AMR's finances past and future

An overview of AMR
corporation's past and
future finances

By: Team 1E Professors:
Patrick Ayers Jeff Anderson
Maggie Bihn Jamie Carter
Julie Brunton Mike Martel
Adam DeBellis Scott Wright
Kabir Uppal

Introducti Analys Recommendations & Outco Appendice
on is Conclusions me s

Introduction
Letter of Transmittal……………………………………………….……….4
Executive Summary………………………………………………….………5
Mission Statement……………………………………………………………6
Corporate Responsibility………………………………………....………..7
Key Strategic Issues Facing AMR……………………………………….8
Analysis
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

Introducti Analys Recommendations & Outco Appendice

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………………………………………………………………..50
Outcome and Effects of Forecasting…………………………………….51
Appendices………………………………………………………………………..52
References…………………………………………………………………………62

Introducti Analys Recommendations & Outco Appendice 4

October 11, 2009

AMR Corp. Board of Directors
4333 Amon Carter Blvd
Fort 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 Forces
Porter’s Five Forces model
Current position and market share within the industry
Benchmark against competitors
Financial 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 1E
Patrick Ayers, Maggie Bihn,
Julie Brunton, Adam DeBellis
Kabir Uppal


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

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 Corporation
1. Global and domestic recessions have led to a decline in air traffic.
2. Regional airline American Eagle is in a struggle to earn profits
3. oneworld Alliance is losing global market shares.

Solutions
1. Strengthen global market position of AA
2. Optimize American Eagles fleet
3. Increase oneworld’s market shares though capitalizing on opportunities


“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.”


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

8


Capacity Cuts
• 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.
Economic Demand
• Global and domestic recessions have led to a decline in air traffic.
• U.S air traffic is down approximately 10% for 2009
Decline in Premium Passenger Traffic
• 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.
The Burden Of American Eagle
• 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
Alliances & Global Consolidation
• 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
Fuel Hedging
• 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.

Employee Optimization

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

9


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 American Eagle

•Worlds Largest Airline •Regional Partner of American Airlines

•Founder of OneWorld Alliance
•Operates fleet of 305 aircrafts
•3rd Largest Fleet in the World
•Hubs in Boston, Chicago O’Hare,
Dallas/Fort Worth, Los Angeles, Miami,
•Only Airline that hasn’t declared
New York LaGuardia and San Juan
bankruptcy
•Employs more than 13,000
•Total revenue for 08 was 23.8 Billion
•$18.2 B from Mainline division
•Serves 159 cities with more than 1800
•$2.49B from Regional
daily flights and 1400 daily jet flights
•$874 M from Cargo


•Cash position stands at a solid competitive •International travel is steadily increasing, thus
average at $2,840 AA should continue to promote “going global”.
•AA could last 52 days on its current •Domestic travel soaks up the majority of
cash, which is significantly lower then it’s other profits, but its decline in traffic has lead to a
competitors focus in the Latin American markets as well as
•AA outsources around 11% of profits to its the pacific.
regional partner.

American Airlines Revenue AA Mainline RPM Distribution
Trend 70.00%
60.00%
$25,000
50.00%
$20,000
$ In Millions

40.00%
$15,000 30.00%
$10,000 20.00%
$5,000 10.00%
$- 0.00%
Latin
Domestic Atlantic Pacific
America
2002
2003
2004
2005
2006
2007

2005
2008

66.40% 14.20% 15.50% 3.90%
2006 65.30% 14.30% 15.80% 4.60%
2007 64.90% 14.50% 16.60% 4.00%
Outsourced Mainline 2008 63.20% 14.70% 17.90% 4.20%

Cash Position in 2Q 2009 Cash Days in 2Q 2009
100
$6,000
$5,000 80
$ In Millions

$4,000 60
$3,000
40
$2,000
$1,000 20

$- 0
AA CO DL UA US AA CO DL UA US


Airlines that establish credibility
•International travel continues to through effective customer
grow, presenting airlines with a loyalty programs place
variety of customers each with
different needs. themselves at a greater advantage
than other carriers within the
•Major carriers in the industry industry.
dominate hubs domestically and
globally, defining themselves as key
players in the market.
•Substitutes for airline travel have
•Regional carriers substantiate the increased due to the effects of volatile fuel
domestic markets. prices.

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

•Decreased amounts of discretionary
Revenue $ Billion
income has led to a decline in leisurely
135 travel.
130
125
120 Profit (Loss)$ Billion
115 5
110 4
105 3
2
100
1
2005 2006 2007 2008
0
-1 2005 2006 2007 2008
-2
-3
-4
-5

Long Term
Intro Analysis Outcome Conclusion
Rec’s


AMR’S Major Competitors:
• Delta Airlines • America West Airlines
• Southwest Airlines • Northwest Airlines
• United Airlines • Continental Airlines
• U.S Airways • Alaska Airlines

The recession and impact of oil prices has
resulted in a decline in the majority of the
industries stock prices.
COM∙PE∙TI∙TION - THE EFFORT •AMR : 08’ Revenues of $23.8 Billion, will lose
$1.01 per share in 09’
OF TWO OR MORE PARTIES •Delta: 08’ Revenues of $22.7 Billion, will
ACTING INDEPENDENTLY TO earn $.54 per share in 09’
•United: 08’ Revenues of $20.2 Billion, will
SECURE THE BUSINESS OF A lose $4.97per share in 09’
THIRD PARTY BY OFFERING •Continental: 08’ Revenues of $15.2
Billion, will lose $.33 per share in 09’.
THE MOST FAVORABLE TERMS •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’.

Market Share (June 2009)
American
12%
22% Southwest
17% Delta
20% U.S
13%
United
16%
Continental


Competitive Rivalry: Threat of New Entry:
The airline industry contains a large number In the airline industry there is an ease of
of firms, which increases rivalry because access to capital, and because it is easy for
more airlines must compete for the same weaker airlines to obtain credit, the industry
customers and resources. This results in has become saturated. Larger airlines benefit
airlines striving for a competitive advantage. from a strong brand identity, and major
Flying incentives have been successful in airlines allocate substantial resources to
attracting travelers to fly with certain marketing efforts.
airlines. Frequent flyer incentives and the
lack of extra fees can be strong enough to
cause a customer to choose a certain airline.

Bargaining Power of Buyers: Bargaining Power of Sellers:
In economic recessions customers will The airline supply business is predominantly
always search for the best deals. Airline travel dominated by Airbus and Boeing. The result
is expensive, and the demand is very elastic. of the concentration of suppliers is that
American Airlines strives to provide airlines cannot implement leverage over the
safe, dependable and friendly air supplier to obtain lower prices or play one
transportation to our customers, along with supplier against another.
numerous related services. These are
reasons one customer may pick American
Airlines over another airline.

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.


Strengths & Opportunities

•Global Network
•Strong Alliances & Marketing Tie-Ups
•New Financing
•Solid Capital Structure
•Frequent Flyer Program
•Growth of Global Airline Market
•Growing Domestic
•Freight Market Threats & Weaknesses
•Declining Operating Efficiency
•Declining Premium Cabin sales in
External Forces Long-Haul Flights
•Fleet Management
•Inefficient Use of Employees
•Global Economic Slowdown
•Competition for Market Share
•Price Competition
•Fuel Prices


One plan, one direction. AMR has
decided to allocate additional resources A positive outlook:
to more profitable flight areas. Their
•$2.9 Billion in new financing.
strategy is to increase flight activity in
their most profitable hubs, while •Sold $1 billion in frequent flier miles to
decreasing activity in their least Citigroup.
profitable ones. The company’s plan also
includes placing a larger emphasis on •Borrowed approx. $300 million from
international travel. AMR has raised General Electric Capital Aviation Services
(GECAS), using their aircrafts as
external cash to prepare themselves for
collateral.
investments in new fleets for the growth
of international travel. •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.


Liquidity

• The current ratio, 0.63, is greater than the industry
average of 0.61, but lower than its top competitors
average of 0.82
Industry
Comparison
•The quick ratio, 0.53, is greater than the industry
average of 0.4, but lower than its top competitors
average of 0.76

Leverage

•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 Industry
Comparison
•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

Equity

•The total debt has fluctuated between 91-112%
within the past three fiscal years
Industry
•The debt to equity ratio is at a disadvantage Comparison
compared to its competitors, this can be attributed
to the company’s resistance of bankruptcy


•AMR Corp. gross profit
margin has decreased
9.3% since 2007 Gross Profit Margin
•It has the highest GPM 100.0%
in 2008 compared to its AMR Corp.
competitors 80.0%
60.0% Delta Air Lines

40.0% UAL Corp.
20.0% Continental
0.0% Airlines
2006 2007 2008

•Revenue began to
increase due to capacity Operating Profit Margin
cuts
120.0%
•Volatile fuel prices 100.0%
hiked up 80.0% AMR Corp.
expenses, offsetting 60.0% Delta Air Lines
revenue
40.0%
UAL Corp.
20.0%
0.0% Continental
-20.0% Airlines
-40.0%
2006 2007 2008

18


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.

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

American's hedging strategy is not about
making a bet on oil prices going up or
down, but finding a way to systematically

1¢
dampen the price unpredictability of a $28
In 1 Gallon Million
significant operating cost (AA Inc). This
strategy compares very favorably to its of Fuel in costs
competitors and in recent years has helped
reduce fuel expenses by hundreds of
millions of dollars. In 2008, American saved
$380 million.

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.

19


This graph shows the
Pre-Fuel Cost Results- 2008
major airlines profit
excluding fuel, compared $9,000
to its fuel expense. $8,000
American is doing very $7,000
well in comparison to its $6,000
$ In Millions

competition
$5,000
$4,000
$3,000
$2,000
$1,000
$0
Americ Southw Contine
United U.S Delta
an est ntal
Profit Excluding Fuel $6,924 $4,034 $5,474 $1,348 $4,024 $5,821
Fuel Expense $8,158 $3,713 $7,725 $3,600 $4,726 $6,327

This graph shows the
major airlines total Cost Per Avail. Seat Mile
system ASM costs with ¢14.00
fuel and
¢12.00
without, compared to its
competition. The most ¢10.00
important factor is the
¢8.00
CASM ex-fuel, which
reflects the actual cost of ¢6.00
running the airline. Only
¢4.00
United and Continental
have higher costs then ¢2.00
American. (Delta and U.S
Airways numbers are ¢0.00
America Southwe Contine
United U.S Delta
skewed because of their n st ntal

bankruptcy) CASM Excluding Fuel 10 5.23 10.22 8.36 10.45 8.33
CASM Fuel @ $1.85 13.07 7.93 13.06 11.3 13.09 11.27


This graph represents the
high, low, and closing stock Stock Price (High-Low-Close)
prices for AMR from years $80.00
1999 to 2008. $70.00
AMR stock is considered a $60.00
moderate buy by many $50.00
financial analysts because $40.00
of its large cash $30.00
position, good free cash
flow generation, hidden $20.00
assets, and a $10.00
focused, financially $0.00
oriented management
team.(Forbes)

Closing Price

AMR Corporation reported Earnings Per Share
annual 2008 losses of $4.57
per share on 01/21/2009. $200.00
(BuisnessWeekly)
$100.00

$0.00

-$100.00

-$200.00

-$300.00

-$400.00

-$500.00

-$600.00


Book Value
$60.00

$50.00

$40.00

$30.00

$20.00

$10.00

$0.00

-$10.00

-$20.00

•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

P/E Ratio 08-99
30
25
20
15
10
5
0
(5)
(10)


Debt (In $Millions)
Delta
Continental
U.S
United
SouthWest
American

$0 $2,000 $4,000 $6,000 $8,000 $10,000 $12,000

American SouthWest United U.S Continental Delta
Long-Term Debt $8,292 $3,278 $6,971 $3,734 $5,360 $8,338
Current Debt $1,124 $105 $1,454 $423 $578 $1,769

•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 Leverage
in 09’
100
•This debt leaves American 50
vulnerable if the economy further
suffers. 0

(50)
•The debt takes a significant
amount of cash flow in the form of (100)
interest expenses, which may
affect operations and future (150)
investments
(200)

(250)


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 Revenue Per Employee in
2008
•AA Employees per Aircraft was 117
$450,000
$400,000
•American Airlines total revenue per
$350,000
employee was $282,592 in 2008. (table)
$300,000
$250,000
$200,000
$150,000
$100,000
New Incentive Program: $50,000
$0
•Pay for performance method which
AMR Delta Continental United
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

24

Introducti
on
Analys
is
Recommendations &
Conclusions
Outco
me
Appendice
s
24

Goal #1
Identifying strategies to create a strong
market position for AA in the crucial global
market.

Recommendation:
•Global market growth plan
oStudy Abroad students Goal #2
oForeign Students
Strengthen Oneworld Alliance by
identifying new global markets

Recommendation:
•Plan for service to teams, staff and fans
for upcoming international sporting
events.
oOlympics
oFifa World Cup
•Using new and old members efficiently
Goal #3 to increase load factor and feed for the
alliance.
Cutting costs on routes losing money and
creating new profitable routes

Recommendation:
•Redesigning fleet and reinvesting it for new
routes
oReplacing current fleet not operating
profitably on certain routes with more
efficient aircrafts.

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

25


Problem
American Airlines is experiencing declines in
per-passenger revenues in long-haul
international markets.

Solution
Identify 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 Looking at the high
who travel to the U.S to attending audience of
study as well as the global sporting events
students who leave the U.S
to study


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
Ultimate Result
schools sending students for study abroad
The Combination of the
programs.
specially designed package
in alliance with Jet Airways
and the contract with
states and universities, we
expect the gain in AA’s
Incoming Foreign students share in the global market
to generate an increase in
sales and revenues by at
least 10%.
• 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


“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. students
studied abroad, an increase of 8.5 percent from the previous year.

# Of U.S Students Studying Abroad
300,000
250,000
200,000
150,000
100,000
50,000
0


A 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.

# Of Students That Study Abroad (By
State)
30000
25000
20000
15000
10000 2005/2006

5000 2006/2007

0


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.

Top 10 Markets For U.S
Students-2007
40,000
30,000
20,000
10,000
0

# Of U.S Students

% Change In # Of U.S
Students (2006-2007)
30.0%
20.0%
10.0%
0.0%


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 It wouldn’t be wise to just
hubs. 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.

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.


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.

Foreign Student Increase

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

100,000
80,000
60,000 07 -'08
40,000 06 -'07
20,000 05 -'06

0
India China


# of Students per top 5 states
100,000 IIE prepared a table on number of
85,009
international students in US states
80,000 69,940 and how much they contributed to
them in 2008:
60,000 51,823 CA- $2,452.3 million
NY - $1,952.7 million
40,000 31,683 28,604
TX - $1,055.4 million
20,000 MA - $1,004.0 million
IL - $710.2 million
0
CA NY TX MA IL

800,000
700,000 IIE also recorded the
number of foreign
600,000 family members that
500,000 were accompanying
Children the students. AA and
400,000 Jet can offer special
Spouses discounts and
300,000
Students services for students
200,000 flying with there
families.
100,000
0
05'-06' 06'-07' 07'-08


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.

Jet Airways (India)
American Airlines has already tied up with Jet Airways.
Jet Airways is India’s second
In February 2008, AA established a code-sharing
largest airline and largest private
agreement with Jet.
airline. In July 2008, UK based
Jet offers travelers frequent flyer miles called JetPrivilege
consumer magazine
miles on all Jet Airways code-share flights operated by
Which?, ranked Jet Airways as the
American Airlines from their JFK hub going to certain US
best long-haul airline after
cities that are to/from India or Jet’s EU hub in
Singapore Airlines having an 84%
Brussels, Belgium. Foreign students, especially
customer satisfaction rate
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.
The Plan: Jet can fly students from India to its
If AA can establish an agreement with Jet hub in Brussels or to AA’s hub in
to create a specialized travel package for London and AA can fly them to their
these foreign students it could generate destinations here in the US.
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
Benefits:
to the students already here or going The agreement between these two airlines could result
abroad. in:
•Higher global market share for AA and Jet.
Assuming that AA already has a share in •More RASM for both with higher load factors on
the total number of students flying to the respective routes.
US, this package should increase their •Increased traffic for Jet at Brussels hub.
share in this market by about 10%. •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.


American Airlines has received AA can also approach China Eastern
tentative approval by the U.S. DOT for Airlines to provide the package as they
authority to offer service between currently codeshare with AA, Japan
Chicago and Beijing, China. Starting Airlines and Qantas, all members of
April 4, 2010, American Airlines plans oneworld. CEA can market the package to
to offer nonstop service from Chicago students traveling to the US from China.
O'Hare International Airport (ORD) to
Beijing, China with its 245-seat, three-
class (First, Business and With the addition of this route to it’s
Coach/Economy) Boeing 777 aircraft. 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
Students in 07/08
IIE prepared a database which recognizes 8,000
7,189
the Universities which enroll the most
international students. The Top four are: 7,000 6,404 6,297
5,933
University of Southern California, New 6,000
York University, Columbia University and
University of Illinois at Urbana 5,000
Champagne.
4,000
AA should get in touch with these 3,000
Universities and offer packages through
them to the students which will further 2,000
contribute to the 10% increase in RASM.
1,000
0
USC NYU Columbia UIUC


Benefits Limitations
Increased share in global market as a Students that are already travelling
result of: have established preferred service

Contracts with states and their Ineffective marketing strategy that isn’t
universities as well as private sensitive to important factors such as
universities culture, language and finances in a
foreign market
Larger customer base through Jet and
CEA Strengthening dollar could affect the
number of foreign students coming to
Service to students that if satisfied the US
could be potential loyal customers
During high flying season availability of
Expansion of AAdvantage incentive seating will determine offer of
program discounts for students as a normal
passenger would be paying more
Increased operations in Europe, Latin
America and Asia through oneworld
and other codesharers.


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 .


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.


Oneworld is currently #3 in the US-EU
market after Skyteam and Star Alliance. It Capacity Share
is also behind its competitors when One World
comparing capacity scheduled at each key
gateways. They are competing for their 15.3%
21.4% SkyTeam
hub in Heathrow as well as trying to gain a
higher share at other high-traffic EU hubs
Star Alliance
36.1% 27.1%

Virgin
Atlantic/Other

Alliance Major Hub Shares
100%
It has the highest
90% share at
Heathrow but
80%
stands third with
70% respect to share
from
60% Paris, fourth
50% from Frankfurt
and has no share
40% at Amsterdam .
30%

20%

10%

0%
LHR-US CDG-US FRA-US AMS-US
Virgin Atlantic/Other 15.1% 1.90% 8.30% 3.70%
Star Alliance 18.5% 18.10% 79.70% 18.00%
SkyTeam 6.0% 64.90% 7.40% 78.30%
One World 60.3% 15.20% 4.50% 0%


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

The major global sporting events contain similar
characteristics:
•Held over a course of several days
•Held in or around a “Host-City” NA·TION·AL·ISM
•Tend to be with a 2-4 years gap between
every event DEVOTION TO
•Countries send national teams to each THE INTERESTS
competition
•Large amount of money spent on these OR CULTURE OF
events. 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)


•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.

Summer Olympics Tickets Sold Winter Olympics Tickets Sold
10,000,000 2,000,000
8,000,000 1,500,000
6,000,000
1,000,000
4,000,000
500,000
2,000,000
0
0


•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

Men's World Cup Tickets Sold # of Qualifying
4,000,000 Teams
by Region(86'-
3,000,000
Region 06')
2,000,000
1,000,000 Europe 85
0
South America 26
North&Central
America/Caribbea
n 16

Africa 22

Asia 18

Oceania 1

42


The JAL situation: Japanese airlines is
highly in debt and is under pressure from the
With oneworld not doing very well in Japanese government to develop a new
comparison to its competitors, it must take survival plan. There are 3 possible endings to
advantage of these international sporting this situation:
events to increase revenues and market •JAL joins Delta and leaves Oneworld. Penalties
share. of them leaving the Oneworld agreement get
absorbed by Skyteam.
Oneworld and all its members should •JAL gets refinanced by AA, British Airways and
develop a preplanned itinerary in the form Qantas and stays in Oneworld.
of a travel package to market to the mass •Japanese government bails out JAL and it
amounts of people attending these remains in Oneworld.
sporting events.
•The 2nd and 3rd result would be beneficial for
AA and Oneworld.

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 4
Place: oneworld website, travel agents.
Promotion: Advertise on Sports channels and
journals, at qualifying events leading up to final
event.
2010 2012 2014 2016
TOTAL 30% 1,237,558 1,597,028 1,237,558 1,597,028
TOTAL 20% 825,039 1,064,686 825,039 1,064,686
TOTAL 15% 618,779 798,514 618,779 798,514
TOTAL 10% 412,519 532,343 412,519 532,343

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

•The Asia/Pacific, European, and North American Oneworld can gain a significant share if they
market all incurred passenger per kilometer market their package plan well before 2012.
declines between 10%-12%.
A team set up by the Japanese government is
•The 3 major markets also experienced capacity analyzing JAL’s situation to advise on the
cuts. company’s overhaul and should decide by
the end of November.

If the JAL situation results in AA and
The Fifa World Cup will be held in the summer of Oneworld’s favor, they can use the ERJ-
2010 in South Africa. This event will bring in 145(50-seater) cut out from Eagle’s fleet to
millions of fans from around the globe. add to JAL’s current fleet. This can increase
scheduled capacity and introduce new routes
Mexicana Airlines which services Mexico and in the North-Eastern pacific market.
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.


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 Problems for LCC’s, Opportunity
Pilots Association (APA), there is a
misconception about LCC’s having lower for AA:
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 Southwest reported three straight quarterly losses for
of resources. 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.
Main Point 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
•The massive growth potential for these through lower fares
carriers has ended No longer have a competitive advantage as
•Affected by the same market forces as the competitors immediately match pricings initiated by
CNC’s. Southwest.
•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


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.

Problem %Outsourced in 2008
AA puts the least amount of resources 25.0% 22.7%
towards the operation of its regional
partner as compared to its competitors. 20.0% 17.1% 16.8%
As of the first quarter of 2009, the
15.0% 12.0%
percentage dropped from 12% to 11%.
 Eagle’s fleet is making significant 10.0%
losses coming out of all its main hubs.
Especially with the flights with 50 or
5.0%
under seating. 0.0%
AA CO DL UA

Our Solution

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.


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)

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
Embraer ERJ-135 would have to generate about 28 ¢ from the
feed passenger on the 300 mile route.


We analyzed the 50-seaters and under that are flying
Our recommendation for AA is to redesign
out of DFW, only three are making profits in the over their regional fleet, cutting out all the 50
600 mile market. Some flights have a frequency of and 44-seater airplanes and replacing them
about 4 or more times a day. Their average load with the Embraer 190 which has 98 to 114
factor is 80% but the routes that are losing the most seats. The costs associated with the
money have a load factor between 60% and 70%. For Embraer-190 are the same or less than the
example the route from DFW to CVG in Cincinnati Embraer-145(Table on next slide). As
made a loss of over one million dollars in 2008 as shown in the table, the EMB-190 can
well as the route to Lexington which lost about 1.1 transport the same amount of people on a
million. SEE TABLE
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.

$3,000,000
$2,500,000
$2,000,000
$1,500,000
Load Factor
CVG - Cincinnati, OH – 63.1%
$1,000,000 Revenue LEX - Lexington, KY – 65.4%
$500,000 Profit/Loss PNS - Pensacola, FL – 73.4%
VPS – Northwest Florida
$0 Airport, FL - 67.8%
CVG
LEX
PNS
VPS

($500,000)
($1,000,000)
($1,500,000)


ERJ-145 EMB-190
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


Benefits Limitations

•Optimized fleet capacity to •Unavailability of buyer for
cut costs on failing routes excess fleet

•Increased load factor and •Still could incur low capacity
RASM rates

•Efficient use of available •Increase in fuel price could
resources cause cost of operating of EMB-
190 to exceed cost of ERJ-145.
•Increased share in domestic
market as a result of plan •High investment required
and decline in LCC

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- $675,000,000
Cash - $675,000,000

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%.

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 oneworld and global sporting event
passenger load – student growth recommendation to increase share by:
Entering high traffic EU hubs
2012 – 5% increase in revenues and Establishing new hubs in Latin America and
passenger load - Olympic games in Asia
February, increase in assets(Investment By efficiently using Mexicana and JAL to
in New aircrafts) Decrease in cash and generate feed at oneworld hubs
retained earnings.

2013 – 3% increase in revenues and American Eagle fleet
passenger load – Student package plan 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.


AMR Delta United Continental
Liquidity
Current Ratio
2006 0.81 0.93 0.79 1.04
2007 0.85 0.79 0.76 1.03
2008 0.63 0.81 0.67 0.97
Quick Ratio
2006 0.75 0.9 0.76 0.99
2007 0.78 0.75 0.73 0.96
2008 0.58 0.77 0.6 0.92

Efficiency Ratio
Inventory Turnover
2006 44.59 94.86 88.72 60.5
2007 38.16 73.11 83.24 52.52
2008 45.27 58.5 44.29 64.86
A/R Turnover
2006 61.82 19.45 15.47 16.18
2007 62.84 20.31 16.09 15.54
2008 65.11 41.52 12.98 16.85
Total Asset Turnover
2006 0.77 0.88 0.76 1.16
2007 0.8 0.59 0.83 1.18
2008 0.94 0.5 1.04 1.2
Total Asset Turnover
2006 1.12 1.32 1.69 2.1
2007 1.32 1.64 1.77 2.17
2008 1.5 1.1 1.96 2.08


Solvency Ratios
Total Debt AMR Delta United Continental

2006 1.02 1.69 0.92 0.97
2007 0.91 0.69 0.9 0.87
2008 1.12 0.98 1.13 0.99
Debt to equity
2006 -49.1 -2.44 10.81 31.59
2007 9.75 2.21 9.02 6.81
2008 -9.58 50.5 -8.9 119.82
Equity Multiplier
2006 -48.1 -1.44 11.81 32.59
2007 10.75 3.2 10.02 7.81
2008 -8.58 51.5 -7.9 120.82
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%


Market Value AMR Delta United Continental
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

AMR's finances past and future

AMR's finances past and future

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