American Airlines Bankruptcy - Case Study Example

American Airlines Bankruptcy Student’s Name Institution Affiliation American Airlines Brief History American Airlines is one of the biggest airlines in the US and the second largest in the world in terms of the passenger miles transported. The airline has its headquarters in Texas. It has a wide domestic and international network with destinations to countries in four continents. American airlines started as American airways in 1930 (Reed, 1993). It came into being through reorganisations and acquisitions that created a conglomeration of more than 80 small airlines. It was renamed American Air Lines in 1934 after it was acquired by businessman E.L Cord. After the Second World War, American Air Lines acquired a company known as “American Export Airlines.” It renamed it as “American Overseas Airways.” This airline operated in the European market (Sterling, 1985). American Airlines is famous for its invention and pioneer of hub-and-spoke system after the 1978 airline deregulation in United States. This spurred its dramatic growth. The decade leading to the September 11 attacks was the best for the airline as it created the Global Alliance One World, which opened routes worldwide for the airline, and increased its capacity (Merced, 2011). However, the decade after the September 11 attacks was not promising for the airline as it underwent a dramatic slump that led to its filing for liquidation protection in November 2011 How American Airlines ended in Bankruptcy The “AMR Corporation,” which is the parent company of the American airlines filed for insolvency defence in November 2011, seeking to decrease its labour costs, as well as shed a debilitating debt weight (Merced, 2011). “AMR corporation” was the only remaining major legacy airline to file for liquidation security after all other major legacy airlines filed for bankruptcy protection following the aftermath of the 9/11 attacks, which had an extremely adverse effects on airline travel (Merced, 2011). The reluctance of “AMR Corporation,” which operates the American airlines to file for bankruptcy, had left the airline in a vulnerable condition. Throughout the bankruptcy process, the airline has remained in operation just like other airlines, and its flight and flier programs have not been affected (Merced, 2011). The company’s board decided to file for bankruptcy protection with a view of restoring its financial strength, operating efficiency and profitability and its profitability. Bankruptcy protection was meant to help the company achieve a competitive cost structure. The financial health of AMR Corporation has been eroding in the years leading to the filing of bankruptcy protection (Merced, 2011; pp.1). The company posted annual losses between 2007 and 2010. In 2010, the losses hit $487 million and in the first nine months of 2011, the losses had more than doubled to $982 million. By September 30, 2011, the company has assets worth $24.7 billion and $ 29.5 billion in debts. The shaky financial picture necessitated a bankruptcy protection American airline was a very profitable carrier in the 90s. However, the events that led to its filing for bankruptcy started in 2011. In 2011, the management of American airlines decided that the company should acquire the struggling Trans World Airlines. Trans World Airlines filed for bankruptcy after the acquisition deal was signed (Merced, 2011; pp.1). American airlines paid for all Trans World Airlines assets in cash amounting to $500 million. The carrier also assumed the operating leases and debts that were valued at $3billion, which was a good decision from an economic perspective because it increased the capacity and reach of American Airlines (Merced, 2011, pp.1). The deal saw American airlines gain 175 gates, 190 aircrafts, and 173 landing slots. Though this acquisition made economic sense, it came at the wrong time because five months later, one of the deadliest terrorist attacks affected America. Two planes belonging to Trans World Airlines were used. Although American airlines could weather that storm due to its healthy financial status, September 11 attacks influenced negatively on the airline industry because of the steep decline in travel, and led to massive losses in the airline industry. In this case, it is clear that the management did not initiate the event that signalled the start of the decline of American Airline. In fact, if the terrorist attack had not happened, American Airline would be in a better position because of the competitive advantage it gained after the merger with Trans World Airlines (Merced, 2011; pp.1 ). The second factor that forced American Airlines into Bankruptcy is increased competition in the airline industry. Though American Airlines is the largest airline in America, it had started to lose ground on smaller airlines such as Virgin America and South West Airlines (Merced, 2011: pp.1). These two airlines are among a number of low costs –no frills airlines operating in America. The airlines charge low fares and attract high volumes of passengers. The growth in prominence of these airlines threatened many legacy carriers such as American Airlines. Due to intense competition that led to the loss of customers to low cost airlines, American Airlines' performance, productivity, and profitability has been on the decline for six years before if filed for bankruptcy (Merced, 2011; p.1). Most airlines responded to the increased competition by reducing fares to compete favourably with the low cost carriers. However, the decision of American Airlines executives not to reduce fares saw the airline lose much ground, leaving unable to compete favourably in the changing airline market environment (Merced, 2011; pp. 1). The third factor that led American Airlines into bankruptcy was increased borrowing. The airline responded to increased competition by increasing its borrowing. Instead of cutting costs and fares to compete with the low cost carriers and other legacy carriers that had lowered their fares, American airlines eventually pledged nearly all its assets, leaving the airline in heavy debts. American airlines principal competitors such as United Airlines and Delta Airlines were able to shed billions of dollars in costs as they renegotiated labour contracts (Merced, 2011; pp. 1). To increase scale, these airlines sough for mergers. Delta merged with Northwest Airlines while United Airlines paired up with Continental Airlines, which allowed them to return to profitability. American Airlines should have taken this move immediately its profitability started dwindling. However, the management of the airline waited until it was too deep in the red to adopt such a move. Solutions to Avert Bankruptcy One of the solutions that can help an airline avert bankruptcy is cross utilization of employees. There is a need for the airline to negotiate with trade unions to seek changes to their agreements with workers with respect to the role they play (Doganis, 2002). The management of the carriers should approach trade unions and highlight how the carrier will benefit from cross utilization of employees. Cross-utilization is important, especially for airlines because it ensures that employees are not limited to a single function only, thereby creating a superior working environment. It leads to increased productivity and reduced costs. One of the airlines that have used the labour model of cross utilisation is southwest. American airlines should use such a model to avoid bankruptcy (Doganis, 2002). The second solution to bankruptcy is maintenance of cost discipline. Emergence of low cost carriers such as Virgin America and Southwest Airlines has driven down flight fairs in many routes, meaning that carriers such as American airlines need to cut costs so that they can remain competitive based on the fare charged. American airline is a legacy carrier and can still charge low fares and make a profit because it has a high level of operational efficiency. To create more operational efficiency and cut costs, American airlines need to eliminate frill services such as meals and snacks (Doganis, 2002). The airline should also aspire to fly a higher number of point-to-point routes, which will effectively decrease turnaround time and maximise utilization of its aircrafts. Combining such cost cutting measures and productivity will enable the airline to increase its competitiveness and reduce the risk of going bankrupt (Doganis, 2002). The third solution is lowering of the break-even factor load. Break even factor load is the most critical factor of operations in the airline industry. Break even factor load can be decreased if the airline lowers it costs. The other solution that can help American airlines avoid bankruptcy is frequent renewal of aircrafts. American Airlines has more than 600 planes. These planes have an average age of 15 years making the fleet one of the oldest in the American airline industry. The older the fleet, the lower the fuel economy and efficiency (Doganis, 2002). Therefore, an ageing fleet has been increasing fuel costs over the years. A major overhaul of the ageing fleet will not only reduce fuel costs but will also attract more travellers to the airline. The airline has already ordered more than 450 new single aisle aeroplanes from Airbus and Boeing as part of its comprehensive overhaul of its old fleet. The fuel economy that will be ensured by the new fleet will influence positively on fuel costs The final solution is working on the intangibles. American airlines need to improve its services and the amenities it offers. There is much competition between airlines with regard to service delivery (Doganis, 2002). Airlines such as Virgin America and Southwest are getting higher customer ratings because of their unique services and plans, while at the same time, offering low fares. Creation of a fun atmosphere in a flight using modern technology is likely to attract, more customers (Doganis, 2002). Making it easier for customers to book flights is another intangible aspect that is likely to improve their airline performance. Marketing and advertising can also play a big role in creating awareness about the service changes taking place within the airline with a view of attracting customers (Doganis, 2002). American airlines should study what the low cost no frills airlines are doing to attract such a large number of customers and implement such methods. These changes will improve productivity and performance, which will also influence positively on the breakeven load. References Doganis, R. (2002). Flying off course the economics of international airlines. London: Routledge Merced, M. (2011). American airlines parent files for bankruptcy. Retrieved from http://dealbook.nytimes.com/2011/11/29/american-airlines-parent-files-for-bankruptcy/?_php=true&_type=blogs&_r=0 Reed, D. (1993). The American Eagle: The Ascent of Bob Crandall and American Airlines. NY: St. Martin's Sterling, R. J. (1985). International directory of company histories. MA: St. James Press. Read More