American Airlines 2007 Annual Report Download - page 16

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The airline industry is fiercely competitive, may undergo consolidation 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, 2007, we
now compete with low-cost carriers on approximately 78 percent of our domestic non-stop mainline 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. 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. Any airline industry consolidation could
substantially alter the competitive landscape and may result in changes in our corporate or business strategy.
We regularly assess and explore the potential for consolidation in our industry, our strategic position and ways to
enhance our competitiveness, including the possibilities for our participation in merger activity. Consolidation
involving other participants in our industry could result in the formation of one or more airlines with greater
financial resources, more extensive networks, and/or lower cost structures than exist presently, which could have
a material adverse effect on us.
We compete with reorganized carriers, which may result in competitive disadvantages for us or fare
reductions.
We must compete with air carriers that have recently reorganized 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. United
emerged from Chapter 11 in the first quarter of 2006, while Delta and Northwest emerged in the second quarter
of 2007. We cannot predict the consequences of such a large portion of the airline industry’s capacity being
provided by 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 further 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.
Fares are at low levels and our reduced pricing power adversely affects our ability to achieve adequate
pricing, especially with respect to business travel.
While we have recently been able to implement some fare increases on certain domestic and international routes,
our passenger yield remains low by historical standards. We believe this is due in large part to a corresponding
decline in our pricing power. Our reduced pricing power is the product of several factors including: greater cost
sensitivity on the part of travelers (particularly business travelers); pricing transparency resulting from the use of
the Internet; greater competition from low-cost carriers and from carriers that have recently reorganized under the
protection of Chapter 11; other carriers being well hedged against rising fuel costs and able to better absorb the
current high jet fuel prices; and fare simplification efforts by certain carriers. We believe that our reduced pricing
power could persist indefinitely.