MBAA517 QUESTIONS AND RESPONSES

MBAA517:

CLASSMATES POSTS:

Sunneary,

Because of very high operating costs, airlines have a very narrow profit margin. After accounting for fuel, wages, and other expenses, an American Airlines transcontinental flight from LA to NY garners only 200 dollars of profit. The airline only makes money if it is flying and to make up for these low profit margins, American Airlines flies 4,000 flights a day and two million passengers a week. With volatile fuel prices and mounting competition, American Airlines has developed interesting techniques to reduce costs and increase profits. These cost accounting techniques have managed to help American Airlines avoid bankruptcy, at least until 2011. Trying very hard to avoid joining its competitors like Delta and United in filing Chapter 11, American Airlines found creative ways to cut costs in all departments. Unfortunately, the challenge of increasing revenues while reducing costs proved to be too great in a highly competitive, low margin industry and despite their best efforts, a weakened global economy and increasing fuel prices, along with ongoing labor struggles, left American Airlines no choice but to file bankruptcy. For a while, American Airlines was able to cut fuel costs by only putting just enough fuel in the airplane to get it to its destination. This decision reduced the weight of the plane, thereby reducing the price per mile traveled. Other measures to reduce the weight of the plane included removing any unused appliances and redundant items like magazines and newspapers. However, only so much could be done to reduce the weight of the airplanes since the majority of the fleet consists of older generation model planes that were not designed with light-weight construction features. American Airlines also participates in fuel hedging as a risk-management initiative to insure itself against a sharp rise in the price of crude oil. Nevertheless, hedging is a gamble and it does not always pay off. Other techniques that American Airlines uses to reduce costs and increase profits include the discontinuation of complimentary catering as well as the discontinuation of complimentary checked luggage. Further, management found that during the maintenance phase of the airplanes, it was more cost effective to move the airplanes from hangar to hangar instead of displacing the maintenance crew. In fact, the maintenance crew evolved into key players in the cost reduction efforts of the airline as they worked to streamline maintenance activities and reduce non-value added processes. Savings on repairable and non-repairable inventory were also realized by the maintenance crew. Another technique used to increase profits, which is the culture of many airlines actually, is to overbook flights in order to maximize the plane’s capacity. American Airlines also has a very loyal following because of its AAdvantage Miles program. These loyal American Airlines customers have almost a cultish relationship to the program and using this to their advantage, American Airlines generates additional revenue by selling these miles to credit card companies that use these miles as promotion for their credit cards. Paradoxically, many of these miles never get used by the customers. Increasing pilot flight hours was also considered, but the union fought this as this would mean losing more pilots to layoffs. As a last resort, management even attempted to cut the pension plans of the maintenance crew, its pilots, and the flight crew, and almost succeeded until there was a backlash after it was discovered that upper management top executives were getting bonuses while everyone else downstream was getting cut left and right to avoid bankruptcy. After filing for bankruptcy, American Airlines intended to transfer its pension obligations to the Pension Benefit Guaranty Corporation (PBGC) and at present, American Airlines has put the pensions on hold. Hopefully after merging with US Airways, American Airlines will use bankruptcy to save money and renegotiate its labor contracts in order to return to profitability just like its competitors, Delta and United, as its final strategy to reduce costs and increase profits.

References

American Airlines cuts labor costs, posts fourth-quarter profit of $262M | New York Post. (2013, January 16). Retrieved from http://nypost.com/2013/01/16/american-airlines-cuts-labor-costs-posts-fourth-quarter-profit-of-262m/

American Airlines Pensions: Get the Facts. (n.d.). Retrieved November 3, 2015, from http://www.pbgc.gov/wr/other/pg/american-airlines-pensions--get-the-facts.html

Films On Demand - View Playlist [Video file]. (2010, October 29). Retrieved from http://digital.films.com/play/JJBBRE

Isidore, C. (2011, December 1). American employees to be biggest losers - Dec. 1, 2011. Retrieved from http://money.cnn.com/2011/12/01/news/companies/american_bankruptcy_employees/

Paarlberg, M. (2011, November 30). How American Airlines will use bankruptcy to cut costs | Michael Paarlberg | Business | The Guardian. Retrieved from http://www.theguardian.com/commentisfree/cifamerica/2011/nov/30/how-american-airlines-use-bankruptcy-cut-costs

Colin,

Reduce Cost

• Reduce weight on the aircraft (magazines)(over fueling) - Use of Tablets (Recent)
• Controlling maintenance expenses or waste
• Do not use APU
• Taxi with one engine instead of two
• Fuel Hedging

Reduce the weight of the aircraft: One of the practices American Airlines uses to reduce their fuel expense is by reducing the weight of the aircraft. There are several ways of accomplishing this: remove magazines, unnecessary equipment, unused potable water, and prevent over fueling. These are just some techniques that were talked about in the video. Since this video was produced airlines have also replaced paper documents with tablets.

Controlling maintenance expenses: There was a brief discussion in the video about reusing old tools. Before AA would discard equipment that was worn. AA found if they refitted and sharpened used equipment they could extend the lifespan and not have to buy new (expensive) replacements.

APU use on the ground:Another fuel saving technique used by AA is to not use the APU while on the ground/at the gate. By using the available ground electricity, AA saves fuel by not using the APU to generate aircraft power.

Taxing with one engine: AA found that the use of two engines for taxiing was unnecessary. By turning one engine off you save a considerable amount of money while on the ground. This practice is ok as long as it does not endanger the passengers.

Fuel Hedging: Fuel hedging is a cost saving technique that AA finds is beneficial to their airline. AA bets on a fuel price by entering a contract stating they will buy fuel at a given price for x amount of time. AA is betting that fuel prices will increase resulting in savings for the company; however, if the prices decrease then AA is paying more for fuel than the market price. Fuel hedging is risky because you are asking an airline to predict what the market is going to do. Personally I believe airlines should not engage in these activities and should stick to what they know how to do. Airlines should not engage in betting in the stock/commodity markets.

Increase profit

• Price Differentiation (Determining the inelastic and elastic travelers)

Revenue Management: Airlines have mastered the ability to price their inventory (seats). While the video was rather degrading on the topic of price differential, it appears they did not fully understand the concept. Everyone must remember the AIRLINES ARE A BUSINESS NOT A PUBLIC SERVICE. For a business to be successful they must make a profit and support their operations. Airlines have successfully found a way to differentiate their customers from one another. By understanding customer behaviors, airlines charge different prices to different customer groups. The main purpose of revenue management is to charge the right price to the right customer at the right time.

PS: David Charles // AS WE DISCUSSED, PLEASE RESPOND TO MY CLASSMATES POSTS FROM MY MBAA517.