American Airlines Group Inc in Travel and Tourism (World)

8/9/2019 American Airlines Group Inc in Travel and Tourism (World)

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AMERICAN AIRLINES GROUP INC IN TRAVEL ANDTOURISM (WORLD)

September 2014


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Euromonitor International PASSPORT 2TRAVEL AND TOURISM: AMERICAN AIRLINES GROUP INC

Disclaimer

Much of the information in thisbriefing is of a statistical nature and,while every attempt has been madeto ensure accuracy and reliability,Euromonitor International cannot beheld responsible for omissions orerrors.

Figures in tables and analyses arecalculated from unrounded data andmay not sum. Analyses found in thebriefings may not totally reflect thecompanies opinions, reader

discretion is advised.

American Air l ines Group

(AAG) has emerged from the

bankruptcy of American Air l ines

and the subsequent merger with

US Airways. The companys

resurgence has been stunning

from loss making and financial ly

c r ipp led to s t rong grow th and

assuming the role as the USs

largest air l ine. Integrat ion is suesremain however, and the Gulf

carr iers have been lookin g

outward whi le AAG cont inues to

look inward to the US domestic

market.

ScopeSCOPE OF THE REPORT

Travel and Tourism

Tourism Flows and Spending

Travel Accommodation

Transportation

Car Rental

Travel Retail

Tourist Attractions

Health and Wellness Tourism
http://www.euromonitor.com/http://www.euromonitor.com/http://www.euromonitor.com/http://www.euromonitor.com/


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STRATEGIC EVALUATION

COMPETITIVE POSITIONING

GEOGRAPHIC AND CATEGORY

OPPORTUNITIES

BRAND STRATEGY

OPERATIONS

RECOMMENDATIONS


4/33


American Airlines Group (AAG) is the holding

company for American Airlines and US Airways.These two brands, combined with American Eagleand US Airways Express, operate nearly 6,700flights per day to 339 destinations in 54 countriesfrom hubs in Charlotte, Chicago, Dallas/Fort Worth,Los Angeles, Miami, New York, Philadelphia,Phoenix and Washington, D.C.

AAG was formed via the merger of US Airways

and American Airlines in 2013 and helped to bringAmerican Airlines out of bankruptcy. The mergerhas made AAG the worlds largest airline byrevenue passenger miles (RPMs) and availableseat miles (ASMs).

AAG is a member of Oneworld alliance whichcomprises 14,244 daily flights to 151 countriesacross its members. AAG also maintains the

American Airlines AAdvantage and US AirwaysDividend Miles loyalty programmes.

The company reported in the second quarter of2014 strong results, with operating revenuesalmost doubling in the wake of the merger.

Key company factsSTRATEGIC EVALUATION

American Airlines Group (AAG)

Headquarters: US

Regional involvement:

North America, LatinAmerica, WesternEurope, Asia Pacific,Middle East, Australasia

Category involvement:Air passenger and cargotransportation

World air transportationvalue share (2013):

5.8%


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The merger between the two airlines was formerly

completed on 9 December 2013. The process ofconsolidation of the two airlines networks, however,will take up to 18 months. In the interim, bothmaintain independent websites that allow customersto book direct with either airlines.

US Airways added over 3,000 additional daily flightsto Americans breadth of service. The merger

however meant USAirwayssexit from competitor

network Star Alliance in March 2014 and its entryinto Oneworld, of which American was a foundingmember.

The merger significantly boosted Americanspresence in the US market where US Airways wasstrongest. It also added significant capacity toEurope from North America. It did very little howeverto add capacity to Asia Pacific. US Airways did not

bring any new Asia routes to the merger. The merger resulted in the worlds largest codeshareand has given both Dividend Miles (US Airways) andElite (American Airlines) members reciprocalbenefits. AAG expects US$1 billion in synergies by2015 through cost savings and increased margins.

The merger significantly improved liquidity, withAAG having US$11.3 billion in liquid assets at theend of 2013. It has subsequently used some of thisto buy back share and pay a dividend for the firsttime to shareholders in over 30 years.

The merger helped both airlines to improve on USmarkets where they were relatively weak.

American Airways gained a stronger position onthe East Coast of the US, while US Airways gaineda stronger position on the West Coast.

Creating the USs largest airlineSTRATEGIC EVALUATION


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It is early days for AAG. Combining the revenues for both

American Airlines and US Airways however reveals anincrease in pre-tax margin and top line growth.

The impact of the merger was made clear in the secondquarter 2014 results, which saw AAG increase revenue by9.2% once both periods are presented on a consistent basisincluding US Airways for the same period in 2013. Themerger has thus far been a successful one for thecompany.

Mainline and regional passenger revenues stood at US$9.9billion, an increase of US$832 million, or 9.2%, compared tothe combined second quarter of 2013. Fuel expenses werehigher in the second quarter by US$92 million or 2.8% asthe average price per gallon rose to US$3.03.

AAG however sold its portfolio of fuel hedging contractsduring the quarter and no longer maintains a hedging policy

with regard to fuel. This follows the US Airways model of nothedging.

Again on the cost side, CASM or cost per available seatmile increased over Q2 2013 due to increases in salaries,wages and benefits from labour negotiations that took placeas part of the merger.

AAG:Key Financial Indicators 2012-2013

US$ million 2012 2013

Revenue 38,620 40,419

Pre-tax loss (1,808) (1,340)

Pre-tax margin (excspecial items)

5.4% 1.1%

Note: For 12-month period ending 31 December. Includes both

American Airlines and US Airways results for both years.

AAG begins to realise benefits of mergerSTRATEGIC EVALUATION

AAG:Key Financial Indicators Q2 2013-Q22014

US$ million 2013 2014

Revenue 10,299 11,355

Operating income 991 1,399

Note: For 3-month period ending 30 June. Includes both

American Airlines and US Airways results for both periods.


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With better than expected Q2 2014 results, AAG

embarked on an aggressive stock buy-backprogramme and announced its first dividend in34 years. The buy-back is expected to becompleted by the end of 2015. This is beingfinanced out of its estimated US$10.3 billioncash pile.

AAG should be wary however, as UnitedAirlines, which entered into its merger with

Continental with its own stock pile at US$9.1billion in 2010 saw it fall to US$5.2 billion in2013. Integration problems, coupled with makingup for lack of capital investment earlier, ate intoits assets quite quickly. Debt repayments alsotook a significant proportion of the cash pile.

AAG has some similarities toUnited/Continental. It has US$17 billion in debt,much of which is shorter term debt, maturing inthe next five years, and it also has to catch upon capital improvements, according to CEODoug Parker. Meanwhile, the company facesfurther integration costs and has not yet movedto a single seat reservation system.

Finally, its decision not to hedge may save thecompany money in the short term but given recent

world events there is every potential for sharp risesin fuel costs.

Expansion of its fleet to build up a strongerpresence in Asia Pacific would be a costly under-taking and AAG is weakening its ability to carry outthat level of investment.

Stock prices soar on dividends and buy-backsSTRATEGIC EVALUATION

05

10

15

20

25

30

35

40

45

50

09/12/2013

23/12/2013

06/01/2014

20/01/2014

03/02/2014

17/02/2014

03/03/2014

17/03/2014

31/03/2014

14/04/2014

28/04/2014

12/05/2014

26/05/2014

09/06/2014

23/06/2014

07/07/2014

21/07/2014

04/08/2014

Shareprice(US$)

AAG Share Price 9 December

2013-2014: August 2014

Source: Edgar Online


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STRENGTHS

OPPORTUNITIES

WEAKNESSES

THREATS

The company hasemerged quickly frombankruptcy protection toa strong financialposition with highliquidity levels.

Financial strength

AAG is now the numberone airline in the USmarket by passengercapacity post themerger with US Airways.

Leader in the US

American Airlines andUS Airways have not yetfully integrated and it willtake up to the end of2015 before they moveto a single seat

reservation system.

Not fully integrated

Asia Pacific is still aweak region in terms ofcoverage. With so muchof long haul businesstravel focused on thisregion, AAG may be

missing out on lucrativeroutes.

Weak in Asia

New alliances can beformed given the

companys dominancein the US market withinternational airlines inthe form of codesharingagreements.

Alliances

AAG has both thefinancial ability and

opportunity to grow itsroutes in relativelyuntapped marketsincluding Asia Pacific toboth primary andsecondary cities.

Expansion

The two airlines havenot moved to a single

seat reservation system.This will prove complex.Unexpected integrationproblems could result inunforeseen costs.

Seat reservation system

The abandonment of itshedging contracts is a

risky move although ithas proved a profitableone at US Airways.Recent political tensionscould mean a sharp risein fuel costs.

Fuel costs

SWOT: American Airlines Group (AAG)STRATEGIC EVALUATION


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W

INNERS

LOSE

RS

The Gulf carriers have embarked on aggressive

expansion through new plane orders and equityinvestments in struggling European airlines. Mostrecently this has seen Etihad agree to take a 49%stake in Alitalia.

AAG meanwhile has been quiet since its 2011purchase of 460 planes including 260 A320s from

Airbus and 200 of various types from Boeing whichbegan delivery in 2013.

AAG itself sits on a significant cash pile but it hasfor the time being opted to deliver some of this toshareholders. It also has significant debtobligations in the next five years that it will have tomeet or roll over.

The integration with US Airways is proceedingsmoothly but there have cases where customers

have seen significant price differences between USAirways and American Airliness websites for thesame routes. As time goes on these discrepanciesare disappearing but the two airlines are not yetusing a single seat reservation system.

Expanded capacity

Challenges on the horizon

Capital investments in fleet will provide betterexperience for the customer and generatemore revenue.

More leverage to negotiate new partnershipsthrough number one position in US market.

Expanded capacity post merger and soundfinancial position.

Lack of integrated seat reservation system.

Overcapacity on international routes.

Competition from low cost carriers.

Investment by Emirates and Etihad ininternational routes.

Key strategic objectives and challengesSTRATEGIC EVALUATION


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OPPORTUNITIES

BRAND STRATEGY

OPERATIONS

RECOMMENDATIONS


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-20

0

20

40

60

80

100

2008-2009 2009-2010 2010-2011 2011-2012 2012-2013

%y-o-yg

rowth

AAG vs Air Transportation Market2008-2013

American Airlines Group Air Transportation

American Airlines underperformed the wider air transportation market for much of the review period,

emerging to push ahead only in 2011-2012. 2013 however saw AAG grow by almost 90% in the wake ofthe US Airways merger. US Airways meanwhile outperformed American for most of the review period untilthe merger.

The companys reliance on North America in the early part of the review period explains its under-performance. As a schedule airline, the sharp downturn in business activity in the US took adisproportionate toll on American Airlines. The company, already burdened with high debt levels, filed forChapter 7 bankruptcy in late 2012. North American air transportation fell by over 17% in 2008-2009.

Air transportation overall has performed well. North America bounced back quickly after the Great

Recession while emerging markets have seen strong growth throughout most of the review period. LatinAmerica in particular has outperformed with double-digit growth for much of the review period with a 12.5%CAGR over 2008-2013.

Global competitive performanceCOMPETITIVE POSITIONING

-15

-10

-5

0

5

10

15

2008-2009 2009-2010 2010-2011 2011-2012 2012-2013

%year-on-yeargrowth

US Airways vs Air Transportation Market2008-2013

US Airways Air Transportation


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Air Transportation: Top 10 Companies by Value Share and

Ranking 2009-2013

Company name5-yeartrend 2

009

2010

2011

2012

2013

% share ofair trans-portation

2013American Airlines

Group Inc4 5 6 5 1 5.8

Deutsche Lufthansa

AG

1 1 1 1 2 4.4

Delta Air Lines, Inc 3 3 3 3 3 4.1

United ContinentalHoldings Inc

- 2 2 2 4 4.1

Air France-KLM GroupSA

2 4 4 4 5 3.6

International AirlinesGroup

75 67 7 7 6 3.1

Emirates Group Plc 9 11 11 10 7 2.5

Southwest Airlines Co 13 10 8 8 8 2.3

Qantas Airways Ltd 8 8 10 11 9 2.0

China SouthernAirlines Co Ltd

16 13 13 12 10 1.9

The air transportation market has been

the subject of considerable consolidationover the review period. Key activityincludes Deltas acquisition of Northwest

in 2009, the merger of United andContinental, and AirTrans acquisition by

Southwest, both in 2011, as well asBritishAirwayssmerger with Iberia in thesame year pushing International Airlines

Group into seventh position.Added to this was the American Airlinesmerger with US Airways in 2013 whichpushed it to number one globally despiteits relative lack of presence in AsiaPacific.

Qatar, Emirates and Etihad, the latterranked outside the top 10 in 32nd

position, have been adding throughcodeshare agreements and capacityexpansion. Meanwhile, Chinese airlinesare becoming more of a global force,cash rich from domestic air transportationgrowth.

Global rankings show impact of M&A activityCOMPETITIVE POSITIONING


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The Gulf carriers have made significant investments in long haul international

routes. Emirates, Etihad and Qatar are the big three and each haveexpanded, while the US schedule domestic airline market stagnated and fellinto financial turmoil.

In 2014, Emirates announced a US$56 billion order for 150 Boeing 777Xaircraft with an option to buy 50 more. Qatar Airways meanwhile announcedits purchase of 50 of these planes with an option to double its order, also in2014.

Etihad meanwhile has been focused on expanding its codesharing

agreements and taking equity stakes in struggling European carriers. Mostrecently, this has meant a 49% stake in Alitalia but it has also acquiredminority equity stakes in Air Berlin and Aer Lingus as well as Virgin Australiaand Jet Airways India. Meanwhile, Lufthansa has expressed concern over theGulf carriers dynamic growth and its impact on supply on international routes.

AAGs largest order in recent years was in 2011 when it placed an order for260 A320 planes from Airbus and 200 of various types from Boeing whichbegan delivery in 2013. AAG has not been as aggressive in pursuinginternational routes before or after the merger. Its unrivalled position in USairspace should not however encourage it to rest on its laurels.

As companies in oil rich states, these carriers benefit from relatively lower fuelcosts and labour costs. Their new fleets mean lower maintenance costs aswell.

Modern andgrowing

fleet

Fuel costs

Cash richwith

relativelysmall

domesticmarkets

Gulf carriers expand aggressivelyCOMPETITIVE POSITIONING

Key Drivers of Growth

for Gulf Carriers


14/33


Fuel costs represented 39% of Emiratesstotal operating expenses in

fiscal 2014. At AAG, this figure stood at only 35% in the same year.Emirates however had a clear advantage in terms of labour costs withits employees representing only 13% of total operating expensescompared to AAG at 22%. Fuel and employee costs represented thetwo most significant operating expenses for both airlines.

In general terms, the big three Gulf carriers, led by Emirates but alsoincluding Etihad and Qatar, have benefited from cheap state capitalfinanced from oil reserves and indirect support from their respective

governments in infrastructure development. These factors have helped them to build a strong presence outsidetheir domestic markets. Meanwhile, their relatively late entry andaccess to capital have enabled them to have some of the mostmodern fleets globally leading to lower operating costs. Theregulatory environment for these airlines is also very lenient with lowtax rates and levies. Emirates for example paid only AED47 million(US$13 million) in tax in fiscal 2014 on AED3.5 billion (US$ 953

million) profit before tax. A comparison with AAG is difficult owing tothe US$2.2 billion pre-tax loss it incurred in 2013. In 2012 however,when the company made a profit before tax of US$90 million, it paidan effective income tax rate of 21%.

Gulf carriers have intrinsic advantagesCOMPETITIVE POSITIONING

0

5

10

15

20

25

30

35

40

Emirates AAG

%totaloperatingcosts

Emirates vs AAG Cost

Structure 2013

Fuel Costs Employee Costs


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OPPORTUNITIES

BRAND STRATEGY

OPERATIONS

RECOMMENDATIONS


16/33


Asia has traditionally been a weak spot for AAG. As the largest airline in the world it will need to address

this or watch its number one position erode as this region will see a CAGR of 8.2% over the 2013-2018period compared to North America at 4%.

AAG held a 19.3% share of the North American market in 2013 and had a reasonable position in LatinAmerica at 2.9% as well as a very small Western European share but it was negligible in Asia Pacific in2013.

The company needs to look at Los Angeles (LAX) as a potential Asia hub. With United firmly installed inSan Francisco and Delta building in Seattle, LAX represents the companys best opportunity, particularly

given the large presence of some Oneworld partners in LAX already, particularly Cathay Pacific and JAL,

which ranked 11th and fifth, respectively, in Asia Pacific in 2013. The challenge will be to overcomecompetition from Delta which ranked second in the first six months of 2014 in terms of market share asmeasured by total number of departures from LAX.

AAG and Delta are tied in terms of LAX departures at 16%. Meanwhile Southwest held about 11%. Deltaheld a 0.5% market share in Asia in 2013 well ahead of AAG. That said, some investment has taken placehowever, including the addition of non-stop flights to Shanghai and Hong Kong from Dallas/Ft Worth, butwith a growing Asian population in the Southern California area, LAX should still be considered.

0510152025

0

30,000

60,000

90,000

Asia Pacific Middle East andAfrica

North America Western Europe Latin America Eastern Europe Australasia%CAGR2013-

2018&company

share2013

Absolutevalue

growth

(US$million)

2013/2018 Prospects in Air Transportation by Region 2013-2018 and Company Share 2013

Absolute Value Growth (US$ million) 2013/2018 % CAGR 2013-2018 AAG % Company Share 2013

Developing LAX as an Asian hubGEOGRAPHIC AND CATEGORY OPPORTUNITIES


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AAG has announced that it expects its Q3 2014 results to be impacted by the elimination of manyVenezuelan flights (from 48 round trips per week to 10) as it seeks a way to get out US$781 million of fundsderived from ticket sales which the Venezuelan government refuses to allow to be converted into US dollarsand removed from the country. In total, according to IATA, the airline industry has some US$4 billion infunds tied up in Venezuela, leading to a widespread reduction in scheduled flights.

With a new debt crisis in Argentina, volatility here is not expected to end soon. AAG however is not asheavily exposed, with this market dominated by state-owned Aerolneas Argentinas.

Brazil is set to dominate growth in air transportation in Latin America. AAG has a negligible presence herealthough it has described itself as the leading US carrier into Brazil. In this market, increasingly consumers

are opting to pay for larger purchases in installments. If AAG can find a suitable Brazilian partner it shouldconsider following this model. Despite strong anticipated growth in air travel sales, AAG has not beenadding capacity here. It has reduced its service to So Paulo but added flights from Miami and New York(JFK) to Viracopos International Airport in Campinas in 2014/2015.

-6.0

-4.0

-2.0

0.0

2.0

4.0

6.0

-3,000

-2,000

-1,000

0

1,000

2,000

3,000

Brazil Mexico Argentina Colombia Venezuela

%CAGR20

13-2018

Absolutevalu

egrowth

(US$million)2013/2018

Latin America: Most Dynamic Air Travel Retail Markets 2013-2018

Absolute Value Growth (US$ million) 2013/2018 % CAGR 2013-2018

Lack of expansion in Brazil despite growthGEOGRAPHIC AND CATEGORY OPPORTUNITIES


18/33


With AAG now first in the US air transportation market, it has anextensive network from which to grow. In Q2 2014, the companyreported passenger revenue per available seat mile up by 5.9%. Thecompany expects further synergies from its merger and expansion inits profit margin.

Regionally in the US, the merger has given it a particularly strongposition on the East Coast, while in the West it continues to face achallenge from Delta and United both of which have strong positionsin San Francisco.

The merger is also likely to make AAdvantage the worlds largestloyalty programme pulling ahead of Delta, according to companyreports. The companys focus has now shifted to integrating US

Airways and in upgrading its fleet including wide body aircraft retrofits.The addition of the Airbus A321 is a key move for the company, flyingthe high fare and business orientated route between New York's JFKand LAX, and JFK and San Francisco.

Regional carriers Southwest Airlines and JetBlue have fared well as

LCCs. JetBlue has benefited from its strong position in the Southeastwith its Florida routes. Southwest, underpinned by strongperformance in the US domestic market, has begun to test the watersinternationally with flights beginning in 2014 out of BaltimoreWashington International Airport to Aruba and Nassau and Atlanta to

Aruba and Montego Bay.

US: Air Transportation by %Market Value Share 2011-2013

2011 2012 2013

American

Airlines

Group Inc

- - 22.1

Delta AirLines, Inc

18.1 18.5 18.2

United

ContinentalHoldings Inc

18.7 18.4 17.9

SouthwestAirlines Co

11.1 11.5 11.4

JetBlueAirwaysCorp

3.2 3.4 3.6

Alaska

Airlines Inc

2.3 2.4 2.4

VirginAmerica Inc

0.7 0.8 0.9

AMR Corp 13.8 14.0 -

US AirwaysGroup Inc

8.0 8.2 -

Consolidating in US marketGEOGRAPHIC AND CATEGORY OPPORTUNITIES


19/33


Increased competition from LCCs in the US Delta links up with Virgin Atlantic

AAG is clearly counting on capturing morebusiness traffic between LAX and JFK with its

A321 aircraft. The layout of the A321 incudes 10first class and 20 business class seats per plane.

LCC JetBlue however is introducing flat bedpremium seats on this route for the first time andincreasing its economy class capacity on both the

JFK to LAX and JFK to San Francisco routes. Bothwill also be using the A321 wide body planes.However, its planes will be equipped with some 30extra seats than the AAG specification. This mayintroduce more price competition.

JetBlue will also pose more of a threat from RonaldReagan Washington National as it uses the slots

AAG was forced to sell to gain approval for its

merger. Southwest, and Virgin America alsogained from this move and will offer pricecompetition on key AAG routes.

Meanwhile, Southwest will be able to fly fromDallas/Ft Worth, previously a stronghold for AAG,following Deltas hub closure from October 2014.

London Heathrow (LHR) to JFK has been astronghold for AAG since its joint venture withBritish Airways with 12 daily non-stop flights. Aswith LAX and JFK, this is a high-profile andlucrative route with considerable business traffic.

However, the Delta/Virgin Atlantic joint venturereceived anti-trust approval in 2014, which will

mean a significant increase in competition asDelta/Virgin Atlantic is likely introduce more seatsales to encourage customers to migrate.

London Heathrow is a key hub to the rest ofEurope and the impact will be felt beyond purelyLHR-JFK.

The joint venture has also brought Virgin Atlantic toDelta hub Atlanta where it will take over Deltas

Atlanta-Heathrow route. Virgin Atlantics access toAtlanta will boost its routes to Mexico, theCaribbean and Canada. Meanwhile, Delta willassume Virgin Atlantics route between Atlanta and

LAX.

Possible headwinds for AAGGEOGRAPHIC AND CATEGORY OPPORTUNITIES


20/33


New York La Guardia Reduced Service Citiesx

Charlottesville Little Rock Roanoke

Dayton Louisville WilmingtonGreensboro Norfolk

Knoxville Richmond

Loss of daily non-stop service to some destinationsGEOGRAPHIC AND CATEGORY OPPORTUNITIES

As part of the merger, American Airlines wasrequired to divest 52 slots at Ronald ReaganWashington National in order to gain approval fromthe Department of Justice. AAG will no longeroperate year-round, daily non-stop services to 17destinations from this airport and 10 at New YorkLa Guardia. AAG sold the slots for a reportedUS$425 million.

However, AAG received 24 slots from JetBlue at

New York JFK, receiving them in exchange for 16Ronald Reagan Washington National slots whichJetBlue had been leasing from American Airlines.In 2014, with greater connectivity to the East Coastvia its US Airways network, AAG announced thetermination of its ticketing agreement with JetBlueas part of an interline agreement that allowedJetBlue customers to buy connecting flights on

each other's planes on one ticket. Also terminatedwas reciprocity on each others loyalty

programmes.

Ronald Reagan Washington National Airport

Destinations Reduced Service CitiesAugusta Little Rock Pensacola

Detroit Minneapolis San Diego

Fayetteville Montreal Savannah

Fort WaltonBeach

Myrtle Beach Tallahassee

Islip Nassau Wilmington

Jacksonville Omaha


21/33


AAG stays with Sabre post merger Fight over ancillary fees

The combined American Airlines/US Airwaysreservation system will be handled through Sabrewith which AAG signed an agreement in early2014. The process of moving to a single system isexpected to take up to two years.

The relationship between American Airlines andSabre however has been rocky. Sabre and

American Airlines settled their long-running disputein 2012 over the latter's direct sales strategy.Meanwhile, a separate case brought by US

Airways has not yet been formerly settled, althoughits subsequent merger with American, which hassettled all claims with Sabre, makes a positiveoutcome for US Airways unlikely.

As part of Americans settlement it agreed to

negotiate with Sabre for additional technologyservices in the future, while American wouldreceive a monetary payment from Sabre with

American continuing to pursue its direct connectinitiative.

Priceline.com meanwhile, a direct competitor toTravelocity, announced in 2011 its partnership with

American Airlines issuing tickets using its directconnect system.

The key debate for distribution systems such asSabre versus Priceline.com as well as directbooking websites www.aa.com and

www.usairways.com is the generation of ancillaryfees via preferred seating, priority boarding andbaggage fees. While costs such as these havecommonly been the domain of the LCCs withseating and boarding priority determined by ticketclass, schedule airlines such as American andDelta have increasingly been looking for ways togenerate incremental revenue.

For Sabre and other distribution systems theseancillary fees are complex to offer through travelagents and have not always been shared by theairlines. In 2013, AAG generated US$521 million inancillary fees.

DistributionGEOGRAPHIC AND CATEGORY OPPORTUNITIES


22/33


In a study published by the consulting firmIdeaWorksCompany of 53 airlines, it found that in terms ofdisclosed ancillary revenue United came up number oneboth overall and among schedule airline with US$5.7 billiongenerated in 2013. In 2007, United generated US$600million in ancillary fees which shows how crucial this sourceof revenue has become for schedule airlines.

Traditionally ancillary revenues have been the domain ofLCCs, which rely on a model of low cost seats combined

with ancillary fees to remain profitable. The schedulecarriers however have been incrementally adding new fees.

American Airlines was a pioneer in this area as the firstschedule US airline to charge customers to check in theirbags in 2008.

United, as a smaller carrier by passenger volume,generates a larger proportion of its sales from ancillaryrevenue. Combined American Airlines and US Airways

carried some 113 million passengers in 2013 compared to67 million for United. Passenger yield however, asmeasured by passenger revenue divided by available seatmiles, was 14.84 cents for American, 14.02 for US Airwaysand 14.35 for United, according to the US Bureau forTransportation.

AAG falls behind in ancillary revenueGEOGRAPHIC AND CATEGORY OPPORTUNITIES

Largest Generators of Ancillary Revenue

Among Schedule Airlines 2013Ancillary Revenue US$ billion

United 5.7

AAG 3.2

Delta 2.5

Air France-KLM 1.7

Lufthansa 1.3

Qantas 1.3

Source: IdeaWorksCompany press release 16 July 2014

Largest Generators of Ancillary RevenueAmong LCCs 2013

Ancillary Revenue US$ billion

Ryanair 1.7

Southwest 1.6

easyJet 1.4


23/33




OPPORTUNITIESBRAND STRATEGY

OPERATIONS

RECOMMENDATIONS


24/33


Global strategy Action Impact 2013 Future impact

Integration of the US Airwaysnetwork and unlockingsynergies

Contract signed with Sabre to bring USAirways and American Airlines into singleseat reservation system. Departure of US

Airways from Star Alliance and move intoOneworld.

Aggressive targeting of JFK-LAX route

Deployment of A321 wide body aircraft.Large representation in seat configurationfor business and first class customers.

Unlocking power of worldslargest customer loyaltyprogramme post US Airwaysmerger

Reciprocal benefits for Dividend Miles andElite members until integration of DividendMiles into AAdvantage in 2015.

Regaining customer trust

In the wake of its filing for Chapter 7bankruptcy, the American Airlines brandsuffered some damage. With the US

Airways merger some customers also have

questions. Faster response times on socialmedia to customer concerns and newlivery in 2013 are some of the ways it isaddressing this.

Brand strategy at a glanceBRAND STRATEGY


25/33


From 2015, Dividend Miles will be integrated intoAAdvantage, AmericanAirlinessown loyaltyprogramme. The move will see the some 30 millionDividend Miles members move into the 71 million-strong AAdvantage programme to create what willlikely be the largest airline loyalty rewardprogramme in the world.

For the time being Dividend Miles members canearn Dividend Miles on American Airlines flights.

The only caveat for AAdvantage members is thatthey cannot use Dividend Miles qualifying miles toachieve Elite status in the AAdvantage programme.

For now, no plan has been announced by AAG tomove to a revenue-based model as Southwest andDelta have both done. United is the most recentmajor airline to announce its intention to move to arevenue-based model.

This shift fits in with the increased reliance onancillary fees as airlines seek to segmentcustomers more and more based on theirpreference for pre-reserved seats, priority boardingor the use of in-flight entertainment.

While AAdvantage is unlikely to do so in the shortterm it will probably move to its own revenue-based scheme over 2014-2016. The companysfocus for the time being is integration of theDividend Miles programme.

The departure from Star Alliance with its some 28airline members will mean some US Airwayscustomers are unable to redeem their DividendMiles points on member airlines. For those who fly

British Airways (Oneworld alliance) thosecustomers will be charged some US$500 in fuelcharges if they redeem points to purchase theirtickets. This has been the case of AAdvantagemembers seeking to fly BA for some time. DividendMiles members will not be used to this type ofpolicy coming from the Star Alliance network.

Some carriers notably Air Canada have begun to

lure US Airways loyalty members with Altitudemembership (Air Canadas own loyalty scheme) if

they have achieved a minimum of Silver inDividend Miles. For Canadian snowbirds this is

likely to be an attractive offer.

Loyalty programmes - shake up and integrationBRAND STRATEGY


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Post emergence from Chapter 7 bankruptcy and itsmerger with US Airways, AAG is working to becomemore proactive on social media.

According to Brand Indexs 2013 rankings, AmericanAirlines was the most improved brand among theairlines in terms of social media.

Overall however, Southwest remains the topperformer followed by JetBlue and Delta as measuredby a You Gov poll, which asked respondents if they

had heard anything about these brands over theprevious two weeks whether positive or negativethrough advertising, news or word of mouth.

Aside from being very visible in 2013 due in part to themerger, American Airlines has adopted a veryproactive approach in some social media outlets,notably Twitter. Some airlines have gone as far as tolist listening in hours during which time customers

can expect a response to a query, complaint orquestion to a tweet. American does not go this far.However, according to Social Bakers, a leading socialmedia consultancy, American was the most activeairline on Twitter in the first three months of 2014.

It answered 9,058 tweets on Twitter compared tosecond-ranked KLM at 6,691. American alsooffers 24/7 customer care via its Facebook page.

American has been using the hastag

#newAmerican on Twitter and Facebook and hasa team of 22 employees devoted exclusively tosocial media engagement including 17 whorespond to Facebook, Twitter, Instagramcomments and questions and four team memberswho develop content for social media.

Online Exposure 2013/2014

Website: www.aa.comwww.usairways.com

Facebook: 1.7 million likes

Twitter: 894,000 followers

Instagram: 59,546

YouTube: 25,547 subscribers

Foursquare: 14,977 followers

Note: As at August 2014, Facebook, Twitter, Instagram, YouTube,

Foursquare

#newAmerican tells its story via social mediaBRAND STRATEGY


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OPERATIONS

RECOMMENDATIONS


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American Airlines/US Airways Combined Fleet

2013

OwnedAverage

Age(Years)

Airbus A319 3 11

Airbus A320 11 15

Airbus A321 72 5

Airbus A330-200 9 3

Airbus A330-300 4 13

Boeing 737-400 - 24

Boeing 737-800 86 6

Boeing 757-200 71 19

Boeing 767-200 ER 1 26

Boeing 767-300 ER 45 20Boeing 777-200 ER 44 13

Boeing 777-300 ER 5 1

Embraer ERJ 190 20 6

McDonnell Douglas MD-80 104 22

As of 31 December 2013, American Airlines andUS Airways operated mainline fleets of 627 and343 aircraft, respectively. In 2013, American tookdelivery of 59 new aircraft and retired 46 aircraft,while US Airways took delivery of 23 new aircraftand retired 20 aircraft. Regional airline subsidiariesand third party regional carriers operating as

American Eagle and US Airways Express operated281 regional jets and 238 regional jets and 40turboprops at the end of December 2013,respectively.

In 2013, American Airlines prior to completion of itsmerger with US Airways began the most significantfleet renewal programme in its history. Among itskey initiatives was 42 Boeing 787-9 Dreamlineraircraft which it expects to take delivery of at theend of 2014, taking delivery of 130 current-

generation Airbus 319 and Airbus 321 aircraftwhich began in 2013, 76 fuel-efficient Boeing 737-800 aircraft to replace the MD-80 fleet andretrofitting its existing fleet of 76 Boeing 737-800s.

Updating its fleetOPERATIONS


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Thus far the integration hasbeen relatively smooth.Passenger service personnel at

American Airlines have recentlyvoted to not join the union whichrepresents US Airwayspassenger service personnel.

In 2014, staff represented bythe International Association of

Machinists (IAM) ratified threecollective bargainingagreements covering more than11,000 employees.

Negotiations for a jointagreement for flight attendantsand pilots are underway,although American Airlines

expressed optimism in June2014 that agreements would bereached soon.

In 2012, American Airlinesfaced disruption following adispute with its pilots union.

US Airways and American Airlines Combined Workforce

AmericanAirlines

US AirwaysWholly-owned

RegionalCarriers

Pilots 7,900 4,100 3,400

Flight attendants 15,000 7,700 2,100

Maintenancepersonnel

11,300 3,100 2,400

Fleet servicepersonnel

7,400 5,500 1,700

Passenger servicepersonnel

10,300 6,200 6,400

Administrative andother

8,200 5,500 2,200

Total 60,100 32,100 18,200

Integration of labour force proceeding smoothly thus farOPERATIONS


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AAG, including both US Airways and AmericanAirlines, is a member of Oneworld alliance whichincludes British Airways, JAL, Cathay Pacific,Qantas and Qatar Airlines. The move by US

Airways from Star Alliance took place in 2014.

A key benefit for AAG in the Oneworld alliance isits position as the only US airline member.

As well as its position in Oneworld, AAG hasagreements with a number of other partners

including JetBlue which it signed in 2014 whichsaw the two airlines begin a frequent flyerrelationship with AAdvantage members able toearn points on JetBlue airlines on certain routesincluding JFK-Boston.

AAG has codesharing agreements with a numberof airlines outside Oneworld. These are primarilywith regional airlines including Gulf Air and WestJet. Notably it does have a codesharing agreementwith Etihad; this means that for select routes,Etihad travellers can gain AAdvantage points.

Etihad recently acquired an equity stake in JetAirways, the Indian regional carrier with plans toreturn it to profitability within three years throughnew codesharing agreements, and synergiesbetween the two airlines in fleet acquisition,maintenance and product development. AAGmaintains a codesharing agreement with Jet

Airways. With Etihad now backing Jet Airways,AAG should look for opportunities to pick up trafficfrom India entering the US by developing further itsrelationship with Etihad.

Etihad has also taken an equity stake in Air Berlin,another Oneworld alliance member. This fact, aswell as its recent moves on Alitalia, Aer Lingus,and Virgin America, will see its influence in theOneworld alliance strengthen. AAG has howeveran unparalleled US presence and this is a valuable

bargaining tool if it chooses to leverage this tocarry Etihad traffic connecting from one of Etihads

growing associated companies.

AlliancesOPERATIONS


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CATEGORY AND GEOGRAPHIC


OPERATIONS

RECOMMENDATIONS


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Under the #newAmerican programme, AAG isabandoning its old-fashioned image and usingsocial media more effectively. Its quick responsetime on Twitter for example will help re-build

customer relationships hurt as the airline struggledfinancially leading up to the 2012 bankruptcy. Themerger with US Airways as well should be carefullyhandled in social media to not alienate previous AAflyers but treat them as new customers who needto be won over.

With the worlds largest loyalty programme willcome more opportunities to create partnershipswith financial institutions and retailers. Once theintegration of Dividend Miles is complete in 2015,

AAdvantage will be able to create more strategicpartnerships. The programme is likely and shouldmove to a revenue-based approach. This willsupport the growing focus on ancillary fees that istaking place across the industry.

Integrating US Airways will be a daunting task.Thus far, everything appears to be proceeding toplan. The move to create a single seat reservationsystem is crucial and will be carried out over aperiod to the end of 2015. This process must behandled carefully. Once complete AAG can trulyunlock the synergies of the merger.

The Gulf carriers are encroaching on internationaltravel and are aggressively expanding. AAG isbeing too cautious and should leverage its size tomake more inroads into Asia in particular.Development of an Asian hub out of LAX should bestrongly considered.

Careful integration International expansion

Loyalty programme should move to revenue Smarter social media

Development of Asian hub out of LAX should be consideredRECOMMENDATIONS


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American Airlines Group Inc in Travel and Tourism (World)