American Airlines

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Table of Contents

Ethical implications of short term focus
Differing maintenance is unethical to customers and shareholders
References

Ethical implications of short term focus

Publically-traded firms, such as American Airlines, are supposed to have high stock prices when their profitability increases. This often implies that the company’s value is increasing; executives and shareholders benefit from a higher value of stock prices, which leads to increased compensation or returns.

Nonetheless, when an organization’s stock price increases devoid of any long term implications, then this could present an ethical dilemma to company managers. Managers are under increased pressure to report continual increases in profits as this serves the company investors’ prime objective, which is to maximize profit.

The ethical dilemma stems from the fact that a manager also has the obligation to make full disclosures on company profits. New shareholders may make investments on the basis of what the manager or employees report, so the truth has adverse implications on this group.

If senior management is obsessed about short term profits, it may be tempted to use unscrupulous methods like pension fund alterations or stock market predictions to achieve their short term goals. In the end, misguided shareholders may loose a lot of money (Rappaport, 2005).

Short-termism in several institutions causes institutions to refrain from necessary long term investments such as research and development, marketing or other forms of improvement. In essence, dwelling on performance in the next quarter will undermine value-maximizing efforts as all the energy and resources go to increases in stock prices. Eventually, these companies will not perform well in the long run. Such senior managers will endanger the survival of the same investors that they were tying to impress.

Differing maintenance is unethical to customers and shareholders

American Airlines was engaging in unethical behavior by avoiding maintenance of its aircrafts. Most customers pay their air fare with the expectation that they will be transported safely. Therefore, prices quoted by the Airline are inclusive of maintenance or a promise of safe travel. When the company obtains money from travelers without delivering all the assurances, then it is engaging in unethical behavior.

All passengers expect that regulators and maintainers will do their job in guaranteeing safe travel. Aside from honoring its end of the financial agreement with the customer, American Airlines was also endangering the lives of these travelers by putting them in aircrafts that had not been properly inspected and maintained.

When an organization knowingly makes decisions with the full knowledge that it could cause harm, then that institution is creating a health hazard among those concerned. In essence, this could lead to massive injuries or even death (Patankar, 2012). There is no doubt that such actions are highly unethical.

Manipulating earnings by differing maintenance could also have a double effect as the company’s reputation could be compromised. American Airlines’ brand image has a direct effect on the amount of business it gets. Clients often look for information about an Airline before flying it, and if American Airlines has a poor maintenance record, then many potential customers will take their business elsewhere.

This may in turn destroy its prospects for revenue growth and hence its sustainability. Therefore, abating maintenance process would be unethical to shareholders because it would ruin their long term ability to get returns from the business.

Factors that led to bankruptcy filing and whether the move was ethical

This main carrier decided to take such an action owing to perpetual and intense losses experienced in 2008, 2009 and 2010. Net losses in 2008 were close to $2.1 billion, and in the subsequent year they reduced to $1.5 billion. In 2010, they reduced further to $471 million. Other major competitors were making profits while United was struggling to stay afloat. It needed to free itself from debt obligations in order to change those numbers.

Maintenance issues also had a part to play in this turn of events because the company deferred aircraft maintenance in order to increase short term profits. This led to a surge in safety complaints from some of the passengers in its flights. As a result, the government, through the Federal Aviation Administration, stepped in and found that the company had violated safety regulations.

FAA imposed a $162 million fine on American Airlines. This figure was too much to handle for the organization, so it opted out of payment by filing for bankruptcy. Challenges in management of labor also caused the problem. Most American Airlines pilots are unionized, and they demanded for additional payments and incentives. If American conceded to pilots’ demands, it would not be able to compete with other carriers.

Conversely, if it rejected their wishes, then it would not operate optimally as some of them would leave the organization. To get out of this dilemma, the firm chose to use the bankruptcy route. It could negotiate with labor effectively without loosing so much in compensation. American Airlines was affected by several other Airlines in the US that had also filed for bankruptcy.

Key organizations include United, Delta, Northwest and US Airways in 2005. The companies felt that filing for bankruptcy would protect them from several debts and permit them to reorganize. It is likely that these earlier moves may have shown American Airlines that it has a lot to gain by filing for bankruptcy.

It was unethical to file for bankruptcy because most of the reasons that put it in that position could have been prevented. The firm could have honored its maintenance obligations. Furthermore, it should have nipped the labor situation in the bud before things spiraled out of control.

Impact of the bankruptcy on American Airlines’ employees and retirees

In the US, companies that file for bankruptcy are not obligated to pay their retirees benefits as this duty is then transferred to the national retirement authority. The latter body is currently overwhelmed by the amount of retirement benefits it has to pay. It is already unable to settle millions of dollars worth of debt, so American Airlines literally abandoned its retirees after filing for bankruptcy (Schultz, 2011).

Employees were also affected by this move as their jobs were no longer secure. Thousands of non unionized employees are expected to loose their jobs in 2013 as the firm’s restructuring actions are justified in law. Abandoning any payments due to employees is highly unethical because the company is dishonoring pledges it made to these individuals concerning their claims.

When an organization abandons its retirement obligations by filing for bankruptcy, then it engages in unethical and irresponsible business practices. The company intentionally caused its business stakeholders to lose money that rightfully belonged to them. It is an abusive practice because it primes survival over integrity. The firm was responsible for the losses it created, so it should own up to them.

References

Patankar, M. (2012). FAA human factors guide for aviation maintenance and inspection. Web.

Rappaport, A. (2005). The economics of short-term performance obsession. Financial Analysts Journal, 65, 61.

Schultz, E. (2011). Retirement Heist: How companies plunder and profit from the next egg of American Workers. NY: Penguin.

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