American Airlines Presentation

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Economics Presentation on American Airlines with an emphasis on Value Pricing.

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  • In a move to make popular Web fares more widely available to consumers while reducing its total distribution costs, American on Sept. 25, 2002, announced its innovative EveryFare program. With EveryFare, AA provides traditional travel agents in the U.S. and Canada the option to access and sell its very low Web fares, previously offered only via American’s own Web site, AA.com, and select low-cost distribution channels. In exchange, travel agents provide AA with long-term distribution cost savings through a creative cost-sharing arrangement.
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  • American Airlines Presentation

    1. 1. American Airlines<br />By,<br />Group 6<br />Laurent Deconinck<br />April Vassau<br />Brock Vestrum<br />John Vilendrer<br />MegganWier<br />
    2. 2. Agenda<br />Company History - Brock<br />Market Structure – Meggan<br />Competitive Advantage – John<br />Game Theory/Pricing – Laurent<br />Industry Update & Conclusion – April<br />Quiz<br />Q & A<br />
    3. 3. American Airlines TimelineThe Beginning: 1930’s-40’s<br />
    4. 4. American Airlines TimelineBuilding an Empire: 1940’s-50’s<br />
    5. 5. American Airlines TimelineIndustry Innovators: 1960’s<br />
    6. 6. American Airlines TimelineModernism & Regulation: 1970’s<br />
    7. 7. American Airlines TimelineProgression: early 1980’s<br />
    8. 8. American Airlines TimelineContinued Expansion: late 1980’s<br />
    9. 9. American Airlines TimelineA New Era: early 1990’s<br />
    10. 10. Market Structure<br />Deregulation of 1978<br />Civil Aeronautics Board<br />Free market<br />Some countries and still regulated to some extent<br />Europe<br />Asia<br />
    11. 11. Market Structure<br />Oligopoly - Concentration ratio of 50%<br />
    12. 12. Characteristics of an Oligopoly<br />Interdependence <br />“Bags fly free”<br />Price setters<br />Few firms<br />High barriers to entry<br />
    13. 13. Competitive Advantage“Innovation”<br />SABRE<br />Computerized Reservation System(CRS)<br />American was the first airline to implement such a system. <br />By 1990, SABRE was the largest reservation system in the world and had a market share of 40%. <br />Screen Bias<br />
    14. 14. Competitive Advantage“Innovation”<br />Advantage Frequent Flier Program<br />In 1980, AA introduced the first frequent flier program. <br />Many other airlines followed due to the huge success of this program.<br />Originally the only reward available for AFF members was free tickets. This evolved into a point system that also offered a variety of products that were presented in a catalog. <br />
    15. 15. Competitive Advantage“Innovation”<br />Two Tier Wage System<br />Starting wages would be on the lower tier.<br />Existing employees would be on the higher tier. <br />In response to the high wage requirement stated by union contracts. <br />Starting salaries could be up to 50% less<br />Necessary to compete against the newly formed companies that were non-union. <br />
    16. 16. Competitive Advantage“Innovation”<br />Airline of the Year 1988 & 1989<br />Mostly due its focus on service<br />On Time arrivals in Sept 1989 - 84.6%<br />Better than Delta or United<br /><ul><li>Customer Service Complaints 1989 – 132,000
    17. 17. Better than United
    18. 18. Baggage Service Complaints 1989 – 5,999
    19. 19. Better than Delta and United</li></li></ul><li>Competitive Advantage“Innovation”<br />Robert Crandall<br />Became CEO in July of 1980<br />“ The physical aspects of our company are very much like our competitors. After all, we all use the same airports, the same planes; we buy food from the same caterers, we use the same computers, and so on. Its pretty clear that the only difference between “us” and “them” is our ability… the ability of all of American’s people to provide superior service.” <br />
    20. 20. Video<br />Video AA<br />
    21. 21. Example of Pricing<br />66 different pricing for one flight.<br />What is the customer willing to pay.<br />Overbooking practice to make sure the flight is full.<br />Adjust pricing based on passenger load factor<br />Sophisticate computer system to maximize profits based on demand and supply.<br />
    22. 22. Game Theory<br />Thus, both airlines will set their fares to $200, a similar analysis was carried out in court to prove that there was price fixing among airlines and in October 1994 some airlines settled for $40 M. <br />
    23. 23. AA uses Yield Management<br />Maximize Profits<br />Maximize Assets Utilization<br />
    24. 24. Milestones to Modern Day<br />SABRE spins off into its own company. <br />Subsidiaries include: Travelocity, Sabre Travel Network, Sabre Airline Solutions and Sabre Hospitality Solutions.<br />
    25. 25. American partners with Travel Agents to provide consumers with better pricing, while reducing distribution costs. <br />American celebrated the 25 th anniversary of its AAdvantage program – the world’s first frequent flyer program that revolutionized the airline industry and set the standard for similar initiatives in many other businesses. AAdvantage began with 300,000 members. Today, it has more than 50 million members.<br />
    26. 26. Change in Stock Price <br />
    27. 27. Industry Leaders Then…and Now<br />1990’s <br />Aeroflot<br />American<br />United<br />Delta<br />Northwest<br />British Airways<br />Continental<br />US Airways<br />TWA<br />Japan Airlines<br />2000’s<br />Delta<br />Southwest <br />American<br />United<br />Lufthansa<br />Air France<br />China Southern<br />Ryanair<br />Continental<br />US Airways<br />
    28. 28. Low-Cost Airline Impact<br />Locally: Southwest entrance into MSP<br />Southwest's entry into Minneapolis has been closely watched because it is an assault on a so <br />called fortress hub of Northwest Airlines, which is now a part of Delta Air Lines Inc.<br />Northwest has a reputation for matching competitor prices and adding extra flights when its hubs <br />are threatened. Last month Northwest executives said they would do both of those things on the <br />Chicago route once Southwest's service starts. – USA Today<br /> "We are likely to be in for some serious fireworks on prices out of Minneapolis in the coming <br />days for spring travel" FareCompare.com CEO Rick Seaney. Adding “that the cheapest fare on that <br />route for Northwest, American and United is round trips for $376, which works out to $188 each<br />way. The cheapest one-way fare is $426, Seaney wrote.<br />"The legacy airlines will quickly have to restructure their airfares, by offering one-way fares<br />instead of the two-night minimum stay roundtrip fares they currently file — likely matching<br />Southwest's new price points," Seaney wrote.<br />
    29. 29. Low-Cost Airline Impact <br />Globally:<br /><ul><li>The CAA (Civil Aviation Authority) calculates that growth in short-haul traffic</li></ul>between 1996 and 2006 averaged five per cent a year – no greater than in the<br />years before the arrival of no-frills airlines. The only years when growth<br />exceeded 10 per cent in the past 20 years was in 1987 and 1994.<br /><ul><li>Although nearly half of all British passengers on short-haul routes now opt for</li></ul>no-frills airlines, this growth seems to have been at the expense of other <br />carriers – both scheduled and charter airlines – which have been forced to<br />close down unprofitable routes.<br /><ul><li>The CAA report shows that since the advent of low-cost flights in 1996 there has been</li></ul>no marked change in the socio-economic profile of air passengers. "The main effect of<br />no-frills flights is to provide further opportunities to those in middle- and higher<br />income groups to fly more often.” – Dr. Harry Bush, CAA Director of Economic<br />Regulation.<br />
    30. 30. Quiz<br />When did AA start the frequent fly program?<br />1980<br />When did AA begin trading on the NYSE?<br />1939<br />When did deregulation take place in the US?<br />1978<br />When did AA fly its 1 billionth customer?<br />1991<br />Who has the highest market share in the Domestic Airline Market?<br />AA<br />
    31. 31. Quiz<br />Name 2 characteristics of an oligopoly?<br />Interdependence <br />Price setters<br />Few firms<br />High barriers to entry<br />Who introduced the first frequent flyer program?<br />AA<br />Who is the current CEO of AA?<br />Robert Crandall <br />How many members are a part of the frequent flyer program?<br />Over 50 million <br />
    32. 32. Bibliography<br />Wikipedia, Oligopoly, 2010<br />Wikipedia, Airline, 2010<br />Wikipedia, Airline Deregulation Act, 2010<br />Research and Innovative Technology Administration, Airline Domestic Market Share Dec 2008 – Nov 2009<br />www.AA.com (American Airlines)<br />

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