American Airlines Case Study
Instructions: Case Questions for American Airlines in 2011 (Group case)
1. You are a high caliber consultant hired by Tom Horton to pilot American through its turbulent times. In a priority listing, what do you consider to be American’s most important challenges?
2. From your answer in question #1, which of these are unique to American and which are affecting the whole industry? Why?
3. How did it come about that American in facing these issues?
4. The success of the LCC’s is well-known. How long did it take the legacy carriers such as American to see the pressure over the entire network? Will this pressure continue as the LCC’s expand into international routes?
American Airlines Case Study .
The airline industry is an essential source of transportation and serves almost every corner in the world. As a major booster to the economic growth, air transport has encountered significant management shortcomings. This paper will discuss the major management problems facing American Airline frustrating periods and the industry as well. American airline is one of the largest airline networks in the world and serves a large number of people in the United States and globally. During Horton period as the president of American Airlines, he was concerned with the problem of coping up with models that low-cost carriers(LCCs) used in the industry restoration of the leadership of the company’s network carrier business model (Willy, 2015). LCCs’ business model was able to help American Airlines to compete outstandingly during the airline deregulation between 1978 and 2001. Also, Horton tried to compete well with those airlines that were restricting by merging to become bigger competitors in the market.
Development of LCCs was not just a problem to the American Airline Industry, but also a challenge for the global airline industry. The only LCCs that had competition with American Airline was the Southwest Airlines. Its model was simple as it based on the economics of density. The model did not have a complex strategy on connecting passengers, luggage at hubs, slack time, and it did not worry about the changes in labor cost in interchange activities. The driver for this model majorly focused on aircraft utilization by turning to a point to point model the hence use of the capital. Southwest Airlines being the pioneers of LCCs were the mastermind behind this model that was boosted by U.S Supreme Court ruling on the Deregulation Act of 1978. The model was able to offer customers a lower price for using their services.
A unique problem coined to American Airline during Horton’s time was his fight to restore leadership in their network carrier model. After deregulation, the company resorted to a model called hub-and-spoke model. This model was essential to American Airline’s progress through the use of information technology that was able to manage complexities in their networks across the world. The design enabled customers to take computerized reservations which allowed easy product distribution. This model also made a clear and smooth load dispatch strategies and ease in allocating capacity to routes. Horton was able to resolve the leadership issues associated with the network carrier business model but still the problem of competing with the LCCs was contemporary.
The arrival LCCs is one of the significant developments in the airline industry but also a big problem to the traditional airliners. LCCs model majorly focus on price rather than amenities that is essential for customer satisfaction. For American Airlines, they recognized that they are facing competition from the LCCs just after the rule of deregulation was passed. Initially charter operators served customers but due to deregulation, it enabled LCCs to expand their networks to federal operations. The Deregulation Act altered many aspects in the airline industry. It removed government control over fares and routes. This system typically led to inefficiency and higher costs and also made American airline loose passengers’ turnover drastically. That is when American Airlines realized that Southwest Airlines were potential competitors in the market.
Globally, the development of LCCs has also created a danger to the legacy carriers. For American airline, it took them a decade to focus on cutting cost so that they can be able to match up with the prices at Southwest Airlines (Willy, 2015). The rise of LCC has led to a new method of transparency in pricing across the aviation industry through the dawn of online fare displays and their powerful internet search engines which enables the customer easy access to the company’s services. Questions are being raised as to whether the pressure from LCCs will persist or not. Arpey argues that eventually the LCC model will converge to the network carriers because contracts of the aging workforces will become pattern bargained. He adds on and suggests that since the LCC models are now developing hubs, they will soon converge the model hence a relief of pressure to American Airline. Horton added on by suggesting that if a company is not a low cost, definitely it cannot yield flat revenues (Willy, 2015).
This trend of competitiveness in the market that the LCCs
have generated will soon come to a stop because the legacy airline carriers are
now stipulating same and better strategies to cope up with the pressure. The
legacy carriers are willing to expand
their profit margins through the
following strategies to overcome the pressure from LCCs. To begin with the installation of modern technology can make
profit margins protected even if prices of LCCs are low. Also, current legacy carriers have developed better
and efficient customer amenities that most customers prefer them to services
offered by LCCs (Ringle, Sarstedt, &
Lastly, legacy airlines are targeting clients
who are interested in ancillary services through
decoupling the service. Therefore, the
legacy carriers still have the upper hand in competing well with the LCCs.
Ringle, C. M., Sarstedt, M., & Zimmermann, L. (2011). Customer Satisfaction with Commercial Airlines: The Role of Perceived Safety and Purpose of Travel. Journal of Marketing Theory and Practice, 19(4), 459-472.
Willy, S. (2015). American Airlines in 2011. Havard Business School.