Essay about American Airline 1992 Value Pricing Strategy

6.2.2 Increase competition. The complexity of the US airline industry and loss of market share to low cost carriers and other competitors. The airline industry is becoming highly competitive with new and emerging airlines penetrating the market as low cost carriers. The low-cost carrier competitors are steadily increasing in the airline industry and are probing the market with low fares to capture valued customers from major airlines like American, Delta and Southwest Airlines, reducing their overall market share and planned revenue in the industry. According to American Airlines President Robert Isom "American Airlines now has something to offer every customer, from those who want simple, low-price travel to those who want an ultra-premium experience via First Class"; to alleviate such issues the airlines can implement new measures and prices to equalize or eliminate the competition, thereby reducing financial risks.

Market structure can be defined as patterns of behaviour by enterprises in an effort to adjust to the markets in which they operate (buy or sell). Pricing strategies and collusive behaviour mergers are a few dimensions of market conduct. It is the industry norm for a legacy carrier to offer service to most popular destinations; Delta reducing routes to a similar schedule as the low-cost airlines is not an option in the multi-billion dollar industry. In order to gain market share from low-cost airlines, Delta must create a value proposition that differentiates itself from its competitors. Many customers will pay a premium if the level of service provided is higher than the low-cost, no-frills

The Primary marketing objective is to achieve a 4-7% increase in fares per route flown by the increase of ticketing prices even with fewer seats on the aircraft. Status matching will be offered to competing airline frequent flyers to encourage them to travel more with American than their current choose airline. Airlines represents a $783 billion a year industry (Fact Sheet: Industry Statistics, 2014). Being able to expand the market to the high-end segment would create an attraction to a unique service not offered by other major US airlines. Break even cost would be the first year goal while there would be an increase in cost to retrofit aircraft.

As equally as important, we cannot forget the latest implementation that American Airlines successfully launched, their Basic Economy and Premium Economy cabin. Back in February, Basic Economy was rolled out to 10 markets. AAL was not alone on this launch; United Airlines also launched their basic economy to compete with ultra low- cost carriers like Spirit Airlines. Basic Economy has lower fares; restrictions of using overhead bins and travelers are expected to board the plane last. Since then, the product has been expanded into 78 markets in the U.S. and Canada. The Premium Economy cabin has more perks than the Basic Economy, which is due to the price that customers are paying. Customers are paying for more legroom, wider seats, pillows, free food, wine and the luxury of using their flagship dining lounges. Currently, American Airlines Premium Economy cabin has an average upsell rate of more than

Airline deregulation was the process of removing the government imposed regulations on the entry of new airlines as well the airline fare limiting the competition and growth of the airline industry. In the United States, airline deregulation mainly refers to the Airline Deregulation Act of 1978 signed by President Carter. President Carter signed the Act, but the act was proposed initially during Nixon’s administration, and carried through Ford administration. The airlines industry was growing dramatically during 1960s and mid-1970s. Due to the steady increase in air travel, and strict regulations imposed by the Civil Aeronautics Board, the industry faced three major difficulties- lack of free and stable market, high ticket prices leading to poor productivity, and rising labor and fuel costs. Airlines have adopted many new strategies ever since the industry has been deregulated. The path since the deregulation has been challenging, as the airlines have faced various hurdles such as terrorism, war, recession, high fuel prices over the years impacting the economic structure of the United States. These challenges have raised the question concerning whether the deregulation should be considered or even reversed.

On August 18, 1993, a fare war erupted. To initiate its new service between Cleveland and Baltimore, Southwest announced a $49 fare (a sizeable reduction from the then-standard rate of $300). Its rivals, Continental and US Air, retaliated. Before long, the price was $19, not much more than the tank of gas it would take to drive between the two cities-and the airlines also supplied a free soft drink. Evaluate he implications of such a price war for three airlines. Due to the fact that Southwest was smart in their operation they were able to outwit their rivals. They were able to take the business of their opponents and offering them fares at a valued price. The big airlines could not afford to keep up with the legal battles as they were already losing money from not enough passenger capacity.

Following the Deregulation in 1978, a competitive price war ensued among the airline industry as a direct result of the new freedom for airlines to set their own fares as well as route entry and exits. This gave rise to the operating structure of the airlines as it exists today, consisting of the point-to-point system and the hub and spoke system. With this came the change of focus for major airlines to non-stop, cross-country routes in densely populated cities, which, in a regulated environment, would be profitable. This resulted in the obvious outcome of increased competition, thus lowering the average industry prices for non-stop cross country routes which were profitable. This caused operating costs to

Due to these regulations on the interstate market and seeing the success of intrastate carriers, such as Pan Southwest Airlines (PSA) and Air Cal, Southwest entered the intrastate market where CAB regulations did not apply.[10] [1] Southwest knew from early on that it had to provide considerably lower fares to stave off the competition from other airlines and was planning “to charge fares that were at least 60% lower than the average coach fare”.1 From the words of Colleen Barrett, “We knew that we were going to have to have substantially lower fares on day one of our operation than were currently being charged because that was our only chance of winning a niche in the business”.1

Due to these regulations on the interstate market and seeing the success of intrastate carriers such as Pan Southwest Airlines (PSA) and Air Cal, Southwest entered the intrastate market where CAB regulations did not apply.[10] [1] Southwest knew from early on that it had to provide considerably lower fares to stave off the competition from the interstate carriers and was planning “to charge fares that were at least 60% lower than the average coach fare”.1 From the words of Colleen Barrett, “We knew that we were going to have to have substantially lower fares on day one of our operation than were currently being charged because that was our only chance of winning a niche in the business”.1

Although there are pros to ‘value pricing’, their are many cons as well. For American Airlines, the price sensitive customers will be highly discontented by the new ‘value pricing’ and they will be encouraged to switch to low cost airlines. American Airlines will no longer benefit from the business travelers that were typically price insensitive but time sensitive and so prepared to pay the higher costs. This will have effects on yield and profitability as the high fixed costs of airlines previously depended on business travelers to buy higher priced tickets. For air travel demand, which in turn creates the lack of customer brand loyalty to airlines, a 38% reduction in American Airline prices in theory would cause customers to switch to American Airlines. However, American Airlines has failed to consider competitors reaction in their value pricing, therefore competitor 's reactions will prevent American Airlines from reaching their estimated revenue for 1992. Lowering the prices to match American Airline prices to guarantee the consumer the lowest

To Increment total revenue and in an effort to better match the ordinant dictation for each flight with its Capacity, airlines offer a variety of fare products at different price levels for the same Flight (differential pricing). Much of the rationale for price differentiation prevarications not in Discrimination but rather in the different costs of accommodating passengers associated with Different requisites. A leisure peregrinator who is inclined to book well ahead when seats are more yarely available is less sumptuous to accommodate than a business peregrinator who demands

Airlines battle for competitive advantage by giving customers unbelievably low fares at an irresistible price.

Airlines must be able to make a profit when setting ticket prices. “By comparing the demand curve with the average total cost curves for each airplane type, the airline can determine which size airplane will maximize profits for a given flight.” (Kons, n.d.)

In the business market it is clear to see that this market aims at providing a premium service which include luxuries, for example the use of airport lounges and bigger seats on the aircraft and people are willing to pay extra money for these luxuries. It is possible to assume that in times of recession and rising fuel costs that pricier seats, such as the seats in business and first class, would be less popular and harder to sell but that does not seem to be the case. IATA estimated that average ticket costs for business class flights have risen 8 percent in the first half of 2010. Business travellers make up 8 percent of overall passenger numbers but contribute 27 percent of ticket revenue, IATA said in its latest snapshot of the airline business. Premium travel has risen almost twice as far in percentage terms from its 2009 low as economy travel, but, such was the depth of the fall of the premium segment, current levels are still 10% below pre-recession peaks, whereas economy travel is now 5% above its pre-recession peak.

The airline industry exists in an extremely competitive market structure, hence the elasticity of prices. With revenue and demand forecasted to increase substantially over the next three years, the industry appears to have recalibrated from the