AA_Group12.pdf

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

AA_Group12.pdf

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