1. Issues 2. American Airlines’ objectives 3. The airline industry 4. Market 5. Consumer needs 6. Brand image 7. Distribution system 8. Pricing 9. Marketing related strategies 10. Assumptions and risks
1- Issues The main issue of this case is the lack of profits of the airline industry, an industry that should be more than profitable due to the large amount of customers, the necessity of using airlines’ services and the high prices charged by most of these airlines. What we are going to deal with is, why is this happening? And how is American airlines dealing with this problem?. To be able to discuss how American airlines wants to regain profitability, we must identify and analyse different issues such as, the company’s background, the airline industry as a whole, the demand for air travel, the marketing strategies, the distribution systems, pricing policies etc.
2- American Airlines’ objectives American Airlines’ prime objective is to bring back value to air travel, through stimulating business travel, lowering prices etc. So in other words American Airlines’ main objective is to become as profitable as possible. To understand better the company’s objectives we first have to focus on the company’s background, this way we will find out why the airline is not as profitable as it should, and what kind of a change is needed. American Airlines had been the largest airline in the United States for a long time. In 1990 and 1991 due to a recession and the Gulf War, demand for air travel dropped drastically, for this reason, fare wars started and all the airlines incurred massive losses.
3- The Airline industry and the market The airline industry is large, specially in the United States, mainly due to the ” Deregulation” of the industry. In 1938, the Civil Aeronautics Board was created to control the growth of the air transportation industry. This board had the authority to control entry, exit, prices and methods of competition. In the late 1970 this structure was found inefficient and in 1978 deregulation took place. Due to the deregulation of the industry competition intensified, prices dropped, and the number of people travelling increased. Many new companies emerged and regional airlines saw deregulation as an opportunity to expand.
Due to the rise in competition, by 1986 mergers started to take place and in 1987 64.8% of the market was controlled by the four largest airlines. The demand for air travel is determined mainly by price, studies revealed that half of the leisure travellers and on quarter of business travellers did not have a preference for a particular airline, which means that prices determined the preference. So the strategy to compete for customers consisted mainly in pricing and flight schedules. The demand for flights varies depending on the season or the business cycle therefore airlines have to develop different pricing strategies and offers depending on the season or the business cycle period. An other determinant for demand is technology, the new telecommunication possibilities have made air travelling unnecessary in some cases, which of course has affected airlines revenues.
4- Consumer needs. Consumer needs are clear, what airline consumers need is basically god prices and good flight schedules. These are the basic needs, apart from these ones we could also point out other needs such as big, comfortable seats for long flights, good service on board, good food, punctual departures, check-in facilities, movie channels, etc. All these are consumer needs, but studies have shown that demand is mainly determined by price and a flight schedules, the rest just add value to these two, therefore companies must focus on ways to lower prices and provide good flight timetables. There are two types of travellers, business travellers and leisure travellers, these two of course have different needs, for the first ones price is not so important because usually the company pays for it on the other hand punctuality and flight schedules are very important to them. For leisure travellers the most important thing is usually price, and the rest comes after that. But as I said before consumer needs can be summarised in these to price and schedules.
5- Brand image American Airlines’ brand image is good, due to its successful background and its new marketing strategies. In 1991 American Airlines was the biggest airline in the United States, and the reason for it is that this airline was pioneer in many fields gaining competitive advantage over the other airlines. When deregulation took part in 1978, American transformed in such a way that it became the industry’s market share leader. American had also pioneered several policies that affected the industry’s structure and standard practices.
In the late 1960’s, American introduced the first computerised airline reservation system, which revolutionised the marketing and distribution of the travel industry. American also introduced “the super saver” fares in 1977, which was the first programme of deep discounts for leisure travellers, and in 1981, American launched the first frequent-flier programme, which created brand loyalty towards the airline. American Airlines is constantly developing new strategies, and introducing new technologies, and this is why its brand image is so high. Some of the new innovations that American Airlines is introducing are, the any time fares for business, new plan ahead for leisure, lower first class fares, etc.
6- The distribution system The main distribution system for air travel is the travel agent, which provides not only the flight ticket, but also supplementary services such as car rentals, hotels, excursions, etc. Airlines ask the agents to make reservations and deliver tickets. There is a difference in the distribution of tickets for business travellers and leisure travellers. Leisure travellers deal always with the agent, but for business travellers sometimes the airlines make deals directly with the companies. Airlines also make special offers to large corporate buyers, like price discount for frequent flier travellers, or quantity discounts. Nowadays there are other distribution systems, such as on line booking, and airlines’ home delivery tickets.
7- Pricing After the deregulation, pricing policies changed drastically, airlines started to offer a wide variety of fares discounted below the regular price. These discount were accompanied by several restrictions such as advanced booking, no refund, no changing dates, etc. Therefore people unwilling to meet these restrictions paid a higher price. At American Airlines management was viewed as selling the right seat to the right person, this means that they search for ways to find out who is willing to pay a higher price, and how can they make him pay a higher price. By 1991, the industry’s pricing structure had become enormously complex. American’s flights involved maintaining 500,000 fares. By late 1991 93% of the tickets were sold at one kind of a discount or another. And the average discount was 63%. Due to the complex pricing structure American developed the “value pricing” plan. This plan consisted in: First for any given flight there would be only four different fares. Second, all fares would be mileage-related, and finally, the new fares were set below the levels of comparable existing fares so lower prices would be available to more business and leisure travellers.
8- Marketing related strategies Some the marketing strategies carried out by American Airlines have been: -Computerised reservation Systems: This system changed the industry’s marketing and distribution systems. This system stored information about, flights, seats availability and fares. Which made the booking and distribution a lot easier. CRS systems gave American Airlines a great competitive advantage over the other airlines, as booking fees by CRS enabled American to earn substantial amounts from its competitors.
-Hubbing: With hubbing, flights from various origins on spokes of the network are channelled through an intermediate location, where they change planes and are re-routed to their final destination. This way the airline can serve more locations with fewer planes. -Frequent Flyer programmes: These programmes provide discounts or bonuses to frequent travellers. The value of the bonuses increase as the mileage flown increase, the bonuses can take various forms such as, fare reductions, upgrades to better classes or even free tickets.
9- Assumptions and risks In my opinion all of this strategies are brilliant, the only risk I see is in hubbing, customers sometimes don’t want spend additional time changing planes, there is the risk of missing connecting planes, luggage may get lost, etc. In the rest of the strategies I don’t see any risks what so ever.