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 2nd largest
Airlines in the US.
• In 1992, American Airlines was the largest
Airlines in the US.
3. 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.
4. 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”.
5. 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.
6. • Introduced the first computerized reservation
system, SABRE, in 1960.
• Introduced “Super Saver” fares in 1977.
• Introduced “Frequent-Flier program” in 1981.
7. 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.
• Consumers preferred 2 things: Low prices and
frequent service & lots of time-of-day choices.
8. 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.
9. 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.
10. 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.
11. 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.
12. 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.
13. 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.
14. The Edge(Cont.)
• Shift in the mix of regular and discount fares.
• Generation of a new business.
15. 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.
16. 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.
