American Airlines Case Study Essay
American Airlines Case Study
With 1988 operating income of $801 million on a revenue of $8.55 billion, American Airlines, Inc. (American), principal subsidiary of Dallas/Fort Worth-based AMR Corporation, was the largest airline in the United States. At year-end 1988 American operated 468 aircraft on 2,200 flights daily to 151 destinations in the United States, Bermuda, Canada, Mexico, the Caribbean, France, Great Britain, Japan, Mexico, Puerto Rico, Spain, Switzerland, Venezuela, and West Germany. The objective of American Airlines revenue management effort was to maximize passenger revenues by selling the right seats to the right customers at the right prices. As the decision maker of American Airlines, I recommend introducing Upgraded Computerized Reservation System to replace current SABRE system to keep the company leader of the industry while maximizing profit.
Part 2: Issues Identification
Low load factors for Chicago – West Coast
Nature: tactic Timing: short term In 1987, in the nonstop markets, American and United competed on the basis of fares, flight schedules, and factors such as quality of service. In the connecting markets, American, United, and Continental also competed on the basis of fares and flight schedules. Once again American and United matched each other’s fares, while Continental, with its post-Chapter 11 reorganization and low-cost structure, was the low-price provider. So, United had a superior flight schedule, and Continental cheaper fares. As for American, our load factors were down to an unacceptable level.
Deep discount for New York – San Juan
Nature: tactic Timing: short term New York-San Juan was American’s largest market, measured in revenue passenger miles. The market was fairly evenly divided into three categories. The first category consisted of business passengers; business travel occurred year-round. Leisure passengers made up the second category; leisure travel peaked in the summer. Passengers of Caribbean origin either coming to the United States or returning to the Caribbean to visit friends and relatives constituted the third category. Eastern periodically offered deep discounts to stimulate demand during traditional slow seasons. In September 1988 Eastern introduced a restricted round-trip fare of $198 midweek and $238 weekend. The fare was applicable for travel until December 14, 1988. American had to decide if and how to respond.
Complicity of Yield Management
Nature: Strategic Timing: long term American Airlines broadly described the function of yield management as “selling the right seats to the right customers at the right prices.” At American Airlines, almost everything is automated because the yield-management decision-making process is too large and therefore too complex to be processed manually.
Part 3: Environmental & Root Cause Analysis
In the past, under regulations, airlines were not allowed to set their ticket prices at will. Rather, all fares had to be approved by the government. Normally, fares were set on a cost plus basis in order to guarantee airlines a minimum return. On the one hand, airlines had no incentive to reduce costs by streaming operations and increasing productivity. Essentially, price discrimination under regulation was based on the assumption of two distinct and easily separable types of customers: price-insensitive, yet very time-sensitive business travelers, normally flying on expenses, and price sensitive, yet-time-insensitive leisure travelers, typically paying for their own trips.
The deregulation of the airline industry has opened up many opportunities to seize market share and revenues. American needs to identify and develop a detailed revenue management and yield management plan to capitalize on this opportunity. Airline deregulation in 1979 led to additional complexity in the practice of yield management. Two major changes took place.
First, the number and variety of discount fares increased. Second, airline began offering connecting service, using centrally located airports as hubs, to serve more of the traveling public and provide national service. The resulting airline environment is very complex. The following factors complicated the yield management task: (1) the demand for full- and discount-fare seats on any given flight was uncertain; (2) the demand was variable over time;
(3) in certain cases, for example leisure flights, the demand was also “lumpy”; (4) there was a bewildering multitude of fare types and restrictions; (5) the hub-and-spoke system made some customers in one fare type more attractive than other customers in the same fare type; (6) some customers booked seats but did not show up for their flights.
Part 4: Alternatives and Options
Below is a detailed breakdown of the alternatives and options for the issues identified above.
Option 1: Marketing
American Airlines could focus its priorities on marketing in order to realize its full potential from a demand, capacity and yield perspective. Offering last minute vacation packages or more aggressive pricing policies for flights that look increasingly like they will not reach capacity would be another way to help fill vacant spots.
a. To sell deeply discounted seats at the last minute could make additional profit. b. American Airlines could be known to offer fantastic last minute vacations periodically.
a. Focusing solely on marketing in an industry that is undergoing rapid change could be extremely costly in the long run. b. Marketing would provide short term benefits but concrete improvements by other airlines may leave American behind. c. Another drawback to an aggressive marketing focus is would skew yield management regression models, most notably overbooking.
Option 2: Upgrade Computerized Reservation System
American Airlines’ “store front” is the computerized reservations system, SABRE (semi-automated business research environment). All sale and cancellation transactions, whether from American Airlines reservations agents or travel agents, pass through SABRE, updating reservations inventory for all affected flights. Because the yield management decision-making process is so large and complex at American Airlines, effective control of the inventory of seats can be accomplished only with more advanced automated models.
a. Increase the productivity of yield-management specialists and the reduction in work load can allow them to spend more time reviewing only critical flights thus making better revenue decisions. b. Instead of being a price follower, the system could guide the company make better pricing strategies. c. Keep American Airlines leader position in the industry.
a. It takes time and capital investment of new system.
b. There is a learning curve for new system and takes time to get used to new system.
Part 5: Recommendations
Critical to an airline’s operation is the effective use of its reservations inventory. American Airlines currently has the most advanced computerized reservations system – SABRE. To increase the responsiveness and effectiveness of yield-management strategies and to coordinate reservations inventory decision with SABRE, it is recommended that option 2 is applied. Because the yield-management decision-making process is so large and complex at American Airlines, effective control of the inventory of seats can be accomplished only with more advanced automated models. The new model is aiming at handling overbooking control, discount allocation and traffic management.
Part 6: Implementation Plan
Step 1: Acquire buy-in from stake holders and management.
Step 2: Set up target and create budget.
Step 3: Establish a team to do the development of new system.
Part 7: Monitor and Control
Yield management performance is difficult to measure because of the dynamic nature of the marketplace. Decision Technologies developed a reliable and credible method of measuring performance that we believe is unique in the airline industry. In order to gauge the success of implementing this process certain KPIs need to be established to compare against previous system: Load factor
Revenue yield per passenger mile
Operating expense per available passenger seat mile