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AMERICAN AIRLINES GROUP INC IN TRAVEL AND

TOURISM (WORLD)
September 2014

SCOPE OF THE REPORT

Scope
Travel and Tourism
Tourism Flows and Spending

Travel Accommodation

Disclaimer
Much of the information in this
briefing is of a statistical nature and,
while every attempt has been made
to ensure accuracy and reliability,
Euromonitor International cannot be
held responsible for omissions or
errors.
Figures in tables and analyses are
calculated from unrounded data and
may not sum. Analyses found in the
briefings may not totally reflect the
companies opinions, reader
discretion is advised.

Transportation

Car Rental

Travel Retail

Tourist Attractions

American Airlines Group


(AAG) has emerged from the
bankruptcy of American Airlines
and the subsequent merger with
US Airways. The companys
resurgence has been stunning
from loss making and financially
crippled to strong growth and
assuming the role as the USs
largest airline. Integration issues
remain however, and the Gulf
carriers have been looking
outward while AAG continues to
look inward to the US domestic
market.

Health and Wellness Tourism

Euromonitor International

TRAVEL AND TOURISM: AMERICAN AIRLINES GROUP INC

PASSPORT 2

STRATEGIC EVALUATION
COMPETITIVE POSITIONING
GEOGRAPHIC AND CATEGORY
OPPORTUNITIES
BRAND STRATEGY
OPERATIONS

RECOMMENDATIONS

STRATEGIC EVALUATION

Key company facts


American Airlines Group (AAG)
Headquarters:

US

Regional involvement:

North America, Latin


America, Western
Europe, Asia Pacific,
Middle East, Australasia

Category involvement:

Air passenger and cargo


transportation

World air transportation


value share (2013):

5.8%

American Airlines Group (AAG) is the holding


company for American Airlines and US Airways.
These two brands, combined with American Eagle
and US Airways Express, operate nearly 6,700
flights per day to 339 destinations in 54 countries
from hubs in Charlotte, Chicago, Dallas/Fort Worth,
Los Angeles, Miami, New York, Philadelphia,
Phoenix and Washington, D.C.
AAG was formed via the merger of US Airways
and American Airlines in 2013 and helped to bring
American Airlines out of bankruptcy. The merger
has made AAG the worlds largest airline by
revenue passenger miles (RPMs) and available
seat miles (ASMs).
AAG is a member of Oneworld alliance which
comprises 14,244 daily flights to 151 countries
across its members. AAG also maintains the
American Airlines AAdvantage and US Airways
Dividend Miles loyalty programmes.
The company reported in the second quarter of
2014 strong results, with operating revenues
almost doubling in the wake of the merger.

Euromonitor International

TRAVEL AND TOURISM: AMERICAN AIRLINES GROUP INC

PASSPORT 4

STRATEGIC EVALUATION

Creating the USs largest airline


The merger between the two airlines was formerly
completed on 9 December 2013. The process of
consolidation of the two airlines networks, however,
will take up to 18 months. In the interim, both
maintain independent websites that allow customers
to book direct with either airlines.
US Airways added over 3,000 additional daily flights
to Americans breadth of service. The merger
however meant US Airwayss exit from competitor
network Star Alliance in March 2014 and its entry
into Oneworld, of which American was a founding
member.
The merger significantly boosted Americans
The merger significantly improved liquidity, with
presence in the US market where US Airways was
AAG having US$11.3 billion in liquid assets at the
strongest. It also added significant capacity to
end of 2013. It has subsequently used some of this
Europe from North America. It did very little however
to buy back share and pay a dividend for the first
to add capacity to Asia Pacific. US Airways did not
time to shareholders in over 30 years.
bring any new Asia routes to the merger.
The merger helped both airlines to improve on US
The merger resulted in the worlds largest codeshare markets where they were relatively weak.
and has given both Dividend Miles (US Airways) and
American Airways gained a stronger position on
Elite (American Airlines) members reciprocal
the East Coast of the US, while US Airways gained
benefits. AAG expects US$1 billion in synergies by
a stronger position on the West Coast.
2015 through cost savings and increased margins.
Euromonitor International

TRAVEL AND TOURISM: AMERICAN AIRLINES GROUP INC

PASSPORT 5

STRATEGIC EVALUATION

AAG begins to realise benefits of merger


It is early days for AAG. Combining the revenues for both
American Airlines and US Airways however reveals an
increase in pre-tax margin and top line growth.
The impact of the merger was made clear in the second
quarter 2014 results, which saw AAG increase revenue by
9.2% once both periods are presented on a consistent basis
including US Airways for the same period in 2013. The
merger has thus far been a successful one for the
company.
Mainline and regional passenger revenues stood at US$9.9
billion, an increase of US$832 million, or 9.2%, compared to
the combined second quarter of 2013. Fuel expenses were
higher in the second quarter by US$92 million or 2.8% as
the average price per gallon rose to US$3.03.

AAG: Key Financial Indicators 2012-2013


US$ million

2012

2013

Revenue

38,620

40,419

Pre-tax loss

(1,808)

(1,340)

5.4%

1.1%

Pre-tax margin (exc


special items)

Note: For 12-month period ending 31 December. Includes both


American Airlines and US Airways results for both years.

AAG: Key Financial Indicators Q2 2013-Q2


2014

AAG however sold its portfolio of fuel hedging contracts


during the quarter and no longer maintains a hedging policy
with regard to fuel. This follows the US Airways model of not
hedging.

US$ million

Again on the cost side, CASM or cost per available seat


mile increased over Q2 2013 due to increases in salaries,
wages and benefits from labour negotiations that took place
as part of the merger.

Note: For 3-month period ending 30 June. Includes both


American Airlines and US Airways results for both periods.

Euromonitor International

Revenue
Operating income

TRAVEL AND TOURISM: AMERICAN AIRLINES GROUP INC

2013

2014

10,299

11,355

991

1,399

PASSPORT 6

STRATEGIC EVALUATION

Stock prices soar on dividends and buy-backs

AAG has some similarities to


United/Continental. It has US$17 billion in debt,
much of which is shorter term debt, maturing in
the next five years, and it also has to catch up
on capital improvements, according to CEO
Doug Parker. Meanwhile, the company faces
further integration costs and has not yet moved
to a single seat reservation system.
Euromonitor International

04/08/2014

21/07/2014

07/07/2014

23/06/2014

09/06/2014

26/05/2014

12/05/2014

28/04/2014

14/04/2014

31/03/2014

17/03/2014

03/03/2014

17/02/2014

03/02/2014

20/01/2014

06/01/2014

23/12/2013

50
45
40
35
30
25
20
15
10
5
0
09/12/2013

AAG should be wary however, as United


Airlines, which entered into its merger with
Continental with its own stock pile at US$9.1
billion in 2010 saw it fall to US$5.2 billion in
2013. Integration problems, coupled with making
up for lack of capital investment earlier, ate into
its assets quite quickly. Debt repayments also
took a significant proportion of the cash pile.

AAG Share Price 9 December


2013-2014: August 2014

Share price (US$)

With better than expected Q2 2014 results, AAG


embarked on an aggressive stock buy-back
programme and announced its first dividend in
34 years. The buy-back is expected to be
completed by the end of 2015. This is being
financed out of its estimated US$10.3 billion
cash pile.

Source: Edgar Online

Finally, its decision not to hedge may save the


company money in the short term but given recent
world events there is every potential for sharp rises
in fuel costs.
Expansion of its fleet to build up a stronger
presence in Asia Pacific would be a costly undertaking and AAG is weakening its ability to carry out
that level of investment.

TRAVEL AND TOURISM: AMERICAN AIRLINES GROUP INC

PASSPORT 7

STRATEGIC EVALUATION

SWOT: American Airlines Group (AAG)


STRENGTHS

Leader in the US

WEAKNESSES

Financial strength

Weak in Asia

Not fully integrated

AAG is now the number The company has


one airline in the US
emerged quickly from
market by passenger
bankruptcy protection to
capacity post the
a strong financial
merger with US Airways. position with high
liquidity levels.

Asia Pacific is still a


American Airlines and
weak region in terms of
US Airways have not yet
coverage. With so much fully integrated and it will
of long haul business
take up to the end of
travel focused on this
2015 before they move
region, AAG may be
to a single seat
missing out on lucrative reservation system.
routes.

OPPORTUNITIES

THREATS

Expansion

Alliances

Fuel costs

AAG has both the


financial ability and
opportunity to grow its
routes in relatively
untapped markets
including Asia Pacific to
both primary and
secondary cities.

New alliances can be


formed given the
companys dominance
in the US market with
international airlines in
the form of codesharing
agreements.

The abandonment of its The two airlines have


hedging contracts is a
not moved to a single
risky move although it
seat reservation system.
has proved a profitable
This will prove complex.
one at US Airways.
Unexpected integration
Recent political tensions problems could result in
could mean a sharp rise unforeseen costs.
in fuel costs.

Euromonitor International

TRAVEL AND TOURISM: AMERICAN AIRLINES GROUP INC

Seat reservation system

PASSPORT 8

STRATEGIC EVALUATION

Key strategic objectives and challenges

AAG meanwhile has been quiet since its 2011


purchase of 460 planes including 260 A320s from
Airbus and 200 of various types from Boeing which
began delivery in 2013.

Expanded capacity

WINNERS

The Gulf carriers have embarked on aggressive


expansion through new plane orders and equity
investments in struggling European airlines. Most
recently this has seen Etihad agree to take a 49%
stake in Alitalia.

Euromonitor International

More leverage to negotiate new partnerships


through number one position in US market.
Expanded capacity post merger and sound
financial position.

AAG itself sits on a significant cash pile but it has


for the time being opted to deliver some of this to
shareholders. It also has significant debt
obligations in the next five years that it will have to
meet or roll over.

Challenges on the horizon


Lack of integrated seat reservation system.
Overcapacity on international routes.
LOSERS

The integration with US Airways is proceeding


smoothly but there have cases where customers
have seen significant price differences between US
Airways and American Airliness websites for the
same routes. As time goes on these discrepancies
are disappearing but the two airlines are not yet
using a single seat reservation system.

Capital investments in fleet will provide better


experience for the customer and generate
more revenue.

Competition from low cost carriers.


Investment by Emirates and Etihad in
international routes.

TRAVEL AND TOURISM: AMERICAN AIRLINES GROUP INC

PASSPORT 9

STRATEGIC EVALUATION
COMPETITIVE POSITIONING
GEOGRAPHIC AND CATEGORY
OPPORTUNITIES
BRAND STRATEGY
OPERATIONS

RECOMMENDATIONS

COMPETITIVE POSITIONING

Global competitive performance


American Airlines underperformed the wider air transportation market for much of the review period,
emerging to push ahead only in 2011-2012. 2013 however saw AAG grow by almost 90% in the wake of
the US Airways merger. US Airways meanwhile outperformed American for most of the review period until
the merger.
The companys reliance on North America in the early part of the review period explains its underperformance. As a schedule airline, the sharp downturn in business activity in the US took a
disproportionate toll on American Airlines. The company, already burdened with high debt levels, filed for
Chapter 7 bankruptcy in late 2012. North American air transportation fell by over 17% in 2008-2009.

Air transportation overall has performed well. North America bounced back quickly after the Great
Recession while emerging markets have seen strong growth throughout most of the review period. Latin
America in particular has outperformed with double-digit growth for much of the review period with a 12.5%
CAGR over 2008-2013.

% year-on-year growth

% y-o-y growth

100

AAG vs Air Transportation Market


2008-2013

80

60
40

20
0

15

US Airways vs Air Transportation Market


2008-2013

10

5
0

-5

-10

-20

-15
2008-2009

2009-2010

2010-2011

American Airlines Group

Euromonitor International

2011-2012

2012-2013

Air Transportation

2008-2009

2009-2010
US Airways

TRAVEL AND TOURISM: AMERICAN AIRLINES GROUP INC

2010-2011

2011-2012

2012-2013

Air Transportation

PASSPORT 11

COMPETITIVE POSITIONING

Global rankings show impact of M&A activity

Euromonitor International

2013

2012

2011

2010

2009

The air transportation market has been


Air Transportation: Top 10 Companies by Value Share and
the subject of considerable consolidation
Ranking 2009-2013
% share of over the review period. Key activity
includes Deltas acquisition of Northwest
5-year
air transCompany name
trend
portation in 2009, the merger of United and
2013
Continental, and AirTrans acquisition by
American Airlines
Southwest, both in 2011, as well as
4 5 6 5 1
5.8

Group Inc
British Airwayss merger with Iberia in the
Deutsche Lufthansa
same year pushing International Airlines
1 1 1 1 2
4.4

AG
Group into seventh position.
Delta Air Lines, Inc
3 3 3 3 3
4.1 Added to this was the American Airlines

United Continental
merger with US Airways in 2013 which
- 2 2 2 4
4.1

Holdings Inc
pushed it to number one globally despite
Air France-KLM Group
its relative lack of presence in Asia
2 4 4 4 5
3.6

SA
Pacific.
International Airlines
75 67 7 7 6
3.1 Qatar, Emirates and Etihad, the latter

Group
ranked outside the top 10 in 32nd
Emirates Group Plc
9 11 11 10 7
2.5

position, have been adding through


codeshare agreements and capacity
Southwest Airlines Co
13 10 8 8 8
2.3

expansion. Meanwhile, Chinese airlines


Qantas Airways Ltd
8 8 10 11 9
2.0

are becoming more of a global force,


China Southern
cash rich from domestic air transportation
16 13 13 12 10
1.9

Airlines Co Ltd
growth.
TRAVEL AND TOURISM: AMERICAN AIRLINES GROUP INC

PASSPORT 12

COMPETITIVE POSITIONING

Gulf carriers expand aggressively


The Gulf carriers have made significant investments in long haul international
routes. Emirates, Etihad and Qatar are the big three and each have
expanded, while the US schedule domestic airline market stagnated and fell
into financial turmoil.
In 2014, Emirates announced a US$56 billion order for 150 Boeing 777X
aircraft with an option to buy 50 more. Qatar Airways meanwhile announced
its purchase of 50 of these planes with an option to double its order, also in
2014.

Etihad meanwhile has been focused on expanding its codesharing


agreements and taking equity stakes in struggling European carriers. Most
recently, this has meant a 49% stake in Alitalia but it has also acquired
minority equity stakes in Air Berlin and Aer Lingus as well as Virgin Australia
and Jet Airways India. Meanwhile, Lufthansa has expressed concern over the
Gulf carriers dynamic growth and its impact on supply on international routes.
AAGs largest order in recent years was in 2011 when it placed an order for
260 A320 planes from Airbus and 200 of various types from Boeing which
began delivery in 2013. AAG has not been as aggressive in pursuing
international routes before or after the merger. Its unrivalled position in US
airspace should not however encourage it to rest on its laurels.
As companies in oil rich states, these carriers benefit from relatively lower fuel
costs and labour costs. Their new fleets mean lower maintenance costs as
well.

Euromonitor International

TRAVEL AND TOURISM: AMERICAN AIRLINES GROUP INC

Key Drivers of Growth


for Gulf Carriers

Modern and
growing
fleet

Fuel costs

Cash rich
with
relatively
small
domestic
markets

PASSPORT 13

COMPETITIVE POSITIONING

Gulf carriers have intrinsic advantages


Fuel costs represented 39% of Emiratess total operating expenses in
fiscal 2014. At AAG, this figure stood at only 35% in the same year.
Emirates however had a clear advantage in terms of labour costs with
its employees representing only 13% of total operating expenses
compared to AAG at 22%. Fuel and employee costs represented the
two most significant operating expenses for both airlines.

These factors have helped them to build a strong presence outside


their domestic markets. Meanwhile, their relatively late entry and
access to capital have enabled them to have some of the most
modern fleets globally leading to lower operating costs. The
regulatory environment for these airlines is also very lenient with low
tax rates and levies. Emirates for example paid only AED47 million
(US$13 million) in tax in fiscal 2014 on AED3.5 billion (US$ 953
million) profit before tax. A comparison with AAG is difficult owing to
the US$2.2 billion pre-tax loss it incurred in 2013. In 2012 however,
when the company made a profit before tax of US$90 million, it paid
an effective income tax rate of 21%.

40

35

30
% total operating costs

In general terms, the big three Gulf carriers, led by Emirates but also
including Etihad and Qatar, have benefited from cheap state capital
financed from oil reserves and indirect support from their respective
governments in infrastructure development.

Emirates vs AAG Cost


Structure 2013

25

20

15

10

0
Emirates
Fuel Costs

Euromonitor International

TRAVEL AND TOURISM: AMERICAN AIRLINES GROUP INC

AAG
Employee Costs

PASSPORT 14

STRATEGIC EVALUATION
COMPETITIVE POSITIONING
GEOGRAPHIC AND CATEGORY
OPPORTUNITIES
BRAND STRATEGY
OPERATIONS

RECOMMENDATIONS

GEOGRAPHIC AND CATEGORY OPPORTUNITIES

Developing LAX as an Asian hub


Asia has traditionally been a weak spot for AAG. As the largest airline in the world it will need to address
this or watch its number one position erode as this region will see a CAGR of 8.2% over the 2013-2018
period compared to North America at 4%.
AAG held a 19.3% share of the North American market in 2013 and had a reasonable position in Latin
America at 2.9% as well as a very small Western European share but it was negligible in Asia Pacific in
2013.
The company needs to look at Los Angeles (LAX) as a potential Asia hub. With United firmly installed in
San Francisco and Delta building in Seattle, LAX represents the companys best opportunity, particularly
given the large presence of some Oneworld partners in LAX already, particularly Cathay Pacific and JAL,
which ranked 11th and fifth, respectively, in Asia Pacific in 2013. The challenge will be to overcome
competition from Delta which ranked second in the first six months of 2014 in terms of market share as
measured by total number of departures from LAX.

90,000

25
20
15
10
5
0

60,000
30,000
0
Asia Pacific

Middle East and North America Western Europe


Africa

Absolute Value Growth (US$ million) 2013/2018

Euromonitor International

Latin America

% CAGR 2013-2018

Eastern Europe

Australasia

% CAGR 20132018 & company


share 2013

Absolute value
growth
(US$ million)
2013/2018

AAG and Delta are tied in terms of LAX departures at 16%. Meanwhile Southwest held about 11%. Delta
held a 0.5% market share in Asia in 2013 well ahead of AAG. That said, some investment has taken place
however, including the addition of non-stop flights to Shanghai and Hong Kong from Dallas/Ft Worth, but
with a growing Asian population in the Southern California area, LAX should still be considered.
Prospects in Air Transportation by Region 2013-2018 and Company Share 2013

AAG % Company Share 2013

TRAVEL AND TOURISM: AMERICAN AIRLINES GROUP INC

PASSPORT 16

GEOGRAPHIC AND CATEGORY OPPORTUNITIES

Lack of expansion in Brazil despite growth


AAG has announced that it expects its Q3 2014 results to be impacted by the elimination of many
Venezuelan flights (from 48 round trips per week to 10) as it seeks a way to get out US$781 million of funds
derived from ticket sales which the Venezuelan government refuses to allow to be converted into US dollars
and removed from the country. In total, according to IATA, the airline industry has some US$4 billion in
funds tied up in Venezuela, leading to a widespread reduction in scheduled flights.
With a new debt crisis in Argentina, volatility here is not expected to end soon. AAG however is not as
heavily exposed, with this market dominated by state-owned Aerolneas Argentinas.
Brazil is set to dominate growth in air transportation in Latin America. AAG has a negligible presence here
although it has described itself as the leading US carrier into Brazil. In this market, increasingly consumers
are opting to pay for larger purchases in installments. If AAG can find a suitable Brazilian partner it should
consider following this model. Despite strong anticipated growth in air travel sales, AAG has not been
adding capacity here. It has reduced its service to So Paulo but added flights from Miami and New York
(JFK) to Viracopos International Airport in Campinas in 2014/2015.
6.0

2,000

4.0

1,000

2.0

0.0

-1,000

-2.0

-2,000

-4.0

-3,000

% CAGR 2013-2018

Absolute value growth


(US$ million) 2013/2018

Latin America: Most Dynamic Air Travel Retail Markets 2013-2018


3,000

-6.0
Brazil

Mexico

Argentina

Absolute Value Growth (US$ million) 2013/2018

Euromonitor International

Colombia

Venezuela

% CAGR 2013-2018

TRAVEL AND TOURISM: AMERICAN AIRLINES GROUP INC

PASSPORT 17

GEOGRAPHIC AND CATEGORY OPPORTUNITIES

Consolidating in US market
With AAG now first in the US air transportation market, it has an
extensive network from which to grow. In Q2 2014, the company
reported passenger revenue per available seat mile up by 5.9%. The
company expects further synergies from its merger and expansion in
its profit margin.
Regionally in the US, the merger has given it a particularly strong
position on the East Coast, while in the West it continues to face a
challenge from Delta and United both of which have strong positions
in San Francisco.
The merger is also likely to make AAdvantage the worlds largest
loyalty programme pulling ahead of Delta, according to company
reports. The companys focus has now shifted to integrating US
Airways and in upgrading its fleet including wide body aircraft retrofits.
The addition of the Airbus A321 is a key move for the company, flying
the high fare and business orientated route between New York's JFK
and LAX, and JFK and San Francisco.
Regional carriers Southwest Airlines and JetBlue have fared well as
LCCs. JetBlue has benefited from its strong position in the Southeast
with its Florida routes. Southwest, underpinned by strong
performance in the US domestic market, has begun to test the waters
internationally with flights beginning in 2014 out of Baltimore
Washington International Airport to Aruba and Nassau and Atlanta to
Aruba and Montego Bay.
Euromonitor International

US: Air Transportation by %


Market Value Share 2011-2013
2011 2012 2013
American
Airlines
- 22.1
Group Inc
Delta Air
18.1
18.5 18.2
Lines, Inc
United
Continental
18.7
18.4 17.9
Holdings Inc
Southwest
11.1
11.5 11.4
Airlines Co
JetBlue
Airways
3.2
3.4
3.6
Corp
Alaska
2.3
2.4
2.4
Airlines Inc
Virgin
0.7
0.8
0.9
America Inc
AMR Corp
13.8
14.0
US Airways
8.0
8.2
Group Inc

TRAVEL AND TOURISM: AMERICAN AIRLINES GROUP INC

PASSPORT 18

GEOGRAPHIC AND CATEGORY OPPORTUNITIES

Possible headwinds for AAG


Increased competition from LCCs in the US

Delta links up with Virgin Atlantic

AAG is clearly counting on capturing more


business traffic between LAX and JFK with its
A321 aircraft. The layout of the A321 incudes 10
first class and 20 business class seats per plane.

London Heathrow (LHR) to JFK has been a


stronghold for AAG since its joint venture with
British Airways with 12 daily non-stop flights. As
with LAX and JFK, this is a high-profile and
lucrative route with considerable business traffic.

LCC JetBlue however is introducing flat bed


premium seats on this route for the first time and
increasing its economy class capacity on both the
JFK to LAX and JFK to San Francisco routes. Both
will also be using the A321 wide body planes.
However, its planes will be equipped with some 30
extra seats than the AAG specification. This may
introduce more price competition.
JetBlue will also pose more of a threat from Ronald
Reagan Washington National as it uses the slots
AAG was forced to sell to gain approval for its
merger. Southwest, and Virgin America also
gained from this move and will offer price
competition on key AAG routes.
Meanwhile, Southwest will be able to fly from
Dallas/Ft Worth, previously a stronghold for AAG,
following Deltas hub closure from October 2014.
Euromonitor International

However, the Delta/Virgin Atlantic joint venture


received anti-trust approval in 2014, which will
mean a significant increase in competition as
Delta/Virgin Atlantic is likely introduce more seat
sales to encourage customers to migrate.
London Heathrow is a key hub to the rest of
Europe and the impact will be felt beyond purely
LHR-JFK.
The joint venture has also brought Virgin Atlantic to
Delta hub Atlanta where it will take over Deltas
Atlanta-Heathrow route. Virgin Atlantics access to
Atlanta will boost its routes to Mexico, the
Caribbean and Canada. Meanwhile, Delta will
assume Virgin Atlantics route between Atlanta and
LAX.

TRAVEL AND TOURISM: AMERICAN AIRLINES GROUP INC

PASSPORT 19

GEOGRAPHIC AND CATEGORY OPPORTUNITIES

Loss of daily non-stop service to some destinations


As part of the merger, American Airlines was
required to divest 52 slots at Ronald Reagan
Washington National in order to gain approval from
the Department of Justice. AAG will no longer
operate year-round, daily non-stop services to 17
destinations from this airport and 10 at New York
La Guardia. AAG sold the slots for a reported
US$425 million.
However, AAG received 24 slots from JetBlue at
New York JFK, receiving them in exchange for 16
Ronald Reagan Washington National slots which
JetBlue had been leasing from American Airlines.
In 2014, with greater connectivity to the East Coast
via its US Airways network, AAG announced the
termination of its ticketing agreement with JetBlue
as part of an interline agreement that allowed
JetBlue customers to buy connecting flights on
each other's planes on one ticket. Also terminated
was reciprocity on each others loyalty
programmes.

Euromonitor International

Ronald Reagan Washington National Airport


Destinations Reduced Service Cities
Augusta

Little Rock

Pensacola

Detroit

Minneapolis

San Diego

Fayetteville

Montreal

Savannah

Fort Walton
Beach

Myrtle Beach

Tallahassee

Islip

Nassau

Wilmington

Jacksonville

Omaha

New York La Guardia Reduced Service Citiesx


Charlottesville

Little Rock

Roanoke

Dayton

Louisville

Wilmington

Greensboro

Norfolk

Knoxville

Richmond

TRAVEL AND TOURISM: AMERICAN AIRLINES GROUP INC

PASSPORT 20

GEOGRAPHIC AND CATEGORY OPPORTUNITIES

Distribution
AAG stays with Sabre post merger

Fight over ancillary fees

The combined American Airlines/US Airways


reservation system will be handled through Sabre
with which AAG signed an agreement in early
2014. The process of moving to a single system is
expected to take up to two years.

Priceline.com meanwhile, a direct competitor to


Travelocity, announced in 2011 its partnership with
American Airlines issuing tickets using its direct
connect system.

The relationship between American Airlines and


Sabre however has been rocky. Sabre and
American Airlines settled their long-running dispute
in 2012 over the latter's direct sales strategy.
Meanwhile, a separate case brought by US
Airways has not yet been formerly settled, although
its subsequent merger with American, which has
settled all claims with Sabre, makes a positive
outcome for US Airways unlikely.
As part of Americans settlement it agreed to
negotiate with Sabre for additional technology
services in the future, while American would
receive a monetary payment from Sabre with
American continuing to pursue its direct connect
initiative.

Euromonitor International

The key debate for distribution systems such as


Sabre versus Priceline.com as well as direct
booking websites www.aa.com and
www.usairways.com is the generation of ancillary
fees via preferred seating, priority boarding and
baggage fees. While costs such as these have
commonly been the domain of the LCCs with
seating and boarding priority determined by ticket
class, schedule airlines such as American and
Delta have increasingly been looking for ways to
generate incremental revenue.
For Sabre and other distribution systems these
ancillary fees are complex to offer through travel
agents and have not always been shared by the
airlines. In 2013, AAG generated US$521 million in
ancillary fees.

TRAVEL AND TOURISM: AMERICAN AIRLINES GROUP INC

PASSPORT 21

GEOGRAPHIC AND CATEGORY OPPORTUNITIES

AAG falls behind in ancillary revenue


In a study published by the consulting firm
IdeaWorksCompany of 53 airlines, it found that in terms of
disclosed ancillary revenue United came up number one
both overall and among schedule airline with US$5.7 billion
generated in 2013. In 2007, United generated US$600
million in ancillary fees which shows how crucial this source
of revenue has become for schedule airlines.
Traditionally ancillary revenues have been the domain of
LCCs, which rely on a model of low cost seats combined
with ancillary fees to remain profitable. The schedule
carriers however have been incrementally adding new fees.
American Airlines was a pioneer in this area as the first
schedule US airline to charge customers to check in their
bags in 2008.
United, as a smaller carrier by passenger volume,
generates a larger proportion of its sales from ancillary
revenue. Combined American Airlines and US Airways
carried some 113 million passengers in 2013 compared to
67 million for United. Passenger yield however, as
measured by passenger revenue divided by available seat
miles, was 14.84 cents for American, 14.02 for US Airways
and 14.35 for United, according to the US Bureau for
Transportation.
Euromonitor International

Largest Generators of Ancillary Revenue


Among Schedule Airlines 2013
Ancillary Revenue

US$ billion

United

5.7

AAG

3.2

Delta

2.5

Air France-KLM

1.7

Lufthansa

1.3

Qantas

1.3

Source: IdeaWorksCompany press release 16 July 2014

Largest Generators of Ancillary Revenue


Among LCCs 2013
Ancillary Revenue

US$ billion

Ryanair

1.7

Southwest

1.6

easyJet

1.4

TRAVEL AND TOURISM: AMERICAN AIRLINES GROUP INC

PASSPORT 22

STRATEGIC EVALUATION
COMPETITIVE POSITIONING
GEOGRAPHIC AND CATEGORY
OPPORTUNITIES
BRAND STRATEGY
OPERATIONS

RECOMMENDATIONS

BRAND STRATEGY

Brand strategy at a glance


Global strategy
Integration of the US Airways
network and unlocking
synergies
Aggressive targeting of JFKLAX route
Unlocking power of worlds
largest customer loyalty
programme post US Airways
merger

Regaining customer trust

Euromonitor International

Action
Contract signed with Sabre to bring US
Airways and American Airlines into single
seat reservation system. Departure of US
Airways from Star Alliance and move into
Oneworld.
Deployment of A321 wide body aircraft.
Large representation in seat configuration
for business and first class customers.

Impact 2013

Future impact

Reciprocal benefits for Dividend Miles and


Elite members until integration of Dividend
Miles into AAdvantage in 2015.

In the wake of its filing for Chapter 7


bankruptcy, the American Airlines brand
suffered some damage. With the US
Airways merger some customers also have
questions. Faster response times on social
media to customer concerns and new
livery in 2013 are some of the ways it is
addressing this.

TRAVEL AND TOURISM: AMERICAN AIRLINES GROUP INC

PASSPORT 24

BRAND STRATEGY

Loyalty programmes - shake up and integration


From 2015, Dividend Miles will be integrated into
AAdvantage, American Airliness own loyalty
programme. The move will see the some 30 million
Dividend Miles members move into the 71 millionstrong AAdvantage programme to create what will
likely be the largest airline loyalty reward
programme in the world.
For the time being Dividend Miles members can
earn Dividend Miles on American Airlines flights.
The only caveat for AAdvantage members is that
they cannot use Dividend Miles qualifying miles to
achieve Elite status in the AAdvantage programme.
For now, no plan has been announced by AAG to
move to a revenue-based model as Southwest and
Delta have both done. United is the most recent
major airline to announce its intention to move to a
revenue-based model.
This shift fits in with the increased reliance on
ancillary fees as airlines seek to segment
customers more and more based on their
preference for pre-reserved seats, priority boarding
or the use of in-flight entertainment.

Euromonitor International

While AAdvantage is unlikely to do so in the short


term it will probably move to its own revenuebased scheme over 2014-2016. The companys
focus for the time being is integration of the
Dividend Miles programme.
The departure from Star Alliance with its some 28
airline members will mean some US Airways
customers are unable to redeem their Dividend
Miles points on member airlines. For those who fly
British Airways (Oneworld alliance) those
customers will be charged some US$500 in fuel
charges if they redeem points to purchase their
tickets. This has been the case of AAdvantage
members seeking to fly BA for some time. Dividend
Miles members will not be used to this type of
policy coming from the Star Alliance network.
Some carriers notably Air Canada have begun to
lure US Airways loyalty members with Altitude
membership (Air Canadas own loyalty scheme) if
they have achieved a minimum of Silver in
Dividend Miles. For Canadian snowbirds this is
likely to be an attractive offer.

TRAVEL AND TOURISM: AMERICAN AIRLINES GROUP INC

PASSPORT 25

BRAND STRATEGY

#newAmerican tells its story via social media


Post emergence from Chapter 7 bankruptcy and its
merger with US Airways, AAG is working to become
more proactive on social media.
According to Brand Indexs 2013 rankings, American
Airlines was the most improved brand among the
airlines in terms of social media.
Overall however, Southwest remains the top
performer followed by JetBlue and Delta as measured
by a You Gov poll, which asked respondents if they
had heard anything about these brands over the
previous two weeks whether positive or negative
through advertising, news or word of mouth.

Online Exposure 2013/2014


Website:

www.aa.com
www.usairways.com

Facebook:

1.7 million likes

Twitter:

894,000 followers

Instagram:

59,546

YouTube:

25,547 subscribers

Foursquare:

14,977 followers

Note: As at August 2014, Facebook, Twitter, Instagram, YouTube,


Foursquare

Aside from being very visible in 2013 due in part to the It answered 9,058 tweets on Twitter compared to
merger, American Airlines has adopted a very
second-ranked KLM at 6,691. American also
proactive approach in some social media outlets,
offers 24/7 customer care via its Facebook page.
notably Twitter. Some airlines have gone as far as to
American has been using the hastag
list listening in hours during which time customers
#newAmerican on Twitter and Facebook and has
can expect a response to a query, complaint or
a team of 22 employees devoted exclusively to
question to a tweet. American does not go this far.
social media engagement including 17 who
However, according to Social Bakers, a leading social
respond to Facebook, Twitter, Instagram
media consultancy, American was the most active
comments and questions and four team members
airline on Twitter in the first three months of 2014.
who develop content for social media.

Euromonitor International

TRAVEL AND TOURISM: AMERICAN AIRLINES GROUP INC

PASSPORT 26

STRATEGIC EVALUATION
COMPETITIVE POSITIONING
GEOGRAPHIC AND CATEGORY
OPPORTUNITIES
BRAND STRATEGY
OPERATIONS

RECOMMENDATIONS

OPERATIONS

Updating its fleet


American Airlines/US Airways Combined Fleet
2013
Owned

Average
Age
(Years)

Airbus A319

11

Airbus A320

11

15

Airbus A321

72

Airbus A330-200

Airbus A330-300

13

Boeing 737-400

24

Boeing 737-800

86

Boeing 757-200

71

19

Boeing 767-200 ER

26

Boeing 767-300 ER

45

20

Boeing 777-200 ER

44

13

Boeing 777-300 ER

20

104

22

Embraer ERJ 190

McDonnell Douglas MD-80


Euromonitor International

As of 31 December 2013, American Airlines and


US Airways operated mainline fleets of 627 and
343 aircraft, respectively. In 2013, American took
delivery of 59 new aircraft and retired 46 aircraft,
while US Airways took delivery of 23 new aircraft
and retired 20 aircraft. Regional airline subsidiaries
and third party regional carriers operating as
American Eagle and US Airways Express operated
281 regional jets and 238 regional jets and 40
turboprops at the end of December 2013,
respectively.
In 2013, American Airlines prior to completion of its
merger with US Airways began the most significant
fleet renewal programme in its history. Among its
key initiatives was 42 Boeing 787-9 Dreamliner
aircraft which it expects to take delivery of at the
end of 2014, taking delivery of 130 currentgeneration Airbus 319 and Airbus 321 aircraft
which began in 2013, 76 fuel-efficient Boeing 737800 aircraft to replace the MD-80 fleet and
retrofitting its existing fleet of 76 Boeing 737-800s.

TRAVEL AND TOURISM: AMERICAN AIRLINES GROUP INC

PASSPORT 28

OPERATIONS

Integration of labour force proceeding smoothly thus far


Thus far the integration has
been relatively smooth.
Passenger service personnel at
American Airlines have recently
voted to not join the union which
represents US Airways
passenger service personnel.
In 2014, staff represented by
the International Association of
Machinists (IAM) ratified three
collective bargaining
agreements covering more than
11,000 employees.
Negotiations for a joint
agreement for flight attendants
and pilots are underway,
although American Airlines
expressed optimism in June
2014 that agreements would be
reached soon.
In 2012, American Airlines
faced disruption following a
dispute with its pilots union.
Euromonitor International

US Airways and American Airlines Combined Workforce


American
Airlines

US Airways

Wholly-owned
Regional
Carriers

7,900

4,100

3,400

Flight attendants

15,000

7,700

2,100

Maintenance
personnel

11,300

3,100

2,400

Fleet service
personnel

7,400

5,500

1,700

Passenger service
personnel

10,300

6,200

6,400

Administrative and
other

8,200

5,500

2,200

60,100

32,100

18,200

Pilots

Total

TRAVEL AND TOURISM: AMERICAN AIRLINES GROUP INC

PASSPORT 29

OPERATIONS

Alliances
AAG, including both US Airways and American
Airlines, is a member of Oneworld alliance which
includes British Airways, JAL, Cathay Pacific,
Qantas and Qatar Airlines. The move by US
Airways from Star Alliance took place in 2014.
A key benefit for AAG in the Oneworld alliance is
its position as the only US airline member.
As well as its position in Oneworld, AAG has
agreements with a number of other partners
including JetBlue which it signed in 2014 which
saw the two airlines begin a frequent flyer
relationship with AAdvantage members able to
earn points on JetBlue airlines on certain routes
including JFK-Boston.

AAG has codesharing agreements with a number


of airlines outside Oneworld. These are primarily
with regional airlines including Gulf Air and West
Jet. Notably it does have a codesharing agreement
with Etihad; this means that for select routes,
Etihad travellers can gain AAdvantage points.

Euromonitor International

Etihad recently acquired an equity stake in Jet


Airways, the Indian regional carrier with plans to
return it to profitability within three years through
new codesharing agreements, and synergies
between the two airlines in fleet acquisition,
maintenance and product development. AAG
maintains a codesharing agreement with Jet
Airways. With Etihad now backing Jet Airways,
AAG should look for opportunities to pick up traffic
from India entering the US by developing further its
relationship with Etihad.
Etihad has also taken an equity stake in Air Berlin,
another Oneworld alliance member. This fact, as
well as its recent moves on Alitalia, Aer Lingus,
and Virgin America, will see its influence in the
Oneworld alliance strengthen. AAG has however
an unparalleled US presence and this is a valuable
bargaining tool if it chooses to leverage this to
carry Etihad traffic connecting from one of Etihads
growing associated companies.

TRAVEL AND TOURISM: AMERICAN AIRLINES GROUP INC

PASSPORT 30

STRATEGIC EVALUATION
COMPETITIVE POSITIONING
CATEGORY AND GEOGRAPHIC
OPPORTUNITIES
BRAND STRATEGY
OPERATIONS

RECOMMENDATIONS

RECOMMENDATIONS

Development of Asian hub out of LAX should be considered


Careful integration

International expansion

Integrating US Airways will be a daunting task.


Thus far, everything appears to be proceeding to
plan. The move to create a single seat reservation
system is crucial and will be carried out over a
period to the end of 2015. This process must be
handled carefully. Once complete AAG can truly
unlock the synergies of the merger.

The Gulf carriers are encroaching on international


travel and are aggressively expanding. AAG is
being too cautious and should leverage its size to
make more inroads into Asia in particular.
Development of an Asian hub out of LAX should be
strongly considered.

Loyalty programme should move to revenue

Smarter social media

With the worlds largest loyalty programme will


come more opportunities to create partnerships
with financial institutions and retailers. Once the
integration of Dividend Miles is complete in 2015,
AAdvantage will be able to create more strategic
partnerships. The programme is likely and should
move to a revenue-based approach. This will
support the growing focus on ancillary fees that is
taking place across the industry.

Under the #newAmerican programme, AAG is


abandoning its old-fashioned image and using
social media more effectively. Its quick response
time on Twitter for example will help re-build
customer relationships hurt as the airline struggled
financially leading up to the 2012 bankruptcy. The
merger with US Airways as well should be carefully
handled in social media to not alienate previous AA
flyers but treat them as new customers who need
to be won over.

Euromonitor International

TRAVEL AND TOURISM: AMERICAN AIRLINES GROUP INC

PASSPORT 32

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PASSPORT 33