American Airlines Financial Ratio

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  • Topic: Financial ratio, Financial ratios, American Airlines
  • Pages : 10 (1781 words )
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  • Published : November 8, 2012
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Summary of the Company
American Airlines, Inc. (American) was founded in 1934 and is the principal subsidiary of AMR Corporation. American provides aircraft services to around 160 destinations around the world. American Airlines has connections to 3 regional carriers. Two carriers are owned by AMR (American Eagle and Executive Airlines). The third carrier is owned by a third party (Republic Airways Holdings) that has no connection to AMR. These regional carriers serve to connect feed from major hubs to smaller regional airports that do not have international service. The major hubs for American are Dallas/Fort Worth, Chicago O’Hare, New York City (JFK), Miami and Los Angeles.

Recent Events
In late 2009, American released a new business plan called FlightPlan 2020. This plan is aimed at helping the company continuously earn profits in the next decade. By establishing the priorities of American, the plan is designed to help the company strategize for the future. Between 2008 and 2010, American entered into a joint business agreement (JBA) with British Airways, Iberia, Finnair, Royal Jordanian, and JAL. In order to enter into a JBA, American applied and was granted permission for antitrust immunity. The reasons for entering a JBA include expand their route network through codesharing, share revenues and cost, and to boost commercial cooperation. In late 2011, AMR filed for Chapter 11 bankruptcy protection to reorganize its business. American’s parent company hopes to reduce debt and mounting costs by restructuring the company. Although its parent company has filed for bankruptcy protection, American stated that it will continue to operate normally at least in the foreseeable future.

Company Strengths
Three company strengths that are important to American’s operations are its inclusion in an airline alliance, its extensive air cargo network, and its large presence in the Latin American market. American is a part of an airline alliance called Oneworld. Being a member of Oneworld, American expands its route network through code sharing, allows passengers to earn frequent flyer miles by flying on other airlines in the alliance, and allows for greater efficiency in day-to-day operations. American has one of the largest air freight operations in the world. It provides cargo services to cities in the United States, Europe, Canada, Mexico, Latin America, and Asia. About 3% of operating revenues in 2010 came from cargo services. The 16.3% increase in revenue for 2010 could be primarily attributed to an increase in demand in the Pacific and Latin American regions. Aside from extensive cargo operations in the Pacific and Latin America, American has a particularly strong presence in the Latin America region due to an increase in passenger revenue. Compared with other regions, the passenger revenue per available seat mile (RASM) was the highest for the Latin America market (RASM for 2010 was 11.80₵). The Latin American market is a strong region for American because of its establishment on routes to the region and the relatively less competition it faces from other airlines on those routes.

Risk Factors and Threats
The important risk factors and threats American are high labor cost, increasing fuel prices, and a global recession. Compared to other airlines, American has to pay relatively higher labor costs to its workers. In 2010, labor costs amounted to 28% of American’s operating expenses. Higher labor costs prevent American from competing with other airlines that pay lower labor costs.

Increasing fuel costs is another important risk factor to consider. Fuel prices have been increasing steadily over the past few years and the availability of fuels are impossible to predict. Although there have been some effort in fuel hedging with derivative contracts, these contracts are no guarantee of providing any specific level of protection against increases in fuel costs. With the...
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