American Airlines 2005 Annual Report Download - page 6

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3
In providing international air transportation, the Company competes with foreign investor-owned carriers, foreign
state-owned carriers and U.S. airlines that have been granted authority to provide scheduled passenger and
cargo service between the U.S. and various overseas locations. The major U.S. air carriers have some
advantage over foreign competitors in their ability to generate traffic from their extensive domestic route systems.
In some cases, however, foreign governments limit U.S. air carriers' rights to carry passengers beyond
designated gateway cities in foreign countries. To improve access to each other's markets, various U.S. and
foreign air carriers - including American - have established marketing relationships with other airlines and rail
companies. American currently has marketing relationships with Aer Lingus, Air Pacific, Air Sahara, Air Tahiti
Nui, Alaska Airlines, British Airways, Cathay Pacific, China Eastern Airlines, Deutsche Bahn, EL AL, EVA Air,
Finnair, Gulf Air, Hawaiian Airlines, Iberia, Japan Airlines, Lan Airlines, Mexicana, Qantas Airways, SN Brussels,
SNCF, Swiss International Air Lines, the TAM Group and Turkish Airlines. In the coming years, the Company
expects to develop these programs further and to evaluate new alliances with other carriers.
American is also a founding member of the oneworld alliance, which includes Aer Lingus, British Airways, Cathay
Pacific, Finnair, Lan Airlines, Iberia, and Qantas. In addition, oneworld has extended invitations to Japan Airlines,
Malev and Royal Jordanian. The oneworld alliance links the networks of the member carriers to enhance
customer service and smooth connections to the destinations served by the alliance, including linking the carriers'
frequent flyer programs and access to the carriers' airport lounge facilities. Several of American's major
competitors are members of marketing/operational alliances that enjoy antitrust immunity. American and British
Airways, the largest members of the oneworld alliance, are restricted in their relationship because they lack
antitrust immunity. They are, therefore, at a competitive disadvantage vis-à-vis other alliances that have antitrust
immunity.
Price Competition The airline industry is characterized by substantial and intense price competition. Fare
discounting by competitors has historically had a negative effect on the Company’s financial results because the
Company is generally required to match competitors' fares because failing to match would provide even less
revenue because of customers’ price sensitivity.
During recent years, a number of low-cost carriers (LCCs) have entered the domestic market. Several major
airlines, including the Company, have implemented efforts to lower their costs since lower cost structures enable
airlines to offer lower fares. In addition, several air carriers have recently reorganized or are reorganizing,
including under Chapter 11 of the United States Bankruptcy Code, including United, Delta, US Airways and
Northwest Airlines. Reorganization will allow these 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 (passenger revenue per passenger mile) and/or cost
reductions, the Company’s operating results will be negatively impacted.
Distribution Systems The growing use of electronic ticket distribution systems provides the Company with an
opportunity to lower its distribution costs. However, the continuous increase in pricing transparency resulting
from the use of the Internet has enabled cost-conscious customers to more easily obtain the lowest fare on any
given route. The Company continues to expand the capabilities of its Internet website - AA.com - and the use of
electronic ticketing throughout the Company's network. In addition, the Company has marketing agreements with
various Internet travel services.
The Company anticipates additional reductions of distribution costs as it renegotiates certain agreements with
global distribution system providers in 2006. The Company will continue to explore distribution cost reduction
opportunities with traditional distribution channels and providers of alternative distribution technologies.