American Airlines Demographic Information, Research Paper Example

American Airlines, Inc (AAL): NASDAQ; also called American Airlines Group (AAG) and founded in 1930 as American Airways, is one of the major airline companies of its industry operating from the US. Previously AMR Corporation, the company merged with US Airways group in 2013 after they had filed for chapter 11 bankruptcy in late 2011. Head-quartered in Fort Worth, Texas, AAG provides domestic and international flights operated primarily throughout North America, South America, the Caribbean, Europe, and Asia. Employing 110,400 workers as of December 2013, AAG also operates together with their third party regional carriers including Air Wisconsin, Express Jet, Mesa, Republic, and Sky West. AAG operates 965 main jets while their third party regional carriers run nearly 520 jets as well as 40 turboprops. AAG is also a member of the Oneworld air alliance. (Line, 2013)

AAG’s macro-environment, or external environment, has a significant dependence on demographic factors. AAG’s demographic factors refer to a target market based on age, gender, house hold income, occupation, and level of education. AAG’s 2013 reporting states that gender passenger profile consists of 57% males and 43% females; about 68% of them are married. The median age for their passenger profile is 45. About 59% of passengers in their passenger profile have a house hold income of at least 100,000 dollars. White collar occupations consist of about 31% for company owners and executive officers while employees at the managerial level make up 70%. Passenger profile for level of education consists of 23% of passengers without a college degree, 55% with at least a college degree, and 22% in post graduate study. (Business, 2014)

The economic environment is another factor in the external environment that AAG has concern for. According to their latest economic impact report from 2012, AAG made a significant impact on the US economy with their contribution of nearly $51 billion USD to the US gross domestic product (GDP) and creating over 965 thousand new jobs. Direct operating expenditures for AAG was $22 billion this year. Fluctuations in oil prices have a major impact on the economic factors within the airline industry including AAG. (Business, 2014)

The technological factor of the external environment is the driving force for the improvement of airline operations and efficiency. Airlines have been able to cut costs and better their operations through the advancements in aircraft engine technology, information technology, as well as mobile technology. Fuel is AAGs primary component as it accounts for nearly 30% of total operating expenses. Modern aircrafts such as Boeing’s 737 MAX, 747-8, and 787 are engineered to significantly decrease fuel consumption compared to older models like the 747s. Technological advances in fuel efficiency also help to extend the distance an aircraft can travel with a given amount of fuel as well as the payload capacity it can carry. With an increased payload, AAG’s aircrafts can drive up revenue by having more seats available. AAG is efficient in keeping their cost of fuel low; currently at just $3.03 per gallon. (Cederholm, 2014)

One effective strategy being used by AAG is their frequent flier program. This program is intended to stimulate and maintain customer loyalty. AAG enacted their AAdvantage program for frequent fliers, which offers awards to travelers as they continue to fly with AAG. Members of AAdvantage can earn mileage points through flying with AAG and associated airlines.  AAG also sells mileage points as well as related services to other entities from outside industries. AAdvantage has over a thousand other participants of their program such as credit card agencies, hotels, rental car services, and participating restaurants. (Line, 2013)

An objective of AAG is to minimize environmental waste. Their goals for fuel efficiency play a part in strategizing this objective as AAG has recently established their Waste Minimization Team (WMT). Their WMT set a performance goal in 2011 to reduce environmental waste by 326,800 pounds. After their continued efforts throughout 2011, AAG’s WMT dramatically exceeded this goal by reducing their environmental waste by 1.3 million pounds, almost a million pounds more than they had initially planned. Their strategy sets their initial goals based on the weight of the Boeing 777 aircraft. Continued efforts for this objective of reducing environmental waste are supported by a steering committee of vice presidents throughout the WMT organization. (Airlines, 2012)

Financial ratio analysis is conducted using AAG’s 2014 statements. All ratios are on a scale of millions.

The current ratio is calculated by dividing current assets by current liabilities. The purpose of this ratio is to measure AAG’s short term ability to pay debt. On a scale of millions, AAG’s total current assets for 2014 of 12,112 divided by their total current liability of 13,435 is 90% which is indicates AAG’s strong liquidity. (Finance, 2014)

The debt to equity ratio is a leverage ratio that measures how much of AAG’s suppliers, creditors, and obligors have committed to the company against how much the shareholders have committed. This indicates what portion of AAG’s equity and debt is being used to finance their assets. Higher leverage means higher risk. In 2014, AAG had $17,904 of short-term and long-term liabilities, divided by their total stockholders’ equity of $2,021 equaled to a debt to equity ratio of 8.86. This indicates that AAG has been aggressive with financing their growth in debt. (Finance, 2014)

The gross profit margin ratio is a measure of profitability. This indicates how much of AAG’s total revenue is being kept as profit. In 2014, AAG had a gross profit of $6,985. Divide this by their revenue of $10,160 and AAG’s gross profit margin ending in 2014 was 72.98%. This percentage indicates AAG’s strong ability to keep substantial profits from their revenue. (Finance, 2014)

The Return on assets ratio is an overall measure of profitability which indicates how well AAG is able to convert their investments into profits. In 2014, AAG’s net income was $2,388. This net income is then divided their average of assets for that year which was $43,972 bringing AAG’s return on assets ratio to 5.43%. This return on assets ratio that AAG generated for 2014 was greater than 93% of the other 187 global companies in the airline industry. (Finance, 2014)

The earnings per share ratio are the amount of earnings for every outstanding share of AAG’s stock. This ratio is calculated by subtracting preferred dividends from net income and dividing that amount by the total shares outstanding. In AAG’s case, their 2014 net income was 2,882 and was divided by the total shares outstanding of 734 because AAG did not have any preferred dividends. The ratio was 3.93 at the end of 2014 indicates AAG’s earning power on each share of common stock. (Finance, 2014)

Finally, a test of AAG’s solvency will be done through the debt to total assets ratio which measures the percentage of AAG’s total assets provided by creditors. AAG’s long-term debt in 2014 was $16,196. This amount is divided by their total assets for 2014 of $43,771 which brings AAG’s debt to total assets ratio to 0.37. This ratio indicates that about 37% of AAG’s assets are comprised of long-term loans and financial obligations that last over a year. This is about a one percent increase from their 2013 debt to total assets ratio of 36%, suggesting that AAG may be progressively becoming more dependent on debt to finance their business. However this increase is not significant enough to compromise their financial independence. (Finance, 2014)

Conversely from other rival US Airlines, AAG does not hedge their fuel and this decision showed to be effective as the company generated $2.9 billion in net profits in 2014. Choosing not to hedge their fuel enabled AAG to gain the benefits of the recent pivotal drop in oil prices. AAG should definitely continue along this strategy for fuel if they want to continue to be both cost efficient and fuel efficient in the next five years. (ATW, 2014)

Their environmental concerns also enforce stakeholder confidence. AAG’s strategy through establishing their WMT benefits not only their business but also the economy as well as the environment by reducing their carbon footprint. AAG’s efforts to project such high performance goals in waste reduction have proven to be successful and should be continued. Climate and energy conditions are impacted by the results of how AAG’s burns their jet fuel. Programs such as the WMT have been initiated to generate the highest fuel efficiency. This continued environmental strategy helps to minimize any greenhouse effect due to gas emissions as well as to reduce energy utilization across AAG’s fleet of aircrafts. (Airlines, 2012)

Management of utilities also aids in keeping AAG’s carbon footprint under control. The AAG ground facilities and the infrastructure of their airports help contribute to environmental factors concerning use of energy, materials, and water, and other waste and emissions. AAG has a Utilities Management Council that put emphasis on sharing the most effective airline industry practices as well as integrating objectives to reduce use of natural resources to conserve the environment and sustain cost savings across all levels. Minimization of environmental waste is a primary focus on both operations in the air and on the ground for AAG. The WMT conducts source reduction, reuse, recycling, and reclamation as is significantly minimizes the amounts of wasted materials. AAG takes into consideration complete compliance with pertaining environmental laws and regulations. Their performance measures across all levels of the company are based on such laws and regulations. In conjunction with the WMT, AAG enacted their Environmental Management System to help enforce and maintain full compliance with relevant environmental laws and regulations. With technological advances in their fuel economy as well as their commitment to their environmental impact, AAG can continue to be the most environmentally friendly airline in the industry five years from now should they continue to practice these strategies. (Airlines, 2012)

Progressive increases in the global tourism industry may help to boost AAG’s market position. Since the financial crisis of 2008, the tourism industry has experienced a significant recovery following its downfall. This resilience of the industry is mostly due to the globally improved economic conditions. The World Tourism Organization (UNWTO) reports that international tourist arrivals increased by 5% in 2013. This 5% increase is up from 2012’s 1,035 million to the current 1,087 million. (Line, 2013)

The UNWTO expects international tourist to progress growth in years to come. International arrivals are predicted to increase by about 4% worldwide. This expected increase in the global tourism industry suggests that consumer confidence has grown with the business. Such increased demands in the global tourism industry are a profitable opportunity for AAG because the demand in international airlines will increase as well. (Line, 2013)

Aircraft maintenance is a continuing demand for airlines. Increased growth is predicted for the aircraft maintenance, repair, and overhaul (MRO) market on a global scale. Because of the continued need for aircraft maintenance among depreciating fleets of aircrafts, the MRO market is forecasted to increase during the next 5 years. Based on marketing analysis, the global MRO market for aircrafts is expecting to reach a value of $55.2 billion during 2015, which is a about a 12% increase from the value in 2013 of 49.2 billion. This projected growth in the MRO market could facilitate AAG to generate progressive increases in revenue for the next 5 years. (Line, 2013)

If I were the CEO of AAG, I would definitely suggest that the company continues their efforts for environmental awareness as it has shown to be profoundly effective. I would also suggest that the company continue to avoid hedging fuel as the $2.9 billion net profit from 2014 showed such a remarkable acumen for business. Based on the financial analysis, AAG seems to be right on the line with the airline industry average as far as being dependent on creditors to finance their business. 2014’s debt to total assets ratio was an industry average of 0.38. AAG’s analysis showed their debt to total assets ratio was 0.37 for the same year. AAG showed to have a strong gross profit margin ratio at nearly 73%. As CEO, I would suggest that the company progressively moves away from creditors as a source of assets to incrementally solidify financial independence. Start paying off the creditors with the strong revenue that is being generated and bring the following years’ debt to total assets ratio down because it was up from 2013. (Finance, 2014)

As far as strategies being used by AAG’s competitors, the entire airline industry is defined financially by the intensive price competition. The primary threat for AAG within the airline industry is the airlines associated with Star Alliance. Prices continue to be competitive throughout these chains of airlines. There are even price threats for AAG outside of the commercial airline industry. Increasing competition in prices from cargo carriers, charter flights, foreign air carriers, and shorter distance travel such as train and bus lines, all impose a threat to AAG’s sales volume. AAG should combat these strategies from other competitors by simply offering better services for their prices. There is no need for AAG to drop their prices. The prices will always be competitive so there is no point in trying to change with s irrelevant. What AAG can strategize against their competitors is what they offer for the same price. Possible strategies are that AAG offers more frequent awards in their AAdvantage program to further stimulate customer loyalty. Another sales strategy AAG may want to consider is more frequent promotion sales on their tickets. These random spurts of price drops can stimulate sales and once the customer enrolls in AAdvantage, they are more likely to remain loyal to AAG for the desire of the program’s benefits. (Line, 2013)

Bibliography

Airlines, A. (2012). Environmental Progress. Retrieved from American Airlines: http://www.aa.com/i18n/aboutUs/corporateResponsibility/environment/progress.jsp

ATW. (2014). American earns $2.9 billion 2014 Net Profit. Airfinance Journal, 12.

Business, T. (2014). American Airlines Demographic Information. Retrieved from Talk Business 360: http://talkbusiness360.com/wp-content/uploads/2014/04/American-Airlines-Demographics-2013.pdf

Cederholm, T. (2014, September 3). Must-know: External factors that influence the airline industry. Retrieved from Market Realist: http://marketrealist.com/2014/09/must-know-external-factors-influencing-airline-industry/

Finance, Y. (2014). American Airlines Balance Sheet. Retrieved from Yahoo Finance: https://finance.yahoo.com/q/bs?s=AAL

Line, M. (2013). American Airlines Group Inc. SWOT Analysis. Market Line, 2-9.