American Airlines’ History, Economy, and Structure

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Table of Contents

Introduction
History of the Airline
Root Structure and Product Alternatives
Airline Departments and Their Roles
Cost Structure and Methods to Obtain Sustainable Competitive Costs
Methods of Revenue Management
Conclusion
References

Introduction

Among the US carriers, American Airlines is one of the most successful. Throughout its history, the company has changed approaches to work and interaction with passengers. One of the significant factors that determined the success of the holding was deregulation, which contributed to expanding the commercial potential of American Airlines. This work aims to present the history of the air carrier, its economic and structural features, cost principles, and revenue management approaches. American Airlines is one of the most successful participants in its target market, domestically and globally.

History of the Airline

American Airlines is an air carrier that has operated scheduled flights for almost a hundred years, both within the United States and outside the country. The company was founded in 1926, and already in that year, the first flight was made (American Airlines, n.d.c). Initially, American Airlines served as a mail carrier, but in eight years, it began to operate regular passenger flights (American Airlines, n.d.c). In the last decade, changes in the structure of the company have been taking place, which have affected mainly the legal principles of work. According to Peterson (2018), the biggest shifts occurred after 1978, when Congress passed a deregulation law that greatly simplified the activities of air carriers and opened up opportunities for them to commercialize their businesses. Until that time, the aviation industry was dependent on government decisions, which also affected the business of American Airlines. The number of scheduled flights was lower and ticket prices were higher, which held back the active accumulation of profits (Peterson, 2018). After 1978, the airline increased the number of flights and simplified check-in and travel principles, eventually allowing it to become a flagship.

In the context of the structure of the airline in question, prior to the Deregulation Act, American Airlines operated ordinary passenger services, following standard routes. However, with the expansion of freedoms, the company pioneered the implementation of “the hub-and-spoke network,” which consisted of creating more complex travel routes, including airports in dozens of countries around the world (Peterson, 2018, p. 13). A loyalty program was developed, mergers with foreign carriers were made, and new routes were developed, which allowed the company to gain a competitive advantage and become a leader in its niche (American Airlines, n.d.c). Economically, American Airlines is also one of the world leaders; the company ended the fourth quarter of 2021 with a net income of $9.4 billion (American Airlines, n.d.a, para. 1). This figure is down 17% from two years earlier due to travel restrictions caused by the COVID-19 pandemic, but prior to deregulation, profit margins were significantly lower for the aforementioned reasons (American Airlines, n.d.a, para. 1). Nevertheless, the company continues to be a leader, occupying a significant market share.

American Airlines adheres to a vertical system of control in its corporate structure. The Board of Directors coordinates all financial and legal aspects of the operation, and the leadership team includes executive officers, strategic advisors, and other competent employees (American Airlines, n.d.b). Due to its free commercial activities, American Airlines has built a stable system of interaction between the company’s departments, thereby expanding the ability to implement timely optimization solutions. As a result, deregulation has become a significant step in building the company’s global business.

Root Structure and Product Alternatives

The structure of American Airlines routes is expanded, so the airline operates flights to different world regions. The corresponding infographic shows that the majority of flights are within the United States; however, scheduled flights also operate to South America, Europe, Asia, and Australia (“American Airlines flights,” n.d.). Moreover, the company regularly expands the range of destinations. According to Griff (2021), there are more flights to smaller cities in the interior of the country, and new routes are emerging. This is due to the gradual lifting of restrictions caused by the pandemic and the increasing needs of passengers for more convenient travel. By increasing its coverage, American Airlines spends money on hiring staff, establishing flights, obtaining licenses, and other expenses. At the same time, profit capitalization is growing, thereby allowing the airline to strengthen its competitive advantage. Thus, an increase in market coverage is a favorable outcome for enhancing customer loyalty and strengthening positions both in the national and international markets.

One of the ways American Airlines promotes bolstering its market position is by offering product alternatives to the population, thereby strengthening the company’s differentiation strategy and broadening its target audience. Bontemps et al. (2021) note that the airline under consideration “can provide a one-stop flight with a connection at an intermediate airport” instead of flying exclusively from origin to destination, as most carriers do (p. 135). In this regard, it becomes more convenient for many passengers to choose American Airlines services because people do not have to get to their desired destination with unnecessary transfers. Such an initiative requires additional fuel costs, as well as time delays. However, the merger of American Airlines and US Airways in 2013 reduced the cost share and increased the carrier’s financial capacity (Bontemps et al., 2021). In addition, US Airways’ customer base became effectively owned by American Airlines, which was also a favorable outcome of that deal. Therefore, the inevitable operating costs related to building more complex routes and a larger number of flights are offset by increased profits due to the influx of new passengers.

Airline Departments and Their Roles

As already mentioned, the corporate control structure at American Airlines holding is vertical, and the Board of Directors is a key overseeing body. The information about the principle of the company organization is taken from the official website (“American Airlines,” 2022). The CEO leads the Board, and the body includes the chairman and 12 directors, who, in turn, stand above the vice chairman and chief officers. There are eight chief officers in total, and each of them oversees the respective departments, divided in accordance with specific areas of activity. This principle of corporate structure allows for maintaining stable accountability and control over the implementation of assigned tasks without the need to appoint incompetent employees.

The vice chairman oversees the finance and planning departments by controlling the holding’s budget and regulating tax-related aspects of operations. The chief operating officer is the supervisor of more departments. American Airlines is working on planning operations inside and outside the country, the allocation of resources, the introduction of innovative technologies, sales organization, and other activities. All of these responsibilities fall within the scope of the chief operating officer’s control. Other officers are assigned to supervise a smaller number of departments, but their functions are also critical for the sustainable functioning of the holding.

The commercial officer is responsible for controlling the company’s partnership strategy, which is necessary for developing flight operations. The customer officer works with passengers and performs communication with customers, provides the necessary information about the products of the air carrier, promotes the necessary innovations in the service sector, and monitors client activity. The HR officer, in turn, deals with internal work with the personnel of American Airlines. This department is entrusted with the functions of hiring employees, implementing talent and inclusion management, developing rewards strategies, and other related functions designed to monitor the performance of the team and, consequently, flight operations’ success.

The chief information officer controls the department whose activities concern program management and IT initiatives, which are crucial tasks to maintain sustainable flight operations. The legal officer is responsible for controlling the deputy legal field and government affairs, as well as organization brand and advertising campaigns. Government affairs, in turn, form a separate department along with the communication branch. All the presented departments of the holding function smoothly due to the vertical structure and regular reporting, which are the basis for effective work. As a result, American Airlines’ performance is stable both in the domestic air transportation market and abroad.

Cost Structure and Methods to Obtain Sustainable Competitive Costs

The cost structure of American Airlines should be viewed as a complex system in which fixed and variable costs do not apply exclusively to one type of activity. Anand (2018) proposes to consider product, service, and customer cost structures as the main ones. Each of these structures, in turn, includes variable and fixed costs. In addition, controllable costs should be taken into account as expenses that the company fully controls. In relation to American Airlines, one can include the power that is needed to maintain and manufacture aircraft, the tools used in the work, and some other attributes. According to Anand (2018), responsible managers at different levels ensure control over the corresponding costs due to the clear organization of the workflow in the holding. Therefore, the value of dividing into individual departments in the company is high.

Regarding fixed costs, American Airlines spends money on administrative needs. They include salaries of employees, production of equipment and components, maintenance of aircraft, and some other expenses that are mandatory (Anand, 2018). Variable costs, in turn, do not have a well-defined budget and vary depending on the situation. For instance, equipment repairs, purchase of additional services for customers, loans, and other costs may fall into this category (Anand, 2018). These types of costs are more difficult to control or predict than fixed ones, but these expenses are inevitable and should be part of a financial planning program.

To ensure cost advantages and outperform competitors in its field, American Airlines does everything possible to control any costs effectively. As Anand (2018) states, the holding utilizes the cost leadership method as such a strategy. One of the key tasks promoted by the company’s management is to minimize costs while maintaining a high level of services provided to passengers. This applies not only to flights within the country but also to foreign flights, and due to this, American Airlines is one of the world leaders. The customer loyalty achieved through bonus programs contributes to maintaining a competitive advantage, and the air carrier successfully implements the cost leadership program in its business model.

Methods of Revenue Management

Throughout its history, American Airlines has long been one of the few companies in the sector. However, with the development of the air travel industry, new organizations began to appear, including competitors providing low-cost services. In this regard, the holding in question was forced to revise its revenue management policy to maintain its leadership position. Carrier and Fiig (2018) argue that, faced with a significant reduction in prices in the target market, “American Airlines responded with the implementation of the first inventory control system” (p. 45). This practice allowed the company to track any financial flows within the holding and make timely and objective decisions regarding the need to allocate the budget for the relevant needs. Under such conditions, it became easier for American Airlines to control cash flows, which was particularly important in the context of a large transportation network. As a result, the principle of control based on revenue tracking with the evaluation of work in individual hubs has proved to be an essential approach to saving money and maintaining a competitive advantage.

Implementing digital controls was a logical way to optimize revenue management at American Airlines. According to Carrier and Fiig (2018), the company was among the first to use computerized ticketing systems, customer activity monitoring, remote interaction with passengers, and other innovations. Machine-learning programs have become an integral part of the company’s activities, and in addition to improving control over the holding’s operations, the management has been able to track cash flows efficiently. Along with many other carriers, American Airlines uses an online sales system, which makes it easier for passengers to purchase tickets and serves as an additional means of increasing loyalty. Thus, introducing innovative technologies has become a significant step in building a reliable revenue management system at American Airlines.

Finally, the holding’s revenue management is largely based on the pricing policy, which is democratic in the company. In an effort to retain customers and attract new passengers, American Airlines offers services at relatively low prices. The continuous monitoring of the market helps find an adequate ratio of price and quality without loss of profit. The company’s resource base allows the management to experiment with bonus programs for the population and develop strategies designed to keep the target audience interested. Such principles are also applied in other industries where the success of a business directly depends on the activity and loyalty of customers. When equating the holding’s activities to the area of providing services to the population, one can note that the company is promoting adequate asset control mechanisms. Therefore, American Airlines’ revenue management may be called sustainable and reasonable.

Conclusion

American Airlines’ success in both the domestic and global air travel markets is driven by the competitive advantage the company has earned over the years. The considered economical, structural, managerial, and other characteristics have made it possible to identify the principles of building the business in the holding and allocating the available resource base. The vertical structure of work is a convenient strategy that ensures stable reporting and coordinated work of all departments. Cost control and revenue management are adequate practices in the company, which help American Airlines keep customer loyalty and maintain its leadership position in the target market.

References

American Airlines. (2022). The Official Board.

American Airlines. (n.d.a). American Airlines reports fourth-quarter and full-year 2021 financial results. Web.

American Airlines. (n.d.b).Corporate structure.

American Airlines. (n.d.c). History of American Airlines.

American Airlines flights. (n.d.). FlightConnections.

Anand, R. (2018). American Airlines and lessons in cost structure. Travel Codex.

Bontemps, C., Remmy, K., & Wei, J. (2021). Ex-post evaluation of the American Airlines-US Airways merger: A structural approach. Journal of Transport Economics and Policy (JTEP), 56(2), 129-155.

Carrier, E., & Fiig, T. (2018). Future of airline revenue management.Journal of Revenue and Pricing Management, 17(2), 45-47.

Griff, Z. (2021). American Airlines adds 4 routes, new destination in latest regional expansion. The Points Guy.

Peterson, R. (2018). Impacts of airline deregulation. TR News, 315, 10-17.

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