American Airlines, Inc.
Group Four
Aditya Anukalpa Narasimha Niranjan Shubhangi Veerendra
Back Ground
1988
● Revenue - $8.55 Billion
● Operating Income - $801 million
● 2200 flights daily to 151 destinations
1978
● Civil aviation in the US is regulated by CAB
● Airline Deregulation Act
Cost containment
Intense price competition
● labor cost reduction - two-tier wage structure
● Fuel and Maintenance costs - little control
● Replace older with newer
● fuel-efficient models
● Cheaper to operate, less maintenance and less noisy and polluting
Route Structure
Hub and Spoke System
● A hub is a central airport that flights are routed through, and spokes are the routes
that planes take out of the hub airport.
Difficulties
● Redesign of route structure
● Match passenger flows with fleets, gate rights, maintenance etc.
● demanding task both at strategic and day to day implementation
● Coordinated, convenient schedule design with minimum delay
Impact
● National carriers merged or entered into agreements with regional ones
Marketing
Revenue Management
● Freedom of altering the fares
● about 200000 fares altered daily
● Average fare life was 1 weeks
Ticket Distribution
● 5 regional reservation centers by AMR
● Telephone sales representatives
● EAASY SABRE
Frequent flyer programs and Customer service
● Brand loyalty
● 3 important factors - origin to destination, punctuality and experience
Revenue Management at American
Objective: maximize passenger revenues by selling the right seats to the right customers at the right price
PRICING
Determination of fare structure and restrictions.
Displacement, share shift, and stimulation — had a major influence on pricing strategy
CHICAGO - WEST COAST PRICING DECISION NEW YORK - SAN JUAN PRICING DECISION
- Served 10 West Coast cities - American's largest market, in revenue passenger miles.
- Competitor: United & Continental - Competitors: Eastern & TWA
- In non-stop markets, American & United competed on fares, - Three segments in market
schedule, service quality - Business passengers: Year-round
- In connecting markets, American, United, and Continental - Leisure passengers: summer
competed on fares and flight schedules. - Passengers of Caribbean origin: spur of the moment
- United: superior flight schedule, and Continental: cheaper fares.
YIELD MANAGEMENT
Challenges:
● Demand uncertainty
● Cancellation
At American Airlines:
● Indexing of fare classes to buckets
FULL
● Deciding initial authorisation levels for each bucket
● Adjusting authorization levels to reflect Forecasted Vs actual
● Adjusting authorization
DIS
CO
UNT
ED
Revenue Management
Five functions which are under revenue management are
1. Domestic Pricing
○ Pricing Strategy - strategic pricing initiatives and responses
○ Pricing implementation - price input into industry databases, SABRE, and other CRSs
2. International Pricing
○ Responsible for pricing for international traffic
3. Yield management Operations
○ Consists a group of specialists for American's critical flights
○ Two tactical analysis groups (leisure flights and non-leisure, non-critical flights)
4. Pricing and Yield Management Systems Development
○ Responsible for research and applications development for decision support and product display
5. Passenger records processing
What are American Airlines’ major strategic and tactical decisions?
COST CONTAINMENT MARKETING
● Labour cost reduction and productivity ● Revenue Management
improvement ● Ticket Distribution
● Acquire new fuel efficient aircraft ● Frequent Flyer Programs
● Reduce aircraft maintenance costs ● Customer Service
ROUTE STRUCTURE QUANTITATIVE TOOLS
● Evolution of hub and spoke model of airlines ● AMR’s SABRE System (Semi Automated
operation Business Research Environment)
● One of the most extensive route systems in the ● Data mining on SABRE System
US with hubs in Dallas, Chicago, Nashville, San
Jose, San Juan and Raleigh/Durham
Should American counter Continental’s $159 fare with a relatively - unrestricted
discount fare on the non-stop Chicago-West coast flights?
Minimum load factor - 56%
Competitors - United and Continental
Low cost carrier - Continental
50% of Continental’s share - 28106 tickets
1% increase in LF - 1250 tickets
What additional information should Doug Santoni collect to decide a response to
Eastern’s pricing initiative?
Information we have
1. Competitors - Eastern and TWA
2. Market - Business, Leisure and Carribean Natives
Additional information needed
1. Overall market size.
2. Segmentation of weekday and weekend travellers.
3. Market segmentation.
4. Market share of major players.
Question 4
Aircraft has 100 seats.
Full Fare = $499 Discounted fare = $99
Demand for full fare seats is between 10 and 30. Assuming uniform demand distribution with a probability
5% (1/20).
Demand for discounted fare seats will be unlimited.
Cost of underestimation of full fare seats = $400
Cost of over estimation of full fare seats = $99
As the loss for underestimation is high it's better to start with 30 full fare seats first. Then based on the
demand we can forecast for the coming days
THANK YOU
