I’m sure we can all remember a time when American Airlines was going bankrupt and their stock was worth close to nothing. It has been about ten years now since then and they have continued to grow as a company. During the past ten years American Airlines used bankruptcy protect to cut costs and allowed almost all of their flying from only five U.S. cities. This type of management strategy allowed them to survive after September 11th and throughout this decade. Now, at O’Hare, they have their own terminal for domestic and international departures and international arrivals. It’s almost hard to imagine they have come this far.
Since they will be exiting bankruptcy protection, they decided to come up with a new management strategy to deal with the upcoming costs and exit bankruptcy. Even though American has a market leading position on flights between U.S. and Latin America, they need to focus on their weakness with continental Europe and Asia. They have introduced new flights to Germany, South Korea, and Peru. Their flight to Germany will be from Chicago to Dusseldorf. They also plan on introducing some new domestic services (Nicas). American believes this strategy will increase their departures by 20% over the next five years while they try and exit bankruptcy.
American’s C.C.O. said, “An underlying foundation of the business plan has been to diversify our portfolio of flying and increase our mix of international flying” (Wall Street Journal). I personally couldn’t agree more with this statement and if I was looking to do this, I would start with the weakest parts of my management strategy. I would search for the gaps in my market and do whatever I could to bridge those gaps for my consumers. That seems like the smartest plan to me. I have begun to wonder if it will cost as much as a regular flight or if they will be trying a new competitive angle.
Do you think the American Airline’s expansion to continental Europe and Asia is a smart management strategy? How will the addition of these new services affect the price of tickets in the future?
4 thoughts on “American Airlines Expanding…”
The key to growth in every industry is expansion, as well as gaining a higher percentage of the market from your competitors. This is usually done by either expanding current operations into new foreign markets, in this case Europe and Asia, or by gaining a competitive advantage in existing markets. American Airlines is looking for growth in new markets which is always a viable option, but they also must be aware of the challenges they will face, such as established competition, and glitches in their new expanded operation. This management strategy is sound because it should eventually lead to greater growth of the corporation, but it will probably take some time until they start to recoup the initial investment required for expansion. As far as ticket prices go, it would seem logical that they will either match competitors, or try to have prices below to gain a competitive advantage in the new markets. Either way the new restructured airline should succeed in this new foreign market under this management strategy.
Do you think the American Airline’s expansion to continental Europe and Asia is a smart management strategy?
American can take two strategies to increase profits. They can increase ticket prices in their already established markets or they can expand their airlines to other continents. Given these two options, expanding into other continents is the smartest strategy for American Airlines. They are finally at a place where they are relatively stable financially, so they should begin to expand their markets to earn more profits. Expanding into Europe and Asia will give them a new market to target and hopefully thrive in.
How will the addition of these new services affect the price of tickets in the future?
While at first it may be expensive to expand into these markets, in the long run I believe that it will lower the overall price of tickets. Due to the fact that American will be operating all over the world, and not just domestically, they can spread out their income. American will not have to rely only on one market to make a profit.
I think that American Airlines strategy is a good way of trying to increase profits, however, the question is, will these additional costs for the flight eventually be beneficial for American or will it just increase labor and production costs. There are so many factors that play into adding additional flight paths including the additional costs for fuel, labor costs and etc. Because of this they are going to have to increase ticket prices which might decrease the chances of sales and people will go to other flight providers. I think its going to take some time for American to dig themselves out of their debt. I also highly doubt that they will be able to match their prices with competitors because of the rise in costs. I don’t think this was the best idea for American Airlines but then again, if they can lower productions costs and create an equilibrium then their strategy might end up being successful.
I believe this will be a positive for American Airlines, but only time will tell. I have also read that American has reached a tentative agreement with its pilots union and should have clear sailing to exit its bankruptcy. To the question of whether it will pay off to expand into foreign markets, I believe they should focus on their regional services first. Although expansion is an obvious opportunity to increase profits, I feel they do not currently serve enough of the U.S. market to justify them looking abroad. Also, flying to only one city as far away from service hubs as discussed could pose significant cost implications when their are technical malfunctions.