American Airlines 2006 Annual Report Download - page 17

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The airline industry is fiercely competitive and we are subject to increasing competition.
Service over almost all of our routes is highly competitive and fares remain at low levels by historical standards.
We face vigorous, and in some cases, increasing competition from major domestic airlines, national, regional, all-
cargo and charter carriers, foreign air carriers, low-cost carriers and, particularly on shorter segments, ground and
rail transportation. We also face increasing and significant competition from marketing/operational alliances
formed by our competitors. The percentage of routes on which we compete with carriers having substantially
lower operating costs than ours has grown significantly over the past decade, and, as of December 31, 2006, we
now compete with low-cost carriers on approximately 82 percent of our domestic network.
Certain alliances have been granted immunity from anti-trust regulations by governmental authorities for specific
areas of cooperation, such as joint pricing decisions. To the extent alliances formed by our competitors can
undertake activities that are not available to us, our ability to effectively compete may be hindered.
Pricing decisions are significantly affected by competition from other airlines. Fare discounting by competitors
has historically had a negative effect on our financial results because we must generally match competitors' fares,
since failing to match would result in even less revenue. More recently, we have faced increased competition
from carriers with simplified fare structures, which are generally preferred by travelers. Any fare reduction or fare
simplification initiative may not be offset by increases in passenger traffic, a reduction in costs or changes in the
mix of traffic that would improve yields. Moreover, decisions by our competitors that increase – or reduce –
overall industry capacity, or capacity dedicated to a particular domestic or foreign region, market or route, can
have a material impact on related fare levels.
There have been numerous mergers and acquisitions within the U.S. airline industry since its deregulation in
1978, and there may be additional mergers and acquisitions in the future. US Airways’ recent bid to purchase
Delta, and other factors, could spur consolidation within the industry in the near term. Any airline industry
consolidation could substantially alter the competitive landscape and may result in changes in our corporate or
business strategy. We cannot reliably predict the impact on us of, and our role in or response to, airline industry
consolidation.
We compete with reorganized and reorganizing carriers, which may result in competitive disadvantages
for us or fare discounting.
We must compete with air carriers that have recently reorganized or are reorganizing, including under the
protection of Chapter 11, including United, the second largest U.S. air carrier, Delta, the third largest U.S. air
carrier and Northwest, the fourth largest U.S. air carrier. It is possible that other competitors may seek to
reorganize in or out of Chapter 11. With the Chapter 11 filings of Delta and Northwest, two out of the four largest
U.S. air carriers are now operating under the protection of the Bankruptcy Code, with United having emerged
from Chapter 11 in the first quarter of 2006. We cannot predict the outcome of any airline bankruptcy
proceedings or the consequences of such a large portion of the airline industry’s capacity being provided by
bankrupt or recently reorganized air carriers.
Successful reorganizations by other carriers present us with competitors with significantly lower operating costs
and a stronger financial position derived from renegotiated labor, supply, and financing contracts, which could
lead to fare reductions. These competitive pressures may limit our ability to adequately price our services, may
require us to further reduce our operating costs, and could have a material adverse impact on us.