By, Alicia Childers BA301 Rodney Barker Fall Term 2011 Page 1 of 35
By,Alicia Childers
BA301 Rodney BarkerFall Term 2011
Page 1 of 24
Table of Contents
TABLE OF CONTENTS 2
EXECUTIVE SUMMARY 3
POSITION 4
SENSE 8
UNCOVER 12
SOLVE 15
BUILD 20
ACHIEVE 21
WORKS CITED 23
Appendix: Table of Contents 24
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Executive Summary:
AMR Corp. is the parent company to one of the leading airlines in the United States. The
company’s vision is to be the largest airline in the world. In the past ten years many issues have
arisen causing the company to lose the capability to compete with other airlines. Many of AMR’s
competitors have chosen to file bankruptcy and reorganize while they have decided to overcome
the loss on their own. The problems affecting AMR Corp are economic downturn, credit card
processing agreements, inability to compete with reorganized airlines, and insufficient liquidity.
The issues causing these problems are current economic conditions, expenses the company faces,
and declining profit. The company has begun to take steps to overcome these problems. One
huge step for the company is negotiating union contracts which employ their personnel. AMR
Corp hopes once negotiations are completed it will significantly decrease their current expense
while increasing productivity. Another stride the company is taking is to replace the gas guzzling
jets with more fuel efficient new models. This paper identifies each problem in detail and
possible solutions for the company to consider.
Each solution is carefully analyzed to show which would be in the company’s best
interest. The solutions looked at are bankruptcy, global distribution services, enhancing their
AAdvantage rewards program, and alleviating unnecessary costs. The paper ends with focusing
on how enhancing their customer rewards program will be a low cost but effective solution to
help generate revenue. A plan on the implementation of this solution is discussed in detail later
in this paper.
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Position:
AMR Corporation was founded in 1982, its name originated from the three letter ticker
symbol on the New York Stock Exchange for American Airlines. It is the parent company to
American Airlines, American Eagle Airlines, and Executive Airlines. The creation of AMR
didn’t change daily activities for these companies, but has offered financial opportunities that
would otherwise be neglected. They are headquartered in Fort Worth, Texas which gives them a
huge advantage as it puts them in the heart of global airline routes. The company strengthened
their advantage by redistributing capacity at hubs in Los Angeles, Dallas/Fort Worth, Chicago,
Miami and New York. Reorganizing and creating this cornerstone strategy gives AMR Corp the
ability to connect passengers globally with their own flights. The company employs over 87,000
full and part-time employees worldwide. On their website they state, “We continuously strive to
make a positive impact in the lives of our customers, employees, shareholders, and in the
communities and environments where we live, work, and play.” They demonstrate their
commitment to the stakeholders starting with their mission statement; this is not easily found on
their website. I found a proposed mission statement by Fathi Salem Mohammad Abdulla and it
states:
“AMR Corporation is committed to providing every citizen of the world with the highest quality air travel to the widest selection of destinations possible. AMR will continue to modernize its fleet while maintaining its position as the largest air carrier in the world, with a goal of becoming the most profitable airline. AMR is the airline that treats everyone with equal care and respect, which is reflected in the way each AMR employee is respected. AMR recognizes that its employees are the key to the airlines success and invests in the futures and lives of its employees. By investing in tomorrow’s technologies and by following a strict adherence towards environmental regulations, AMR demonstrates its commitment to the world environment.”
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A company is unable to succeed without its customers and AMR Corporation is
continually striving to earn customer loyalty. They understand that in order to excel they need to
meet and exceed the customer’s expectations. They do this from the very first interaction with a
customer; when a customer goes to purchase the product AMR offers competitive pricing,
frequent flyer programs, and a global network route. Once onboard the plane customers will
experience a clean aircraft, a safe and dependable flight, as well as timely baggage delivery.
Throughout the experience customers will continually experience a crew that is knowledgeable
and professional that differs in languages, experiences, and cultural backgrounds. Every year the
airline continues to improve its on-time arrival rates to ensure passengers are able to reach their
destination without delay. Overall they continue to meet the three top customer concerns of:
Get me there on time Treat Me well Don’t lose my bags.
The customer’s needs are met by the approach each employee takes when interacting
with customers. The employees continually deliver quality customer service at every point of
interaction. They continually ask for feedback from customers in order to engage customer’s on
improvements for the company. AMR Corp does this from many different perspectives from
asking questions pertaining to advertising ideas, frequent flyer programs, and a customer
satisfaction survey. This information is reviewed and tracked on a corporate level. Each location
receives an analysis that takes the information received from customers and applies it to the six
key areas of the customer experience, which are:
Delays and delay management Onboard interactions Bag handling Bag Resolution Gate and boarding experiences Cabin cleaning and interior aircraft condition
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From the feedback received they are able to identify areas of improvement. The website states
that, “Several best practices have emerged from the analysis of survey results, including
delivering bags in waves to reduce customer wait times and streamlining gate announcements.
This continuous ongoing dialogue between AMR Corp and the customers ensures that the
company is listening and striving to meet the customers’ expectations.
This continual effort put forth by staff does not go unnoticed. AMR continually takes
strides to further health and safety for all employees and make it an even better place to work.
The company believes in promoting a work culture that is focused on safety by hosting safety
fairs, wellness incentive programs, and encourages employee communication. AMR Corp
understands that in order to be successful you must first invest in your staff. They do this by
creating a culture that encourages diversity and inclusion. Gerard Arpey, the Chairman and Chief
Executive Officer of AMR said:
“As a global airline serving a quarter of a million customers daily from around the world, we take pride in the important part we play in bringing people together. American is more than an airline. We are a global company that connects people from many different cultures and communities. And we will only be successful if the experience we deliver, and the environment we create, is welcoming and respectful to everyone.
As a company that bears the name “American,” much is expected of us, and we hold ourselves to a high standard. From hiring the industry’s first African American flight attendant in 1963, to the first female pilot in 1973, to the creation of our supplier diversity program in the 80’s and our diverse segment sales team in the 90’s, we have a long history of leadership. And we will keep striving to make progress, with our employees, our business partners, and our communities. For us, diversity isn’t just an inspirational goal. It’s the way we do business.”
The vision of the company states: “To become the largest airline in the world”, this effort
serves the benefit of all the stakeholders. AMR continually puts forth an effort to serve the best
interests of its shareholders. In recent years, the company has been able to persevere and grow
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during a time of many obstacles. The first hurdle they had to overcome was September 11, 2001;
the terrorist attack caused a drastic decrease in air travelers. It not only impacted them by
decreasing business it also affected the AMR Corporations credit ratings. Their ratings have been
lowered and forced them to become below investment grade. This reduction has increased the
company’s borrowing costs, adversely affected borrowing terms, and limited options for
borrowing. The ability to raised funds and increasing borrowing will be two areas of the business
that will be impacted by the decrease in credit ratings. Other financial problems in recent years
have caused consequential indebtedness. The current recession has also caused the company to
face difficulties such as historically high prices for fuel, less liquidity, widening credit spreads,
and insufficient funding. These factors, could impact operation and obligations the company has
and cause the company to consider a solution in a direction that does not compliment their
mission statement and vision. For this paper I will focus on whether AMR Corp. will
successfully be able to recover their liquidity and prevent their current debt from causing their
demise and forcing them to file bankruptcy.
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Sense:
AMR Corp. strives to be the largest airline company in the world but currently ranks
fourth. The company continually strives to climb the rankings but first needs to overcome
barriers that are limiting their ability to compete. Each issue has a significant impact on allowing
the airline to become the leader in the industry. Although the company could seek refuge in
filing for bankruptcy through Chapter 11, they refused to; instead they have chosen to overcome
the barriers. I will address each problem the company faces and funnel down and dissect the key
problem that could give the company a light at the end of the tunnel.
The first and most obvious problem the company is having is suffering from the current
economic downturn. AMR Corp. truly felt the impact throughout 2008 and the first half of 2009.
With the crash of the United States economy it harshly impacted the airline industry. People
were no longer able to afford vacancies or choose flights. The capacity reductions caused them to
be subject to additional special charges related the aircraft and under occupied flights. As the
decline in the purchasing of airline tickets caused AMR to readjust their flights offered. The
company also decided not to open additional flights until all flights were filled up. This strategy
causes the public to be blind to their financial issues. As a passenger they have a perception that
business has not been impacted and do not understand why additional charges have been added
at their expense. Capacity reductions also subjected them to additional special charges related the
aircraft. The 2010 annual report does not go into detail about what the special charges are or
disclose an amount spent. Instead it lists it on their expense list with a dash.
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Most of the flights being purchased are paid for by credit cards. A second problem AMR
is trying to overcome is credit card processing agreements. With current credit scores the
company could be required to maintain a reserve. Due to the recession many credit agencies have
subjected companies that are unable to maintain a certain amount to liquidity to this process. The
processors (banks) place a certain amount of funds on hold in a non-interest account and hold
onto the funds until an undistinguished amount of time. They use these reserves to protect the
bank from any losses due to fines or charge backs that could come from the merchant account. If
AMR is unable to overcome its current credit rating it will be subject to this process. This will
have an extremely negative impact on their financial standing as the company will not be
receiving payments on a regular basis.
A third problem are the intoxicatingly high fuel prices. The price of jet fuel is making
history and continues to be on the rise. In order to run their business AMR depends on fuel to get
their passengers to the desired location. As the price continues to fluctuate, fuel hedging comes
into play in order for a company to compete. The company currently has to put cash up front to
create this contract. This financial move is uncontrollable as the company cannot create the
availability of fuel. They are constantly subjected to new state and federal regulations. AMR has
taken initiative and made their fleet renewal program a priority. This will retire their old jets that
are not fuel efficient and replace them with new aircrafts.
Expenses have a toll on a company and continue to be there. The fourth problem of AMR
is their labor costs. The company has the highest payroll and benefits in the industry. They are
currently re-negotiating contracts with their three major unions as well as looking at how to
decrease the cost of insurance for their company. The company fully recognizes if they cut
benefits such as healthcare it will cause them to lose employees. The annual report stated that
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31% of the airlines expenses in 2010 were related to labor. This needs to be cut in order to allow
them to continue to compete to be the largest airline.
Another problem is their ability to compete with airlines that have reorganized as part of
the Chapter 11 bankruptcy. As they filed bankruptcy it alleviated a lot of issues and allowed
them to renegotiate labor, supply, and financing contracts. It notably lowered the operating costs
and gave them influential financial positions. These companies are limiting the pricing power
AMR Corp. has. Instead of them being able to raise prices they are forced to lower prices and
subject themselves to a loss in order to have competitive pricing.
As the problem snow ball walls downhill and gains momentum I will address the final
problem facing the company. All the problems impact AMR Corp.’s ability to maintain a
sufficient amount of liquidity. They need this in order to meet upcoming obligations such as
pension funding, leases, and paying off debt. The annual report approximated some of the
upcoming expenses as follows:
$2.5 billion dollars towards principal payments, long term debt and capital leases $1.6 billion dollars towards capital expenditures $520 million dollars towards pension plans
These expenses will only be addressed if they are able to access considerable additional funding.
This funding will be limited due to AMR Corp.’s tangential assets and the decreasing value of
their aircraft assets. If the company’s credit continues to decrease then it will subject the
company to borrowing and additional costs and limit borrowing options as well as restrict their
ability to raise capital.
In order to fully assess the impact of each problem on the company I have created a
decision wheel. As you can tell from reviewing the chart all the problems are root causes of the
main problem. Through this chart we are able to discover that even problems that seem to be out
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of the companies control such as fuel expenses and economic downturn can be root causes. Each
problem listed below filters down to one main issue for the company which is liquidity. If the
business is able to recover liquidity it will cease other issues the company is facing.
AMR Corp. with need to address the issue of recovering liquidity from different angles,
in order to be successful and overcome this barrier that is impeding their ability to compete and
become their vision of the largest airline in the world. They will need to address the issues in a
manner that save costs and maximize revenue. This new approach for the business will allow
them to avoid the restructuring and other direction of court supervision when bankruptcy is filed.
It will take continual effort on behalf of the company to identify areas for improvement while
maintaining the operations and service to their customers that is expected.
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Uncover:
The issue of liquidity is the underlying issue to all problems listed in the 2010 annual
report. If they are able to recover their liquidity they will alleviate many of their other problems.
In the past few years the company has been facing major losses when reporting their annual
reports. This painful realization has given them the vigor to try and do everything possible to shy
away from bankruptcy. Many other competitors have taken the option of bankruptcy and now
offer competition that is quite hard for AMR Corp. to compete with, as they are still burdened
with the financial issues that have been alleviated for the other companies. Below is a pie chart
that was constructed by reviewing the reported expenses in their 2010 annual report that displays
the expenses incurred by AMR Corp.
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As you can tell from the chart above two of the biggest expenses faced by the company is
the cost of fuel and wages for employees. Together they are 60.6%. Both expenses are necessary
are in order for the company to function. If the company doesn’t invest in its employees it has no
staff to cater to the needs of their customers. If they choose to cut back on the cost of fuel which
may cause limitation of supply then they will not have planes that can fly. A plane without fuel is
just an ornament on a runway.
In the annual report for 2010 the company recognizes these issues as problems and does
discuss their plans to overcome them. Tim Smith in their corporate communications group said
one of the companies challenges in labor costs, which due to union contracts are much higher
than that of their competitor airlines. The issue is in the process of being solved as they are
dynamically negotiating with their three major unions. He believes with the negotiations it will
provide employees enticing wages while improving productivity for the company. He says this
will save money for the company by reducing labor costs. He ends by stating “We are not there
quite yet, but we believe we are on a path to achieve new contracts soon.” The unions AMR
Corp. is negotiating with represents the pilots, flight attendants, mechanics, and ground handling
personnel.
Mr. Smith also discussed how the company plans to reduce fuel costs in the upcoming
year. He said an “obvious cost-saving example is our 460 new aircraft orders that we announced
recently (July). Each of those new aircraft will be making money on the first day they are
operated.” This immediate profit is due to the leasing options they received from Boeing and
Airbus. Not only this, but the new airplanes are more fuel efficient and have lower maintenance
costs. This fleet renewal program will allow them to retire older fuel hogs such as MD-80s and
757s will allow passengers newer planes to fly in.
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Economic Downturn has been a key player in the issue of liquidity. When times get
rough people don’t want to travel unless necessary. This means a decrease in vacations and fewer
flights taken. To help maintain supply and demand in the marketplace, AMR Corp. focused on
join businesses. It created relationships with other airlines globally which decreased cost for
them. These ventures allow them to offer more access to customers without having to switch
airlines. In turn those airlines get a break as well as all companies involved in the joint
relationship share revenues, assets, and expenses. A few companies AMR Corp. has joint
relationships with are:
British Airways Japan Airlines Quantas Iberia
The company immediately saw a benefit from the joint businesses. Though they believe
more revenue benefits will be apparent in the future. Tim Smith stated that “the benefit we’ve
seen so far could easily more than double in the next year.” This approach will result in millions
of dollars for the company. There will be more joint business relationships in the future for AMR
Corp. allowing them to keep evolving and offer more to their customers. Even with this new
tactic of joint businesses the company has decided to keep with their conservative approach with
flying capacity. It will fly less on days of slower business during the fall and winter months. The
company believes this will help in the unpredictable times of this economy. This approach is
known as total flying capacity. It limits how often they fly and when they fly. They do their best
to fill flights and not have flights with minimal capacity.
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Solve:
As we can see there are many solutions to end the financial woes faced by AMR Corp.
The company has faced significant losses the past ten years and only recently has begun to make
a profit. Tim Smith said that “AMR ended their 3rd quarter operations of 2011 with nearly five
billion dollars cash in the bank”. This hopefully will reflect in their annual report for 2011. I
reviewed the past three annual reports to gather enough information on gains and losses to make
the chart below. When reviewing the chart you can see the company is losing on average 1.5
billion dollars a year. 2002 was their largest loss in the ten year span I researched with 3.5 billion
dollars.
The appealing and easy solution for the company would be to file bankruptcy. This
would allow them to alleviate all debt and restructure the company. If AMR Corp. chose this
route it will allow them to fairly compete with other airlines that have previously gone bankrupt.
They wouldn’t have to figure out how to cut costs or increase revenue. Instead the company
would need to focus on what the court mandated. AMR has time and time again stated that they
have no interest in going this route. As a company they believe they can overcome this difficult
time and persevere.
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AMR Corp. may want to consider continuing business with global distribution services
(GDS), to allow them to distribute fare content while comparing to other airlines prices. The
company terminated its agreement with Orbitz and Expedia this past December in 2010. In the
past approximately 60% of bookings are booked through travel agencies. (Data Monitor pg 29) If
the company chose to renegotiate and contract with travel agency companies it would allow
consumers to compare pricing and choose the flight most suitable for them.
Another direction the company could choose to go is instead of contracting with travel
agencies they could create a rewards program that would encourage customers to go directly to
their website, such offers they would establish customer loyalty. The company currently has a
program known as the AAdvantage. This program offers customers the ability to earn free miles
based on what class they fly, and how far. This table shows what the company currently offers.
Qualifying Points per Mile Earned onAmerican Airlines, American Eagle and American Connection
Fare PurchasedBooking
Class
Points Per Qualifying
Mile Earned
First Class A, F, P 1.50
Business Class D, I, J 1.50
Full Fare Economy Class B, Y 1.50
Discount Economy Class
H, K, M, L, W, V 1.00
Deep Discount Economy Class
G, Q, N, O**, S 0.50
**Tickets between North America and Latin America booked in O are not eligible.
Excludes Internet fares noted as non-mileage earning.
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This table displays that the company offers customers no benefit to flying first class or business
class. If AMR Corp. enhanced the qualifying points, it would allow the consumer to earn miles
quicker and possibly provoke them to fly more. Business class should earn 2.0 points per mile
earned and first class should earn 2.5 points. If you have more variable people who fly frequently
will see the advantage of flying those classes. A person who flies, frequently is going to
appreciate earning points quickly which can be redeemed and create a free flight. They could
also create double point earnings during slower parts of the year. Improving their advantage plan
will draw customers in. This customer focus could quickly build revenue and offer a competitive
advantage against other airlines.
AMR Corp. could also choose to continue focusing its efforts on alleviating unnecessary
costs to the company. This would allow the company to internally revamp and overcome areas
that need improvement. If the company chooses to go this direction it needs to not have one
expense as its primary focus. To be successful it will need to take a multi-faceted approach that
will allow them to see changes in revenue clearly. If they choose to focus on strengthening their
company they will need to ensure that whatever changes they decide to make will still
encompass the best interests of the shareholders, employees, and customers.
Another viable solution for AMR Corp. is that they continue to focus on minimizing
expenses for the company. This option seems viable as it allows AMR to maintain control of
their company with no court supervision. The company has taken many strides in the past few
years and understands the importance of overcoming the costs that are holding them back. It is of
extreme importance the company quickly completes the negotiation of union contracts. Though
this should be done in a timely fashion, AMR Corp. should remember to put quality before
quantity, with this mindset the company will do what’s best for all members at the table. Once
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that area is coming to a close it is important for them to continue replacing old jets with modern
jets. Investing in their fleet will allow them immediate benefits. Each of these will substantially
increase the company’s profits and offer relief to their financial issues.
The flow chart below helps to show that focusing on their liquidity by addressing the
issues of cost will offer more opportunity for the company. AMR Corp. has continually stated
they do not want to go the route of bankruptcy. This chart shows that both are viable options but
if the company can solve the problems without assistance it allows them more control in decision
making.
The table above makes it seem as easy as flipping a coin for the decision to be made. To
show the complexity I will add weight to the possible solutions. The decision matrix below will
allow me to weight each solution in how easily it can be implemented, and if it’s long term or
short term.
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I recommend that AMR Corp. incorporate a customer loyalty program that better
enhances the needs of the customer. It is important to appreciate the customers choosing to do
business with AMR Corp. This is an easy option for the company to implement that will quickly
increase profits.
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Build:
We have now come to the decision to implement a customer loyalty program that will expand
what currently exists. Before deciding to fully implement this solution, we first must decide
whether this coincides with AMR Corps values and ethics. Dictionary.com defines ethics as
“that branch of philosophy dealing with values relating to human conduct, with respect
to the rightness and wrongness of certain actions and tothe goodness and badness of the motives
and ends of such actions.” Implementing a plan that appreciates the business of customers is
absolutely ethical. It will encourage customers to continually fly with AMR Corp. which will
benefit the customer by rewarding them with more points and also impact the business
positively.
The solution easily depicts a win-win solution. Although it appears to be extremely
beneficial to all parties involved is it feasible? The answer is YES. The feasibility diagram below
shows the easiness for the company to incorporate. Not only will it be easy for AMR Corp. to
enhance their program but it also will not be a great expense to them. The company already has
the software for the program they will just be enhancing it to entice customers to purchase more
flights solely through them. This solution will show profit immediately and only grow as more
customers discover there is such a plan intact. Offering such a rewards program will build
customer satisfaction allowing them to make their vision statement true. Customer loyalty will
give them the competitive edge needed to be the number one airline.
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Achieve:
AMR Corp. can easily execute the solution of enhancing their AAdvantage program to
make it more appealing to customers. They already have most of the program in place. The board
of directors will need to meet and discuss what enhancements should be made. If they decided to
do double point earning during the year a timeline should be established for when that would be.
When the board approves the enhancements because of the ease and benefits, then a team of
professionals should be assigned to oversee this project. The team should be made up of various
members of the AMR Corp. team who come from different experience. This team will be in
charge of incorporating the increase in earning point as well as coming up with additional
services to offer the customers to continue customer satisfaction. As a first step I believe they
will need to assess the cost to the company. This will be a presentation brought back to the board
to show any costs to update the webpage, if they will need extra personnel to maintain the
program, and how they will market the program.
Once the program is in place, it should be piloted for one year. During this time it should
be measured how many customers enrolled, how often points were redeemed, and what class of
customers participated. If more business class or first class possibly the team can assess how to
captivate the attention of other fliers. After this year an analysis should be put together to
formally forecast the anticipated impact it will have for the company in the next year. The
program should be revisited for further review at a certain time interval based on the success or
failure of the program. If all seems well go another year, if there were bumps then 3 months.
With the new customer rewards program as well as the other strides the company is
making I believe they will be able to recover their liquidity and not have to file bankruptcy. In a
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few years the company will be able to look back and see the successes they made, as they reap in
the rewards. With this solution all will be pleased from shareholders, employees, to customers.
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Works Cited:
2010 Annual Report. December 31, 2010 AMR Corp. October 17,2011 <http://phx.corporate-ir.net/phoenix.zhtml?c=117098&p=irol-reportsannual>.
2009 Annual Report. December 31, 2009 AMR Corp. October 18,2011 <http://phx.corporate-ir.net/phoenix.zhtml?c=117098&p=irol-reportsannual>.
2008 Annual Report. December 31, 2008 AMR Corp. October 20, 2011 <http://phx.corporate-ir.net/phoenix.zhtml?c=117098&p=irol-reportsannual>.
AMR Corp. September 30, 2011 Morningstar. October 20, 2011 <http://investors.morningstar.com/ownership/shareholders-major.html?t=AMR>.
Corporate Responsibility Report. December 31, 2010 AMR Corp. October 17,2011 <http://www.aa.com/content/images/corporateResponsibility/CREXSummary.pdf>.
Qualification Requirements. AMR Corp. October 19,2011 <http://www.aa.com/i18n/AAdvantage/eliteStatus/qualification-requirements.jsp>.
Flight Plan for Smaller Footprint. AMR Corp. October 15, 2011 <http://www.aa.com/i18n/aboutUs/environmental/main.jsp?anchorEvent=false&from=Nav>.
Diversity and Inclusion. AMR Corp. October 18,2011 <http://www.aa.com/i18n/aboutUs/diversityInclusion/main.jsp?anchorEvent=false&from=Nav>.
"AMR Corp." The New York Times 20 10 2011. The New York Times. 20 10 2011. October 20, 2011 <http://topics.nytimes.com/top/news/business/companies/amr_corporation/index.html>.
"Ethics." Dictionary.com. 2011. Dictionary.com. November 7, 2011 <http://dictionary.reference.com/browse/ethics>.
Abdulla, Fathi Salem Mohammed. American Airline Case Study. 2009. October 17,2011 <http://www.scribd.com/doc/16170571/American-Airline-Case-Study>.
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Smith, Tim. Personal interview. October 25, 2011.
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