American Airlines’ Value

Pricing
Group 4
Overview
 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 1960’s.
 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.
 Airline Deregulation Act,
1978
 Competition increased, prices fell, coast-to-
coast routes increased and passenger volume
grew by almost 80% between 1980-90

 By1986, a wave of mergers commenced as

competition intensified.
Demand for Air Travel
 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

 Competitive Market
Strategies
 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.

 American’s 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

Distribution Systems
 In 1991, 85% of all air travel was booked
through Travel Agents vis-à-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
Pricing
 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.
Pricing
 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.
Value Pricing
 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.
Analysis
 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.
Current scenario
Traffic Average Total
discount discount

Regular 7% 0 0

Discounted 93% 63% 58.59%

REALIZATION 41.41%
New Scenario

Traffic Average Total

discount Discount

Regular 33% 38% 12.54%

Discounted 67% 49% 32.83%

Realization 54.63%
Difficulties :
 Competitive Reaction – difficult to predict
 Very Difficult to wind back the clock as it’s a

pricing strategy and not a promotion

 Price Competition – Difficult to win and easily

imitated by other firms.

THANKYOU!