American Airlines is one of the largest Airline operations in the world. They are headquartered in Dallas, Texas and has the largest fleet of Aircraft in the world with a total of 947 planes. American Eagle is the regional airline that is a subsidiary of American Airlines and is a network of seven regional carriers such as Envoy Air and Piedmont Air. They were founded in 1930 when 80 smaller airlines came together to form the American Airlines Group.
It was difficult to quickly find their mission statement on the corporate website. American’s Mission Statement is “committed to provide every citizen of the world with the best service of the air travel to the extensive selection of destination possible.” Additionally, they state that their mission statement has three primary components:
- Distinguished services
- Improving lives
- Exceeding expectations
The Airline industry is notoriously difficult to operate in. The profit margins per passenger in 2017 was $ 17.75! They are also susceptible to exogenous shocks such as terrorism, energy market fluctuations, and pandemics. One would expect managers in this field to be conscious of risk, especially unforeseen risks and manage accordingly.
Due to the thin margins associated with airline operations, American has forced to try and create or extract value any way possible from operations. This includes fees for travelers that would like to have marginally better experience like first class, baggage, skymall etc. This tweet below demonstrates the frustration that many travelers feel towards air travel and the contempt that many consumers have for the
In addition, in order to maximize value for the shareholders, American has spent the past decade or so financially engineering the company by aggressive share repurchase programs details on that program from the 2019 SEC 10K filing are below.
Share Repurchase Programs – In April 2018, we announced that our Board of Directors authorized a $2.0 billion share repurchase program that will expire on December 31, 2020. Since July 2014, our Board of Directors has approved seven share repurchase programs aggregating $13.0 billion of authority. As of December 31, 2019, there was $565 million of remaining authority to repurchase shares under our current $2.0 billion share repurchase program. Share repurchases under our repurchase programs may be made through a variety of methods, which may include open market purchases, privately negotiated transactions, block trades or accelerated share repurchase transactions. Any such repurchases that may be made from time to time will be subject to market and economic conditions, applicable legal requirements and other relevant factors. We are not obligated to repurchase any specific number of shares and our repurchase of AAG common stock may be limited, suspended or discontinued at any time at our discretion and without prior notice.In 2019, we repurchased 33.8 million shares of AAG common stock for $1.1 billion at a weighted average cost per share of $32.09. Since the inception of our share repurchase programs in July 2014 through December 31, 2019, we have repurchased 312.7 million shares of AAG common stock for $12.4 billion at a weighted average cost per share of $39.76.
For context in 2019 American spent $2.38 billion dollars on aircraft maintenance, materials and repairs and spent almost as much buying back shares at around $39.76 per share. The share price at time of writing is about $9.39. Perhaps it would have been more prudent to buy low sell high.
Sources:
Profit Margins for Airline Industry – Wall Street Journal
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Hi Alex,
Thnak you for finding the detailed information regarding their vision & mission, compiling data from 10K, and penetrating their equity. It is really surprising that their margin is so low. Hence, they have to think about all possible ways that can increase their stock price and offset the negative impact of low margin, which is fairly reasonable. However, it is still really surprising for me that the market price is so low compared with the buyback price. The premium is even three times bigger than the stock price. I guess the advantage created by repos was easily offset by their low margin (or even poor performance). I always believe that stock price will eventually reflect the real performance of the company in a long run, and there will be an end of such tireless buybacks. Will they find new ways to squeeze out any residual value from a customer? That is obviously harmful in a long run.
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Hi Alex,
I am glad that you are able to find their mission and vision statement because it’s useful to us to move forward with our reasoning on this ethical dilemma. Their mission statement allows us to know if they follow the code of conduct or the principles while doing their business. I think their purpose or goal is clear enough, which is providing the best services to their customers. I know that “the best service” means at the most excellent, effective, and desirable quality so they must be ethical in doing so. However, American Airlines have to perform well in order to provide those services at the best level possible. How are they going to handle their business in this time of crisis? Let’s see what’s next.
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