An Explanation of Proposed Strategies for American Airlines Essay

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American Airline Is Based on a SWOT Analysis Focusing on Weaknesses, Opportunities and Threats

Weaknesses & Opportunities

Enhance international offerings through strategic alliance in Asian markets (W1, O1)

The development of a strategic alliance within the Asian markets would help the airline to take advantages of opportunities while reducing weaknesses. The Asian aviation market is forecast as presenting significant opportunities. The Asia Pacific is forecast at becoming the third-largest aviation market, behind the U.S. and China by 2035 (IATA, 2013). In October 2015, more than 23.2 million passengers were carried in this area (FE Online, 2015), with relatively high load capacity of 76.9%, and a focus of exponential growth expected to increase market further, with the area accounting for 31.7% of all global passengers by the year 2017, an increase from the 2012-1128.2% (IATA, 2015; 2013).

These growth forecasts indicate that the Asia-Pacific market makes it attractive, as it presents opportunity to generate revenue in an expanding market. This may be particularly attractive given the current status of the U.S. market, which is a relatively mature market with a lower growth potential due to the slow economic growth (The Economist). Furthermore, in a mature market, expansion for an airline may be difficult due to the barriers, mainly access to desirable takeoff and landing slots at major airports (Simaiakis et al., 2011). Although there is still your competition in the Asia-Pacific region for the most attractive slots the most popular airports, as a market with a greater level of development, there is a high level of potential with a more diversified market (Adler et al., 2014).

By undertaking the expansion utilizing a strategic alliance, American Airlines will also benefit from the knowledge and resources of the strategic alliance partner; effectively reducing the potential risk, as well as the capital that will be required in order to enter the market. The organization will also be able to gain increased knowledge of the market place, which may provide additional opportunities for further expansion into other nearby related market, such as China, which is forecast at becoming the second largest global market (IATA, 2013).

The expansion into the Asia region will also increase diversification of the markets by American Airlines. In addition to providing more revenues, this may also help to provide risk diversification, reducing exposure to negative impacts or economic shocks that are found in individual/regional markets (Quick MBA, 2015).

Strategy 2. Reduce debt aggressively after the current aggressive buyback program ends (W2, O3)

The organization currently has an aggressive buyback program, purchasing shares, effectively increasing the concentration of existing shareholders. With when the current buyback program ends, the operating revenues has been previously budgeted for the buyback program will be available for expenditure elsewhere. Utilizing these revenues to decrease debt levels will have a number of benefits for the firm. Firstly, lower levels of debt will result in lower levels of interest payments due. At the current time, interest rates are relatively low, but this is expected to change in the future, therefore reducing debt now will provide long-term advantages. Furthermore, a reduced level of debt will impact positively on the debt to equity ratio, and perceived risk. Overall, reducing the level of debt an organization may reduce the perceived level of risk, and therefore the overall cost of capital, including the cost of equity (Adkins, 2014).

Reducing debt at the current time also provide increased flexibility for the future, facilitating greater access to different sources of capital, where there may be restraints on the existing level of debt. Lower levels of debt may also facilitate other practice, such as increased use of hedging in order to protect the organization could increase operating costs from rising fuel prices, a practice that requires a relatively strong financial structure due to the financial resources required to undertake that in practice, the impact that accounting policies may have with the derivatives used for hedging measured at real market value (Morrell and Swan 2006).

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Weaknesses & Threats

Strategy 3. Use a mixed model. Some operations point-to-point to improve cost structure and reduce customer inconvenience (W1, T2, T3)

A major threat faced by airlines is the high level of competition. In order to gain passengers, airlines need to provide the desired routes, at a desired time. The most profitable flights are not those which are in the greatest demand, with prices for the greatest demand flights providing airlines is a premium (McAfee and te Velde, 2012). Those in greatest demand operate between the desired points of travel, and at convenient times of day.

One strategy utilized by many airlines to increase efficiency is the hub and spoke model, where large aircraft are used to fly between major airports, with connections provided to the regional destinations utilizing smaller aircraft. This helps to increase the overall capacity and reduce costs (Bhatia, 2015). However, while this may help to reduce costs for passengers, and helps to support operating efficiency, it is often inconvenient for passengers, who would prefer point-to-point service.

By adopting a mixed model, providing some point-to-point services, the airline may be able to attract customers who are willing to pay a premium to avoid the inconvenience of changes. However, there will also be passengers who are willing to make changes in return for lower prices. The adoption of the mixed model will help the organization compete with other airlines, especially if there is an absence of the point-to-point service, and increase the services offered. By adopting a strategy that helps to mitigate the threat of competition, the organization is also reducing its exposure to internal weaknesses.

An examination of the point of origin and final destination points of passengers may also facilitate increased efficiency in the way resources are utilized. This may be particularly valuable if the organization is involved in coaching programs, and may help to provide efficiency within the coaching network, as well as for the airline itself. This will increase potential sales received from co-chair partners.

Strategy 4. Eliminate unprofitable routes to improve financial position and reduce industry capacity (W2, T1)

The operating model so that both a hub and point as well as point-to-point service offered, will require additional resources, including aircraft fly the route. These resources may be found by eliminating the current unprofitable routes. An examination of current route structures may help to identify those which are unprofitable, provide profit at a high opportunity cost, to facilitate reallocation of resources to more profitable routes. The assessment may need to consider not only the direct routes and the revenue/profit they produce, but also potential connects made, some uncomfortable rates may be essential to support the more profitable services. An existing problem within the industry is also the overcapacity, with many flights taking off with a number of apprentices. The marginal cost of additional seats on each flight is very low due to the high overhead costs. Therefore, overcapacity is a significant issue within the industry. By reducing some of the unprofitable flights, the overall capacity will be reduced, it will benefit American Airlines, potentially increasing the overall capacity on other flights, may also encourage other airlines to undertake similar strategies, which will benefit the industry as a whole capacity is reduced.

Unprofitable routes present a significant opportunity cost to the airline. By operating unprofitable routes the airline is not only losing the opportunity for profit, they are also incurring the short- and long-term cost, both in terms of operating costs, as well as the overheads, and essential maintenance for aircraft.

Reducing the unprofitable routes will also improve cash flow for the organization, and improve the financial position. This will have a positive impact on the financial ratios, which may also be utilized by potential creditors, as well as investors. Improving the cash flow will also reduce the amount of working capital that is required, as well as improve.....

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