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 2 nd
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.

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.

Thank You !!