American Airlines Case
Essay Preview: American Airlines Case
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Senior managements short-term focus on stock price in a publically traded company can lead to unethical behavior.
In an article by (Trevino & Brown 2009), is stated that “Unethical behavior in organizations has been widely reported in the wake of many recent high-profile corporate scandals. As researchers and practitioners consider what may be driving such behavior, leaders are coming under increasing scrutiny not only because many senior executives are accused of having committed unethical acts but also because of the role that leaders at all levels are thought to play in managing the ethical (and unethical) conduct of organization members”. For example, Bernie Ebbers, the former chief executive officer of WorldCom, was hailed as a great leader for growing the company into a telecommunications superpower. Ebbers, however, was later discredited for his failure to provide moral leadership as WorldCom became engulfed in financial scandals that resulted in the largest bankruptcy in U.S. history. Organizational researchers are increasingly interested in the “moral potential of leadership”. The assumption is that a leader who exerts moral authority should be able to influence followers ethical behavior.
The purpose of the senior management is to show that the quarterly targets for revenues and earnings have been achieved. If the required growth in revenues and profits are earned the stock price does not plummet and in most cases the senior management gets its bonus and commission. Such targets can lead to unethical behavior. The management tries to “plan” out its earnings and income. When the revenues are high, part of the revenues and profits are held back in the form of reserves, so that future earnings can be increased. Such behavior is unethical because from the deontological ethical perspective, the company is duty bound to disclose its correct revenues and income. (Trevino & Brown 2009)
On the other hand when the revenues are relatively low there are several unethical means used to increase the revenues and profits. One method is channel stuffing. Unordered goods and overpriced goods are sent to the distributors or dealers at the end of the quarter. The purpose is to illegitimately inflate the revenues of the company. Similarly, goods sent on consignment or sent on approval basis are shown as sales and revenues are inflated. Each of these activities is unethical. From the consequential ethics perspective the inflation of sales can adversely affect the sales of the next quarter. This unethical procedure has to be repeated the next quarter till the bubble bursts. The obsession with achieving quarterly profit targets leads to more unethical behavior. Expenses are shown as assets, and the effect is that the profits are inflated. These behaviors mislead the stakeholders including the shareholders, employees, and investors. (Trevino & Brown 2009)
The senior managements short-term focus on stock price can lead to a variety of unethical behavior. The focus is to achieve the targets set for the quarter through fair means or foul. The unethical behavior can be reduced if the stock market prices reflect the long term prospects of the company instead of its quarterly results. Further, if the remuneration of the senior management including their commission is not directly linked to the short term performance of the firm then this problem can be eliminated. (Trevino & Brown 2009)
How this behavior may be unethical to both its shareholders and customers.
According to (CBS 2011) “American Airlines and its parent company filed for bankruptcy protection as they tried to cut costs and unload massive debt built up by years of high fuel prices and labor struggles. AMR Corp. had continued to lose money while other U.S. airlines returned to profitability in the last two years.” (CBS) also stated that “the last decade has been extraordinarily hard on the U.S. airline industry,” noting that bankruptcy filings by other major airlines. “The people of American Airlines have worked very hard and very honorably over the past decade to avoid that path but they are now at a point where its time to turn the page and move forward. American said it would operate normally while it reorganizes in bankruptcy. The airline said it would continue to operate flights, honor tickets and take reservations. It said the AA dvantage frequent-flier program would not be affected. Horton said, however, that as the company goes through a restructuring it will probably reduce the flight schedule “modestly,” with corresponding cuts in jobs. American was the only major U.S. airline that didnt file for bankruptcy protection in the aftermath of the 2001 terrorist attacks that triggered a deep slump in the airline industry. The last major airline to file for bankruptcy protection was Delta in 2005.
(CBS 2011) also stated, “However, that there was no single factor that led to the bankruptcy filing. He said the company needed to cut costs in view of the weak global economy and high, volatile fuel prices. The average price of jet fuel has risen more than 50 percent in the past five years. Ray Neidl, an analyst with Maxim Group LLC, said AMR was wise to file for bankruptcy while it still had about $4 billion in cash. He said the company has strong assets but needs to find labor peace and more revenue. He believes American might be pushed into a merger with US Airways.
The effect of deferring aircraft maintenance is that that the expenses of aircraft maintenance do not reduce the profits during the current quarter or current year. This behavior is unethical because it misleads the stakeholders such as the shareholders, employees, creditors, and investors in the company. Specifically, this behavior is unethical to shareholders because it leads the shareholders to believe that the earnings of American Airlines are higher than what they actually are. In simple terms the company is lying to its shareholders. This prevents shareholders from selling off the shares of American Airlines and investing them elsewhere. At the same time the relatively higher earnings actually attract potential investors to buying the shares of American Airlines. This is unethical because these potential shareholders have been duped. They may actually lose their hard earned money because of the deferred maintenance expenses. (CBS 2011)
I feel this behavior is even more unethical when applied to customers. The customers of American Airlines are paying their fares thinking that the airlines have been maintained properly at the right time. When this does not take place, the customers place themselves at an increased risk when they fly American Airlines. The chances that the plane