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S e r v i c e M a r k e t i n g C a s e A n a l y s i s
American Airlines Inc.: Revenue Management Group No. 12 Harshitha | DM15217 Gaurav Dutta | DM15219 Rohit Rakshith | DM15247 Keerthi .P | DM15267 R.S.Pavithra | DM15134
Session 14
08 Fall
Case Facts:
The 1978 Airline Deregulation Act came into action, resulting in: • Free Entry and Exit
• Route structure became an important tool for competitive strategy
• No Pricing restrictions
• Entry of many players in the market led to decrease in market share
• Decrease in prices
• Increase in fuel prices
Hub and Spoke Model: • Short haul flights
• Developing and managing time slots to provide convenient passenger arrival and departure with
same carrier and minimum delay
• At its Dallas/Fort Worth hub alone, American managed 12 complexes, involving 382 daily flights
to 95 cities, arriving and departing through 41 gates, and served out of over one million square
feet of terminal space
• National carriers acquired, merged with, or entered into formal and informal agreements with regional ones
Cost Management: • Two tier wage structure
• Pay less to new hires
• Fuel & maintenance cost
• New Aircraft with better fuel efficiency - lower maintenance costs, needs smaller crew
As of 1988, American Airlines had:
Fleet Size: 468 AircraLs
Flights: 2200 per day
DesPnaPons: 151, Largest airline in the US
Total Revenue: USD 8.55 Billion OperaPng Income: USD 801 Million
Hubs: 6 hubs( Dallas/Fort Worth, Chicago, Nashville, Raleigh/Durham, San Jose, San Juan)
SWOT Anlaysis: Strengths Weaknesses
• Network - Multi-hub
• Quality of service
• SABRE
• “AAdvantage”
• Two Tier wage structure
• Old Revenue management system
• Operating system
• Pricing decision
Opportunity Threats
• Better Revenue Management system
• Price Indexing
• Over Booking
• Cannibalization by low cost carriers
• Human intervention
• Free entry/ Exit
Market Segmentation in the Airline Industry: Characteristics of the two types of passengers:
Leisure Business Highly Price Sensitive Book earlier More flexible to departure and arrival times More accepting of restrictions such as Saturday night stayovers
Less price sensitive Book later Less flexible Less accepting of restrictions
Typical airline segmentation:
Segment Business Leisure
Price Sensitivity Schedule Inflexibility Inventory Product
Low Need Last Seat Unrestricted Business
Moderate Important Somewhat restricted Corporate Discount
Sensitive Somewhat Restricted Discount Business
Moderate Prefers Restricted Regular Leisure
Very High Very flexible Very limited Sale fares Web only
Marketing focused on the three following areas: • Revenue Management: Multiple fares and juggled their availability in order to maximize
revenue. American Airlines was well positioned as it was considered to be a leader in the use of
analytical tools to manage fare levels and availability.
• Ticket Distribution: SABRE (Semi-Automated Business Research Environment) gave American
a strong advantage in the ticket distribution business.
• Frequent Flyer Programs: American was the first to introduce this concept with its “A
Advantage’ program by offering free or upgraded flights to frequent travelers to build brand
loyalty.
Revenue Management The objective was to maximize passenger revenues by selling the right seats to the right customers at the
right prices
Steps in RM: • Pricing - Influenced by airline’s cost structure and pricing philosophy, the behavior of
competitors and travelling preferences of customers. American Airlines estimated that about half
of all air travel prior to 1978 was at full fare; by 1988, discount fares were used more than 90% of
all domestic passengers, and average discount was around 60%
• Yield Management - Control the number of seats available in each fare category
• Optimize the trade-off between cost of an empty seat v. cost of turning away a full-fare passenger
Challenges faced by AA: • The demand for full and discount-fare seats on any given flight was uncertain
• The demand was variable over time
• For leisure flights, the demand was also lumpy
• Multiple fare types
• The hub-and-spoke system - customers in one fare type more attractive than other customers
• Some customers booked seats but did not show up for their flights
American Airlines carried out yield management through four activities at each flight leg: • “Indexing” of fare classes to buckets
• Deciding initial authorization levels for each bucket
• Adjusting authorization levels to reflect differences between forecasted and actual demand
• Adjusting authorization levels for market-specific factors such as conventions, city celebrations,
special events, etc.
Revenue Management Organization: AA carried out five functions under revenue management: • Domestic Pricing- this consisted of pricing strategy, pricing operations and pricing
implementation
• International Pricing- This was a separate organizational group which was responsible for
pricing for international traffic
• Yield Management Operations- This consisted of an operational support group with yield
management responsibilities for American’s critical flights and two separate tactical analysis
groups; one for leisure flights and the other for non-leisure, non-critical flights
• Pricing and Yield Management Systems Development- This was responsible for research and
applications development for decision support and product display
• Passenger Records Processing
Chicago-‐West Coast Pricing Decision:
Problem: • Main Competitors - United and Continental • ���Their offerings- Non-stop service and lower price • AA had an unacceptable level of load factors • ���UA had an advantage in flight schedule
What AA did: • Competed on the basis of fares and flight schedules • Matched UA in fares but fell short in terms of flight schedule ��� • ���Full fare was USD 575 and discounted fare was USD 177
Recommendation: • Work on flight schedules • Allocate discount seats with USD 10-20 premium with restriction like advance purchase.
This could dislocate Continental’s position of advantage. • Focus on better price mix��� • Change in metrics from load factor to Revenue per available seat mile (RASM)
New York-‐San Juan Pricing Decision:
Problem: • Major Competitor – Eastern and TWA – offering non stop flight service • Predominantly point to point traffic • Off season fare - EA offered deep discounting – introduced restricted one-way fare of
USD 79 and USD 198 round trip for weekdays & USD 238 weekend fare
Users: • Business traveler (round the year) • ���Leisure traveler peaked in summer��� • Other Passengers travelling to visit travelers without definite return plans • Common unrestricted fares rather than restricted round trip discount fares
Recommendations: • Expand within the Caribbean market with more flights and better schedules for
connections • Promote attractive return fares and reap benefits of product bundling • Retain business traffic through incentives