This paper provides a comprehensive analysis of American Airlines, tracing the carrier's origins from its 1934 formation through key milestones in fleet development, route expansion, and technological innovation. It examines the wide-ranging effects of the Airline Deregulation Act of 1978 on competition, mergers, low-cost carrier growth, and route architecture choices. The paper evaluates the hub-and-spoke and point-to-point network models, discusses product differentiation strategies, and outlines the roles of four key departments — customer service, finance/accounting/audit, human resources, and information technology — in planning and executing flight operations. It concludes with an overview of the airline's cost structure and revenue management practices, including its historically influential yield management system.
American Airlines was formed in 1934 through the consolidation of American Airways Inc. and several airline subsidiaries acquired by the Aviation Corporation between 1929 and 1930. Cyrus Smith Rowlett was elected president — a position he held until his appointment as U.S. Secretary of Commerce in 1968. By 1940, American had become the leading domestic carrier and had surpassed the one-million passenger mark. The first domestic scheduled freighter DC-3 was introduced in 1944, with the DC-4, DC-6A, and DC-7 entering service in the second half of the decade. By 1949, American was the only U.S.-based airline with a complete post-war fleet.
The jet age began with the 1959 introduction of the Boeing 707 and the Lockheed Electra, and progressed through the 1960s and 1970s with the release of the Boeing 727 in 1964 and the Boeing 747 Freighter in 1970. Albert Cary was appointed president in 1974, steering the company to introduce the One-Stop automatic check-in system and the SABRE network in Canada and Mexico.
Deregulation took place in 1978, and the company moved its headquarters from New York to Fort Worth, Dallas. L. Crandall assumed the company's presidency in 1980. In 1983, the McDonnell Douglas MD-80 was added to the fleet, and the American Eagle regional system — connecting small communities to large cities — was introduced. Same-day service was introduced in 1988. In 1992, the company launched the American Flagship Service for domestic travel and began flights to Paris and Berlin. Ticketless travel was introduced in 1996. In 2001, the company acquired TWA's assets, and in 2011, it partnered with Etihad Airways to offer customers the opportunity to redeem earned frequent flyer points across both carriers.
Prior to deregulation, the airline industry was controlled by the government, particularly through the Civil Aeronautics Board (CAB). The board regulated the industry's every move, determining all aspects of operations — from mergers and acquisitions and alliance formations to pricing, marketing, and market entry and exit. The industry functioned more like a legalized cartel (Cento, 2009). Airfares were high, and the load factor, in line with the law of demand, was relatively low. Gildner et al. (2010) place the average load factor at approximately 50% over the first half of the 1970s. However, by the beginning of 2008, "the average number of passengers on board a flight had greatly improved due to deregulation and the effects of competition in the industry," and the load factor had risen to 75% (Gildner et al., 2010, p. 21).
Deregulation pushed airlines to make operating adjustments that would increase the accessibility of air transport and improve operational efficiency. A wave of mergers and alliances swept through the industry during the 1980s and 1990s, and this trend continues today as airline companies seek to raise their competitiveness and increase their power to influence prices (Cento, 2009). Recently, American merged with US Airways, its parent company, coming only years after the large-scale merger between Delta and Continental Airlines. Such large-scale mergers and acquisitions raise concerns about reduced competition, as dominant firms can effectively block new entrants from certain markets — a trend that could result in airfare increases, the elimination of less profitable routes, reduced customer choice, and heightened inefficiency (Cento, 2009). On a brighter note, however, merging companies are able to boost their competitiveness and strengthen their positions in external markets, as was demonstrated when American entered a joint venture with Japan Airlines to reinforce its presence in the Asian market.
Another significant effect of deregulation has been the entry of low-cost carriers (LCCs) such as Southwest Airlines into the market (Gildner et al., 2010). These LCCs continue to gain "market share as traditional carriers increase prices to make up for losses of revenue during the current economic crisis" (Gildner et al., 2010, p. 21). Over the last decade, LCCs have attracted customers in part because, unlike traditional carriers, they do not impose surcharges and extra fees to recover lost revenues, allowing them to offer more competitive pricing. American Airlines, like many other legacy carriers, has reported ongoing financial losses and a loss of business to LCCs. The company's net profits have followed a notable downward trend for much of the decade, with significant deviation from pre-deregulation revenue levels. As Cook and Goodwin (2008) note, "four of the six largest airlines entered bankruptcy, with American avoiding the fate only by an eleventh hour concessionary agreement" (p. 52).
The structure of airline routes also changed as a result of deregulation. American transitioned from a point-to-point routing system to a hub-and-spoke network in 1981, opening its first hub at Dallas/Fort Worth that year and a second at Chicago O'Hare the following year. From these hubs, the company expanded its services into European and Japanese markets throughout the 1980s.
Deregulation also spurred a range of technological innovations, including the widespread adoption of computer reservations systems. Through the SABRE innovation, American owns one of the most dominant reservation platforms in the industry, from which it has continued to generate significant revenues.
Deregulation granted airlines the freedom to choose, among other things, the business models and route structures they deemed most efficient. The two primary structures are the point-to-point system and the hub-and-spoke system.
In the point-to-point framework, all passengers board at the flight's origin and disembark at the destination (Cook & Goodwin, 2008, p. 52). The fundamental advantage of this structure is that it is relatively cheap and simple to operate. Total travel time is reduced because circuitous routings and intermediate stops are eliminated (Cook & Goodwin, 2008). Both the airline and its customers benefit from these time savings, with airlines having greater opportunity to generate revenues by utilizing aircraft more effectively.
The system does, however, have one key drawback: its "inability to consolidate traffic bound for many destinations on a single flight severely limits the number of city-pairs in which non-stop flights can be economically operated" (Cook & Goodwin, 2008, p. 55).
In the hub-and-spoke model, the flight's origin serves as the boarding point, with the hub representing the deplaning point where passengers headed to destinations beyond the hub transfer to connecting flights (Cook & Goodwin, 2008). The hub-and-spoke framework provides two fundamental advantages. First, it allows an airline to offer a wide range of flights from a single hub, thereby creating a customer base strong enough to withstand the price competition posed by LCCs. Second, it increases productivity and efficiency by allowing airlines to consolidate long-distance passengers from various origin markets through transfer stations — what Cook and Goodwin (2008) describe as the "anywhere to everywhere" effect.
The framework is not without its disadvantages, however. It is costly to operate, first because it requires substantial personnel and extensive facilities to ensure smooth passenger transitions at the hub, and second because of the additional costs incurred in the form of facility charges and landing fees. A further disadvantage stems from the operational complexity involved, which necessitates the charging of an additional fare premium for certain travelers (Cook & Goodwin, 2008).
"Strategies used to distinguish American from competitors"
"Four departments and their operational responsibilities"
"Fixed and variable costs in airline operations"
"Yield management strategies and SABRE system use"
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