places of origin

• Utilizing new routes

• Marketing and Sales of student Packages

Outgoing Study Abroad Students

•Rising number of students enrolling in study abroad programs especially in European countries

• Can further add to market share of long-haul traffic going from the US to EU and other study abroad destinations.

• Establish contracts with states that operate schools sending students for study abroad programs.

Ultimate Result

The Combination of the specially designed package in alliance with Jet Airways and the contract with states and universities, we expect the gain in AA’s share in the global market to generate an increase in sales and revenues by at least 10%.

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Study Abroad Market

“International experience needs to be a component of every student’s education, equipping them for 21st century careers and for global citizenship,”

Allan E. Goodman, President & CEO of the Institute of International Education

Recognizing the magnitude of an international education in today’s global society, U.S. students are studying abroad in record numbers. Over the past decade, the number of U.S. students studying abroad has increased by over 150 percent. In academic year 2006-2007, 241,791 U.S. studentsstudied abroad, an increase of 8.5 percent from the previous year.

050,000

100,000150,000200,000250,000300,000

# Of U.S Students Studying Abroad

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0

5000

10000

15000

20000

25000

30000

# Of Students That Study Abroad (By State)

2005/20062006/2007

Study Abroad MarketA portion AMR’s recent financing of $2.9 Billion will be allocated to its main hubs, in order to satisfy the highly profitable international market and improve the future for AA growth by gaining more global share. AA defines its major and most profitable hubs as Chicago, Dallas-Fort Worth, Miami, New York and Los Angeles. AA also receives a substantial amount of traffic through their Philadelphia and Boston markets.

Our recommendation calls for a sales /promotion contract with individual states education programs. AMR has the potential to dominate the market for American students who study abroad, because of the high density of students traveling abroad through their main focus hub’s cities.

Currently, the common way for students to travel to their global destinations is to book tickets at current price. If Texas, New York, California, Illinois, Florida, Massachusetts, and Pennsylvania all accept contract bids with American Airlines to have exclusive packages with their students, the students would get cheaper flights, and bonus miles added to their AAdvantage account. This plan would have introduced 90,381 flyers in 2006, and 96,841 flyers in 2007. With the numbers of students taking the opportunity to study abroad steadily increasing, AA can take advantage of their new international flight strategies.

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Not only has the number of students increased, but 17 of the 20 leading destinations of U.S. study abroad students witnessed increases in the number of American students studying at those destinations. U.S students have recognized that China and India are economies with high growth rates, which in turn lead to better opportunities. The numbers of U.S students that studied in China has increased by 25% and 24% in India. U.S students have also recognized the importance of learning the highest growing language in their country, Spanish.

0

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Top 10 Markets For U.S Students-2007

# Of U.S Students

0.0%

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% Change In # Of U.S Students (2006-2007)

Study Abroad Market

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The Contract

One part of our recommendation for AA’s international growth plan is that they should develop a contract with states and specific universities that have a high rate of students being sent for study abroad programs.

Most students travelling out of the states are likely to fly out of large hubs present in them. For example, a student travelling out of Illinois would probably fly out of Chicago which is one of AA’s main hubs.

Presently most study abroad programs require students to book their flights, the university usually takes care of living arrangements. Through this contract, the university or state would get special discounts and packages for their program students.

It wouldn’t be wise to just develop a contract for states as they only fund state universities, we also recommend that AA makes a contract for private universities that send students abroad for programs.

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Incoming Foreign Students

The inflow of foreign students is increasing . Acquiring a good education is being seen as an essential element to surviving in today’s shifty job market. According to the Institute of International Education (IIE), just in 2008 623,805 foreign students landed in the US to pursue an education, a 7% increase from 2007. The top places of origin bringing in foreign students were India and China.

India China0

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80,000

100,000

07 -'0806 -'0705 -'06

Foreign Student Increase

India – Increased from 76,503 in 05-06 to 94,563 in 07-08China – Increased from 62,582 in 05-06 to 81,127 in 07-08

Outcome

Appendices

Introduction

Analysis


31

Incoming Foreign Students

05'-06' 06'-07' 07'-080

100,000

200,000

300,000

400,000

500,000

600,000

700,000

800,000

ChildrenSpousesStudents

CA NY TX MA IL0

20,000

40,000

60,000

80,000

100,00085,009

69,940

51,823

31,683 28,604

# of Students per top 5 statesIIE prepared a table on number of international students in US states and how much they contributed to them in 2008:CA- $2,452.3 millionNY - $1,952.7 millionTX - $1,055.4 millionMA - $1,004.0 millionIL - $710.2 million

IIE also recorded the number of foreign family members that were accompanying the students. AA and Jet can offer special discounts and services for students flying with there families.

Outcome

Appendices

Introduction

Analysis


32

Our recommendation after doing research about students from India and China is that AA should form a strategic partnership with airlines from the east to capture a higher share in this global market.

Recommendation for Incoming Foreign Students

American Airlines has already tied up with Jet Airways. In February 2008, AA established a code-sharing agreement with Jet. Jet offers travelers frequent flyer miles called JetPrivilege miles on all Jet Airways code-share flights operated by American Airlines from their JFK hub going to certain US cities that are to/from India or Jet’s EU hub in Brussels, Belgium. Foreign students, especially undergraduate students have the tendency to buy round-trip tickets between the US and their home countries at least once or twice a year whether it is for summer or winter break.

Jet Airways is India’s second largest airline and largest private airline. In July 2008, UK based consumer magazine Which?, ranked Jet Airways as the best long-haul airline after Singapore Airlines having an 84% customer satisfaction rate

Jet Airways (India)

The agreement between these two airlines could result in:•Higher global market share for AA and Jet.•More RASM for both with higher load factors on respective routes.•Increased traffic for Jet at Brussels hub.•Increased load factor for Eagle, as they would handle regional flights with these customers.•Consumers in this case will be able to gain frequent flyer miles from both airlines.

The Plan:If AA can establish an agreement with Jet to create a specialized travel package for these foreign students it could generate high amounts of revenue. Jet could promote this package to the Indian market as it is a highly reputed service provider in India and can reach out. AA can market it to the students already here or going abroad.

Assuming that AA already has a share in the total number of students flying to the US, this package should increase their share in this market by about 10%.

Jet can fly students from India to its hub in Brussels or to AA’s hub in

London and AA can fly them to their destinations here in the US.

Benefits:

Outcome

Appendices

Introduction

Analysis


33

USC NYU Columbia UIUC0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,0007,189

6,404 6,2975,933

Students in 07/08IIE prepared a database which recognizes the Universities which enroll the most international students. The Top four are: University of Southern California, New York University, Columbia University and University of Illinois at Urbana Champagne.

AA should get in touch with these Universities and offer packages through them to the students which will further contribute to the 10% increase in RASM.

American Airlines has received tentative approval by the U.S. DOT for authority to offer service between Chicago and Beijing, China. Starting April 4, 2010, American Airlines plans to offer nonstop service from Chicago O'Hare International Airport (ORD) to Beijing, China with its 245-seat, three-class (First, Business and Coach/Economy) Boeing 777 aircraft.

With the addition of this route to it’s schedule and an agreement with CEA , AA can make an effort to develop marketing strategies to capture the foreign student market from China. O'Hare being one of AA’s main hubs can easily manage the inflow of traffic and Eagle can provide regional support for flying the students to their respective destinations.

Further Marketing this Package

AA can also approach China Eastern Airlines to provide the package as they currently codeshare with AA, Japan Airlines and Qantas, all members of oneworld. CEA can market the package to students traveling to the US from China.

Recommendation for Incoming Foreign Students

Outcome

Appendices

Introduction

Analysis


34

BenefitsIncreased share in global market as a

result of:

Contracts with states and their universities as well as private

universities

Larger customer base through Jet and CEA

Service to students that if satisfied could be potential loyal customers

Expansion of AAdvantage incentive program

Increased operations in Europe, Latin America and Asia through oneworld

and other codesharers.

LimitationsStudents that are already travelling have established preferred service

Ineffective marketing strategy that isn’t sensitive to important factors such as

culture, language and finances in a foreign market

Strengthening dollar could affect the number of foreign students coming to

the US

During high flying season availability of seating will determine offer of

discounts for students as a normal passenger would be paying more

Benefits & Limitations

Outcome

Appendices

Introduction

Analysis


35

Conclusion: International Growth Plan

Both the strategies that have been recommended for travelling students can be operated in coordination. Many of the study abroad students are going to India and China as well. The deal with Jet and CEA will also include students going from the US to India and China, students will gain miles with AA, Jet as well as CEA. Jet also met with the members of oneworld in June 2009, its potential entry could add to the alliances feed and reach. The new hub in China will open the Asian market for AA to expand their base.

The full effects of student targeted strategies can only be realized in the long-term as more students adopt the package. The marketing mix must be carefully established in order to capture the share desired. We have put together a marketing mix for AA to market their services:Product – A specialized package for students pursuing an education in a place away from home to provide safe, affordable and satisfactory transportation.Price – Discounted rates for booking 1 or 2 round-trips that can be used in a 2 year span.Place – Offer package through universities, states, travel agents, recruiters and company websites.Promotion – Advertising through universities, foreign media, College Board and ETS. All students have to submit SAT and TOEFL(test of English as foreign language) scores .

Outcome

Appendices

Introduction

Analysis


36

One World(stylized as oneworld) whose founding member is American Airlines was formed in 1999. In February 2009, they celebrated their ten year anniversary along with its members British airways, Cathay pacific, Iberia, Finnair, Japan Airlines, Malév, LAN, Qantas and Royal Jordanian. In today’s global market, trying to capture a significant share is not easy as an independent airline. To capture huge flows of passengers and goods between different regions(countries and continents) being part of a transatlantic alliance is necessary.

Each airline in the alliance contributes to total traffic captured making it possible for all members to service traffics they would not have seen otherwise. This alliance provides AA with incremental feed and a virtual connection to places where AA cannot fly profitably or where aircrafts and assets would not provide sufficient return on investments.

Open Skies Closing Business: The US-EU open skies agreement essentially allows any EU carrier to fly anywhere within US boundaries and conversely allows any US carrier to fly within the EU countries. This doesn’t help AA much as the US is a country and the EU is a union of multiple nations in Europe. The opening of the EU skies unleashes a swarm of US carries that are competing to service them. Before the OpenSkies agreement AA and BA through oneworld dominated the US-UK service as they had slots. Other airlines had to fly through Gatwick. OpenSkies has weakened the US-Heathrow traffic for AA.

Recommendation #2: OneWorld & Open Skies

Outcome

Appendices

Introduction

Analysis


37

21.4%

27.1%36.1%

15.3%

Capacity Share

One World

SkyTeam

Star Alliance

Virgin Atlantic/Other

Oneworld is currently #3 in the US-EU market after Skyteam and Star Alliance. It is also behind its competitors when comparing capacity scheduled at each key gateways. They are competing for their hub in Heathrow as well as trying to gain a higher share at other high-traffic EU hubs

LHR-US CDG-US FRA-US AMS-US

One World 0.603000000000001

0.152 0.045 0

SkyTeam 0.06 0.649000000000001

0.074 0.783

Star Alliance 0.185 0.181 0.797 0.18

Virgin Atlantic/Other

0.151 0.019 0.0830000000000001

0.037

5%

15%

25%

35%

45%

55%

65%

75%

85%

95%

Alliance Major Hub SharesIt has the highest share at Heathrow but stands third with respect to share from Paris, fourth from Frankfurt and has no share at Amsterdam .

Oneworld Not Revolving

Outcome

Appendices

Introduction

Analysis


38

Global Sporting Events

The major global sporting events contain similar characteristics:

• Held over a course of several days• Held in or around a “Host-City”• Tend to be with a 2-4 years gap between every

event• Countries send national teams to each

competition• Large amount of money spent on these events.

Global sporting events are very profitable. The high attending audience, not only watch the events, but they spend money on traveling expenses in the host cities. The top three most attended global sporting events are: Summer & Winter Olympics and the Men’s FIFA World Cup

NA·TION·AL·ISM DEVOTION TO

THE INTERESTS OR CULTURE OF ONE'S NATION

Fans of large nations tend to be very loyal in attending events world-wide. The population of these fans will continue to always travel because of a loyalty to an “imagined community.” It creates a sense of common identity even among people who have never met one another and probably never will. (Billing)

Outcome

Appendices

Introduction

Analysis


39

Olympic Games

1988 Calgar

y

1992 Alb

ertv

ille

1994 Lilleh

amm

er

1998 Nag

ano

2002 Salt

Lake C

ity

2006 Turin

0

500,000

1,000,000

1,500,000

2,000,000

Winter Olympics Tickets Sold

1984 Los Ange

les

1988 Seoul

1992 Bar

celo

na

1996 Atla

nta

2000 Sydney

2004 Ath

ens

2008 Beij

ing

0

2,000,000

4,000,000

6,000,000

8,000,000

10,000,000

Summer Olympics Tickets Sold

•The Olympic Games is the most attended world-wide sporting event.

•Uniquely every two years the games switch from summer games to winter games.

• The last 7 Summer Games had average ticket sales of 5,323,428• The previous 6 Winter Games had average ticket sales of 1,235,000

•The host city for an Olympic Games is usually chosen seven years before their set event. •Summer Olympics typically happen occur around late summer-early autumn.

•Winter Olympics typically occur in the month of February.

Outcome

Appendices

Introduction

Analysis


40

1986 Colom

bia

1990 Italy

1994 U.S

1998 France

2002 Japan

/ S.K

orea

2006 Ger

man

y0

1,000,000

2,000,000

3,000,000

4,000,000

Men's World Cup Tickets Sold

Men’s FIFA World Cup

•The average tickets sold in the last 6 years totals 2,890,194.

•32 Nations compete for the World Cup at venues within the host nation(s) over a period of around a month.

•The World Cup is very popular, it is the most viewed sporting event in the world, with an estimated 715.1 million people watching the 2006 final(FIFA.COM)

•2010 In South Africa•2014 In Brazil

•Occurs in the Summers, opposite of the Summer Olympics

Region

# of Qualifying Teams

by Region(86'-06')

Europe 85

South America 26North&Central America/Caribbean 16

Africa 22

Asia 18

Oceania 1

Outcome

Appendices

Introduction

Analysis


41

42

Marketing Mix:Product: Travel packages for Olympic Games(Summer and Winter) and Fifa World Cups.Price : Discounted rates for early bookers, groups larger than 8 and Families larger than 4Place: oneworld website, travel agents.Promotion: Advertise on Sports channels and journals, at qualifying events leading up to final event.

With oneworld not doing very well in comparison to its competitors, it must take advantage of these international sporting events to increase revenues and market share.

Oneworld and all its members should develop a preplanned itinerary in the form of a travel package to market to the mass amounts of people attending these sporting events.

2010 2012 2014 2016

TOTAL 30% 1,237,558 1,597,028 1,237,558 1,597,028TOTAL 20% 825,039 1,064,686 825,039 1,064,686TOTAL 15% 618,779 798,514 618,779 798,514TOTAL 10% 412,519 532,343 412,519 532,343

The JAL situation: Japanese airlines is highly in debt and is under pressure from the Japanese government to develop a new survival plan. There are 3 possible endings to this situation: •JAL joins Delta and leaves Oneworld. Penalties of them leaving the Oneworld agreement get absorbed by Skyteam.•JAL gets refinanced by AA, British Airways and Qantas and stays in Oneworld.•Japanese government bails out JAL and it remains in Oneworld.

•The 2nd and 3rd result would be beneficial for AA and Oneworld.

Conclusion: oneworld & Global Sporting events

Outcome

Appendices

Introduction

Analysis


42

43

The 7-year notice of the selection of host cities allows oneworld a lot of planning time to configure code-sharing and to effectively use their fleet.

Every 2 years a new large scale influx of customers will flood the international markets.

•The IATA monthly traffic analysis shows that February is the least traveled month in the global market.

•The Asia/Pacific, European, and North American market all incurred passenger per kilometer declines between 10%-12%.

•The 3 major markets also experienced capacity cuts.

Winter Olympics take place February 2012 in Vancouver, Canada. February is the least traveled month in the global market.

Oneworld can gain a significant share if they market their package plan well before 2012.

A team set up by the Japanese government is analyzing JAL’s situation to advise on the company’s overhaul and should decide by the end of November.

If the JAL situation results in AA and Oneworld’s favor, they can use the ERJ-145(50-seater) cut out from Eagle’s fleet to add to JAL’s current fleet. This can increase scheduled capacity and introduce new routes in the North-Eastern pacific market.

The Fifa World Cup will be held in the summer of 2010 in South Africa. This event will bring in millions of fans from around the globe.

Mexicana Airlines which services Mexico and Central America is joining the Oneworld alliance in November,2009. Mexicana will further increase feeds and scheduled capacities for oneworld and its members.

Being able to reach as many regions to transport fans for these sporting events and utilizing the resources we have will contribute to ultimate goal of creating a strong position in the global market.

Conclusion: oneworld & Global Sporting events

Outcome

Appendices

Introduction

Analysis


43

Low-Cost Carriers Analysis

In the past, low fare carriers have successfully been able to generate demand from the passenger as well as utilize its fleet to cover costs.

According to a report prepared by the Allied Pilots Association (APA), there is a misconception about LCC’s having lower costs than Comprehensive Network Carriers, CNC’s. Airlines such as Southwest have approximately the same unit cost as AA but are able to spread them out through high aircraft utilization and efficient management of resources.

Southwest reported three straight quarterly losses for the first time in 17 years. They currently face the following problems: Require flying many hours in a market where they need to capture strong passenger loads. Demand has declined for every segment of this industry and easy-entry markets have been exhausted. Trying to enter larger airports to take share from other carriers as opposed to stimulating new traffic through lower faresNo longer have a competitive advantage as competitors immediately match pricings initiated by Southwest.

•The massive growth potential for these carriers has ended•Affected by the same market forces as the CNC’s. •All main players of LCC sector are reducing capacity. •Based on currently filed schedules, Southwest is cutting 6.2% capacity this year across its current route system. •As of 4Q of 2009, it will have reduced its service at 90% of the cities served in January 2008. •According to Fitch Ratings, Southwest’s long-standing cost advantage to the rest of the industry is being eroded gradually as non-fuel unit operating costs continue to rise at a high single-digit percentage rate

Problems for LCC’s, Opportunity for AA:

Main Point

Outcome

Appendices

Introduction

Analysis


44

Recommendation #3: American Eagle

Represents about 11% of AA’s revenues Has 266 units under its wing which comprises 29% of AA’s fleet. Contributes feed and revenues to AA’s hubs but is losing a lot of money at this stage and is not competing effectively with its competitors.

AA CO DL UA0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

12.0%

17.1%

22.7%

16.8%

%Outsourced in 2008

AMR corp. can take advantage of the potential drop in the share of Southwest and other regional carriers by rethinking the way they operate American Eagle. Our recommendation to redesign the fleet of American Eagle will allow them to use less aircrafts and not waste resources that are being fed into American Eagle currently. This is not a recommendation for them AA to increase revenues, but to cut costs and utilize the resources available more efficiently.

Our Solution

AA puts the least amount of resources towards the operation of its regional partner as compared to its competitors. As of the first quarter of 2009, the percentage dropped from 12% to 11%. Eagle’s fleet is making significant losses coming out of all its main hubs. Especially with the flights with 50 or under seating.

Problem

Outcome

Appendices

Introduction

Analysis


45

American Eagle Recommendation

American Eagle has the potential to operate more efficiently by capturing a higher market share through fleet management to efficiently use the resources they have. This capture would generate higher load factors which are essential to earn revenues to cover costs.

Current Inefficient fleet

We looked at the 50, 44 and 37-seater jets that Eagle owns and the efficiency of their operations. As of now they own:110 50-seater jets (Embraer-145)59 44-seater jets (Embraer-140)33 37-seater jets (Embraer-135)

50-seater on a 300 mile route: •Paying an average of $1.85 per gallon of fuel •ASM cost of 17 ¢ •Average 80% load factor generates 21.3 ¢ per mile. 37-seater: bringing Eagle down:37-seater jets are doing worse. At current fuel costs with a 22.5 ¢ ASM cost, the 37-seater would have to generate about 28 ¢ from the feed passenger on the 300 mile route.

Embraer ERJ-135

Outcome

Appendices

Introduction

Analysis


46

CVGPNS

($1,500,000)

($1,000,000)

($500,000)

$0

$500,000

$1,000,000

$1,500,000

$2,000,000

$2,500,000

$3,000,000

RevenueProfit/Loss

We analyzed the 50-seaters and under that are flying out of DFW, only three are making profits in the over 600 mile market. Some flights have a frequency of about 4 or more times a day. Their average load factor is 80% but the routes that are losing the most money have a load factor between 60% and 70%. For example the route from DFW to CVG in Cincinnati made a loss of over one million dollars in 2008 as well as the route to Lexington which lost about 1.1 million. SEE TABLE

CVG - Cincinnati, OH – 63.1%LEX - Lexington, KY – 65.4%PNS - Pensacola, FL – 73.4%VPS – Northwest Florida Airport, FL - 67.8%

Load Factor

Our recommendation for AA is to redesign their regional fleet, cutting out all the 50 and 44-seater airplanes and replacing them with the Embraer 190 which has 98 to 114 seats. The costs associated with the Embraer-190 are the same or less than the Embraer-145(Table on next slide). As shown in the table, the EMB-190 can transport the same amount of people on a route with less frequency. Although this could hinder the competitive strategy to capture traffic, at high density hubs this could help AA optimize their fleet. For example AA’s flight schedules from Boston to Chicago in one day run 9 flights. This could be cut down to 5 by the EMB-190.

American Eagle Recommendation

Outcome

Appendices

Introduction

Analysis


47

300 MILE 600 MILE

ERJ-145 EMB-190 ERJ-145 EMB-190

Fuel $1.85 CASM 26.29¢ 27.16¢ 17.80¢ 17.10¢

Fuel $3.00 CASM 29.14¢ 29.35¢ 20.65¢ 19.30¢

Seats 50 98 50 98

Trips 2 1 2 1

Total Market Cost @ $1.85 $7,888 $8,066 $10,678 $10160

Total Market Cost @3.00 $8,742 $8,718 $12,388 $11,464

Cost comparison of ERJ-145 & EMB-190

ERJ-145 EMB-190

Outcome

Appendices

Introduction

Analysis


48

Benefits & Limitations

Benefits

• Optimized fleet capacity to cut costs on failing routes

• Increased load factor and RASM

• Efficient use of available resources

• Increased share in domestic market as a result of plan

and decline in LCC

Limitations

• Unavailability of buyer for excess fleet

• Still could incur low capacity rates

• Increase in fuel price could cause cost of operating of EMB-190 to exceed cost of ERJ-145.

• High investment required

Outcome

Appendices

Introduction

Analysis


49

50

This recommendation is designed to reorganize eagle’s routes and aircrafts that are losing money for the company as of now.

Our recommendation calls for the cutting out of some routes and their frequency of trips they make in a day.

Using more efficient planes with higher seat capacity which cost the same as our current fleet to run routes to maximize load factor.

This recommendation requires AA to invest in at least 45 EMB-190 ‘s which will run up a total investment of approximately $1.35 billion.

We suggest that AA finance this plan by reinvesting 50% of this amount from retained earnings and investing 50% from our cash holdings. when the company is in profit and can afford to invest.

Investing retained earning s- $675,000,000Cash - $675,000,000

Conclusion: American Eagle Fleet Management

Outcome

Appendices

Introduction

Analysis


50

51

International Growth plan to increase revenue by 10%

oneworld alliance plan and global sporting event plan to increase revenues by 7%

Increase in revenues from Eagles new fleet, cutting losses on failing routes. Increase in revenue by 1%.

oneworld and global sporting event recommendation to increase share by:Entering high traffic EU hubsEstablishing new hubs in Latin America and AsiaBy efficiently using Mexicana and JAL to generate feed at oneworld hubs

2009 – 3% increase in revenue and passenger load – Student package sales in Fall and Winter.

2010 – 4% increase in revenues and passenger load – Fifa World cup(summer) + Student packages(summer, fall and winter)

2011 – 3% increase in revenues and passenger load – student growth

2012 – 5% increase in revenues and passenger load - Olympic games in February, increase in assets(Investment in New aircrafts) Decrease in cash and retained earnings.

2013 – 3% increase in revenues and passenger load – Student package plan

American Eagle fleet recommendation to increase load factors , cut expenses by using more efficient fleet.Putting old fleet into JAL and creating new routes in North-East pacific region.

Outcome & Effects of Forecasting

Outcome

Appendices

Introduction

Analysis


51

AMR Delta United ContinentalLiquidity Current Ratio

2006 0.81 0.93 0.79 1.042007 0.85 0.79 0.76 1.032008 0.63 0.81 0.67 0.97

Quick Ratio 2006 0.75 0.9 0.76 0.992007 0.78 0.75 0.73 0.962008 0.58 0.77 0.6 0.92

Efficiency Ratio Inventory Turnover

2006 44.59 94.86 88.72 60.52007 38.16 73.11 83.24 52.522008 45.27 58.5 44.29 64.86

A/R Turnover 2006 61.82 19.45 15.47 16.182007 62.84 20.31 16.09 15.542008 65.11 41.52 12.98 16.85

Total Asset Turnover 2006 0.77 0.88 0.76 1.162007 0.8 0.59 0.83 1.182008 0.94 0.5 1.04 1.2

Total Asset Turnover 2006 1.12 1.32 1.69 2.12007 1.32 1.64 1.77 2.172008 1.5 1.1 1.96 2.08

Appendix A: Liquidity & Efficiency Ratios

Outcome

Appendices

Introduction

Analysis


52

Solvency Ratios Total Debt

2006 1.02 1.69 0.92 0.972007 0.91 0.69 0.9 0.872008 1.12 0.98 1.13 0.99

Debt to equity 2006 -49.1 -2.44 10.81 31.592007 9.75 2.21 9.02 6.812008 -9.58 50.5 -8.9 119.82

Equity Multiplier 2006 -48.1 -1.44 11.81 32.592007 10.75 3.2 10.02 7.812008 -8.58 51.5 -7.9 120.82

AMR Delta United Continental

Appendix B: Solvency & Profitability Ratios

Profitability Gross Profit Margin

2006 44.80% 0.00% 96.50% 28.60%2007 64.00% 0.00% 98.40% 29.80%2008 54.70% 39.50% 48.20% 42.80%

Operating Profit Margin 2006 5.60% -36.00% 122.30% 5.90%2007 6.20% 12.90% 6.70% 6.70%2008 -5.70% -37.00% -24.15% -2.31%

Net Profit Margin 2006 1.00% -36.12% 118.30% 2.80%2007 2.20% 8.40% 2.00% 3.20%2008 -8.70% -39.30% -26.48% -3.48%

Return on Assets 2006 0.79% -31.61% 90.17% 3.26%2007 1.76% 4.97% 1.66% 3.80%2008 -8.23% -19.82% -27.50% -4.61%

Return on Equity 2006 -38.12% 45.63% 1064.99% 106.34%2007 18.97% 15.94% 16.67% 29.61%2008 70.56% -1020.82% -216.96% -557.14%

Outcome

Appendices

Introduction

Analysis


53

Market Value

Price to earnings ratio

2006 26.75 -0.041 0.22 9.94

2007 6.811 3.641 10.67 4.7

2008 -1.33 -0.601 -0.26 -3.26

Earnings per share

2006 0.83 -7.98 157.66 2.89

2007 1.8 2.07 2.78 3.71

2008 -7.4 -11.47 -36.86 -4.73

Appendix C: Market Value Ratios

AMR Delta United Continental

Outcome

Appendices

Introduction

Analysis


54

Appendix D: Interview

Interview: Captain Mike Morrison, American AirlinesDate: October 1st

Topic: Any issues with labor unions or any side of the current employment staff.

About me: Bachelor of Science in Operations and Systems Analysis from Indiana University School of Business, 1980.Management trainee, Bank One of Columbus 1980-1982. Product Analyst Check free Systems Inc., 1983-1986. Pilot, Ohio Air National Guard 1981- 1992; USAF Ready Reserve 1992-2001.

Almost every pilot at American has a college degree, many with advanced degrees. The pilots are represented by a labor union. It is an efficient way to manage a large work force that essentially perform the same job. Flight Attendants, Mechanics, & Ramp workers are all represented by labor unions also. For the first time in AA's history, all of these union contracts are expiring or have expired. The company does not have an agreement with any of these unions. I don't believe any of the unions is even close.

There is tremendous resentment among the unions toward management about agreements from 2003 made under the threat of bankruptcy. Don Carty, the previous CEO, was forced out shortly after the signing of these agreements due to compensation, retirement and bonus packages for executives that were secretly exempted from bankruptcy (if declared). Gerard Arpey had a tremendous opportunity to unite the company after the effects of 9/11/2001 and then this bankruptcy scare. Instead, the top executives at American have received over $295 million in bonuses in the last 4 years while wages concessions of over 25% were taken by everyone else and the workforce has been cut by over 27000 employees.

I feel I am as qualified as most, if not all, of our management team. Many pilots feel the same, yet we are probably the most wasted group of talent in the entire company. There are plenty of loose cannons in the pilot group, just as in any group. However, there is a tremendous amount of people capital that is being wasted.

Mike Morrison

Outcome

Appendices

Introduction

Analysis


55

Future RatiosAMR

Operating Profit Margin 2009 0.1242010 0.1242011 0.1132012 0.1072013 0.106 Net Profit Margin 2009 1.1492010 1.1372011 1.0042012 0.942013 0.93 Return on Assets 2009 9.9%2010 9.8%2011 8.6%2012 8.2%2013 8.1% Return on Equity 2009 91.4%2010 48.0%2011 30.6%2012 24.8%2013 201.5%Total Assets Turnover 2009 0.8632010 0.8632011 0.8632012 0.8742013 0.874

Debt Ratio 2009 0.722010 0.692011 0.672012 0.652013 0.63

Appendix E: Future Ratios

Outcome

Appendices

Introduction

Analysis


56

57

AMR Corporation 2006 2007 2008

Income Statement Actual% of Rev. Actual

% of Rev. Actual

% of Rev.

Passenger-American Airlines 17,291 76.6% 17,651 77.0% 18,234 76.7%

Passenger-American Eagle 2,502 11.1% 2,470 10.8% 2,486 10.5%

Cargo 827 3.7% 825 3.6% 874 40.2%

Other revenues 1,943 8.6% 1,989 8.7% 2,172 9.1%

Total operating revenues 22,563 100.0% 22,935 100.0% 23,766 100.0%

Aircraft Fuel 6,402 28.4% 6,670 29.1% 9,014 37.9%

Wages, salaries & benefits 6,813 30.2% 6,770 29.5% 6,655 28.0%

Other rentals & landing fees 1,283 5.7% 1,278 5.6% 1,298 5.5%

Depreciation & amortization 1,157 5.1% 1,202 5.2% 1,207 5.1%Comm., fees & credit card expense 971 4.3% 1,057 4.6% 1,237 5.2%Maintenance, materials & repairs 1,076 4.8% 1,028 4.5% 997 4.2%

Aircraft rentals 606 2.7% 591 2.6% 492 2.1%

Food service 508 2.3% 534 2.3% 518 2.2%

Special charges - 0.0% 63 0.3% 1,213 5.1%Other operating expenses 2,687 11.9% 2,777 12.1% 3,024 12.7%

Operating income (loss) 1,060 4.7% 965 4.2% (1,889) -7.9%

Interest income 279 1.2% 337 1.5% 181 0.8%

Interest expense (1,030) -4.6% (914) -4.0% (756) -3.2%

Other (78) -0.3% 116 0.5% 393 1.7%Income (loss) before income taxes 231 1.0% 504 2.2% (2,071) -8.7%

Income tax - 0.0% - 0.0% - 0.0%

Net earnings (loss) 231 1.0% 504 2.2% (2,071) -8.7%

Appendix F: Income Statement

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Income Statement Forecasts

2009% of Rev. 2010

% of Rev. 2011 % of Rev. 2012 % of Rev. 2013 % of Rev.

18,781 76.7% 19,532 76.72% 20,118 76.7% 21,124 76.7% 21,758 76.7%

2,561 10.5% 2,663 10.5% 2,743 10.5% 2,880 10.5% 2,966 10.5%

900 3.7% 936 3.7% 964 3.7% 1,013 40.2% 1,043 3.7%

2,237 9.1% 2,327 9.1% 2,396 9.1% 2,516 9.1% 2,592 9.1%

24,479 100.0% 25,458 100.0% 26,222 100.0% 27,533 100.0% 28,359 100.0%

5,249 21.4% 5,510 21.6% 5,945 22.7% 6,380 23.2% 6,757 23.8%

7,155 29.2% 7,383 29.0% 7,652 29.2% 8,035 29.2% 8,281 29.2%

1,371 5.6% 1,426 5.6% 1,468 5.6% 1,542 5.6% 1,446 5.1%

1,248 5.1% 1,305 5.1% 1,343 5.1% 1,409 5.1% 1,446 5.1%

1,151 4.7% 1,197 4.7% 1,232 4.7% 1,294 4.7% 1,333 4.7%

1,102 4.5% 1,146 4.5% 1,180 4.5% 1,239 4.5% 1,276 4.5%

603 2.5% 629 2.5% 650 2.5% 688 2.5% 709 2.5%

563 2.3% 579 2.3% 598 2.3% 633 2.3% 652 2.3%

- 0.0% - 0.0% - 0.0% - 0.0% - 0.0%

2,994 12.2% 3,111 12.2% 3,204 12.2% 3,359 12.2% 3,460 12.2%

3,044 12.4% 3,173 12.5% 2,951 11.3% 2,954 10.7% 2,999 10.6%

334 1.4% 312 1.2% 320 1.2% 330 1.2% 352 1.2%

(962) -3.9% (998) -3.9% (1,028) -3.9% (1,074) -3.9% (1,106) -3.9%

155 0.6% 159 0.6% 163 0.6% 165 0.6% 170 0.6%

2,571 10.5% 2,646 10.4% 2,406 9.2% 2,375 8.6% 2,415 8.5%

- 0.0% - 0.0% - 0.0% - 0.0% - 0.0%

2,571 10.5% 2,646 10.4% 2,406 9.2% 2,375 8.6% 2,415 8.5%

Appendix G: Forecasted Income Statement

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Analysis


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Balance Sheet 2006 2007 2008

Actual% of T.A. Actual

% of T.A. Actual

% of T.A.

Unrestricted cash & short-term investments 4,715 16.2% 4,535 15.9% 3,107 12.3%

Other assets 2,187 7.5% 2,694 9.4% 2,828 11.2%Total current assets 6,902 23.7% 7,229 25.3% 5,935 23.6%

Equipment & property, net 17,941 417.0% 17,394 60.9% 15,735 62.5%Other assets 4,302 14.8% 3,948 13.8% 3,505 13.9%Total Assets 29,145 100.0% 28,571 100.0% 25,175 100.0%

Accounts payable 3,374 11.6% 3,449 12.1% 3,710 14.7%Air traffic liability 3,782 13.0% 3,985 13.9% 3,708 14.7%Current maturities long-term

debt & capital leases 1,349 4.6% 1,049 3.7% 1,956 7.8%Total current liabilities 8,505 29.2% 8,483 29.7% 9,374 37.2%

Long-term debt and capital leases 12,041 41.3% 10,093 35.3% 9,001 35.8%Other liabilities and credits 9,205 31.6% 7,338 25.7% 9,735 38.7%

Total long-term liabilities 21,256 72.9% 17,431 61.0% 18,736 74.4%Preferred stock - 0.0% - 0.0% - 0.0%C/S & additional paid-in capital 2,946 10.1% 3,744 13.1% 4,070 16.2%

Treasury shares at cost

(367) -1.3%

(367) -1.3% (367) -1.5%Accumulated other

comprehensive income (loss) (1,291) -4.4% 670 2.3% (3,177) -12.6%

Accumulated deficit (1,894) -6.5% (1,390) -4.9% (3,461) -13.7%

Total equity

(606) -2.1% 2,657 9.3% (2,935) -11.7%Total liabilities and equity 29,145 100.0% 28,571 100.0% 25,175 100.0%

Appendix H: Balance Sheet

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Balance Sheet Forecasts

2009 % of T.A. 2010 % of T.A. 2011 % of T.A. 2012 % of T.A. 2013 % of T.A.

3200 12.3% 3,328.2 12.3% 3428 12.3% 2753 9.6% 2836 9.6%2913 11.2% 3,029.3 11.2% 3120 11.2% 3276 11.4% 3374 11.4%6113 23.6% 6,357.5 23.6% 6548 23.6% 6029 20.9% 6210 20.9%

16,207 62.5% 16,855 62.5% 17361 62.5% 18711 65.0% 19272 65.0% 3,610 13.9% 3,755 13.9% 3867 13.9% 4060 14.1% 4182 14.1%

25,930 100.0% 26,967 100.0% 27776 100.0% 28800 100.0% 29664 100.0%

3,821 14.7% 3,974 14.7% 4,093 14.7% 4,298 14.9% 4427 14.9% 3,819 14.7% 3,972 14.0% 4,091 14.7% 4,296 14.9% 4425 14.9%

2,015 7.8% 2,095 7.8% 2,158 7.8% 2,266 7.9% 2334 7.9% 9,655 37.2% 10,041 37.2% 10,343 37.2% 10,860 37.7% 11186 37.7% 9,001 34.7% 9,001 33.4% 9,001 32.4% 9,001 31.3% 9001 30.3% 9,735 37.5% 9,735 36.1% 9,735 35.0% 9,735 33.8% 9735 32.8% 18,736 72.3% 18,736 69.5% 18,736 67.5% 18,736 65.1% 18736 63.2% - 0.0% 0 0.0% - 0.0% - 0.0% 4,070 15.7% 4,070 15.1% 4,070 14.7% 4,070 14.1% 4070 13.7% (367) -1.4% -367 -1.4% (367) -1.3% (367) -1.3% -367 -1.2%

- 0.0% 0 0.0% - 0.0% - 0.0% (890) -3.4% 1,756 6.5% 4,162 15.0% 5,862 20.4% 8277 27.9% 2,813 10.8% 5,459 20.2% 7,865 28.3% 9,565 33.2% 11980 40.4% 31,204 120.3% 34,236 127.0% 36,943 133.0% 39,161 136.0% 41902 141.3%

5,274 7,269 9,167 10,361 12,238

EFN is needed because for all five years because we are not paying long-term debt, which is increasing our liabilities. Retained earnings in the year 2012 were used to invest in new aircrafts for the American Eagle recommendation.

Appendix I: Forecasted Balance Sheet

Outcome

Appendices

Introduction

Analysis


60

AMR Corporation Statement of Retained Earnings for the Year Ending 2009 ($ millions)

Balance of retained earnings, 2008 $ (3,461)

Add: Net income, 2009 2,571 Less: Dividends to common stockholders -

Balance of retained earnings, 2009 $ (890)


Balance of retained earnings, 2009 $ (890)

Add: Net income, 2010 2646 Less: Dividends to common stockholders -Balance of retained earnings, 2010 $ 1,756


Balance of retained earnings, 2010 $ 1,756 Add: Net income, 2011 2406 Less: Dividends to common stockholders -Balance of retained earnings, 2011 $ 4,162





Outcome

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Analysis


Appendix J: Retained Earnings

61

References

American Airlines, Inc. (2009). American Airlines, Inc. overview. Retrieved September 29, 2009, from http://www.aa.com/i18n/amrcorp/newsroom/american-airlines-inc.jsp

American Airlines, Inc. (2009). AMR Corporation – American’s Parent Company. Retrieved September 28, 2009, from

http://www.aa.com/i18n/amrcorp/corporateInformation/facts/amr.jsp

American Airlines Inc. (2009). Fuel Smart. Retrieved October 10, 2009,http://www.aa.com/i18n/amrcorp/newsroom/fuel-smart.jsp

American Airlines. (4, May, 2009). News and Advisories. Retrieved October 9, 2009, fromhttps://aacargo.com/content/news_article_09.jhtml?cargoID=article21

American Airlines, Inc.(19 February, 2009) Spotlight on Fuel Hedging.Arpey, G. (17 September, 2009). Letter from Chairman and Chief Executive Officer at American Airlines.

AV JOBS. (2009). Online Journal. Boyd Group International. (July 2009). 2009 Economic Report To The Membership American

Airlines/AMR & The US Airline Industry.

Cowell, S. 19 (July, 2009). Top 10 European airports. Retrieved October 6, 2009, from http://www.arabiansupplychain.com/article-353-

top_10_european_airports/1/print/

Fidelity Investments (2009). Key Statistics: AMR. Retrieved October 9, 2009, from http://eresearch.fidelity.com/eresearch/evaluate/fundamentals/

keyStatistics.jh tml?stockspage=keyStatistics&symbols=AMR

Hettermann, M. (Summer 2009) Flights Deck Online. Journal of Operational Excellence.

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Analysis


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Hoovers. (2009). Online Journal. Horton, T. (Third Quarter 2009) Flagship News. American Airlines, Vol 63. No 3. Institute of International Education. (2008). Leading places of origin. Retrieved

October 2, 2009, from http://opendoors.iienetwork.org/?p=131534 Journal of Commerce Online. (17 Sep 2009). American Airlines Cargo Wins Envirotainer

Accreditation for New Temperature-Controlled Solution. Retrieved October 6, 2009, from http://www.joc.com/node/413446Morrison M. Personal communication, October 1, 2009.

Oneworld (2009). Oneworld.com. Retrieved October 29, 2009, from

http://www.oneworld.com/

Reuters. (23 July, 2009). Fitch Downgrades Southwest Airlines to ‘BBB’; Outlook Negative.

Retrieved October 3, 2009. http://www.reuters.com/article/ pressRelease/idUS177063+23-Jul-2009+BW20090723

Standard & Poor. (2009). Online Journal.

Which? Reviews. (2009). Best airlines: Best long-haul airlines. Retrieved September 29, 2009,http://www.which.co.uk/reviews-ns/best-airlines/best-long-haul `airlines/index.jsp

The New York Times. (14 September, 2009). Japan airlines in Talks with U.S. Rivals.

Retrieved October 10,2009 ,http://www.nytimes.com/2009/09/15/business/global/15air.html

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Documents

AMR Corporation Overview