American Family Insurance (aka AmFam) is a private mutual company that focuses on property, casualty and auto insurance, but also offers commercial insurance, life, health, and homeowners coverage, as well as investment and retirement-planning products. A Fortune 500 company, its revenues for 2008 were over $6.7 billion[2][4].

AMR Corporation (NYSE:AMR) is the parent company of American Airlines, the second largest airline in the world based on available seat miles and revenue passenger miles, and AMR Eagle Holding Corporation, which runs American Eagle Airlines and Executive Airlines. On an average day, American Airlines flies approximately 3,400 flights between 250 countries.[1]

The company recorded a net loss of $1.5 billion in 2009 compared to a net loss of $2.1 billion in 2008.[1] The company’s 2009 net loss is primarily attributable to a significant decrease in passenger revenue due to lower traffic and passenger yield (passenger revenue per passenger mile).[1] In 2009, AMR experienced very weak demand for air travel driven by the continuing severe downturn in the global economy.[1] Thus, AMR implemented reductions in capacity and reduced seating by 7.2% in 2009.[1]


The company’s results were positively affected by the year-over-year decrease in fuel prices from an average of $3.03 per gallon in 2008 to an average of $2.01 per gallon in 2009.[1] Although fuel prices have abated considerably from the record high prices recorded in July 2008, they have steadily increased since the first quarter of 2009 and remain high and extremely volatile by historical standards.[1] Fuel price volatility, additional increases in the price of fuel, and/or disruptions in the supply of fuel may adversely affect AMR’s financial condition and its results of operations.[1]

Business Overview

Contents
1 Business Overview
1.1 Business & Financial Metrics
1.1.1 2010 Fourth Quarter Overview
1.1.2 2010 Third Quarter Overview
1.1.3 2010 Second Quarter Overview
1.1.4 2010 First Quarter Overview
1.1.5 2009 Overview
1.1.6 2008 Highlights
1.2 Business Segments
2 Trends & Forces
2.1 Airline industries are more sensitive to the economy than other industries
2.2 The recession has resulted in very weak demand
2.3 Price competition in the airline industry is prohibitively intense
2.4 AMR's bottom line is heavily impacted by fuel prices
3 Competition
4 Market Share
5 References
AMR operates in the airline business primarily through American Airlines but also owns American Eagle Airlines and Executive Airlines.[1] The company generates its revenue by booking passengers on its flights throughout the world and only turns a profit by keeping its cost per available seat mile (CASM) below its revenue per available seat mile (RASM). The highly competitive nature of the airline industry forces AMR to keep its prices low but highly volatile oil prices directly impact costs.

Business & Financial Metrics
2010 Fourth Quarter Overview
AMR Corporation reported a net loss of $97 million for the fourth quarter of 2010.[2] These results compare to a loss of $344 million for the fourth quarter of 2009.[2] AMR reported fourth quarter revenue of approximately $5.6 billion, an increase of 10.3 percent year-over-year. American had double-digit year-over-year increases because total operating revenue was approximately $523 million better in the fourth quarter 2010 compared to the fourth quarter 2009.[2] The company’s cargo revenue increased by 10.6 percent to $181 million in the fourth quarter compared to the same period in 2009.[2]

American’s mainline passenger revenue per available seat mile increased by 7.1 percent compared to fourth quarter 2009.[2] The company’s fourth quarter unit revenue performance reflects a recovering economy and a significantly improved fare environment, as well as a business travel market that has regained strength. Total available seat miles, in the fourth quarter increased by 3.1 percent compared to the same period in 2009.[2] American’s mainline load factor – or the percentage of total seats filled – was a record 81.6 percent during the fourth quarter, compared to 81.1 percent in the fourth quarter of 2009.[2] American’s fourth quarter passenger yield, which represents average fares paid, increased by 6.5 percent.[2] The increase in yield was largely due to a stronger fare environment and increased premium demand.

As of January 24th, 2011, the company is in dispute with Expedia and Orbitz, who have both removed airline fares and ticket booking from their website.[2] Other corporate developments include AMR's announcement of the enhancement of service in Los Angeles and its 28% increase in daily departures.[2] AMR also plans to launch new service from Los Angeles to Shanghai, China, as well as nine new domestic markets in spring 2011. New flights between Los Angeles and Shanghai are scheduled to begin on April 5, 2011.[2]


2010 Third Quarter Overview
AMR Corporation reported a net profit of $143 million for the third quarter of 2010, in comparison to a $359 million loss in the third quarter of 2009.[3] This is the first quarter since the third quarter of 2007 that AMR corporation has reported a positive net income.[3] AMR is repositioning itself as a growing company after hiring 800 employees for whom it had previously issued furloughs.[3] Included in this positioning is a 28% increase in daily departures in Los Angeles and adding new flights from Los Angeles to Shanghai. [3]

AMR reported third quarter consolidated revenues of approximately $5.8 billion, an increase of 14.0 percent year over year.[3] American Airlines and all other airline companies under AMR all experienced double-digit, year-over-year increases, as total operating revenue was approximately $715 million better in third quarter 2010 compared to the third quarter 2009.[3] Passenger revenue per available seat mile grew 10.7 percent compared to the third quarter 2009, and mainline unit revenue at American also grew 10.7 percent.[3] Improving economic conditions and strong load factors drove higher unit revenue.[3] Passenger yield, which represents the average fares paid, increased at American by 10.7 percent year over year in the third quarter.[3]

On the costs side, AMR's costs only went up due to fuel hedging. Mainline unit costs in the third quarter 2010 decreased 0.7 percent year over year, excluding fuel costs[3]. Including the impact of fuel hedging, AMR paid $123 million more for jet fuel in the third quarter, at an average of $2.24 per gallon, than it would have paid at prices prevailing during the third quarter 2009, when it paid $2.07 per gallon.[3] AMR currently has 40% of its anticipated 4th quarter 2010 fuel consumption hedged at $2.33 per gallon.[3]

2010 Second Quarter Overview
AMR reported a net loss of $10.7 million for the second quarter of 2010 compared to a net loss of $390 million in the second quarter of 2009.[4] The company cites fuel expenses for having a large impact on their bottom line, having paid $334 million more in fuel expenses compared to year ago 2nd quarter.[4] AMR reported second quarter consolidated revenues of approximately $5.7 billion, an increase of 16.0 percent year over year.[4] All of AMR's segments experienced double-digit, year- over-year increases, as total operating revenue was approximately $785 million better in second quarter 2010 compared to the second quarter of the previous year.[4] [[Passenger Revenue}PRASM]] grew 16.7 percent compared to the second quarter of 2009.[4]

AMR agreed to purchase 35 fuel-efficient Boeing 737-800 aircraft as they renew their fleet.[4] The company is also expanding their regions of operation. AMR received authority from the U.S. Department of Transportation to operate daily, year-round scheduled service from New York‟s John F. Kennedy International Airport to Tokyo starting Jan. 20, 2011. American Airlines also launched its first flight between Chicago O‟Hare International Airport and Beijing Capital International Airport, one of the world‟s busiest airports, on May 25.[4]

AMR is planning for an average system price of $2.25 per gallon in the third quarter of 2010 and $2.29 per gallon for all of 2010.[4] As such, the company has 44% of its fuel for the third quarter hedged, and 38% for the full year 2010.[4]

2010 First Quarter Overview
AMR reported a net loss of $505 million for the first quarter of 2010.[5] This compares to a net loss of $375 million in the first quarter of 2009. AMR reported first quarter consolidated revenues of approximately $5.1 billion, an increase of 4.7%, year over year.[5] While the company made significant progress in improving revenues in the first quarter, net income fell short because the company couldn't overcome the challenges of the global economic environment coupled with increasing fuel prices.[5] The increase in fuel prices forced AMR to pay $211 million more for jet fuel in the first quarter, at an average of $2.23 per gallon, than it would have paid at prices prevailing during the first quarter of 2009, when it paid $1.91 per gallon.[5]

AMR has 39 percent of its anticipated second quarter 2010 fuel consumption hedged at an average cap of $2.47 per gallon of jet fuel equivalent, with 38 percent subject to an average floor of $1.89 per gallon of jet fuel equivalent. AMR has 33 percent of its anticipated full-year consumption hedged at an average cap of $2.43 per gallon of jet fuel equivalent, with 32% subject to an average floor of $1.82 per gallon of jet fuel.[5]

Consolidated passenger revenue per available seat mile (unit revenue) grew 7.3 percent compared to the first quarter of 2009, while mainline unit revenue at American grew 6.8 percent. Tight capacity control, along with a general increase in demand for airlines since the previous year increased those figures. However, inclement weather and natural disasters in Haiti and Chile reduced revenue by an estimated $20-25 million in the first quarter.[5]

For 2010, the company expects to reinstate of flying that was canceled in 2009 due to the H1N1 virus and the launch of Chicago-Beijing service, which was deferred from 2009. Even including this, AMR expects its mainline capacity to increase only by 1% by the end of 2010.[5]

2009 Overview
AMR’s revenues decreased approximately $3.8 billion, or 16.2 percent, to $19.9 billion in 2009 compared to 2008.[6] American’s passenger revenues decreased by 17.5 percent, or $3.2 billion, on a capacity decrease of approximately 7.2 percent year over year.[6] The company recorded a net loss of $1.5 billion in 2009 compared to a net loss of $2.1 billion in 2008.[6] AMR’s 2009 net loss is primarily attributable to a significant decrease in passenger revenue due to lower traffic and passenger yield (passenger revenue per passenger mile).[6] In 2009, the company experienced very weak demand for air travel driven by the continuing severe downturn in the global economy. In addition, as a result of reduced demand, substantial fare discounting occurred across the industry, which resulted in decreased passenger yield.[6] Mainline passenger revenue decreased by $3.2 billion to $15.0 billion for the year ended December 31, 2009 compared to 2008. Mainline passenger unit revenues decreased 11.1 percent in 2009 due to an 11.2 percent decrease in passenger yield compared to 2008.[6]

The company initially implemented capacity reductions in 2008 and again in the first half of 2009 in response to record high fuel prices in 2008 and a rapidly deteriorating economy. he reduction consisted of an approximately 8.5 percent reduction in consolidated domestic capacity and approximately 5.1 percent reduction in consolidated international capacity compared to the year ending December 31, 2008.[6][1]

The company’s results were positively affected by the year-over-year decrease in fuel prices from an average of $3.03 per gallon in 2008 to an average of $2.01 per gallon in 2009.[1] However, throughout the 2009 year, oil prices have risen up and remain extremely volatile.[6]

2008 Highlights
2008 proved to be the second-worst year in AMR's history, and its $2.1 billion loss was only trumped by its $3.5 billion loss in 2002 when the company struggled in the wake of the September 11 terrorist attacks.[7]

Early in the year, the company suffered from high fuel prices like many of its competitors, as average fuel price per gallon increased from $2.13 in 2007 to $3.03 in 2008 [8]. As a result, the company spent $9.01 billion on fuel throughout the year, 35% more than in 2007.[7] Overall, operating expenses grew by 16.8%, to $25.7 billion in 2008, primarily due to the rise in oil prices.

Business Segments

AMR aims to increase revenue with growth in international travel.[6]
AMR has only one reportable operating segment that involves the operation of its principal subsidiary, American Airlines, and its regional airline subsidiary, AMR Eagle Holding Corporation.[6] However, the company has unofficial geographic segments as shown in the graph.

Trends & Forces

Airline industries are more sensitive to the economy than other industries
Typically, airline companies and aircraft manufacturers are more prone to swings in revenue and equity market prices due to the release of economic indicators.[9] Consumers tend to reduce travel if personal economic conditions are suboptimal, forcing airlines to cut capacity and production. Indicators such as unemployment indices, personal income, and even home sales affect airline industries in exaggerated fashion.

Since early July, the airline index has gained 13% as carriers reported monthly double-digit unit revenue after last year's slump.[9] But now the industry is facing a slower travel season while economic data seem to indicate a general slowdown in the recovery. For the last two weeks of August 2010, many economic indicators revealed that the U.S economy has erased all of its employment recovery since one year ago. Unemployment increased unexpectedly to November 2009 levels, and existing homesales decreased by more than 27%.[9] Even though such recessionary indications typically reduce fuel futures prices, this does not fully offset the reduction in travel demand that follows a recession, and will affect the bottom line of airline companies.

The recession has resulted in very weak demand
AMR is experiencing very weak demand for air travel driven by the severe downturn in the global economy. Many of the countries it serves are experiencing economic slowdowns or recessions. The company began to experience weakening demand late in 2008, and this weakness has continued into 2010. It reduced capacity in 2008, and in the first half of 2009 it announced additional reductions to our capacity plan. In connection with these capacity reductions, the company incurred special charges related to aircraft, employee reductions and certain other charges. If the global economic downturn persists or worsens, demand for air travel may continue to weaken. There is no certainty that further capacity reductions will have any positive effect - such capacity reductions or other steps might result in additional special charges in the future. Further, other carriers may not reduce capacity or may increase capacity, which may reduce the expected benefits of AMR's capacity reductions.[10]

Price competition in the airline industry is prohibitively intense
The airline industry is characterized by substantial and intense price competition. Fare discounting by competitors has historically had a negative effect on AMR’s and others' financial results because airline providers are generally required to match competitors' fares - failing to match would provide even less revenue due to customers’ price sensitivity. In 2009, the recession forced significant fare discounting to occur throughout the industry, reducing the company’s passenger yield.

In recent years, a number of low-cost carriers have entered the domestic market. Several major airlines, including AMR, have implemented efforts to lower their costs since lower cost structures enable airlines to offer lower fares. In addition, several air carriers have reorganized in recent years under Chapter 11, including United, Delta and US Airways. These cost reduction efforts and bankruptcy reorganizations have allowed carriers to decrease operating costs. In the past, lower cost structures have generally resulted in fare reductions. If fare reductions are not offset by increases in passenger traffic, changes in the mix of traffic that improve yields and/or cost reductions, AMR's operating results will be negatively impacted.[1]

AMR's bottom line is heavily impacted by fuel prices
Fuel expenses represent one of the most variable and significant costs faced by airliners. From 2004 to 2008, fuel costs climbed from 21% to 35% of American's total operating expenses.[11] AMR has used hedging strategies that reduced its total fuel costs by $64 million, $97 million, $239 million, and $380 million in 2005, 2006, 2007, and 2008, respectively.[12] However, oil prices have declined sharply since their peak of $145.29 in July 2008, reaching under $45 in January 2009.[13] Since AMR entered into hedging agreements that would make the company break even at prices near $130 per barrel, these significantly lower fuel prices contributed significantly to the company's multibillion dollar loss in 2008 and 2009.[14] In 2009, AMR reported that their fuel hedging program increased fuel prices by 651 million, erasing all the gains from fuel hedging since 2005.[1]

As the airline industry becomes increasingly price-focused, AMR cannot easily pass on fuel price increases to customers.[15] Instead, American began cutting down its flight schedule in May 2008.[16]

Competition

AMR competes with other legacy airlines, like Delta, as well as with newer discount airliners like Southwest. The company did not file for bankruptcy after the September 11, 2001 terrorist attacks and consequently did not restructure its business model to cut costs as did its legacy airline competitors. AMR's discount airline competitors have been able to keep costs low because of their emergence after airline deregulation. The merger between United Airlines (UAUA) and Continental Airlines (CAL) leaves just three other major network carriers: American Airlines (AMR), US Airways Group (LCC) and Delta Air Lines Inc. (DAL).[17] This improves UAUA's competitive landscape substantially. American Airlines has the highest cost structure and has been unable to acquire a lower-cost company due to Delta acquiring Northwest and UAUA acquiring CAL. [17]

AirTran Holdings (AAI): AirTran Holdings is one of America’s largest low-fare passenger airlines. The airline has managed to achieve low operating costs despite relying on a hub-and-spoke system, in which most of its flights originate and terminate at its hub in Atlanta, Georgia. Given AirTran's continued reliance on the hub and spoke system, airline management has cited other operational factors as cause for the airline having a cost structure that is among the lowest in the industry.[18]

Southwest Airlines Company (LUV): Southwest Airlines is the largest domestic carrier by total passengers, carrying over 101.3 million passengers in 2009 on over 1.18 million flights. Southwest thrives on maintaining low operating expenses, primarily through its extensive fuel hedging, which saved the company an estimated $1.1 billion in fuel costs in 2008. Because of its low costs, Southwest was able to remain profitable for 35 consecutive years, a feat unmatched in commercial aviation history. However, the percentage of fuel costs the company has hedged declines precipitously beyond 2009, and the drop in fuel prices caused by the global economic crisis renders Southwest's key advantage - its low fuel costs in comparison to its competitors - much less valuable.[19]

Delta Air Lines Inc. (DAL): Delta Air Lines is the 2nd largest passenger airline in the world by available seat miles. In recent years, the company has faced financial difficulties due to price competition from discount airlines like JetBlue and Southwest. This has limited Delta's ability to raise prices to their natural supply/demand and cost reflective levels. As a result, Delta was forced into bankruptcy in September of 2005. Since exiting bankruptcy on April 30, 2007, the company has followed a revised operating strategy calling for a network shift towards more profitable international routings. [20]

JetBlue Airways (JBLU): JetBlue Airways is the 8th largest airline in the U.S. by revenue passenger miles. JetBlue differentiates itself from other Airline Travel companies with its low fares, made possible by low distribution and operating costs - largely due to the fact that it has the youngest fleet in all domestic airlines. JetBlue Airways specializes in cheap point-to-point flights with high levels of customer service to 52 destinations in 19 states, Puerto Rico, Mexico, and the Carribean.[21]

United Airlines (UAUA): With hubs in Los Angeles, San Francisco, Denver, Chicago and Washington D.C., United operates approximately 3,300 flights per day to over 230 destinations domestically and internationally. In 2009, United Airlines was the first in on-time performance for scheduled domestic flights, with 81% of all domestic flights arriving approximately on time. As of December 31, 2009, United Airlines has a 13.7% market share. As a result of high operating expenses and declining consumer demand for travel, United has significantly reduced its capacity or Available Seat Miles (ASM) recently. UAUA announced in April 2010 that it is acquiring Continental Airlines.[22] UAUA has also merged with Continental Airlines. Continental Airlines (CAL): Continental Airlines is the world's fifth largest airline by revenue passenger miles. CAL serves 242 destinations worldwide, offering 2000 daily flights. Continental's cost per available seat mile of 10.75 cents is among the lowest in the airline industry. The company recently announced that they were being acquired by United Airlines.[23]

US Airways Group (LCC) US Airways is a major domestic air carrier, which as of April 2008 operates 3,800 flights to 230 destinations across the U.S., Canada, the Caribbean, Latin America and Europe. The company’s finances suffered considerably due to reduced air travel following September 11th, forcing the airline to declare bankruptcy in 2002. However, unlike other carriers that improved and emerged stronger following Chapter 11 protection, US Airways never fully recovered. The combination of high fuel costs and tough labor negotiations forced the company into a merger with America West in 2005. While the US Airways name was maintained for brand purposes, the merger actually left America West executives and stockholders with more control over the new company.[24]



Market Share

2010 Top 10 U.S. Airlines Market Share based on Revenue Passenger Miles[25]
Rank Carrier Market Share
1 American 13.8%
2 Southwest 13.8%
3 Delta 11.8%
4 United 10.4%
5 US Airways 8.0%
6 Continental 7.6%
7 Northwest 4.8%
8 JetBlue 4.3%
9 AirTran 3.4%
10 Alaska 3.1%
11 Other 19%
 
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