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University of Jordan

Faculty of Business
Strategic Management

“American Airlines ”

Case Study
Strategic Management

Prepared By
Fathi Salem Mohammed Abdulla

2009

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Introduction

American Airlines, Inc. (AA) is a major airline of the United States. It is the
world's largest airline in passenger miles transported and passenger fleet
size; second largest, behind FedEx Express, in aircraft operated; and second
behind Air France-KLM in operating revenues. A subsidiary of the AMR
Corporation, the airline is headquartered in Fort Worth, Texas, adjacent to
the Dallas-Fort Worth International Airport. American operates scheduled
flights throughout the United States, and flights to Canada, Latin America,
the Caribbean, Europe, Japan, the People's Republic of China, and India.
The Chairman, President, and CEO of AA is Gerard Arpey. In 2005, the
airline flew more than 138 billion revenue passenger miles (RPM).

Vision Statement (proposed)

To become the largest airline in the world.

Mission Statement (proposed)

AMR Corporation is committed to providing every citizen of the world with the
highest quality air travel to the widest selection of destinations possible. AMR
will continue to modernize its fleet while maintaining its position as the largest air
carrier in the world, with a goal of becoming the most profitable airline. AMR is
the airline that treats everyone with equal care and respect, which is reflected in
the way each AMR employee is respected. AMR recognizes that its employees
are the key to the airlines success and invests in the futures and lives of its
employees. By investing in tomorrow’s technologies and by following a strict
adherence towards environmental regulations, AMR demonstrates its commitment
to the world environment.

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External Audit
Opportunities
1. Favorable wage negotiation climate
2. Travel increasing in general
3. Low interest rates
4. Government backed loans
5. Information technology
6. New fuel efficient engines
7. Partnerships with Asian Airlines

Threats

1. Increased air travel inconvenience (security related)


2. Business travel declining
3. Increased competition from point-to-point competitors
4. Availability of pricing information
5. Overcapacity in industry

Competitive Profile Matrix

Weighted Weighted Weighted Weighted


Critical Success Factors Weight Rating Score Rating Score Rating Score Rating Score

Financial Position 0.10 1.00 0.10 1.00 0.10 2.00 0.20 4.00 0.40

Cost Structure 0.30 3.00 0.90 2.00 0.60 2.00 0.60 4.00 1.20

Information Technology 0.20 3.00 0.60 3.00 0.60 3.00 0.60 4.00 0.80

Partnerships 0.25 4.00 1.00 3.00 0.75 4.00 1.00 1.00 0.25

Fleet 0.15 3.00 0.45 4.00 0.60 2.00 0.30 3.00 0.45

1.00 3.05 2.65 2.70 3.10

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EFE Matrix

Key External Factors Weight Rating Weighted Score


Opportunities
1. Favorable wage negotiation climate .15 4 .60
2. Travel increasing in general .05 2 .10
3. Low interest rates .05 3 .15
4. Government backed loans .05 4 .20
5. Information Technology .05 3 .15
6. New fuel efficient engines .05 3 .15
7. Partnerships with Asian Airlines .10 3 .30
Threats
1. Increased air travel inconvenience (security .05 2 .10
related)
2. Business travel declining .10 3 .30
3. Increased competition from point-to-point .15 3 .45
competitors
4. Availability of pricing information .10 3 .30
5. Overcapacity in industry .10 2 .20

Total 1.00 3.00

Internal Audit
Strengths
1. Size of fleet
2. Number of routes
3. Partnerships
4. IT infrastructure
5. Government relations

Weaknesses

1. Financial position
2. Cost structure
3. Unprofitable routes
4. Too many divisions
5. Reliance of business fares

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Financial Ratio Analysis (March 2007)
Company Industry Sector S&P 500

Valuation Ratios
P/E Ratio (TTM) N/A 23.71 25.41 24.01
P/E High - Last 5 Yrs NA 55.30 42.96 45.41
P/E Low - Last 5 Yrs NA 15.49 16.23 16.26
Beta 2.77 1.38 0.62 1.00
Price to Sales (TTM) 0.10 1.24 1.62 3.33
Price to Book (MRQ) 37.67 5.42 3.67 4.29
Price to Tangible Book (MRQ) N/A 2.43 3.96 7.56
Price to Cash Flow (TTM) 11.86 10.03 13.19 17.32
Price to Free Cash Flow (TTM) NM 6.61 37.18 28.97
% Owned Institutions 95.00 70.90 59.87 64.19

Dividends
Dividend Yield N/A 0.27 1.38 2.04
Dividend Yield - 5 Yr Avg 0.00 0.10 1.01 1.48
Dividend 5 Yr Growth Rate NM 5.77 13.66 6.48
Payout Ratio (TTM) 0.00 1.88 23.05 26.78

Growth Rates %
Sales (MRQ) vs Qtr 1 Yr Ago 3.93 12.97 9.04 13.40
Sales (TTM) vs TTM 1 Yr Ago 0.12 12.79 8.27 11.90
Sales - 5 Yr Growth Rate -0.09 8.39 6.94 9.30
EPS (MRQ) vs Qtr 1 Yr Ago N/A 48.32 -4.57 28.69
EPS (TTM) vs TTM 1 Yr Ago NA 70.64 1.92 21.92
EPS - 5 Yr Growth Rate NM -2.27 6.80 12.15
Capital Spending - 5 Yr Growth Rate -21.91 5.49 0.82 4.06

Financial Strength
Quick Ratio (MRQ) 0.52 1.20 1.18 1.26
Current Ratio (MRQ) 0.71 1.43 1.42 1.76
LT Debt to Equity (MRQ) 285.35 1.09 0.51 0.68
Total Debt to Equity (MRQ) 302.83 1.19 0.59 0.85
Interest Coverage (TTM) -1.20 4.86 19.24 11.86

Profitability Ratios %
Gross Margin (TTM) 17.26 26.52 33.15 47.32
Gross Margin - 5 Yr Avg 19.31 29.28 33.94 47.01
EBITD Margin (TTM) 3.06 12.74 17.88 20.79
EBITD - 5 Yr Avg 2.39 12.48 18.06 20.82
Operating Margin (TTM) -4.84 6.88 11.72 20.33
Operating Margin - 5 Yr Avg -4.69 7.03 11.77 18.35
Pre-Tax Margin (TTM) -7.50 8.34 10.24 17.27
Pre-Tax Margin - 5 Yr Avg -6.40 7.38 9.93 17.54
Net Profit Margin (TTM) -7.04 5.27 6.77 13.12
Net Profit Margin - 5 Yr Avg -4.63 4.22 6.13 11.59
Effective Tax Rate (TTM) N/A 37.15 34.89 31.31
Effective Tax Rate - 5 Yr Avg 37.13 38.22 38.75 34.20

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Management Effectiveness %
Return on Assets (TTM) -4.15 4.71 6.66 6.40
Return on Assets - 5 Yr Avg -2.43 4.15 6.48 6.79
Return on Investment (TTM) -5.45 6.51 8.59 9.97
Return on Investment - 5 Yr Avg -3.16 6.11 8.51 10.93
Return on Equity (TTM) N/A 11.68 14.57 18.71
Return on Equity - 5 Yr Avg -66.33 2.78 14.38 19.22

Efficiency
Revenue/Employee (TTM) 180,913 191,714 198,139 622,866
Net Income/Employee (TTM) N/A 13,861 14,032 81,707
Receivable Turnover (TTM) 17.23 35.21 14.58 9.76
Inventory Turnover (TTM) 25.36 42.78 39.40 10.46
Asset Turnover (TTM 0.59 0.83 1.10 0.92
www.investor.stockpoint.com March 2004

Company Worth Analysis (year­end 2001 2002 2003 average)

Stockholders Equity $2,125,000,000
Net Income x 5 ($10,835,000,000)
(Share Price/EPS) x Net Income ($2,436,937,716)
Number of Shares Outstanding x Share Price $2,015,000,000
Method Average ($2,282,984,429)

IFE Matrix
Weight Rating Weighted
Key Internal Factors Score
Strengths
1. Size of fleet 0.10 4 0.40
2. Number of routes 0.10 4 0.40
3. Partnerships 0.15 4 0.60
4. IT infrastructure 0.10 3 0.30
5. Government relations 0.05 4 0.20
Weaknesses
1. Financial position 0.05 1 0.05
2. Cost structure 0.15 2 0.30
3. Unprofitable routes 0.15 2 0.30
4. Too many divisions 0.05 1 0.05
5. Reliance of business fares 0.10 2 0.20
TOTAL 1.00 2.80

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SWOT Matrix

S-O Strategies W-O Strategies

1. Develop new partnerships in Asia utilizing the 1. Sell unprofitable/smaller divisions to improve
number of routes as a key negotiating point. financial positions.

2. Negotiate lower wage rates with unions to improve


cost structure.

S-T Strategies W-T Strategies

1. Use IT to reduce the check-in and wait times on 1. Use a mixed model i.e. Some operations point-to-
flights. Such as more curb side check-ins and e- point to improve cost structure and reduce customer
tickets. inconvenience.

2. Use market position by reducing number of 2. Eliminate unprofitable routes to improve financial
unprofitable flights and reducing industry capacity. position and reduce industry capacity.

SPACE Matrix

Y axis
Financial strength 1 +1 worst to + 6 best Y axis: 1 + (-5) = -3
Environmental stability -5 -1 best to -6 worst

X axis
Industry strength 2 +1 worst to +6 best X axis: 2 + (-5) = -3
Competitive advantage -5 -1 best to -6 worst

FS
Conservative Aggressive

C IS
A

Competitive

Defensive
ES

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Grand Strategy Matrix
Rapid Market Growth

Quadrant II Quadrant I

Weak
Strong
Competitive
Competitive
Position
Position

Quadrant IV

Quadrant III
Slow Market Growth

The Internal-External (IE) Matrix


The IFE Total Weighted Score

Strong Average Weak


3.0 to 4.0 2.0 to 2.99 1.0 to 1.99
High I II III
3.0 to 3.99
American Airlines

Medium IV V VI
The EFE Total 2.0 to 2.99
Weighted
Score

Low VII VIII IX


1.0 to 1.99

QSPM

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Strategic Alternatives
International Domestic
Key Internal Factors Weight Expansion Expansion
Strengths TAS AS TAS
AS
1. Size of fleet 0.10 --- --- --- ---
2. Number of routes 0.10 4 0.18 1 0.12
3. Partnerships 0.15 1 --- 2 ---
4. IT infrastructure 0.10 --- 0.20 --- 0.20
5. Government relations 0.05 --- 0.24 --- 0.18
Weaknesses
1. Financial position 0.05 1 0.28 3 0.07
2. Cost structure 0.15 4 0.12 3 0.18
3. Unprofitable routes 0.15 1 0.08 4 0.12
4. Too many divisions 0.05 --- --- --- ---
5. Reliance of business fares 0.10 --- --- --- ---
SUBTOTAL 1.00 1.35 1.60

International Domestic
Key External Factors Weight Expansion Expansion
Opportunities AS TAS AS TAS
1. Favorable wage negotiation climate .15 --- 0.24 --- 0.24
2. Travel increasing in general .05 4 --- 1 ---
3. Low interest rates .05 4 --- 1 ---
4. Government backed loans .05 3 --- 1 ---
5. Information Technology .05 1 --- 4 ---
6. New fuel efficient engines .05 4 0.05 1 0.15
7. Partnerships with Asian Airlines .10 --- 0.06 --- 0.03
Threats
1. Increased air travel inconvenience (security related) .05 --- 0.20 --- 0.15
2. Business travel declining .10 --- 0.16 --- 0.08
3. Increased competition from point-to-point competitors .15 3 0.08 4 0.08
4. Availability of pricing information .10 3 --- 3 ---
5. Overcapacity in industry .10 1 --- 4 ---
SUBTOTAL 1.00 1.65 1.70
SUM TOTAL ATTRACTIVENESS SCORE 3.00 3.30

EPS/EBIT Analysis

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Amount Needed 500M
Interest 5%
Tax 0%
Share Price $15.00
Shares Outstanding 155M

Common Stock Financing Debt Financing
Recession Normal Boom Recession Normal Boom
EBIT (500,000,000) 0 500,000,000 (500,000,000) 0 500,000,000
Interest  0 0 0 25,000,000 25,000,000 25,000,000
EBT (500,000,000) 0 500,000,000 (525,000,000) (25,000,000) 475,000,000
Taxes 0 0 0 0 0 0
EAT (500,000,000) 0 500,000,000 (525,000,000) (25,000,000) 475,000,000
# Shares 188,333,333 188,333,333 188,333,333 155,000,000 155,000,000 155,000,000
EPS (2.65) 0.00 2.65 (3.39) (0.16) 3.06

70 Percent Stock ­ 30 Percent Debt 70 Percent Debt ­ 30 Percent Stock
Recession Normal Boom Recession Normal Boom
EBIT (500,000,000) 0 500,000,000 (500,000,000) 0 500,000,000
Interest  7,500,000 7,500,000 7,500,000 17,500,000 17,500,000 17,500,000
EBT (507,500,000) (7,500,000) 492,500,000 (517,500,000) (17,500,000) 482,500,000
Taxes 0 0 0 0 0 0
EAT (507,500,000) (7,500,000) 492,500,000 (517,500,000) (17,500,000) 482,500,000
# Shares 178,333,333 178,333,333 178,333,333 165,000,000 165,000,000 165,000,000
EPS (2.85) (0.04) 2.76 (3.14) (0.11) 2.92

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