American Airlines' Value Pricing

Group 4
In 1992, American Airlines was the largest airline in the Unites States with 622 jet aircraft flying 2450 flights daily in 182 locations. SABRE, the first computerized airline reservation system was introduced by American in the late 1960s. The Super Saver fares were the first of its kind discounts offered to leisure travelers by American in 1977.
The deregulation of the domestic airline industry in 1978 led American to undergo a transformation which made it the market leader.
American suffered losses of about $77 million in 1990 and $165 million in 1991 due to the recession, Gulf war and general decline in demand for air travel.
Competition increased, prices fell, coast-tocoast routes increased and passenger volume grew by almost 80% between 1980-90 By1986, a wave of mergers commenced as competition intensified.
Price mainly determined air travel During 1980s air fares declined yet there was customer dissatisfaction with airline prices Customers preferred 2 things- low price and frequent service and lots of time-of-day choices
Demand for air travel varied by season, weekday and hour reflecting requirements of the 2 basic segment of airline customer base.
Business Pleasure or Leisure travelers
Business was less elastic than leisure
Deregulation led to market changes in airlines tactics and Strategies. Major developments were: 1. Computer Reservation Systems 2. Hub and spoke network 3. Frequent flier Programs
Computerized Reservation Systems: CRSs played an integral role in the marketing and distribution system by storing information on flights, seat availability and fares. In 1992, 92% of domestic reservations were booked by CRS. Americans SABRE was the largest CRS used with a 43.1% share of domestic bookings.
Spoke and Hub With this a carrier replaced non stop flights with a set of connecting flights. Thus the airline could serve more locations and passengers located in less heavily travelled markets. Frequent Flyer Programs FFPs provided the flyers with an incentive to fly a particular airline. The bonuses offered increased with increase in mileage flown. They included fare reductions, upgrades and free tickets
In 1991, 85% of all air travel was booked through Travel Agents vis--vis 50% in 1985 TACO was the commission rate structure used by most airlines to compensate the travel agents. The typical TACO was about 2% of ticket revenues
Deregulation led to pricing involving two key decisions: fare structures and yield management. Fare structure was formulated by defining different classes of fares. Eg: First, business, coach etc. Restrictions were imposed on the discount fares to smooth demand. Yield Management was to gain maximum profits by deciding on whom to sell the tickets, at what prices and when to sell.
Overbooking was a policy adopted by the airlines where they sold more seats than were actually available. This compensated for cancellations and no shows. However, to avoid the problem caused by discount fares, a discount allocation process was formalized. Traffic Management was a process of controlling reservations by destination and origin to provide a mix of markets to maximize revenues.
Yield Management was the key to sustain American Airlines in this competitive environment. It was called Value Pricing where American offered four kinds of fares: first class, regular coach and two discount coach fares. The discount fares required purchase of tickets either 7 or 21 days in advance of departure.
The sustainability and profitability of Value Pricing is a question since it goes against the market prices. Even though the revenues get hit in the second quarter, overall in the long term the revenue would be positive. It would reduce the number of different fares leading to simplicity in the system of fares. Instill confidence in the airlines , enforcing customer satisfaction. It would also add value back into American air travel.
Load factor is expected to increase thus revenue generation is via increasing customer base Easy pricing leads to reduction in Travel agents commission and hence may generate more revenue. Hence Value Pricing is a good option for American Airlines to go ahead with.
Traffic
Regular Discounted REALIZATION 7% 93%
Average discount
0 63%
Total discount
0 58.59% 41.41%
Traffic
Average discount 38%
Total Discount 12.54%
Regular
33%
Discounted 67%
Realization
49%
32.83%
54.63%
Competitive Reaction difficult to predict Very Difficult to wind back the clock as its a pricing strategy and not a promotion Price Competition Difficult to win and easily imitated by other firms.
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American Airlines' Value Pricing

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Group 4

Business was less elastic than leisure

Average discount 38%

Total Discount 12.54%

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