AMERICAN AIRLINES’ VALUE PRICING -presented by Group- 2
Case Facts• Airline industry been regulated from 1938 until 1978.• Airline Deregulation Act passed in 1978.• Intensified competition along with the start of price war.• In 1978, American Airlines was the 2nd largest Airlines in the US.• In 1992, American Airlines was the largest Airlines in the US.
Case Facts(Cont.)• Passenger volume grew by 80% between 1980 and 1990.• Industry hit by recession and Gulf War in 1990-91.• Severe fall in demand.• Robert L. Crandall, chairman, president and CEO of American Airlines, introduced the new pricing strategy.
Robert L. Crandell• Currently chairman, president and CEO of American Airlines.• Joined the company in 1973 as vice president of Finance.• Named President and COO in June 1980.• Embarked on a structuring program that restored the firm to profitability.• Regarded as the “fiercest competitor and industries leading “visionary”.
American Airlines: A Glance• Second Largest Airlines of US in 1978 at the time of deregulation.• Regarded as the least efficient in terms of strategy, organization structure and performance at that time.• Adjusted well to deregulation with its innovative strategies.• Became the largest in 1992.
• Introduced the first computerized reservation system, SABRE, in 1960.• Introduced “Super Saver” fares in 1977.• Introduced “Frequent-Flier program” in 1981.
The Demand: The people• In 1991, 76% adults had flown at some time in their lives with 32% in past year.• Price was the major determinant for demand.• Substantial consumer dissatisfaction with airlines prices.• Consumers divided into 2 categories: Business travelers and Leisure Travelers.• Consumers preferred 2 things: Low prices and frequent service & lots of time-of-day choices.
The Demand: The people(Cont.)• Leisure or pleasure travel tended to be discretionary with inclination towards lower fares.• Business travel tended to be shorter duration, less seasonal, less flexible and less focus on price.
The Competitive Strategies• Computerized Reservation System – Stores information on flights, seat availability and fares and processes millions of bookings daily.• Hubbing – Non-stop flights replaced by a set of connecting flights through intermediate locations called hubs. Improves resource utilization and reduces operational cost.
The Competitive Strategies(Cont.)• Frequent Flyer Programs – Incentives like discounts, class upgrades and free tickets offered to travelers to choose a particular airlines every time. Special appeal to business travelers.
Post deregulation pricing• Decisions on 2 key areas: fare structure & restrictions and yield management.• Fare structure formulated by defining different class of fares and setting the levels of fares for each class.• At American Airlines, yield management was viewed as “ selling the right seats to the right customers at the right prices” .• The industry pricing structure became extremely complex by 1991.
The New Plan• Realized a need for fair and simple pricing.• Based the new plan on simplicity, equity and value.• The model was based on three key design concepts. • Four different types of fares: First Class Regular Coach Discount Coach 7 day advance Discount Coach 21 day advance • All Fares were mileage related. • New fares lower than the existing fares.• Promotion through television, radio and newspapers.
The Edge• Gives an added advantage over other airlines at the current time of recession.• Added advantage being the current market leader.• Simplified pricing.• Increase in revenue and profits in the long term.• Cost savings of $25 million per year.
The Edge(Cont.)• Shift in the mix of regular and discount fares.• Generation of a new business.
Analysis/Recommendations• As said before, the priority for the customer is that of low price which is being fulfilled by the new plan.• Added simplicity is an added advantage for the customers.• Should expect higher profits in the long run.• Chances of a price war n added competition with the followers coming in.
Analysis/Recommendations• Key to the new strategy would be conveying it to the customers.• Should utilize SABRE as a tool to convey the strategy to the consumers.