University of Jordan

Faculty of Business

Strategic Management

“American Airlines ”

Case Study

Strategic Management

Prepared ByFathi Salem Mohammed Abdulla

2009

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Introduction

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

Vision Statement (proposed)

To become the largest airline in the world.

Mission Statement (proposed)

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

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External Audit

Opportunities

1. Favorable wage negotiation climate2. Travel increasing in general3. Low interest rates4. Government backed loans5. Information technology6. New fuel efficient engines7. Partnerships with Asian Airlines

Threats

1. Increased air travel inconvenience (security related)2. Business travel declining3. Increased competition from point-to-point competitors4. Availability of pricing information5. Overcapacity in industry

Competitive Profile Matrix

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EFE Matrix

Key External Factors Weight Rating Weighted Score

Opportunities1. Favorable wage negotiation climate .15 4 .602. Travel increasing in general .05 2 .103. Low interest rates .05 3 .154. Government backed loans .05 4 .205. Information Technology .05 3 .156. New fuel efficient engines .05 3 .157. Partnerships with Asian Airlines .10 3 .30Threats1. Increased air travel inconvenience (security related)

.05 2 .10

2. Business travel declining .10 3 .303. Increased competition from point-to-point competitors

.15 3 .45

4. Availability of pricing information .10 3 .305. Overcapacity in industry .10 2 .20

Total 1.00 3.00

Internal Audit

Strengths

1. Size of fleet2. Number of routes3. Partnerships4. IT infrastructure5. Government relations

Weaknesses

1. Financial position2. Cost structure3. Unprofitable routes4. Too many divisions5. Reliance of business fares

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Financial Ratio Analysis (March 2007)

Company Industry Sector S&P 500

Valuation Ratios

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

Dividends

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

Growth Rates %

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

Financial Strength

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

Profitability Ratios %

Gross Margin (TTM) 17.26 26.52 33.15 47.32Gross Margin - 5 Yr Avg 19.31 29.28 33.94 47.01EBITD Margin (TTM) 3.06 12.74 17.88 20.79EBITD - 5 Yr Avg 2.39 12.48 18.06 20.82Operating Margin (TTM) -4.84 6.88 11.72 20.33Operating Margin - 5 Yr Avg -4.69 7.03 11.77 18.35Pre-Tax Margin (TTM) -7.50 8.34 10.24 17.27Pre-Tax Margin - 5 Yr Avg -6.40 7.38 9.93 17.54Net Profit Margin (TTM) -7.04 5.27 6.77 13.12Net Profit Margin - 5 Yr Avg -4.63 4.22 6.13 11.59

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Effective Tax Rate (TTM) N/A 37.15 34.89 31.31Effective Tax Rate - 5 Yr Avg 37.13 38.22 38.75 34.20

Management Effectiveness %

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

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

Company Worth Analysis (year-end 2001 2002 2003 average)

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

Method Average ($2,282,984,429)

IFE Matrix

Key Internal FactorsWeight Rating Weighted

Score

Strengths1. Size of fleet 0.10 4 0.402. Number of routes 0.10 4 0.403. Partnerships 0.15 4 0.604. IT infrastructure 0.10 3 0.305. Government relations 0.05 4 0.20Weaknesses1. Financial position 0.05 1 0.052. Cost structure 0.15 2 0.303. Unprofitable routes 0.15 2 0.304. Too many divisions 0.05 1 0.055. Reliance of business fares 0.10 2 0.20TOTAL 1.00 2.80

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SWOT Matrix

SPACE Matrix

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

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

Conservative Aggressive

Competitive

Defensive

FS

ISCA

ES

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Grand Strategy Matrix

The Internal-External (IE) Matrix

The IFE Total Weighted Score

Strong Average Weak3.0 to 4.0 2.0 to 2.99 1.0 to 1.99

High I II III3.0 to 3.99

American Airlines

Medium IV V VIThe EFE Total Weighted Score

2.0 to 2.99

Low VII VIII IX1.0 to 1.99

Quadrant II Quadrant I

Quadrant IV

Quadrant III

Rapid Market Growth

Strong Competitive

Position

WeakCompetitive

Position

Slow Market Growth

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QSPM

Strategic Alternatives

Key Internal Factors WeightInternational

ExpansionDomestic

ExpansionStrengths

ASTAS AS TAS

1. Size of fleet 0.10 --- --- --- ---2. Number of routes 0.10 4 0.18 1 0.123. Partnerships 0.15 1 --- 2 ---4. IT infrastructure 0.10 --- 0.20 --- 0.205. Government relations 0.05 --- 0.24 --- 0.18Weaknesses1. Financial position 0.05 1 0.28 3 0.072. Cost structure 0.15 4 0.12 3 0.183. Unprofitable routes 0.15 1 0.08 4 0.124. Too many divisions 0.05 --- --- --- ---5. Reliance of business fares 0.10 --- --- --- ---SUBTOTAL 1.00 1.35 1.60

Key External Factors Weight International

ExpansionDomestic

ExpansionOpportunities AS TAS AS TAS1. Favorable wage negotiation climate .15 --- 0.24 --- 0.242. Travel increasing in general .05 4 --- 1 ---3. Low interest rates .05 4 --- 1 ---4. Government backed loans .05 3 --- 1 ---5. Information Technology .05 1 --- 4 ---6. New fuel efficient engines .05 4 0.05 1 0.157. Partnerships with Asian Airlines .10 --- 0.06 --- 0.03Threats1. Increased air travel inconvenience (security related) .05 --- 0.20 --- 0.152. Business travel declining .10 --- 0.16 --- 0.083. Increased competition from point-to-point competitors .15 3 0.08 4 0.084. Availability of pricing information .10 3 --- 3 ---5. Overcapacity in industry .10 1 --- 4 ---SUBTOTAL 1.00 1.65 1.70SUM TOTAL ATTRACTIVENESS SCORE 3.00 3.30

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EPS/EBIT Analysis

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

Recession Normal Boom Recession Normal Boom

EBIT (500,000,000) 0 500,000,000 (500,000,000) 0 500,000,000Interest 0 0 0 25,000,000 25,000,000 25,000,000EBT (500,000,000) 0 500,000,000 (525,000,000) (25,000,000) 475,000,000Taxes 0 0 0 0 0 0EAT (500,000,000) 0 500,000,000 (525,000,000) (25,000,000) 475,000,000# Shares 188,333,333 188,333,333 188,333,333 155,000,000 155,000,000 155,000,000EPS (2.65) 0.00 2.65 (3.39) (0.16) 3.06

Common Stock Financing Debt Financing

Recession Normal Boom Recession Normal Boom

EBIT (500,000,000) 0 500,000,000 (500,000,000) 0 500,000,000Interest 7,500,000 7,500,000 7,500,000 17,500,000 17,500,000 17,500,000EBT (507,500,000) (7,500,000) 492,500,000 (517,500,000) (17,500,000) 482,500,000Taxes 0 0 0 0 0 0EAT (507,500,000) (7,500,000) 492,500,000 (517,500,000) (17,500,000) 482,500,000# Shares 178,333,333 178,333,333 178,333,333 165,000,000 165,000,000 165,000,000EPS (2.85) (0.04) 2.76 (3.14) (0.11) 2.92

70 Percent Debt - 30 Percent Stock70 Percent Stock - 30 Percent Debt

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