Case: American Airlines,

Inc.: Revenue
Management

Submitted To:

Done By:

Group 4
1. What did American Airlines initially do to counter the threat posed by low-cost
airlines?

Ans) The civil aviation in the United States found that many low-cost airlines ware
operating in profitable routes and captured high market share due to low fare.

So, cost reduction was more important to drive competitive strategy. Hence, they
adopted below two ways:

1. Reduction of direct cost: They formulated two-tier wage structure to reduce

2. Reduction in maintenance costs: However, they had little control over fuel
costs. Hence, they replaced the existing fleets with fuel-efficient aircraft with newer,
more fuel-efficient models. That needs a smaller crew, improved electronics and
navigational aids and were less noisy with low pollution and cheaper maintenance
cost.

2. What is the hub & spoke system of routing and why did it become important in the
post- airline-deregulation era in the US?

Ans) The Hub and spoke system is where service delivery is arranged as a network where
the primary establishments are interconnected. Secondary establishments are
connected to their respective primary establishments. In airline industry, the major
airports will be hubs which are interconnected with other major airports through long
haul flights. These hubs are connected to nearby smaller airports (spokes) through
short haul flights. This new model required a greater number of short haul aircrafts
and less number of long haul aircrafts this increased the overall profitability.
Airline Deregulation act of 1978 enabled airlines to enter or exit routes and change
the fares. This change paved the way for hub and spoke model. Through the new
model, the airlines can fly aircrafts of different capacities across different routes
depending on the demand. It has increased the connectivity further by leveraging
the economies of scale. The one thing the airlines should focus while implementing
this model is utmost importance should be given while scheduling, estimating

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 passenger flow etc. Any delays for one flight would cascade to other flights due to
the bottleneck of single hubs.

3. What was the goal behind “frequent flyer” programs initiated by American Airlines?

Ans) “Frequent Flyer” Programs were one of the marketing strategies where post-
deregulation competition was centered around. It was introduced by the American
Airline in 1981 to promote future customer loyalty by rewarding the frequent
travellers with free or upgraded flights.

By locking in customers through this program, the airlines could track the buying
and travelling habits which they leveraged to strategically price and plan routes, and
also design personalised flying experience for its travellers.

4. Apart from market segmentation, what other considerations did the revenue
management system at American take into account?

Ans) Apart from market segmentation, the revenue management system took into
account the following considerations.

Displacement: Displacement was a result of the hub and spoke system. If there
are too many discounted passengers travelling from Boston to Las Vegas via the
Dallas/Fort Worth hub, some of them might displace full-fare business passengers
travelling from Boston to Dallas or from Dallas to Las Vegas. The system has to
consider the revenue being generated from discounted travellers is in excess of that
of full fare travellers travelling a part of the route. In some cases, this displacement
was desirable. For example, American Airlines would prefer to sell a A – B to a
discounted fare seat passenger continuing onto destination C, rather than to a full-
fare seat passenger terminating at B if A – C discount fare is greater than A – B full
fare and A – B flight is expected to fill but not the B – C flight.

Share shift: The revenue management system also considered the effect on an
airline’s market share because of a change in its fares relative to its competitors’
fares. This phenomenon is known as share shift.

Stimulation: When prices are lowered, there would be an increase in demand from
a segment of the population which would not have flown otherwise. This beneficial
effect due to low prices is called stimulation.

Yield management: After prices and restrictions are fixed, then the next important
responsibility of revenue management system is to control the number of seats
available in each fare category. This is also called as yield management. An
important challenge in yield management is to optimize the trade-off between the
cost of an empty seat (the lost discount fare) and the cost of turning away a full-fare
passenger (the difference between full and discount fares).

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5. Referring to the discussion of the Chicago-West Coast pricing decision: Should
American counter Continental’s $159 fare with a relatively-unrestricted discount fare
on the non-stop Chicago-West Coast flights?

Ans) American Airlines should counter Continental’s $159 fare with a discount fare on the
non-stop Chicago-West Coast flights but not without any restrictions. Unrestricted
discount fare can lead to cancellations. Discounting can be done with a small $10 -
$20 premium and some restrictions like advance purchase requirements and partial
refundability for those tickets. This strategy will reduce Continental’s market share.

In addition to that, the low load factor for American Airlines is due to the superior
flight schedule of United and cheaper fares of Continental Airlines. Hence American
Airlines should focus on its flight schedule to counter them.

Also, load factor alone is not an ideal metric for success. Instead RASM can be used
to measure the success.

Load Factor = Revenue Passenger Mile/Available Seat Mile

Revenue per Available Seat Mile (RASM) = Net Yield * Load Factor

6. Referring to the discussion of the New York-San Juan pricing decision: What
additional information should Doug Santoni collect to decide on a response to
Eastern’s pricing initiative?

Ans) In order to decide on a response to Eastern’s pricing initiative, Doug Santoni should
collect the following data:

1. The proportion of Business, Leisure and Caribbean passengers that travelled

2. their protection limits and current booking details

3. and the booking limit of these passengers from their origin.

7. What were the challenges in implementing yield management at American Airlines?

Ans) 1. Uncertain Demand: The demand for full admission and rebate toll seats on some
random flight shifted on a regular premise. Hence, it was extremely challenging
to track down the ideal proportion for division of seats to augment the income.

2. Variable demand: The demand likewise changed in entirety. Every so often, the
tickets for a given flight may be sold out well ahead of time, and other days
American couldn't fill the seats even till takeoff.
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3. No show ups: Some clients booked seats however didn't appear for their flights.
Carriers attempted to handle this with overbooking which once in a while misfired
when the generally reserved clients couldn't be furnished with a seat due to
overbooking, prompting client disappointment.

4. Compromise: Hub-and-spoke system made a few clients in a single admission

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