By, Alicia Childers BA301 Rodney Barker Fall Term 2011

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Table of Contents
FALL TERM 2011.....................................................................................1 TABLE OF CONTENTS .............................................................................2

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Executive Summary: AMR Corp. is the parent company to one of the leading airlines in the United States. The companys 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 AMRs 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 companys 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 didnt 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 tomorrows 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 customers 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 Dont lose my bags.

The customers 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 customers 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 Page 5 of 24

Cabin cleaning and interior aircraft condition

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 industrys first African American flight attendant in 1963, to the first female pilot in 1973, to the creation of our supplier diversity program in the 80s and our diverse segment sales team in the 90s, 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 isnt just an inspirational goal. Its 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

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interests of its shareholders. In recent years, the company has been able to persevere and grow 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 companys 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 companys 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 doesnt 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 dont 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 weve 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 wouldnt 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 on American Airlines, American Eagle and American Connection Points Per Booking Qualifying Fare Purchased Class Mile Earned First Class Business Class Full Fare Economy Class Discount Economy Class Deep Discount Economy Class A, F, P D, I, J B, Y H, K, M, L, W, V G, Q, N, O**, S 1.50 1.50 1.50 1.00 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 whats 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 companys 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 its 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.pd f>. Qualification Requirements. AMR Corp. October 19,2011 <http://www.aa.com/i18n/AAdvantage/eliteStatus/qualificationrequirements.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.ht ml>. "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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