American Airlines

GROUP 7

Introduction

American Airlines has more than tripled its revenue since 1980.

AA has been maintaining profit for more than 7 consecutive years

(1983-1989).

In 1991 cost increased more compared to revenue due to Persian

Gulf war.

Labour
cost were largest operating expense and various
contracts signed in 1991 and 1992 with pilots, ramp workers,
ticket and reservation agents led to increase in labour costs.

Competition in Airline business

Basis of Competition

Route Structure

Quality of service

Marketing program Frequent Flyer Program, AAdvantage

Program

Price

AA after Deregulation

Crandall started cost reduction by implementing some innovative

ideas.

Focus on a strategy to average down costs by reducing both the

number of employees per dollar of revenue and the cost of
employing them.

Produce services at costs approximately equal to those of lowcost carriers.

Bargaining with the Transport Workers Union to reduce wages by

making threats to shrink or liquidate the airline.

Two Tier Compensation System

All new employees hired would start at significantly lower wages

compared to the existing AA levels.

Old employees
agreements.

Helped AA to reduce costs and increase revenue.

There was an increase in application for jobs in AA due to various

incentives provided in the new system.

Low travel rates were provided to employees as an incentive

under the two tier compensation system

continued

working

under

the

existing

Commitment and Efficiency

Various programs and schemes were started to improve the

commitment level and the efficiency of the employees

Presidents Conference in 1981

QWL program in 1983 to increase better communication

Peak Performance through commitment (PPC) program in 1987 to

counsel, coach and motivate employees.

Committing to Leadership (CTL) program in 1988 to increase the

alignment of the employees with corporate vision.

IDEAAS in action program for suggestions from employees related to

cost saving, productivity improvement and new revenue resources.

New contracts

Intervening contracts between 1983 and 1989 altered the two

tier structure.

New pilots, co-pilots and flight engineers still entered at low

wages but received higher pay scales after few years.

Pilots demanded lucrative compensation packages.

In February 1991, the parties agreed to new contracts that met

many but not all of the pilots demands.

Two tier system was brought to an end.

Issues

To reduce the operational cost specially the labour cost to make it

manageable with the increase in revenue.

During 1990 cost of fuel increased by 70% leading to a huge

increase in the operational cost of AA.

Maintaining employee relations to achieve the strategy of cost

reduction and leading customer service.