American Airlines provides scheduled jet service to approximately 150 destinations throughout North America, the Caribbean, Latin America, Europe, and the Pacific (Profile for AMR Corp.). It served approximately 250 cities in approximately 40 countries with approximately 3,800 daily flights with a combined network fleet of approximately 1,000 aircraft, as of March 1, 2005. American offers a hub business model which minimizes layover times by scheduling lots of flights to arrive and depart within narrow windows of time called "banks" (Coy and Zellner, 2002). American's major business challenges are that it faces weak consumer demand, intense price competition from carriers that operate lower-cost point-to-point models and price inelasticity for several important market segments along with the diminished ability to price discriminate. .
Consumer demand at American has been anemic over the past four years. Reasons range from the effects of terrorist attacks, the downturn in the economy, the war in Iraq, the SARS epidemic in Asia, soaring fuel costs and intense competition from the entry of newer low-cost carriers such as Southwest, JetBlue, AirTran and Spirit (America's airlines, flying on empty, 2005). In the summer of 2005 things finally started looking up. Airline passenger numbers were up and planes were on average seventy-nine percent full. However, revenues per seat ("yields") were still falling, decreasing by 1.8 percent for the same period in 2004.
On the supply side, low-cost carriers have already captured around twenty percent of the market and are rapidly gaining a greater share (Eli). Contrary to popular belief, the low-cost carriers have unions and pay good wages. For example, Southwest employs the most unionized labor force in the industry and pays average to above-average wages. The competitive weapon of the low-cost carriers is productivity. Southwest has been an innovator in negotiating union agreements that include more-flexible work rules that facilitate greater cross utilization of labor.