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AA Faces Tough Challenges

May 20, 2009 By: George Dooley
 


gerardarpey

American Airlines (AA) will do what it can do to make sure its competitive in the marketplace, fight hard for every customer, and take care of the capital that’s been invested in the company,  Gerard Arpey, chairman and CEO of AMR Corp. said during the 2009 AMR Shareholders Meeting.

“We will remain focused on the things we can control, not fixated on the things we can’t, Arpey said. "In the short term, we are expecting another busy summer, and we are going to use all the levers at our disposal to keep our airplanes full of paying customers -- with the hope that we will be able to charge fares that enable us to turn a profit.

“In recent months we have sharpened our focus on using our scarce resources to prudently invest in customer service and our long term future," Arpey continued. "Last year, despite the extraordinary challenges the fuel crisis presented, we launched an initiative we call our Customer Blueprint. The Blueprint is a framework that aligns and focuses all of our customer-related efforts. The foundation of the Customer Blueprint is delivering on the basics of customer satisfaction -- safety, dependability, cabin cleanliness, baggage handling, courtesy and professionalism.  We must consistently deliver on these basics for all our customers.”

Other comments by Arpey include:
Economic Crisis
"While the price of oil has fallen rather dramatically in recent months, we have now in effect transitioned, rather seamlessly, from a fuel crisis to an economic crisis.  Put another way, we still have a gap between our revenues and our costs, but now the gap is being driven by a shortfall in revenue rather than a spike in fuel expenses. And just as the airline industry was not built for 125 dollar oil, neither was it built for an environment of negative global economic growth and non-functioning capital markets."

Capacity Service Fees
"While there is no sugarcoating the impact associated with the fall off of both business and leisure travel, the supply and demand relationship is not nearly as bad as it would have been without the capacity reductions we implemented in 2008. The benefits of capacity discipline are evident in the fact that American’s load factor -- or percentage of seats filled -- was actually up year over year in April.  At the same time, the various service charges we implemented last year have been very helpful, generating hundreds of millions of dollars in incremental revenue."

First and Business Class
“We are focused on doing what it takes to win a disproportionate share of the industry’s premium travelers. And one of the most powerful weapons at our disposal is AAdvantage, our award-winning recognition program.  Earlier this month, we announced our latest innovation -- one-way flex awards, which give our customers more options to redeem travel.”

Economy Travel
“Of course, the sheer size of the AAdvantage program -- we have more than 62.8 million members -- reminds us that in addition to our premium customers, we also serve many millions of customers, who fly less frequently and who -- despite being very budget conscious -- are extremely important to us. Earning their business means offering a competitive price and true value for their travel dollar. Delivering the basics -- getting them where they want to go, safely, on-time and with their bags -- in a clean airplane -- and treating them with courtesy and respect every step of the way -- and doing all that at a competitive price, is the key.”

A La Carte Service
“The key to our unbundled -- or a la carte -- pricing initiative’s effectiveness is that it gives customers the ability to customize their travel experience as they see fit, according to what they value most. We have enhanced our Buy on Board food service in the coach cabin, selling Boston Market sandwiches and salads on some longer flights, and we are continuing to look for more opportunities to sell value-added products and services to our customers, both in-flight and on the ground."

Competition
“As you know, because of the adjustments we have made to respond to the oil shock and the economic crisis, we are a smaller airline today than we were a year ago.  The same is true for most of our competitors. But it’s worth noting that while the combined Delta/Northwest has eclipsed us in total size, we remain larger when it comes to the top thirty domestic origin-and-destination markets -- in other words, the markets that matter most."

New Markets
“Moreover, we have made -- and will continue to make -- some strategic additions to our global network, in markets that are very important to our best customers.  We’re building a presence in China and India, and expanding our reach into new markets like Barcelona, Milan and Moscow. We are very optimistic about the DFW-Madrid service we launched earlier this month, and of course our enhanced presence in Spain will both bolster -- and be bolstered by -- the deeper relationship we are pursuing with Iberia.”

Alliances
“The airline business today is evolving into a competition between the global alliances, and today we and our oneworld partners are at a significant disadvantage. By enabling us to coordinate our efforts, the joint business agreement we have reached with BA and Iberia will level the playing field as we battle it out with the Star and Sky Team alliances, both of which already enjoy broad antitrust immunity across the Atlantic.”

Labor Costs
"‘One of those hard truths is that American’s labor cost per available seat mile is the highest in the industry. Every one of our legacy competitors has used the bankruptcy courts -- some more than once -- to lower their labor costs relative to American. And every new carrier entering the marketplace has a built-in labor cost advantage from day one. That has a profound impact, because we have to compete with these companies, whether we like it or not.”

Unions
“There is no escaping the fact that we are going to disagree with some employees, and the unions representing them, about how we balance their interests with those of our customers, shareholders and other constituencies. That’s the nature of the process, and the nature of operating in the real world.  But I believe that if we continue to confront our challenges honestly and directly, particularly in this difficult economic environment, we can continue to strengthen our company, and position it for long term success.”


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