American Airlines Value Pricing Analysis
After the recession of the 1990’s , American airline industry is facing a serious need for change in these critical times. The conventional pricing structure which includes higher and higher full fares and ever-growing array of discount fares and ever-changing restrictions is very complex.
American Airlines believes there is a need of new pricing approach which would offer simplicity ,equity and value to customers. It aims to offer customer both lower fares and greater flexibility and is called “Value Pricing”.
Problem Statement To find out whether the new pricing structure will benefit American Airlines to bring back the lost volume of people travelling by air . To ascertain profitability of the new pricing structure over the old structure .
Also how customers need to be made aware of the new pricing structure and the value they will get out of it needs to be communicated effectively.
Analysis The excel analysis comparing old pricing structure with the new one is attached in a separate file. We found out that, load factor is consistently below 0. 6 since 1968 which shows that airlines are struggling to create demand. Also most sort out price for the airline is in the range of 50% to 150% of the industry average. Percentage of customers paying this price has decreased substantially.
New pricing will benefit both business and leisure travelers. Alternative Market Strategies
Instead of going for new value pricing structure American Airlines can go for strategy taken up by Southwest Airlines which was profitable for more than 2 decades following no-frills approach. Increased use of Information Technology to manage overbooking and yield management.
Customized Approach Evaluation of Alternatives
Alternative 1 No frills approach as taken up by Southwest Airlines. American airlines can go for shorter routes with an average flight of an hour .
They could offer low fares and high frequency and on-time service. It can cut down on costs by shunning amenities including assigned seats, meal service , luggage transfer to other airlines.
This approach has both pros and cons attached to it . What could work for American y following this would be – they can get customer’s confidence back by offering on-time service and frequent flights .
Customers weigh more weightage to service quality as indicated by surveys (see Appendix). By catering to these needs American can get value back to market and increase its volume and thus profitability. Also, we need to look the other side of this approach. American is the largest airline in the US market (as per 1992). It serves nearly 182 locations in US , and a plenty around the world.
Being an international carrier offering no-frills on long distance doesn’t seem feasible and apt.
On its short duration flights it can offer no-frills service ut that would be like same company offering two kinds of service. This might not be very well taken up by the American people.
Alternative 2 Increased use of Information Technology to manage overbooking and yield management. Overbooking means deliberately selling more seats on a flight than were actually available.
This is widely carried out by most of the airlines to cut off the vacant seats on each flight. Every flight scheduled has about 50% passenger cancellations and no-shows which is a huge loss to the airlines. By overbooking an airline can cut down on its losses due to vacant seats. In absence of overbooking even on flights that were sold out , 15 % of seats would be unfilled.
Also , numerous number of discounted fares and ever-changing fares till the last moment pose a great challenge for the airlines to determine exact amount of overbooking that needs to be done for a particular flight.
Inaccurate overbooking calculations can lead to increased cost for the American. Sometimes Airlines need to pay for accommodating passengers in case of number of passengers turning out for flight are more than estimated, A new flight might also have to be booked for those customers leading to increased costs. Overbooking poses both a challenge and profits. So a very strong team of IT professionals including statisticians is required to construct a logical algorithm for calculating overbooking. American needs to spend on its IT infrastructure to cater to the needs of overbooking calculations.
A strong IT structure in place will ensure correct predictions and thus less losses for American.
A strong team of IT coupled with less comples pricing structure will give good yields for American . Yield Management requires a massive database to be maintained in and stored in a network of powerful computers . Data needs to be continuosly updated to support a variety of comples models and optimization methods. An advanced automated system for decision making for yield management is required . For advanced and more efficient system a strong team of IT is required. So it is suggested American should invest in IT for stronger Yield Management program to be implemented.
With this current complex pricing structure , along with 2450 jet departures daily , each flight having more than 12 published fares whose availabilities were constantly being revised there is a need of strong algorithm and models . With around maintaining more than 500000 fares for American a efficient yield management program is required. Also after implementing value pricing these 500000 fares will cut down to 70. 000. So if a new enhanced system catering to new fare structure is implemented it could prove very beneficial for American. Alternative 3 Customized Approach Feasibility and Strategic Issues Implementation of new Value Pricing structure would require on mass scale consumer awareness.
So American needs to spend a considerable amount on advertisement . This could back-fire in case consumers do not respond quickly to the changes offered. Also competitors might follow the suit on the same lines or stick to the same old structure of theirs. A fare competition in the market would provide grounds for all airlines to compete and offer value to customers. So if competetitors come out with plans offering much lower air fares as discounts , that could prove not in favor for American. Also logistic issues in implementing new pricing structure with just 4 fares will require new algorithms for overbooking calculations and yield management.
Also with no discount offered , it will be difficult for travel agents to make money and attract customer base . With no possibility of discount fares travel agents will not have much to offer in terms of prices . This might lead to loss in number of travel agents and would require changes in current TACO program. Recommendations Convey to the customers the benefits due to the new pricing structure Clearly communicate the objective of this new approach Plan for merger with competitors like North West Airlines to cut competition.
Analysis and Report American Airlines’ Value Pricing (A) Submitted By: Saurabh Jain – 10DM198 Saikat Roy – 10DM197 Saswat Patra Satyam Khandelwal Rashi Singh Sudharshan V. E.