Load Factors, Stock Price, and Safety Records - a Profile of American Airlines as It Approached Bankruptcy

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Stock Price, Load Factor and Safety Records:

A Case Study of American Airlines Approaching Bankruptcy

Graduate Capstone Proposal

Submitted to the Worldwide Campus

In Partial Fulfillment of the Requirements of the Degree of

Master of Aeronautical Science

Abstract

American Airlines is one of the largest and most successful airlines in American history. But, its plunge into bankruptcy in 2011 was a dreaded and fearful outcome for stakeholders. Safety provision theory holds that market conditions impact safety protocols in the airline industry. Healthy financial profiles will be reflected in greater safety records, and market failure will result in increasing accidents. This study seeks to gather secondary data representing load factors, stock prices, and accident/incident data as a test of safety provision theory. A secondary hypothesis is that stock price should improve after the bankruptcy according to process theory because the proper function of bankruptcy is to restore value for stakeholders. This study as a test of safety provision theory will describe the way a major airline grappled with issues of safety, profitability, and public perception while it simultaneously grappled with the realities of immanent bankruptcy. It is this philosophy that is at the heart of the AA corporate strategy and the hypotheses tested in this project will suggest how continual concerns with being competitive in the industry, as well as continued trouble remaining financially healthy, played a role in the safety provisions at AA as it approached bankruptcy. Keywords: American Airlines, safety, safety provision theory, bankruptcy, process theory

Load Factors, Stock Price, and Safety Records:

A Profile of American Airlines as it Approached Bankruptcy

Objective
The case of American Airlines (AA) provides an opportunity to consider how load factors, stock price, and safety records were related to each other and to the impending bankruptcy of American Airlines in 2011. It is an unusual prospect because American Airlines is one of the largest in the industry to have filed bankruptcy. It is standard operating procedure for a major airline to be concerned with the efficiency of operations from a business standpoint, the stock price from an investor standpoint, and the safety record of both accidents and incidents from a customer standpoint. Each of these is an important index of daily operations and one may ask how these are interrelated. That much would comprise a worthy study of any major airline. But, the fact that AA filed bankruptcy in 2011 also reveals a chance to see how these are interrelated in a major airline that is on the way to declaring bankruptcy. The project is particularly focused on how these critical indices of a major airline’s health may have been affected by, and related to, this impending bankruptcy. This research project proposes to utilize secondary data in order to perform such an analysis. This research proposal will give a brief history of AA, with a review of the literature, followed by a proposal for relevant theory, and research methodology, with outcomes expressed in terms of the six Program Outcomes chosen for this project. Scope: Testing Safety Provision Theory

Moses & Savage (1990) discuss a theory of safety provision for airlines that posits economic factors are critical to safety in daily operations of an airline. The authors clearly state that “Safety is an economic attribute of transport service, because it is a characteristic of service that is highly valued by consumers yet costly to provide” (172). The theory of safety provision for airlines holds that safety (S) is a function of economic circumstances (E), safety and surveillance protocol (B), and combined airport and airline infrastructure (C). S=f(E, B, C)

As such, safety provision theory predicts that when airlines are involved in intense competition for...
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